Family Court Approves Assignment of Tax Debts Between Spouses

The following question was recently put to the Full Court of the Family Court of Australia:

Does s90AE(1)-(2) of the Family Law Act 1975 (Cth) grant the court power to make Order 8 of the final orders sought in the amending initiating application of the wife?

The relevant Order sought by the wife was as follows:

Pursuant to section 90AE(1)(b) of the Family Law Act 1975 (Cth), in respect of the applicant wife’s indebtedness to the Commissioner of Taxation for the Commonwealth of Australia taxation related liabilities in the amount of $256,078.32 as at 9 August 2016 plus General Interest Charge (GIC) the respondent husband be substituted for the applicant wife as the debtor and the respondent husband be solely liable to the Commissioner of Taxation for the said debt.

The Court confirmed that it did indeed have that power.

Section 90AE of the Family Law Act 1975 (Cth) (the ‘Act”) provides (relevantly) as follows:

In proceedings under section 79 the Court may make any of the following orders:

• An order directed to a creditor of the parties to the marriage to substitute one party for both parties in relation to the debt owed to the creditor;
• An order directed to a creditor of one party to a marriage to substitute the other party, or both parties, to the marriage for that party in relation to the debt owed to the creditor.

The fact scenario in Tomaras & Tomaras and Anor and Commissioner of Taxation [2017] FamCAFC 216 is quite common with the agreed facts being as follows:-

1. The parties were married for 17 years from 1992 until separation in 2009.
2. During the relationship the applicant wife was assessed to pay income tax and the Medicare Levy but she failed to do so and failed to lodge any objection to the assessments.
3. In November 2009 the Commissioner of Taxation obtained a default judgment against the applicant wife for the unpaid liabilities. The applicant wife did not pay the debt.
4. In November 2013 the respondent husband became bankrupt.
5. In December 2013 the applicant wife commenced proceedings for property adjustment orders.
6. In February 2016 the Commissioner for Taxation was given leave to intervene in the proceedings.

The Commissioner contended that s90AE of the Act does not bind the Crown and accordingly the Court had no jurisdiction to substitute the husband for the wife in respect of her tax debt.  It relied upon the decision of the High Court in Bropho v State of Western Australia [1990] HCA 24 which established the position that the Australian Courts must apply a presumption that statutory provisions expressed in general terms do not bind the Crown.

When considering if s90AE should bind the Crown as the applicant sought, the Full Court was of the view that s90AE of the Family Law Act could only be of benefit to the Crown, rather than detrimental as the Crown perceived it to be.

The reasons for such a finding included:

1. Instead of an impecunious taxpayer being responsible for the tax debt, a more wealthy spouse may be made solely responsible for the debt which would increase the prospects of recovery; and
2. Instead of only one spouse being responsible, both spouses could be made liable, again increasing the prospects of recovery.

In matrimonial property settlement disputes, it is not uncommon that one spouse has a taxation liability in their name, arising from the distribution of income from a Family Trust throughout the relationship.

It is also not uncommon for that spouse to have no income from which to meet that liability and that they are reliant upon the more financial spouse to meet their tax debt.  Post separation the preparedness of the financial spouse to meet that debt more often than not, wains and the issue of responsibility for the tax liability becomes a matter of argument between lawyers.

The debt usually “lies where it lies” meaning that it will have to be met from property settlement entitlements, causing financial detriment to a party who may not be in employment and can ill afford to lose many thousands of dollars from their property entitlements.

The Court’s confirmation that s90AE of the Act specifically enables taxation debts to be assigned will open up a new method by which to deal with responsibility for matrimonial tax debts, irrespective of in whose name they are held.

If you have separated from your spouse and have concerns or questions regarding the appropriate treatment of taxation liabilities, or any other aspects of your property adjustment matter, our Family Law team are available to assist you with confident, cost effective and expert advice.