Implications of financial structures in the event of a separation – a reminder from the Court of Appeal

A recent Court of Appeal case serves as a further reminder that financial arrangements entered into for accounting purposes may have significant implications for relationship property matters in the event of a separation.

This case involved a couple who separated after a 10 year relationship (having been married for the majority of that period).  Prior to the relationship, the husband and his family were involved with investing in commercial properties.  In 1999, early on in the relationship, the husband was involved in the purchase of a commercial building, using his separate property resources (including companies and involving a trust).  The purchase price was $560,000.

In 2003, the commercial building was transferred into the joint names of the husband and wife.  Approximately one year after the transfer, the property was sold for $1.575 million (GST inclusive).  All but $50,000 of the net sale proceeds were then disposed of by the husband for his separate commercial interests.  As such the bulk of the net sale proceeds did not form part of the couple’s relationship property pool.   

In late 2008, the couple separated.  Through the Family Court, the wife successfully sought a half share of the net sale proceeds.  That decision was later overturned by the High Court. 

The wife appealed to the Court of Appeal.  In that Court the husband conceded that the purpose of the registration in joint names was to avoid GST liability and to avoid “tainting” the property for income tax purposes.  He argued that as a result, the property was never intended to be beneficially owned by the parties. 

The Court of Appeal’s direction on this matter was clear:

“A Court of law will not permit a party to avoid the consequences of a course of action deliberately taken [in this case registration of the property in joint names] by adducing evidence that the course of action was taken for an unlawful purpose such as avoiding tax or defeating creditors.”

The husband’s argument on that point was rejected.

The Court of Appeal went on to conclude that the husband must have known, when he disposed of the net proceeds of sale to his separate property company, that he was exposing his wife to a significant risk of not being able to assert her rights in respect of the proceeds.  This was considered to be a disposition undertaken with the intention of defeating the wife’s claims.  As such, the Court ruled that the disposition was effected in order to defeat the wife’s rights and the matter was referred back to the Family Court to determine remaining issues in the proceeding.

This case serves as another clear reminder that changes to financial arrangements need to be carefully considered.  If you are considering a change to your current financial structures or you are a professional who is advising clients on a change to their financial structures, expert legal advice should be sought. 

If you would like any further information on these matters, please contact our Wellington based family lawyers Debbie Dunbar, email debbie.dunbar@morrisonkent.com, phone (04) 495 9940 or Maretta Twentyman, email maretta.twentyman@morrisonkent.com, phone (04) 495 8918.