Til debt do us part: High Court rules on transferring tax debt in family law matters
By Chloe Forder
22 January 2019
In the recent decision of Commissioner of Taxation v Tomaras, the High Court considered the question of whether the Family Law Act 1975 (Cth) (“the Act”) grants the court power to transfer tax liabilities to the other party in family law proceedings.
In this matter, the husband and wife married in 1992 and separated in July 2009. During the marriage the wife incurred significant tax liabilities which accrued general interest charge (“GIC”) from November 2009, with a total debt of over $250,000 owed to the tax office. The husband was declared bankrupt in November 2013 and the wife commenced family law proceedings soon thereafter. Among other orders, the wife sought that the tax liabilities owed by the wife be transferred to the husband.
The order sought by the wife in relation to her tax liabilities raised the issue of whether the court has the power to make the requested order. The Commissioner of Taxation (“the Commissioner”) was granted leave to intervene in the family law matter and the discrete issue was taken all the way to the High Court.
The question put to the High Court was whether s 90AE(1)-(2) of the Act grants the court power to order that the husband be substituted for the wife in relation to the tax debt.
The Commissioner relied on the common law presumption that ‘a statute does not bind the Crown’ and contended that the court subsequently lacks the power to make such an order, because the jurisdiction conferred in relation to ‘proceedings between the parties to a marriage with respect to the property of the parties to the marriage’ does not extend to tax debts. This argument was squarely rejected by the High Court.
The court decided that s 90AE(1) does confer power for the husband to be substituted for the wife in relation to the tax debt. However, the High Court was only required to determine the threshold jurisdictional issue, and was not actually asked to make the order for the debt to be transferred. In fact, the High Court commented that ‘the court has the power…but there will seldom, if ever, be occasion to exercise that power’. This is because of the restrictions in s 90AE(3), which provide that the court may only make such an order if ‘the making of the order is reasonably necessary…to effect a division of property’, ‘it is not foreseeable…that to make the order would result in the debt not being made in full’ and ‘it is just an equitable’ for such an order to be made. In this instance, the husband was bankrupt and it was not foreseeable that he would be able to pay the tax debt if it was transferred to him.
This case shows that the Court will be unlikely to transfer tax debts to the other party in family law proceedings under s 90AE(1) of the Act, although it clearly does have the power to do so. The Court maintains broad powers in relation to debts of the parties in a family law dispute, which includes the power to make an order under s 80(1)(f) of the Act for a party to make a payment directly to the tax office on behalf of the other party.
Although the jurisdictional point was found in favour of the Applicant wife in this instance, the court has in practical terms rejected what seems to be an attempt to minimise the funds going to the tax office in a family law settlement. The treatment of liabilities incurred both during a relationship and pending financial settlement continues to be a complex area of family law, and early advice on these issues is recommended.