An Australian court can order that the tax liabilities of spouses who have separated be transferred from one spouse to the other through a property settlement, the High Court ruled recently.
Mr. and Mrs. Tomaras (whose full names don’t appear in the court record) separated in July 2009. Before separating, Mrs. Tomaras had received assessments from the Australian Taxation Office for unpaid income tax and Medicare liabilities. Mr. Tomaras was declared bankrupt in November 2013. The following month, Mrs. Tomaras asked the Federal Circuit Court to make
her husband liable for all tax assessed on her income for the tax year ending June 30, 2009, through a date that was not specified in the court record. As of August 9, 2016, Mrs. Tomaras’s tax liabilities totaled AUD 256,078 (around $183,000.)
The Federal Circuit Court asked the full court of the Family Court to determine whether section 90AE(1)-(2) of the Family Law Act 1975 allows for the interspousal shifting of a tax liability. In 2017 the full court agreed with the Federal Circuit Court that section 90AE(1)-(2) does allow for interspousal shifting of tax debts. The full court rejected the ATO’s position that section 90AE does not bind the Crown regarding tax debts. The ATO was granted special leave to appeal the decision to the High Court.
In a December 13 decision (Commissioner of Taxation v. Tomaras, [2018] HCA 62) that appears to have been published only recently, the High Court upheld the full court’s decision, but it also said the fact that the husband was bankrupt was “reason enough not to [issue] the order sought by the wife under [section] 90AE.”
Max Meyer, an attorney with Pearson Emerson Meyer Family Lawyers, said that, unlike the U.S. Internal Revenue Code, there is no provision under Australian law allowing spouses to file joint tax returns. “The question of when a spouse may become responsible for the tax debt of the other spouse involves very complex questions of both tax law and family law,” he said. “Without some further proceeding, one spouse is not liable for the tax debt of the other spouse, and such a provision was not relevant in the instant case.”
In a May 2018 blog posting about the Family Court’s original decision, Matthew Carney, a family law attorney with Turnbull Hill Lawyers, said the ruling had beneficial implications for a less wealthy spouse who might carry the risk of an income tax liability of a wealthier partner after the breakdown of their relationship. “In the case of a wealthier spouse who allocates income to his or her spouse through trust distributions and where this gives rise to a taxation liability, where no provision for the payment of the tax was made, it allows for orders to be sought protecting the less wealthy spouse,” Carney said.
Keturah Sageman, an attorney with Nicholes Family Lawyers, said the issue before the High Court was whether the Federal Circuit Court, which exercises jurisdiction under the Family Law Act, has jurisdiction over tax debts owed to the Commonwealth, and power to order the ATO to substitute the husband for the wife when the tax liability was originally hers.
Meyer said the High Court’s decision is unlikely to result in arrangements in which, for instance, a well-off spouse with tax debts could transfer that liability to his or her impecunious partner in exchange for other assets, or even parental custodial rights. “Some few commentators have suggested that this decision opens the floodgates for such arrangements, but others, including [myself], do not agree, ” he said. “One of the factors a court has to consider in the exercise of its power to make just and equitable orders for distribution of property is the effect of any proposed order on the ability of a creditor of the party to the marriage to recover that debt of the creditor’s. That includes the commissioner of taxation.”
Part VIIIAA of the Family Law Act allows the court to issue orders against third parties, including the ATO. Sageman said that authority is conditional upon satisfaction of section 90AE(3). Among the conditions is a requirement that, at the time the order is made, it is not foreseeable that the order would result in the debt not being paid in full. The court must also be satisfied that, in all circumstances, the order “is just and equitable,” Sageman said.
“Given that . . . the husband is a bankrupt and the wife is solvent, it is not possible to see how the condition in [section] 90AE(3)(b) could be satisfied in this case,” Justices Susan Kiefel and Patrick Keane wrote in the High Court’s decision. “More generally, it is difficult to see how any case where there is a real prospect that the substitution of one spouse for another as the debtor of the revenue authority would create or enhance a risk of nonpayment would not fall foul of [section] 90AE(3)(b) of the act.”
Meyer said the court has the power to order one spouse to pay the tax liability of the other. He also said that parties to a marriage can make binding postnuptial agreements altering their property interests upon the breakdown of the marriage without a court order. “However, the power to set aside such an agreement at the instance of a creditor is still in existence in the same way as if it had been an order of the court,” Meyer said. “Moreover, the Family Court has a power to set aside any order the parties might have induced a court to make by consent if the effect is to defraud a creditor.”
This article was originally published in Tax Analysts on 24 January 2019 with words by William Hoke and a contribution by Partner Keturah Sageman. Keturah is an Accredited Family Law Specialist and a Fellow of the International Academy of Family Lawyers. Her practice covers all areas of family law, with expertise in complex property and financial settlements.
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