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

Last Updated: 29 January 2019
Article by Monique Robb

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".

For further information please contact:

Monique Robb, Senior Associate
Phone: + 61 2 9233 5544
Email: mcr@swaab.com.au

Katerina Lonergan, Solicitor

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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