In the realm of family law, financial settlements often serve as the cornerstone of post-divorce arrangements. Yet, within the framework of these settlements, a lesser-known concept plays a pivotal role in achieving justice and equity: add backs. The term "add back" holds significant weight. It represents a financial adjustment made during the formalisation of a settlement agreement. When one party has dissipated or mishandled assets, an add back serves as a corrective measure by the court. Imagine a scenario where assets or financial contributions that should rightfully be part of the shared property pool have been squandered or spent recklessly by one of the parties. In such cases, the court intervenes to reinstate these specific assets or contributions back into consideration during the settlement process. This ensures that the party responsible for the dissipation does not escape accountability and that a fair distribution of assets is achieved.
Thus, an add back serves as a mechanism to rectify financial imbalances and uphold the principles of fairness and equity in property settlements. By acknowledging and addressing the improper disposal or mishandling of assets, the court strives to reach a resolution that truly reflects the contributions and entitlements of each party involved. Justice Young, in the case of Sebastian v Sebastian (No 5) [2013] FamCA 191, provides invaluable insights into the process of add backs within financial settlements, particularly under the purview of the Family Law Act 1975 (Cth) (“the Act“).
Courts, empowered by the Act and exercising discretion pursuant to Section 79, typically assess the property of the involved parties as of the date of the final hearing. However, exceptions to this principle arise, notably concerning the notion of add backs. Add backs serve as a mechanism to address situations where one party has dissipated assets for their own benefit post-separation, thus disrupting the equitable distribution of assets. A significant exception to the general principle of assessing property as of the final hearing involves the notional addition of dissipated assets to the asset pool. As articulated by the Full Court in Milankov & Milankov (2002) FLC 93-095 at para 113, this concept entails including in the "pool of assets" items that no longer exist but are deemed necessary for achieving justice and equity among the parties.
The rationale behind add backs is deeply rooted in the principles of fairness and equity. By notionally considering these dispersed assets, courts aim to ascertain a fair share of the existing asset pool for each party involved. This approach ensures that assets unfairly disposed of by one party are not simply disregarded, but rather accounted for in the overall distribution of assets. Thus, add backs serve as a crucial tool in rectifying imbalances and promoting a just outcome in family law financial settlements.
Categories of Add Backs
In the evolution of family law jurisprudence, courts have strived to delineate commonly accepted categories of add backs, despite their discretionary nature. Over the years, through notable cases like Omacini & Omacini (2005) FLC 93-218 at para 30, the judiciary has identified several recurring scenarios where add backs are deemed appropriate:
Expenditure on Legal Fees: This category encompasses situations where parties have expended significant sums on legal fees during divorce proceedings. As elucidated in DJM v JLM (1998) FLC 92-816, such expenditures can erode the matrimonial asset pool and warrant consideration as add backs.
Premature Distribution of Matrimonial Assets: Instances where there has been a premature distribution of matrimonial assets constitute another recognised category for add backs. This was exemplified in Townsend v Townsend (1995) FLC 92-569, where the court acknowledged the need to rectify situations where assets were prematurely distributed, leading to inequities in the settlement.
Circumstances outlined by Baker J in Kowaliw and Kowaliw: In the seminal case of Kowaliw and Kowaliw (1981) FLC 91-092 at 76,644, Justice Baker delineated various circumstances where add backs may be warranted. These include situations where one party engages in conduct aimed at reducing the effective value of matrimonial assets or acts recklessly with matrimonial assets, leading to their diminution.
By establishing these categories, the judiciary provides guidance for practitioners and litigants, fostering consistency and predictability in the application of add backs. In the case of Kouper & Kouper (No 3) [2009] FamCA 1080, Murphy J provided a comprehensive framework for analysing add backs in family law financial settlements. This framework, outlined in para 108 of the judgment, consists of five key questions designed to guide the assessment process:
Assessment of Dissipated Property: The first step involves determining whether property, which would otherwise be available for distribution between the parties under a Section 79 order, has been dissipated, resulting in a consequential loss.
Classification of Expenditure: Next, the court evaluates whether the dissipation of property occurred in relation to expenses beyond what would be considered reasonable living expenses given the specific circumstances of the marriage.
Allocation of Loss: The court then considers why the loss to the divisible property, resulting from the dissipation of property beyond reasonable living expenses, should be shared unequally between the parties.
Consideration of Addback: It's crucial to assess whether an addback is warranted in the circumstances. This consideration is distinct from adjustments pursuant to Section 75(2)(o), which involve bringing past expenditure into account dollar for dollar in current dollars.
Quantification of Addback: Finally, the court determines the appropriate method for quantifying the addback or adjustment pursuant to Section 75(2)(o) to ensure an equitable distribution of assets between the parties.
The approach outlined by Murphy J in Kouper & Kouper (No 3) has garnered judicial consensus and approval, as affirmed by Bryant CJ in Shimizu & Tanner [2011] FamCA 271 at para 74. This framework provides a structured method for courts to analyse add backs, ensuring consistency and fairness in their application across diverse cases.
Discretion of the Courts
In the realm of family law, add backs are subject to the discretionary judgment of trial judges operating under Section 79 of the Family Law Act 1975. While commonly accepted categorisations exist, it's crucial to acknowledge that add backs are not rigid rules but rather guidelines, as affirmed by the Full Court in Browne v Green (1999) FLC 92-873 at para 44. This discretionary nature allows judges to tailor their decisions to the unique circumstances of each case. As emphasised in C & C [1998] FamCA 143 at para 46, add backs should be viewed as exceptions rather than the norm. While acknowledging the importance of ensuring fairness, the court recognises the parties' right to conduct their affairs post-separation in a manner conducive to moving forward with their lives. This sentiment underscores the need for caution when considering add backs in financial settlements.
Despite these warnings, the prevalence of add backs in family law proceedings has become increasingly apparent. In Kouper, Murphy J notes the widespread use of add backs, cautioning against a default assumption that add backs should always form part of the divisible assets.[1] Emphasising that add backs are exceptions, not the rule, Murphy J underscores the importance of a case-by-case analysis to determine their appropriateness. A pertinent example of the complexities surrounding add backs can be found in the case of Mayne v Mayne.[2] Here, the court grappled with the issue of whether to add back certain expenditures into the asset pool. While recognising its role in resolving financial disputes within marriages, the court also acknowledged the challenges of singling out specific transactions post-separation. Strickland J's dissent highlights the tension between the desire for fairness and the risk of double dipping. The court's decision to notionally add back funds expended before separation underscores the nuanced nature of addback considerations.
In navigating the intricacies of add backs, courts must strike a delicate balance between ensuring equity and avoiding undue interference in the parties' post-separation affairs. While add backs remain a valuable tool in achieving just outcomes, their application requires scrutiny and consideration of the circumstances at hand. In the case of Chorn & Hopkins [2004] FamCA 633 at [57], the court established a clear principle regarding the addback of funds used post-separation. If the funds existed at the time of separation and both parties can be seen as having an interest in them, such as through contributions, then those funds should be added back as a notional asset of the party who benefited from them. This principle ensures that assets unjustly depleted post-separation are appropriately accounted for in the asset pool.
In Townsend v Townsend [1994] FamCA 144, the court took a robust approach by notionally adding back wasted property to the pool of assets. In this case, the husband sold an asset, a taxi, for $148,000 post-separation, leaving no proceeds for equitable distribution. The court deemed this action a premature distribution of marital property and included the taxi notionally in the asset pool. However, Anthony Dickey QC critiques this approach, particularly regarding the lack of guidance on when to apply the dollar-for-dollar accounting method in notional add backs. While notionally adding back assets is not a new concept, the absence of specific directives in the Family Law Act 1975 necessitates appellate direction. Determining whether to pursue an addback involves weighing the costs against the benefits. Pursuing legal proceedings for an addback can incur significant expenses, including legal fees and court costs, and requires a substantial investment of time and effort. Therefore, it's essential to assess the potential value of the asset or funds that could be recovered through an addback.
Case Study: Candle & Falkner [2021] FedCFamC1A 102
In the recent Full Court decision of Candle & Falkner [2021] FedCFamC1A 102, the principles governing add backs in property settlement cases within family law were reaffirmed, providing valuable guidance for legal practitioners and clients alike. The Court highlighted the exceptional nature of add backs, emphasising that they constitute a discretionary exercise aimed at achieving justice and equity between the parties. Four key propositions were restated to clarify the law on add backs:
Firstly, adding back distributed and expended property is discretionary and reflects an exceptional exercise of discretion for the purpose of achieving justice and equity under Sections 79(2) and (4) of the Family Law Act. Secondly, the nature of the expenditure identified as an addback is crucial, with incurred expenditure typically not considered as such. Thirdly, while previous decisions like Stanford v Stanford (2012) 247 CLR 108 and Bevan & Bevans (2013) 279 FLR 1 do not preclude the inclusion of notional property as an addback, existing property interests must be duly considered. Finally, in cases not falling within the "exceptional" category, expended interim distributions can be addressed under Section 75(2) rather than included as add backs in the balance sheet exercise.
This restatement of principles provides clarity for legal practitioners and clients navigating property settlement cases, ensuring a more informed and consistent approach to arguing for and determining add backs in family law proceedings.
In Dimacopoulos and Dimacopoulos [2003] FamCA 227, a similar scenario unfolded where the parties disputed the inclusion of damages received by the husband post-separation in the asset pool. Despite the wife's contention to include the entire verdict in the pool, the court added back a portion of the damages, recognising the exceptional nature of add backs and the need to achieve a just and equitable outcome. This case underscores the significance of judicial discretion and careful consideration of the circumstances in determining add backs in property settlement cases.
Conclusion
The nuanced landscape of add backs in family law property settlements reflects the delicate balance between achieving justice and equity while respecting the parties' autonomy post-separation. Through a careful examination of case law and judicial guidance, it becomes evident that add backs are not a routine aspect of property settlement proceedings but rather exceptional exercises of judicial discretion.
The principles restated in Candle & Falkner [2021] FedCFamC1A 102 reaffirm the exceptional nature of add backs and provide valuable clarity for legal practitioners and clients navigating property settlement cases. These principles underscore the importance of clear reasoning by judges and a meticulous consideration of the balance sheet to ensure fairness and equity between the parties.
While add backs serve as a tool to rectify instances of asset dissipation and premature distribution, they must be applied judiciously, considering the nature of the expenditure and the existing property interests of the parties. The discretion afforded to trial judges allows for a case-by-case analysis, ensuring that add backs are employed where necessary to achieve just outcomes.
Disclaimer: The information provided here is for educational purposes only and should not be considered legal advice. If you need legal assistance, we recommend contacting Carter Dickens Lawyers or consulting a qualified attorney. Legal matters can vary based on laws and regulations, and it is important to seek professional advice for your specific situation.
[1] Kouper & Kouper (No 3) [2009] FamCA 1080.
[2] Mayne v Mayne (2011) 46 Fam LR 197.
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