In its recent ruling, Commissioner of Taxation for the Commonwealth of Australia v Tomaras1, the High Court of Australia held that a wife’s $250,000 tax debt to the Australian Tax Office (“ATO”) could be assigned to her husband.
Tomaras concerned a husband and wife who were married in 1992 and separated in 2009. Throughout the marriage, the wife received several assessment notices from the Commissioner of Taxation requiring her to pay income tax, the Medicare levy, penalties and the general interest charge (GIC). The wife did not pay the amounts assessed, nor did she lodge any objections. By 9 August 2016, the wife’s liabilities to the ATO amounted to $256,078.32.
In November 2013, the husband was declared bankrupt. A month later, the wife commenced family law proceedings against the husband in the Federal Circuit Court of Australia seeking, amongst other things, that the husband be substituted for her as the debtor to the ATO.
The Commissioner of Taxation intervened in the proceedings and argued that the relevant sections of the Family Law Act did not bind the Crown, and therefore the Family Court did not have the authority to make orders affecting the wife’s tax debt.
The High Court considered the Commissioner’s objections but concluded that, under the Family Law Act 1975 (Cth), the Family Court has jurisdiction over debts owed to the Crown. The Act allows the Family Court to make an order that “payments be made … to a public authority for the benefit of a party to the marriage”.2 Moreover, it specifically empowers the Family Court to make an order “directed to a creditor of one party to a marriage to substitute the other party … to the marriage in relation to the debt owed to the creditor”.3
The court noted however that a substitution order should only be made where it is “just and equitable to do so” and not in cases where it is foreseeable that the debt would not be paid in full.
The decision in Tomaras has significant consequences for parties to family law proceedings. Spouses and de facto partners need to be mindful that they may ultimately have to bear the burden of their ex-partner’s taxation liabilities and penalties during family law proceedings.
On the plus side, the ability to substitute one spouse for another in relation to an outstanding tax liability offers a creative alternative when effecting a final property settlement. Instead of being paid out from the existing asset pool, parties may seek to have their outstanding tax liabilities resolved.
For further information on the effect of tax liabilities on your post-separation property settlement, contact one of our experienced lawyers to have an obligation free discussion at +61 3 8393 0144.