Pass the Parcel. Former Wife Transfers her Tax Debt to Ex-Husband: Commissioner of Taxation v Tomaras (2018)

Background

The recent case of Commissioner of Taxation v Tomaras (2018) raised both constitutional and family law issues. It considered whether, in property settlement proceedings, the Court has the power to order that a (bankrupt) husband be substituted for his (former) wife with regard to the tax debts owed by her so that he became solely liable.

The case hinged on s90 of the Family Law Act 1975 (Cth) which confers powers onto the Court so as to enable it to make an order that the Commissioner of Taxation be directed to substitute the husband for the wife in relation to the tax debt owed by the wife.

In the Full Court of the Family Court and subsequent appeal to the High Court, the Commissioner relied on the presumption that “the Crown” is not bound by statute and so the order was not valid.

Key Facts

Mr and Mrs Tomaras were married from 1992, separating in 2009. During their marriage, the Australian Tax Office (ATO) had issued assessments against Mrs Tomaras for payments of income tax and Medicare levy, with penalties and interest amounting to $127000. In November 2009 the Commissioner of Taxation successfully obtained a default judgment against Ms Tomaras.

Four years later in November 2013, Mr Tomaras was declared bankrupt. The following month Ms Tomaras commenced property settlement proceedings in the Federal Circuit Court to alter their property interests pursuant to s79 of the Family Law Act.

In February 2016, facing the reduced possibility of recovery of the tax debt, the Commissioner was granted leave to intervene in proceedings in which the wife was seeking an order pursuant to s90AE (1)(b) of the Family Law Act to substitute the husband for herself as the debtor making him solely liable for her tax debt. At this time the wife’s tax liability now amounted to $256000.

The matter was referred to the Full Family Court for a determination.

Key Issues

1. The Alteration of Property Interests

On a relationship breakup, when a Family Law Court divides property that people acquired together, the law refers to the Court’s action as “an alteration of property interests”. Under s79, in family law property settlement proceedings, the Court may make such order as it considers appropriate.

2. Substitution of Spouses

Under s90AA Family Law Act the Court may make an order directed to or altering, the rights, liabilities or property interests of a third party.

Under s90AE(1)(b) the Court may make an order binding a third party which is “directed to a creditor of one party to a marriage to substitute the other party....in relation to the debt owed to the creditor”.

3. The Crown is Not Bound by Statute

In the Full Court of the Family Court and a subsequent appeal to the High Court, the Commissioner relied on the presumption that “the Crown” is not bound by statute in trying to prevent the transfer of the tax debt.

Historically, in England at common law, the Crown could not be sued under the rationale that it was inappropriate for the King (and by extension his government) to be subject to his own courts. The position of Crown legal liability in Australia was originally much the same as had been in England.

In Australia, a principle of statutory construction has been that statutes are presumed not to bind the Crown, a presumption that extends to Crown agents. However, since Bropho v Western Australia the principle is that this general presumption can be displaced by the legislative intent in the statute so the presumption is not as strong as it was.

4. Decision

In December 2018 the High Court dismissed an appeal by the Commissioner of Taxation against the judgment of the Full Court of the Family Court. The Federal Court had the power to order that the Commissioner substitute the husband for the wife in relation to the wife’s tax debt. The tax debt of one spouse can be transferred to the other spouse during a property settlement. However, the Court noted that “there will seldom, if ever, be occasion to exercise that power and adversely affect the commissioner or other creditors”.

The decision also suggested that where such a substitution order is made against the Commissioner the substituted spouse would have the same right to object and appeal.

What Does it Mean?

The case arose because the ATO took the view that the Crown was not bound by the Family Law Act and the Court could not order the ATO to substitute one party for another. The High Court disagreed.

Usually the debts of married or de facto couples, incurred during the relationship, form part of the final property settlement between them including any tax owing. The Court has powers to substitute one of the parties in the relationship for the other party so that they are responsible for paying the debt. Such orders are uncommon.

The High Court has confirmed the power of the Court to substitute parties extends to debts owed to the Commonwealth. However, it does not seem probable that it has increased the likelihood of one spouse being made solely liable for the tax debt of the other spouse. While the High Court ruled against the Commissioner by dismissing its appeal, it pointed out there will seldom, if ever, be occasion to exercise the power. It is likely, therefore, that such orders will remain rare.

Nevertheless, the case does go to highlight the importance of both spouses being aware that they might end up being responsible for the other spouse’s tax debts, possibly even a long time after separation.

Contact Us

Szabo & Associates, Solicitors, can provide you with expert advice on a wide range of family law matters, including property settlements, divorce and separation, domestic violence, pre- and post-nuptial agreements, child custody, child support and spousal maintenance. Please call us today on 02 9281 5088 or fill in our online contact form.