Understanding Future Maintainable Earnings and the Assessment of the Future Income Capacity of a Spouse

As part of the exercise of valuing such a business under such a methodology, all of the main core business expenses need to be removed or adjusted. For instance, any expenses that relate to the proprietor’s expenses (such as their own financing costs, tax, unusual or abnormal expenses and wages paid to themselves and associated persons), need to be removed and adjusted for. With proprietor’s wages, the common test is to substitute wages of a manager or an appropriate skilled person who is able to run the enterprise.

For instance, a husband and wife may be paying themselves, through salaries and dividends, an amount of close to $500,000.00. Let us assume that after separation the husband continues to pay himself a salary and take dividends to the extent of $500,000.00.

The other party, prior to resolution, rightly points out that the husband has a substantial earning capacity into the future. This may be a relevant factor under s75(2).

However, after a forensic accountant has performed an independent valuation, the business may be valued according to its future maintainable earnings. Let’s assume that this produces a business valuation of goodwill of approximately $1M. Let’s assume that in the valuation exercise, the valuer removed the husband’s dividends and drawings of close to $500,000.00 and replaced it with a notional commercial salary of a manager of $120,000.00.

The value of the business at $1M therefore gets placed into the Balance Sheet of the matrimonial assets and liabilities. The husband does not intend to sell the business, as he is still operating it. However, now it has a value of $1M based on its goodwill calculated according to its future maintainable earnings.

Assuming that the net core assets of the business are less than $1M, then it is clear that the valuation of the business is represented by a substantial and tangible, being goodwill. The value is based on a hypothetical purchaser at arm’s length.

There is now, no room to make an adjustment under s75(2) for a substantial income earning disparity, other than to the extent of the husband now being in possession of a business where he can notionally earn $120,000.00. In reality, he will go on taking dividends and receive benefits of close to $500,000.00. However, if one were to take the $500,000.00 future income capacity into account, together with the goodwill of $1,000,000.00 – then that would be a clear “double dipping” and it would not amount to a just and equitable adjustment under s75(2).

The Court has on occasions and in Rodgers case, continued to confuse the issues. For example, in Rodgers case, the Full Court were confused as to the adding back of expenses and the calculation of a notional salary. It was said at Paragraph 66:

“The amount taken up and the calculation of future maintainable earnings (a net expense of the business of about $17,000.00) is not reflective of the sums actually received by the husband (and the wife) from the business historically… Those historical sums received into the hands of the parties are significantly greater than the amount forming part of the assumption and figures upon which an assessment of future maintainable earnings is based…The husband has sole effective control over what the actual future sums paid to him will be…”

With all due respect, such reasoning is flawed.

In relation to any expenses that the husband and/or wife paid to themselves that were non-core business expenses, then those expenses were added back. In other words, the maintainable earnings figure was increased because the overall expenses on the books of the business were decreased. This resulted in a greater goodwill calculation as the maintainable earnings were higher. The part of the expenses that were not added back were retained as proper expenses of the business and thus, included in the calculation of maintainable earnings.

There can be no overlap. An expense is either properly incurred as part of the business expenses ongoing for the future, or, it is not a properly incurred maintainable expense of the business.

The Full Court, seems to confuse this concept. They seem to think that the husband will have not only a capacity to maintain the business and receive his salary of $120,000.00, but also – to pay himself other expenses that are non-core business expenses. Of course, in practicable terms that is the case, but the value calculated in the goodwill has already taken up the non-business expenses that the husband will pay to himself in the future.

It is suggested, that one must always be careful to avoid “double dipping” when assessing the current and future income earning capacity of a party who remains in control of a business that has been valued, according to future maintainable earnings which has produced a significant goodwill value.