tax debt

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 a 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 actually had the power to transfer a tax debt between parties. The Commissioner of Taxation (“the Commissioner”) was granted leave to intervene in the family law matter and this discrete issue was taken all the way to the High Court of Australia.

The question put to the High Court was whether Section 90AE(1)-(2) of the Act grants the Court the 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 (i.e. Judge-made law) that ‘a statute does not bind the Crown’ and contended that the Court subsequently lacked 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 Section  90AE(1) of the Act 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 Section 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 Section 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 Section 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.

For more information, please contact the TLFC Family Law Team on 03 8600 9333.