Two tax issues need to be considered by family law advisers when structuring family law settlements:
- the availability of CGT roll-over relief on the transfer of assets and the consequences for each party of receiving an inherited cost base; and
- the intended apportionment of liability of the parties for existing tax debts.
In relation to the apportionment of liability between the parties for tax debts, section 79 Family Law Act allows the Family Court to make such orders as it considers appropriate for altering the interests of the parties in matrimonial property.
Relevantly, section 90AE Family Law Act states:
‘(1) In proceedings under section 79, the Court may make any of the following orders:
…
- 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.
…
(2) In proceedings under section 79, the court may make any other order that:
(a) directs a third party to do a thing in relation to the property of a party to the marriage; or
(b) alters the rights, liabilities or property interests of a third party in relation to the marriage.’
The operation of these provisions in the context of outstanding tax liabilities was explored in Commissioner of Taxation v Tomaras [2018] HCA 62 (Tomaras Case).
Tomaras Case
In brief, the facts of the Tomaras Case were as follows:
- Mr and Mrs Tomaras married in 1992 and were separated in 2009;
- During their marriage, Mrs Tomaras had received several notices of assessment from the Tax Office which she failed to pay (and did not object to). The Tax Office obtained a default judgement against Mrs Tomaras but did not enforce it;
- Mr Tomaras was declared bankrupt in November 2013;
- In December 2013, Mrs Tomaras commenced proceedings against Mr Tomaras pursuant to the Family Law Act and amongst other things, sought an order under section 90AE(1)(b) Family Law Act that Mr Tomaras be substituted as the sole debtor to the Tax Office in respect of her income tax liabilities (which totalled around $250,000);
- The Tax Office applied for and was granted leave to intervene in the proceedings. The Tax Office was concerned that if the order was granted, the tax debt would become partly or entirely unrecoverable since Mr Tomaras was bankrupt.
The Tax Office argued before both the Family Court (in first instance) and the High Court (on appeal) that the Court did not have the power to make the orders.
In particular, the Tax Office argued that sections 90AE(1) and (2) Family Law Act could not apply in relation to taxation debts owed by one or both of the parties to the Commonwealth, relying on the common law presumption that a statute does not bind the Crown.
The Family Court and High Court both rejected the Tax Office’s arguments and held that the Court had jurisdiction to make the orders sought – namely to order the Tax Office to substitute one party to the marriage for another, in respect of a tax debt owed by the first party to the Tax Office.
That said, the High Court observed in its judgement that while the Court had the power to make the order, ‘there will seldom, if ever, be occasion to exercise that power and adversely affect the Commissioner or other creditors.’
For further information, please contact Patrick Ellwood on 0400 503 111 or patrick@cloverlaw.com.au
Comments are closed.