Com­mis­sion­er of Tax­a­tion v Tomaras: High Court rules that tax debts can be trans­ferred between spouse parties

Gen­er­al­ly, debts of par­ties to a mar­riage (or de fac­to rela­tion­ship) which were incurred dur­ing the mar­riage, are paid out of joint assets as part of a final prop­er­ty set­tle­ment. It is not uncom­mon for par­ties to pay out any debts owing to the Aus­tralian Tax Office, as part of this process.

How­ev­er, the Court does have the pow­er under 90AE of the Fam­i­ly Law Act to effec­tive­ly sub­sti­tute one par­ty to a rela­tion­ship for the oth­er par­ty, and order that the sub­sti­tut­ed par­ty there­fore be respon­si­ble for dis­charg­ing that debt. Orders for sub­sti­tu­tion are rel­a­tive­ly rare, and are a depar­ture from the ​“norm”, when made. 

The recent High Court deci­sion of Com­mis­sion­er of Tax­a­tion v Tomaras con­sid­ered the ques­tion of whether in fam­i­ly law prop­er­ty set­tle­ment pro­ceed­ings, the court has the pow­er (under 90AE(1) or (2) of the Fam­i­ly Law Act) to order that the hus­band be sub­sti­tut­ed for the wife in rela­tion to a tax debt owed by the wife. 

Back­ground

The hus­band and the wife were mar­ried in 1992 and sep­a­rat­ed in 2009. Through­out the mar­riage, the ATO had issued assess­ments requir­ing pay­ment of income tax, the Medicare levy, penal­ties and inter­est by the wife. The Com­mis­sion­er obtained default judg­ment against the wife in the sum of $127,669.36 after the wife failed to make pay­ment as assessed and failed to lodge any objec­tions to the assessments. 

The hus­band was declared bank­rupt in 2013, after which the wife com­menced prop­er­ty set­tle­ment pro­ceed­ings in the Fed­er­al Cir­cuit Court of Australia.

The wife sought Orders that the hus­band be respon­si­ble for pay­ment of any income tax as assessed for the 2009 finan­cial year, as well as an order that the hus­band do all nec­es­sary to release and indem­ni­fy the wife ​“against any lia­bil­i­ty present or con­tin­gent includ­ing tax and bank lia­bil­i­ties, in respect of the [hus­band] or a relat­ed par­ty of the [hus­band].”

The Com­mis­sion­er was grant­ed leave to inter­vene in the pro­ceed­ings in 2016, at which time the wife’s tax lia­bil­i­ty amount­ed to $256,078.32, com­prised of the judg­ment debt plus inter­est. The tri­al judge stat­ed a ques­tion of law for the Full Court’s opin­ion; name­ly whether sec­tion 90AE of the Fam­i­ly Law Act grants the court pow­er to make the fol­low­ing order:

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

Rel­e­vant sec­tions of the Act

Sec­tion 79 of the Fam­i­ly Law Act pro­vides that in fam­i­ly law prop­er­ty set­tle­ment pro­ceed­ings, the court may make such order as it con­sid­ers appropriate. 

Under sec­tion 90AA of the Fam­i­ly Law Act, the Fam­i­ly Court and Fed­er­al Cir­cuit Court may make an order ​“direct­ed to, or alter[ing] the rights, lia­bil­i­ties or prop­er­ty inter­ests of a third party.”

Sec­tion 90AE gives the court the pow­er 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 that creditor.

Deci­sion

In Com­mis­sion­er of Tax­a­tion v Tomaras, the Com­mis­sion­er appealed to the High Court against a judg­ment of the Full Court of the Fam­i­ly Court that the Fed­er­al Cir­cuit Court had the pow­er to order that the Com­mis­sion­er sub­sti­tute the hus­band for the wife in rela­tion to the wife’s tax debt. 

In the Full Court of the Fam­i­ly Court and the sub­se­quent appeal to the High Court, the Com­mis­sion­er relied on the pre­sump­tion that the Crown is not bound by statute. 

The High Court ruled against the Com­mis­sion­er and dis­missed the appeal, how­ev­er not­ed that ​“there will sel­dom, if ever, be occa­sion to exer­cise that pow­er and adverse­ly affect the com­mis­sion­er or oth­er creditors”.

Ques­tions in respect to who, fol­low­ing a rela­tion­ship break­down, should be respon­si­ble for cer­tain debts are high­ly depen­dent on the indi­vid­ual sit­u­a­tion. Our accred­it­ed spe­cial­ists in Fam­i­ly Law are able to answer these ques­tions for you. For advice on your indi­vid­ual cir­cum­stances, please call Swaab on +61 2 9233 5544.