Separate Property.  Parliament should amend s9A of the PRA

This week’s article is about a decision that has caused people to establish Trusts to protect their separate property - the Supreme Court’s decision in Rose v Rose [2009] 3 NZLR 1. 

The case attracted a lot of publicity.  Why?

One reason was that s 9A of the PRA - the section that led to the outcome - had been on the statute books since 2001 and the Supreme Court gave it a new interpretation.

A new interpretation of a statute has retrospective effect.  All the people who entered into pre-nuptial and post-nuptial Agreements in the years since the s 9A came into effect in 2002 were at risk of having their Agreements set aside.  (The situation is worse with the bundle of rights doctrine.  It operates retrospective all the way back to 1978!  How many lawyers drafted pre-nuptial and post-nuptial agreements with that doctrine in mind 32 years ago?)    There is much to be said for the belief that changes of such magnitude should be left to Parliament since any new provisions that it enacts will be prospective – and not retrospective – in their effect.

A second reason why the decision attracted such large publicity was that it seemed wrong that a contribution to an increase in value of separate property which was only a fraction more than “trivial” could convert the whole of the increase in value into relationship property that had to be shared on a 50:50 basis.

Two of the more diligent academic lawyers in this area of the law have researched s 9A and concluded that it is a poorly worded section that should not have been enacted in its present form as it offends some of the main principles of our relationship property legislation.  They should be commended for their work.

The authors, Margaret Briggs and Professor Nicola Peart are from the Law School in Otago and their article is published in Volume 24 of the NZ Universities Law Review.

They summarise their conclusions in these uncompromising terms:

“S 9A is now conceptually incoherent, internally inconsistent and incompatible with the aims and principles of the [PRA].  Indeed, the amendments to s 9A are a retrograde step that has undermined the coherent approach to the classification and division of increases in value of separate property that the Courts had already begun to develop prior to the 2001 amendments.”

It is a principle of the PRA that contributions in money and contributions of labour are to be treated equally yet the section doesn’t recognise this.  A financial contribution leads to an automatic 50:50 sharing while a gain from a non-monetary contribution is to be shared in such proportions as the Court directs.

The notion that a contribution that is only a trifle more than “trivial” should automatically entitle a spouse to take 50% of the gain in the value of separate property is fundamentally unfair as the contribution may be wholly disproportionate to the amount of the increase in value.

For those who have not read Rose recently, it is worth repeating that the Supreme Court said that its decision would be likely to convert the gains on separate property into relationship property in respect of all but “purely passive investments”.  Because “purely passive investments” are probably less common than other types of investments, the Supreme Court’s ruling may convert the majority of gains on separate property into relationship property.  One of the main principles of the PRA is the recognition of the right of a spouse to retain separate property.  A law which says that all gains on separate property are relationship property if they are indirectly related to a spouse’s contribution that is only a trifle more than “trivial” is fundamentally unfair because it shuts it eyes to the effect that inflation and other factors have played in creating the increase in value.  Blind justice leads to injustice.

What should be done about this?  Briggs and Peart have drafted two forms of amendments for consideration. 

When the Supreme Court’s decision was published I wrote a short piece about it in NZ Lawyer and was subsequently asked to speak about it in the media.  A number of people contacted me as a result of this publicity.  One, a policeman, told me that much of his inheritance had been lost through the Supreme Court’s interpretation of s 9A.  He was not alone.

It will not occur to most people that indirect actions of a spouse that are only a trifle more than trivial – and completely unassociated with a spouse’s separate property – will convert all of the gains on it into relationship property.

I was speaking to a group of about 25 accountants a couple of weeks ago and asked how many of them were aware of the Supreme Court’s decision in Rose.  Only two or three were.  If news of the decision has not reached accountants, what chance is there that it has reached into the community as a whole?

This poorly worded section should not be allowed to cause continuing unfairness and I encourage all readers who have influence within Government to read the article by Briggs and Peart and do what they can to promote an amendment to s 9A. 


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