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Family Law Litigation: why you shouldn’t tell the left hand you’ve been stealing from the right

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By Jeremy Hogg, Senior Lawyer, MST Lawyers

The recent decision in Kern & Kern[1] by the New South Wales Federal Circuit Court is a timely reminder of the risks litigants run when they attempt to bolster their family law case by leading evidence in Court of their (or their ex-partner’s) prior fraudulent behaviour.

In the case of Kern the wife’s parents, through their development business, gifted a block of land to her during her marriage.  At trial, the wife put forward that her contributions to the marriage (and accordingly the benefit she should receive upon separation) were greater than apparent from the property transfer documents.  Whilst the Transfer of Land document transferring the block of land from the wife’s parents’ business to her showed a consideration of $110,000 , both the wife and her father gave evidence during the family law proceedings that the true market value of the land was in the range of $150,000 to $179,000.  Importantly, the stamp duty paid by the wife at the time of the transfer was based on the land being worth $110,000.

While the wife was ultimately successful in convincing the Court that her contribution of the block of land should be given the higher value, the presiding judge also referred the matter to the NSW Office of State Revenue for an investigation of both the wife and her parents’ business in relation to possible duties fraud.

At the conclusion of the case it’s likely that the wife was reconsidering whether or not her strategy of belated truth telling had been a wise one, and was perhaps asking her lawyers some pointed questions about the advice they’d provided to her before she gave her evidence.

Common issues similar to those dealt with in Kern which regularly come before the Courts in family law proceedings include:

  1. “Cash” trading in family businesses;
  2. Fraudulent declaration of consideration in transfers of property;
  3. False statements made to Centrelink or the ATO regarding income, marital status or family situation; and
  4. Property being “held on trust” for other family members.

The role of the Family Law Courts as protectors of the public coffers is a longstanding one. In 1985 in In The Marriage of P & P[2] Justice Lindenmayer, in tracing the source of the Court’s obligations in this regard back to the operation of the English Court of Exchequer in the 19th century, stated the Court “has a duty to protect the revenue of the Crown in right of the Commonwealth.

The manner in which the Court has carried out this duty has varied over the years, however, and has not been consistently applied.

For many years, the Courts appeared to favour the approach taken in the case of Elias & Elias.[3] In that case the Court put forward the position that:

…when a party has made representations of fact to third parties and has gained advantage from so doing, it is open for the court in subsequent proceedings…to decline to accept from that party evidence which contradicts those representations.

In simple terms, the Court said that litigants who had made and benefited from statements to third parties (such as the taxation office) during their relationship could not then simply come to the Courts after their separation and tell a new story that suited them better than the original one, regardless which version of events was true.

In more recent times, the Courts have tended to depart from the principle set out in Elias & Elias and to permit parties to lead evidence of the “true story”, but to also reserve the right (as seen in the case of Kern) to refer one or both of the parties for investigation by the relevant government authorities.

A litigant who decides to introduce the “true story” at Court is courting the risk of their evidence being referred to a government authority, such as the Australian Tax Office, relevant State Revenue Office, Centrelink or the Department of Human Services in relation to Child Support, for further investigation. The outcomes of such investigations may include revised assessments of payable tax or duties, or even prosecution for fraud.  In some circumstances, such as in the case of Atkinson v Federal Commissioner of Taxation[4], even without a referral by the Court documents submitted by the parties during the course of family law proceedings can be inspected by the Australian Tax Office during a tax audit and the evidence contained therein may be relied upon in issuing default assessments.

Parties must also take great care when attempting to engineer an adverse outcome for their ex-partner. Unless one party can show that they too were a victim of the other’s fraud, it is likely that any penalty relating to a period when the parties were in a relationship will be shared by both of them, particularly if both parties enjoyed the benefit of the fraud (such as the use of “tax free” income).  It is not enough for a party who had knowledge of a fraud to simply rely on the fact that they did not actively take part in it.

As may be expected, honesty and integrity in dealings with government authorities during a relationship is the best protection a party can have from later disadvantage during family law proceedings. As the old adage in equity goes, the Courts will assist those who come with clean hands.

Where this has not been the case, however, litigants must very carefully consider which issues they decide to put before the Court: while a party’s disclosures may assist their family law case in the short term, an unwitting litigant may ultimately regret their candour in Court when it comes time to pay the proverbial piper.

[1] [2014] FCCA 1108

[2] (1985) 9 Fam LR 1100

[3] (1977) FLC 90-267

[4] (2000) ATC 4332

For Further Information, Please contact our Family Law team by email family@mst.com.au or by telephone +61 8540 0200.