Report 113 (2006) - Relationships - Law Reform Commission : Lawlink NSW

8.1 This Chapter considers the ways in which the Property (Relationships) Act 1984 (“the PRA”) defines the terms “property” and “financial resources”. It outlines the types of property that can be the subject of an adjustment order under s 20 of the PRA. In particular, it discusses the ways in which entitlements to superannuation can be brought within the adjustment scheme under Part 3 of the PRA, as well as the issue of whether parties’ contributions made before or after a relationship can come within the scope of an adjustment order.

8.2 Section 20 authorises the Court to adjust the parties’ interests in “property”. Section 3(1) defines “property” as:

8.4 In addition to these more common assets, other types of property may be brought within the scope of s 20 to be made the subject of an adjustment order. These include windfalls such as lottery or gambling wins, inheritances, loans, and gifts.³ There is no clear rule about whether such types of assets will or will not be included within the general pool of property to be divided between the parties. The issue is whether or not it is just and equitable to include them within the general property pool, and much may depend on the particular circumstances of the individual case. For example, where a lottery ticket is jointly purchased by both parties, it is more likely that the winnings from that ticket will be considered as part of the property to be divided up under s 20. If, on the other hand, the lottery ticket was purchased by one party, towards the end of or after the relationship, the Court may be less inclined to take into account the lottery winnings in the adjustment process.⁴ Similarly, in the case of a gift to one party only, the Court will look at the circumstances in which the gift was made. If it is evident that it was intended primarily to benefit its recipient, then it is likely to be considered as a contribution made by that party in the adjustment process.⁵

8.5 To determine whether to adjust property interests, and the terms of such adjustment, s 20(1) of the PRA requires the Court to consider financial and non-financial contributions made to property and to the parties’ “financial resources”. Section 3(1) of the PRA defines “financial resources” as including:

8.6 The legislative definition of “financial resources” expressly includes reference to superannuation entitlements. A degree of uncertainty surrounds the way in which the Courts have approached superannuation in relation to property division under the PRA. The approach at the State level contrasts with the legislative innovations at the federal level, with the recent amendment to the Family Law Act 1975 (Cth) (“the FLA”) to allow the Family Court to split spouses’ interests in superannuation. The approach in New South Wales, and the new system under the FLA, are outlined below.

8.7 Next to the family home, entitlements under superannuation funds are the most significant asset in most households.⁶ Indeed, the less wealthy a family household is, the greater the likelihood that superannuation plays a more significant part of the household’s finances.

8.8 Since the introduction of compulsory employer superannuation, access to superannuation is wide, but not universal. It is confined to Australian residents in paid employment, earning over $450 per month. Even for those in receipt of superannuation, contributions vary.

8.9 Because of the link with paid employment, it is not surprising that superannuation coverage and the level of benefits varies widely between men and women. Not only do fewer women have superannuation, the median value of their superannuation entitlements is generally much lower than that held by men.⁷ Therefore, the Commonwealth’s move to treat superannuation as property capable of division⁸ potentially increases the degree of equity in the division of assets of divorced or separated couples.

8.10 There does not appear to have been a uniform approach in the Courts’ treatment of superannuation for the purposes of property adjustment under the PRA. One line of reasoning considers entitlements to superannuation solely as a financial resource, and not as property. As such, superannuation entitlements cannot be directly affected by an order adjusting property under s 20 of the PRA. The only ways for the Courts to recognize superannuation contributions is as contribution to a financial resource. Such contribution is then recognized by the adjustment of interests in (some other) property that is already vested in possession at the time of the order. Alternatively, the Court could adjourn the application for adjustment until the superannuation entitlements vest in possession.⁹

8.11 Another line of reasoning maintains that entitlements to superannuation are, in fact, both a financial resource and property, as defined by the PRA, therefore implying that the two terms are not mutually exclusive. As property, they can be directly affected by an order for property adjustment under s 20, including an order adjusting an interest in a superannuation entitlement which has not yet, at the time of making the order, reached the stage where it can readily be converted into money.¹⁰

8.12 There has also been disagreement in the case law about the ways in which the Courts can recognize parties’ contributions to superannuation funds in exercising their discretion under s 20 of the PRA. On the one hand, it has been held that, in order for a Court to make an adjustment of property in favour of a party, in recognition of the other party’s entitlements to a superannuation fund, it must be shown that the non-member party contributed to those entitlements, rather than to any other property or financial resource.¹¹ On the other hand, it has more recently been held that, like any other property or financial resource, superannuation entitlements should be included in the assets considered in identifying and valuing the parties’ property, and an adjustment order that takes account of the superannuation entitlements does not depend on identifying contributions as contributions made directly or indirectly to those superannuation entitlements. It is not necessary to discern a connection between a party’s contribution, a piece of property, and an adjusting order.¹²

8.13 Part 8B of the FLA provides for the division of superannuation entitlements between separating spouses as part of the property adjustment process. Part 8B was inserted by amendments which came into effect in December 2002.¹³ These amendments were a response to perceived difficulties and uncertainties in the Family Court’s approach to the adjustment of superannuation entitlements.¹⁴ What most often happened, prior to the 2002 amendments, was that a spouse with substantial superannuation entitlements received a much smaller proportion of available assets in the expectation that he would, in future, be entitled to a significant superannuation benefit.¹⁵ It left that party with few current assets but a large future contingency, and the other party (usually the woman with little or no superannuation entitlements, and more often than not, the resident parent of the children of the marriage post-separation) with a greater share of the current assets but little prospect of a future nest egg.

8.14 Part 8B expressly provides that superannuation entitlements are to be treated as if they were property¹⁶ for the purposes of the property adjustment discretion under s 79 of the FLA, and sets out the ways in which such entitlements can be split (whether by Court order or by agreement between the parties). The Part also makes provision for the flagging of superannuation interests, where the division of the interest is deferred and a trustee of a superannuation fund will not be able to deal with that interest until the flag is lifted. The Family Court can make orders affecting third party trustees, and the Family Law (Superannuation) Regulations 2001 (Cth) set out methodologies for calculating the amount of a superannuation interest (except where the parties agree on an amount). Part 8B is generally designed to catch all superannuation schemes.¹⁷ A majority of the Full Court of the Family Court has recently held that, because of the way the legislation is drafted, superannuation interests are different from property as defined in s 4(1) of the FLA, and are in fact another species of asset in relation to which orders can also be made in adjustment proceedings under s 79 of the FLA.¹⁸

8.15 Once the referral of powers to the Commonwealth comes into effect,¹⁹ the Family Court will, presumably, consider claims by opposite sex de facto couples according to the new regime set up by Part 8B of the FLA. This leaves people in same sex de facto relationships and close personal relationships to have their claims for superannuation entitlements dealt with according to the (arguably conflicting) case law surrounding s 20 of the PRA. Whatever may be considered the merits or shortcomings of the FLA approach, it must be undesirable to have two, significantly different, approaches to superannuation apply to different groups in the same population. This is a strong argument in itself for reform of the PRA to adopt the same, or similar, scheme to the FLA.

8.16 Indeed, when proposing its new regime, the Commonwealth government encouraged the States and Territories to amend their de facto relationships legislation, in order that all couples whose relationships break down might be treated equally under the law.²⁰ The Commonwealth government does not have the power to legislate in respect of relationships outside marriage, and, in the absence of agreeing to take up the State’s referral of powers, it has no power to legislate in respect of the division of superannuation entitlements for same sex and close personal relationships. It is therefore for the State government to make these legislative changes. To do so, however, it must be mindful of the constitutional constraints on its own legislative powers. In particular, it would need to consider whether the adoption of the FLA model for splitting and flagging superannuation entitlements would conflict with Commonwealth legislation, and, for that reason, be invalid.²¹

8.17 It would be necessary for the Commonwealth to legislate to empower a Court in New South Wales to exercise similar powers to the Family Court to split or flag the superannuation interests of parties on the breakdown of a relationship. The need arises from the Commonwealth’s extensive regulation of the superannuation industry.²² Although State law can, generally, deal with superannuation to the extent to which it is capable of operating concurrently with Commonwealth law,²³ State legislation allowing for the splitting or flagging of superannuation interests would directly conflict with obligations (for example, in respect of payment and contribution and benefit accrual standards) that attach under the Commonwealth’s regulatory regime.²⁴ That regime exempts splitting or flagging orders under the FLA from the impact of such obligations.²⁵ Orders made by a New South Wales Court under the PRA would require similar exemption. It is with a view to giving the Family Court of Western Australia the same powers to deal with the superannuation interests of de facto couples that Western Australia has referred legislative power to the Commonwealth in relation to the superannuation interests of de facto partners whose relationship has broken down.²⁶

8.18 Of the submissions that addressed the issue of superannuation, most agreed that the simplest and most effective way to ensure that the new superannuation splitting arrangements applied to de facto couples was for the State to refer powers to the Commonwealth.²⁷ The Equity Division of the Supreme Court submitted that a referral of State powers to the Commonwealth would provide benefits beyond superannuation, as it would enable custody and property matters relating to de facto relationships to be heard in the one court.

8.19 The Victorian Bar submitted that it would be prudent to wait and see how the new provisions operate in the federal sphere before adopting parallel laws in the PRA, assuming that the constitutional difficulties can be overcome. It submitted, in a more general way extending beyond the treatment of superannuation, that there should be a distinction in arrangements between families with children and those without.

8.20 The Equity Division of the Supreme Court stressed the significance of the limitations on the power of the New South Wales Parliament to make laws with respect to superannuation. New South Wales cannot make laws that are inconsistent with Commonwealth laws about the administration of superannuation. In order to implement parallel laws, and thus treat superannuation as a form of property capable of division under the PRA, rather than being simply a financial resource, Commonwealth laws would need to be amended. Any such amendment would thus require the co-operation of the Commonwealth and New South Wales legislatures. It is not an initiative which the New South Wales Parliament can achieve alone.

8.21 The judges of the Equity Division further submitted that if superannuation is presently being ignored as a factor in litigation under the PRA, this is not due to a defect in the PRA but to the legal presentation of the case. The PRA, they submit, clearly permits contributions to financial resources to be taken into account.

8.22 The current uncertainty surrounding, and limitations on, the division of superannuation entitlements under the PRA is unsatisfactory, especially when contrasted with the exhaustive regime that is now set up under the FLA for married couples (and opposite sex de facto couples). While the Commission acknowledges the limitations on the State government to make unilateral legislative reform, this is an area where reform is obviously highly desirable, particularly in light of the relative financial importance that superannuation represents for many households in New South Wales. For this reason, the State government should take what steps are necessary to make such reform possible. The Commonwealth has recently been willing to make legislative amendments to include same sex couples within other areas of federal regulation, such as migration and taxation law. There is no reason why it should not be similarly open to extend reform of superannuation laws to same sex relationships. Such reform would fall well short of a general recognition of same sex relationships in federal law.

8.23 There has been much debate in the case law about whether financial and non-financial contributions of the kind contemplated in s 20, but made before or after the relationship, can be taken into account by the Court under the PRA.

8.24 The narrower view, espoused by Justice Powell in Roy v Sturgeon, was that only contributions made during the course of a relationship could be taken into account. Contributions that were made before a de facto relationship commenced, or after it ended, were held to be outside the scope of s 20 and therefore could not be taken into account. Consequently, when a de facto relationship commenced and when it ended became of critical importance to the outcome of a claim for property adjustment.

8.25 Another significant, and related, issue is how the Court should treat breaks in the relationship. At one end of the spectrum, some judges took the view that moving out of the common residence, irrespective of how long, indicated the end of the relationship. If the parties resumed cohabitation at some later stage, such resumption constituted the beginning of a second and discrete period of cohabitation. This quite restrictive approach had a number of repercussions in terms satisfying the jurisdictional requirements under the PRA, such as whether the parties satisfied the minimum two year period of cohabitation and whether a claim was brought within two years of the end of the relationship. It also had significant implications in terms of what contributions the Court could take into account when exercising its discretion under s 20.²⁸ By contrast, physical separation in the context of a marriage, does not in itself terminate the relationship. Only divorce will end a marriage.

8.26 Determining when a de facto relationship ends is a question of fact, and one that cannot be answered merely by the presence, or absence, of cohabitation. Although moving out of the common residence will, in many cases, be an indication of the end of a de facto relationship, periods of separation for the purpose of a holiday, business trip or due to illness will not affect the continuation of the relationship.²⁹ A “trial separation”, usually taken when the relationship is rocky and the parties need time out from each other in order to decide whether or not to continue in the relationship, has been interpreted differently in several cases. The narrow view is that if a party decides not to live with the other and moves out, even if merely to decide whether to stay in the relationship, the relationship is considered ended.³⁰ The other, more beneficial approach, is that a small hiccup in an otherwise lengthy relationship should not be enough to terminate it.³¹

8.27 In DP 44, the Commission asked whether the PRA should be amended to provide some criteria to guide the Court when determining the date at which a relationship ends. None of the submissions which addressed this issue thought it was appropriate to prescribe in legislation what matters a Court should take into account when determining when the relationship came to an end. New South Wales Young Lawyers stated that the very nature of personal relationships makes it unsuitable to try to measure against a hard and fast rule, for example the time at which, or the way in which, they terminate. Each case needs to be considered in isolation. However, some of the factors to be considered should include the date of physical separation, whether the parties expressed an intention for the relationship to end, whether they believed that reconciliation was possible and whether they intended to attempt reconciliation. They noted that incorporating de facto and domestic relationships under the aegis of the Family Court would mean that the remedial discretion would lie in one court which could build expertise in handling similar relationship situations.³²

8.28 The Commission agrees that it is appropriate to leave this issue as a question of fact to be determined by the Court in the circumstances of each individual case.³³ In any case, the issue appears to have been settled by the Court of Appeal’s decision in Jones v Grech,³⁴ which is outlined below.

8.29 Until the decision of the Court of Appeal in Jones v Grech, there had been a wide divergence of views among judges in relation to how periods of separation between parties in a domestic relationship should be treated. The restrictive approach espoused by Justice Powell was that the Court could not have regard to contributions made prior to the commencement of a relationship.³⁵ Justice Bryson declined to follow this approach in Foster v Evans³⁶ as did several Family Court judges in matters heard under cross-vesting legislation.³⁷

8.30 In Jones v Grech, the parties had been involved in a series of de facto relationships over a 32 year period from 1965 to 1997, punctuated by several breaks. At first instance, the Master formed the view that only the most recent period of cohabitation, from 1995 to 1997, could be considered in the application for a property adjustment order as only it was brought within the limitation period. However, the Court of Appeal held that contributions made prior to that relationship, and occurring during an earlier relationship, could be considered in an application to adjust property interests.³⁸ In particular, Justice Ipp noted that:

8.34 There is now a preponderance of authority which favours the view that post separation contributions, both financial and non-financial, made in the period between separation and hearing, can and should be considered by the Court when determining whether to make a property adjustment order under s 20.⁴¹ If there is still some doubt as to whether this is the correct view in matters brought under the PRA, amendment of s 20 as recommended by the Commission in the preceding Chapter⁴² to confer a wider discretion on the Court to consider other relevant factors in property adjustment proceedings will certainly remove any such doubt. In a case under the ACT legislation, which reflects the provisions of the FLA, Justice Crespin found that there was no doubt that post-separation contributions to the welfare of a child could be considered under s 15 of the Domestic Relationships Act 1996 (ACT).⁴³

Table of contents

1. Other choses in action include any claims a party may have to recover a sum of money, for example insurance claims.

2. These definitions are used in G Sheehan and J Hughes, “What is a fair settlement? The division of matrimonial property in Australia” (2000) 55 Family Matters 28 at 31.

3. See NSWLRC, Review of Property (Relationships) Act 1984 (NSW) (Discussion Paper 44 , 2002) (“DP 44”) at para 6.58-6.76.

4. See Mackie v Mackie (1981) FLC 91-069; Wallace v Stanford (1995) 37 NSWLR 1; but contrast Theodoropoulos v Theodoropoulos (1995) 38 NSWLR 424.

6. See J Dewar, G Sheehan and J Hughes, Superannuation and Divorce in Australia (AIFS, Melbourne, 1999).

7. See R Clare, “Women and superannuation” (Association of Superannuation Funds of Australia Research Centre, 2001), especially at 21-22.

9. See Green v Robinson (1995) 36 NSWLR 96 at 108 (Powell JA); Gazzard v Winders (1998) 23 Fam LR 716 at 729 (Beazley JA).

10. See Green v Robinson (1995) 36 NSWLR 96 at 113 (Cole JA); Chanters v Catts [2005] NSWCA 411 at para 23-24 (Hodgson JA), para 90 (Bryson JA).

12. Green v Robinson at 103 (Kirby P (as he then was)); Chanter v Catts [2005] NSWCA 411 at para 21 (Hodgson JA), at 88-89 (Bryson JA), at para 120 (Hunt AJA).

14. See Australia, Attorney General’s Department, Superannuation and Family Law: A Position Paper (AGPS, Canberra, 1998); Australia, Senate Select Committee on Superannuation and Financial Services, Report on the Provisions of the Family Law Legislation Amendment (Superannuation) Bill 2000 (AGPS, 2001); A Nicholson, “Proposed changes to property matters under the Family Law Act” (Address to the NSW Bar Association, Sydney, 20 May 1999).

15. Invariably it was the husband, in full time paid employment, who held substantial superannuation interests.

17. See FLA s 90MB (Part 8B generally overrides any law of the Commonwealth, States or Territories, and anything in a trust deed or other instrument).

18. See C and C [2005] FamCA 429, especially at para 40-45 (Bryant CJ, Finn and Coleman JJ). Contrast with the judgments of Warnick J, especially at para 90-99, and O’Ryan J, especially at para 158-159 (their Honours dissented from the majority on this point, although they agreed on the final outcome in that case).

20. Australia, Attorney General’s Department, Superannuation and Family Law: A Position Paper (AGPS, 1998) at 79.

22. The basis for Commonwealth regulation is discussed in ALRC, Collective Investments: Superannuation (Report 59, 1992) Ch 7.

23. For example, Superannuation Industry (Supervision) Act 1993 (Cth) s 350; Retirement Savings Accounts Act 1997 (Cth) s 197. See further Attorney-General for the Commonwealth v Breckler (1999) 197 CLR 83 at 101 (Gleeson CJ, Gaudron, McHugh, Gummow, Hayne and Callinan JJ).

25. For example, Superannuation Industry (Supervision) Regulation 1993 (Cth) Pt 7A.

27. NSW Young Lawyers, Submission at 12-13; Law Society of NSW, Submission at 9.

30. Hibberson v George (1989) 12 Fam LR 725, followed in Theodoropoulos v Theodosiou (1995) 38 NSWLR 424. But compare George v Hibberson (1987) DFC 95-054 (Cohen J) at first instance.

34. (2001) 27 Fam LR 711, followed in, eg, Greenwood v Merkel [2004] NSWSC 43; Hughes v Egger [2005] NSWSC 18; Karlos v Sarbutt [2006] NSWCA 11.

36. Foster v Evans (NSW SC, No 4439/95, Bryson J, 31 October 1997, unreported).

37. See, for example, Griffiths and Brodigan (1995) 20 Fam LR 822; Fuller v Taaffe (1997) 23 Fam LR 702.

41. See, eg, Chanter v Catts [2004] NSW 1025 (Macready AJ); Foster v Evans (NSW SC, No 4439/95, Bryson J, 31 October 1997, unreported); approved by Campbell J in Nguyen v Scheiff [2002] NSWSC 151 at [104]-[111]. See also Dridi v Fillmore [2001] NSWSC 319 and McDonald v Stelzer [2000] NSWCA 302 (Bergin J).