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Cunningham v Cunningham: When Income is Affected by Property Orders

When making orders for property division in family lawdisputes, the Court looks, among other things, at the future needs of theparties, including their respective income earning capacities (Family Law Act s 75(2)(b)).

But what happens when earning capacity is affected by the would-be property orders, such as when one party buys the other out of a joint business venture? Can the Court consider the income that the business will generate for the party retaining it, to make further property adjustments on a future needs basis? The Full Court of the Family Court in Cunningham v Cunningham [2005] FamCA 159 held that it could.

In that case, the husband and wife jointly owned anauto-electrical engineering business, for which the husband worked full-time asmanager and engineer, and the wife worked part-time in an administrative role.At first instance the Court made orders for the business to be sold and proceedsdivided between the parties. The husband obtained orders enabling him topurchase the business at a price equivalent to that offered by a 3rd partypurchaser, which he did.

When taking future needs (s 75(2)) factors intoaccount, the trial judge found that while the parties had the same capacity todraw salaries of $52,000, the husband had a greater income capacity because ofhis retention of the business, which generated profits of nearly $100,000 peryear. Taking this into account, the trial judge ordered an adjustment of 7.5%($82,000, of a pool worth $1.09m) in the wife’s favour.

The husband appealed, claiming that he had purchasedthe wife’s 50% interest in the business at fair market value, and the wifeshould not receive further adjustment simply because he was able to generatemore income from the manner in which he invested his share of the parties’assets, namely by acquiring the business. He submitted that the wife wasequally in a position to invest her share of the asset pool (proceeds from thesale of her share in the business) to generate income, and he should not bepenalised if she chose to adopt a conservative investment policy.

The Court held on appeal that there is nothing in the Family Law Act that prohibits it from taking into account the relative income and earning capacities of the parties in circumstances such as these, where a disparity is caused by one party’s acquisition of the other’s interest in a business pursuant to Family Court orders. However, the Full Court found that it was necessary to acknowledge the fact that in order for the husband to maintain the income differential, he had to keep his half share of the matrimonial asset pool invested in the business, while the wife had available to her an equivalent sum to invest as she saw fit. The wife had the capacity to reduce the gap between the parties’ income through investment of her share of the pool in a way that generated income or capital growth. As such, the Full Court reduced the adjustment that had been awarded in the wife’s favour at first instance to approximately 4.5% (a cash payment of $50,000).

 

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