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Substitution of Parties to Recover Taxation Debts

It is not uncommon for a party to have a taxation liability but no means to meet it, especially when the income arises through a distribution from a Family Trust. In these situations, the party may be reliant on their higher earning partner to meet their liabilities.

The recent Full Court of the Family Court decision of Tomaras & Tomaras (2017) FLC examined whether the Court has power to make a binding substitution order on the Commissioner of Taxation so that the higher earning spouse can be liable for these debts.

Facts

Mr and Mrs Tomaras were married from 1992 to 2009. During their marriage, the Commissioner of Taxation issued an assessment against Mrs Tomaras with respect to income tax and Medicare levies.

In November 2014 Mr Tomaras became bankrupt. Soon after, in December 2014, Mrs Tomaras initiated proceedings in the Federal Circuit Court seeking alteration of property interests pursuant to s 79 of the Family Law Act 1975.

The Commissioner was given leave to intervene in the proceedings as Mrs Tomaras had failed to pay the amounts owed after the assessment, without having lodged any objection. Her related taxation liabilities by 9 August 2016 were over $250,000.

In response, Mrs Tomaras sought an order to substitute Mr Tomaras for herself as the debtor pursuant to s 90AE(1)(B) of the Family Law Act. If granted, the order would make Mr Tomaras solely liable to the Commissioner for his ex-wife’s taxation related liabilities and General Interest Charges.

Pursuant to s 94A(3) of the Act, Purdon-Sully J referred the question to the Full Court of the Family Court to make a determination on the question of law.

Issue

The Full Court had to consider whether s 90AE of the Family Law Act conferred power on the court to make final orders substituting one party to a marriage for the other in relation to a taxation debt.

Findings

The Commissioner contended that the court had no jurisdiction to substitute the husband for the wife, as where taxation debts are concerned s 90AE does not bind the Crown. The Commissioner relied on the High Court decision of Bropho v State of Western Australia [1990] HCA 24, where it was established that the Crown is not bound when statutory provisions are expressed in general terms.

The majority of the Full Court found that this presumption did not apply in the circumstances as s 90AE did not impose the necessary detriment, obligation or restraint. Their Honours found that there were instead benefits to the Commissioner if the provision applied. If the wealthier spouse was to become solely liable for the debts, or even if both spouses were to become jointly liable, prospects of recovery thereby increased.

The minority, Aldridge J, agreed with the proposed orders, however considered that s90AE did impose a detriment on the Commissioner by changing its rights at law.

The Court ordered that the Commissioner substitute Mr Tomoras for Mrs Tomoras in relation to her outstanding debts.

It had previously been assumed that post separation these debts had to be met from property settlement entitlements. The confirmation that s90AE enables taxation debts to be assigned, regardless of whose name they are held in, provides a new method by which to manage these debts in matrimonial property disputes.

 

 

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