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Property – Error to exclude latent CGT liability where evidence indicated sale of investment property would occur in near future

In Shnell & Frey [2021] FedCFamC1A 55 (5 November 2021), the Full Court (Watts, Austin and Tree JJ) heard an appeal from a decision of Carew J (Shnell & Frey [2020] FamCA 631, summarised in our archived case notes – property under “inheritance”).

After a 35 year marriage that produced two children, the wife sought an order that the husband pay her $1,860,000 plus a superannuation split of $200,000 and the husband sought an order that she pay him $162,000. Carew J ordered that the parties each retain their respective property, resulting in the husband retaining 48 per cent of the asset pool and the wife 52 per cent.

The wife appealed, arguing that it was not possible to discern how the decision was reached and that the rejection of the capital gains tax (CGT) on the possible sale of a property owned by her as a liability was in error.

The Full Court said (from [35]):

“Having determined that a property settlement order should be made, the primary judge first identified and valued the property, liabilities and financial resources of the parties at the date of the trial; secondly discussed contributions; thirdly discussed prospective considerations; and lastly, reached a conclusion as to what order was just and equitable in this case. … [A]t the end of the second stage, the primary judge at [69] concluded:

‘69. Overall, I consider that the myriad of contributions made by each party should be assessed as largely equal although slightly favouring the wife because of the disparity in the inheritances/gifts and the timing of the wife’s inheritance.’

[36] The disparity referred to was a difference of $534,388 with the wife bringing in $2,550,026 and the husband $2,015,638 by way of inheritances/gifts. It is unclear what ‘slightly favouring’ means. …

[37] There is also ambiguity about what the primary judge meant about the ‘timing of the wife’s inheritance’. …

[38] The primary judge has not, as recommended in Hickey and Hickey and Attorney-General (Cth) (Intervener) [2003] FamCA 395, expressed the result of her assessment of the parties’ contributions as a percentage of the net value of the property of the parties. Had the primary judge done so, what her Honour intended … may have been more adequately explained.

[39] … [A]lthough the primary judge poses the question as to what adjustment should be made for prospective considerations, her Honour does not answer it.

[40] The parties are left to guess what the primary judge concluded at the third stage. At the fourth stage, the wife received about a two per cent adjustment overall. If the words in [69] ‘as largely equal although slightly favouring the wife’ mean a two per cent adjustment to the wife based on contributions, then the primary judge has likely made no adjustment at the third stage.

( … )

[42] … [T]here is the reference by the primary judge to two matters which were the subject of focus at the trial. Firstly the latent CGT on the wife’s property (which had an assessment at the date of hearing in the sum of $290,029) and secondly, the advantages the husband obtained, together with his two siblings, from the Trust (which the wife asserted had net assets of $4,683,297). Both of these considerations favoured the wife. The primary judge’s reasons do not make clear how those considerations have been taken into account …

[43] … [W]e conclude that the … reasons do not adequately enable the parties to ascertain how the primary judge reached her ultimate conclusion. …”

As to the treatment of the wife’s latent CGT liability, the Court said (from [64]):

“The primary judge placed the value of the wife’s Suburb L property on the balance sheet at its current value but rejected the wife’s submission that the latent CGT on that property also be included. … [T]he primary judge indicates … that she took the latent CGT into account when adjusting prospective factors.

[65] There was no controversy that if the wife’s Suburb L property was sold today then the CGT payable upon the distribution of the property would be $290,029 based on the gain that the wife had achieved on the property, her current level of income and the fact that it had never been her principal place of residence.

( … )

[76] … [T]he primary judge erred in failing to find that the sale of the property ‘would probably occur in the near future’. … [and] failed to recognise the undisputed evidence that this was an investment property held by the wife and had always been rented out.

( … )

[79] … [A]lthough it is true that the ultimate selling price might not be known, the value of the property was placed on the balance sheet at the date of the hearing and the latent CGT at that date was known. The property has been always rented and there was no evidence to indicate that the wife might occupy the property before sale.

[80] … [T]he primary judge’s finding that the wife had made a concession in cross-examination which precluded the wife from relying upon the second limb of Rosati, was erroneous. Had the primary judge not made that error, it would have been appropriate for the primary judge to have included the latent CGT onto the balance sheet, so that the wife received full value for that liability.”

The appeal was allowed and the discretion was re-exercised to reduce the asset pool by the wife’s latent CGT liability and to divide the asset pool 55 per cent to the wife and 45 per cent to the husband, requiring a payment from the husband to the wife of $399,412. The husband was ordered to pay the wife’s costs in the sum of $51,000.

 

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Property – Amended versions of arbitral award invalid and incapable of registration – Arbitrator became functus officio upon making the first award under regulation 67P of the Family Law Regulations

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