Husband Not Allowed to Withheld Proceeds on Accounts of Capital Gains Tax (CGT) as a “Legal Cost of Sale” in Family Court Proceedings

Background

In the recent Family Court case of Kelby [2017] FamCA 438 (26 June 2017) McClelland J considered a partial property settlement order made by Rees J in August 2016. This initial order required the husband to pay the wife $250,000 within 28 days, failing which he cause a property to be sold and pay the wife 50 per cent of the sale proceeds net of “the costs of the real estate agent and the legal costs of sale”.

The husband subsequently received $23,640 from proceeds “on account of capital gains tax” (CGT), paying one half of the balance to the wife. The wife filed an Application in a Case for an order that the husband pay her $11,820 (half of the withheld amount) due to her under the order.

Wife’s Submission

The wife’s argument was that the component for CGT, which was deducted by the husband from the proceeds of the sale of Property D, should not have been treated as forming part of “the legal costs of sale” of the property, and should thus not have been deducted from proceeds payable to the wife pursuant to the orders of Rees J.

Husband’s Submission

The husband contended that the wife had not established a basis for the Court ordering that the husband pay the wife the amount of $11,820. Specifically, it was submitted that the wife had not particularised why she was entitled to that payment, either by way of spousal maintenance pursuant to s 74 of the Family Law Act 1975 (Cth), partial property settlement pursuant to s 79 of the Act, or by way of a variation to the orders made by Rees J on 24 August 2016, pursuant to s 79A of the Act.

Court’s Analysis

It was clear from the wife’s Application that the wife was not seeking an additional payment from the husband.

The substance of the wife’s application was that she was seeking to enforce order 2 of the orders made by Rees J on 24 August 2016 by requiring the husband to pay the total amount of proceeds of sale that she alleged he was required to pay to her.

The orders of Rees J did not, in the Court’s view, intend CGT to be included as a legal cost of the sale.

In Rosati and Rosati [1998] FamCA 38, the Full Court considered an appeal against orders adjusting the parties’ property interests pursuant to s 79 of the Act. The Full Court held in that case that, applying the particular facts, there was no error on the part of the trial judge in not automatically making an allowance for CGT that was potentially payable on the sale of the business.

According to the Court in the current case, consistent with a host of case law, it may well be that the CGT liability in respect to Property D is treated as a joint liability of the parties. It was noted, however, that it begs the question as to whether CGT liability in respect to Property D should have been treated as constituting part of ‘the legal costs of sale’ provided for in the Orders. According to McLelland J , the CGT liability should not be so included.

The case of Rosati and Rosati made it clear that a potential CGT liability that applies to a property should not automatically be deducted from the proceeds of the sale of that property as a necessary consequences of the sale. Whether such an order be made will depend upon the particular facts and circumstances of the case.

Orders

In the Court’s view, pursuant to order 2 of the Orders made by Rees J the husband was required to pay to the wife the amount of $206,155 being 50 per cent of the net proceeds of sale in the sum of $412,310.87 which was paid into the Trust Account of L Lawyers.

The wife’s costs of her application were reserved to the final hearing.

Leave a Reply