Depleted Assets

When a couple separates, the Family Law Act 1975 sets out how their assets should divided in a property settlement. A problem arises, however, if one party to the family law matter has depleted assets from the asset pool in a reckless or irresponsible manner before the property settlement. Routine expenditure is perfectly acceptable, but the court will take note if a party has depleted assets by gambling, gifting or selling assets for less than their true value. This article outlines the types of expenditures that are considered depleted assets, and how the court usually responds to this behaviour in family law matters.

5-Step Test

The Federal Circuit and Family Court of Australia (FCFCA) assess property settlements according to a five-step test. The initial step is to identify all the assets and liabilities of the relationship, including property, savings, loans and mortgages. This is not calculated from the date of separation but the date when the parties enter into a binding financial agreement, receive final court orders or consent orders. As such, assets and debts acquired after separation are eligible to be included in the asset pool.

If financial assets were depleted from the asset pool between separation and the date of the financial agreement this will be revealed during this step. For instance, if a savings account has been drained, then the financial documentation submitted during disclosure will reveal this discrepancy.

The subsequent steps are designed to assess the relative contributions and future needs of the parties. Step two is when the court makes a preliminary assessment of whether the existing distribution of assets is just and fair. If there needs to be an alteration to the arrangement, then the court will move on to step three and quantify the contributions of each party to the asset pool, including financial and non-financial contributions (such as housekeeping and childrearing), and direct and indirect contributions. During the fourth step, the court will consider the future needs of each party, depending upon their respective potential to earn income in the future, in combination with factors such as age, health and whether they will have primary custody of the children. The final step is to assess whether the prospective new distribution of property would be equitable and fair given the particular circumstances of the case.

Sometimes the relationship between the parties is highly acrimonious, and one or both parties feel like they would rather waste assets than have them distributed to their spouse. Examples of depleted assets include when a spouse:

• Withdraws money from bank accounts and spends the funds
• Gifts assets to family members and friends
• Gambles funds away
• Sells assets for less than their market value

If it can be proven that the spouse acted recklessly or deliberately to decrease the value of the asset pool, then the loss will be considered an “add-back”. The Family Court has typically responded to this situation by acting as if the depleted asset still exists, and the calculated lost value is subtracted from the share of the property settlement allocated to the person who decreased the pool. An example of this was when, after 35 years of marriage, an Australian businessman spent $15 million dollars in a short period, on luxury properties, jewellery and designer clothes for his new girlfriend, first-class travel, expensive dinners and champagne, to diminish the size of the asset pool for distribution to his ex-wife. The Family Court found that his behaviour was “reckless” and “flagrant” and he was forced to sign over $4 million dollars worth of assets.

There is some suggestion that the courts are beginning to rethink the concept of add-backs for depleted assets. In the 2015 case of Owen, the wife inherited over $300,000 after separating from her husband and distributed the funds to her children. The wife claimed that she and her estranged husband had a preexisting agreement that the children should receive most of the money, but the husband disputed this claim and asked that the funds be considered as depleted assets. The court found that as the money had been given to the children it was no longer owned by either party and would not be included in the combined assets. However, it would be a relevant consideration for the purpose of adjusting the distribution of assets. The decision in Owen confirms that depleted assets will not always be added back to the property pool.

As case law about depleted assets demonstrates, it is crucial that parties move swiftly after separation to proceed to property settlement. Once an asset has been depleted, it is very hard to retrieve it, and given recent precedent, the court may not be willing to add back the depleted asset to the asset pool. If you need advice about depleted assets and the implications for a property settlement, please contact Armstrong Legal on 1300 038 223 or email us to make an appointment.