18 Dec 2018

The power of the Court to assign a tax debt of one spouse to another pursuant to Part VIIIAA of the Family Law Act 1975 (Cth) (‘FLA’) was recently considered by the High Court in the case of Commissioner of Taxation for the Commonwealth of Australia v Tomaras & Ors [2018] HCA 62.

1. BACKGROUND
The husband and wife, the first and second respondents, married in July 1992 and separated in July 2009. During the parties’ marriage, the Commissioner issued several assessments requiring the wife to pay income tax, Medicare levies, penalties and general interest. The wife did not pay the amounts assessed, and did not lodge objections to those assessments. In late 2009, the Commissioner obtained a default judgment against the wife in the amount of $217,669. The wife did not subsequently pay the judgment debt and the Commissioner failed to enforce it.

In November 2013, the husband became bankrupt. One month later, the wife commenced proceedings against the husband in the Federal Circuit Court seeking orders for the alteration of property interests under s 79 of the FLA. She sought, pursuant to s 90AE(1)(b) FLA, that the husband be substituted as the sole debtor to the Commissioner in respect of her taxation liabilities including general interest charged.

In February 2016, the Commissioner was granted leave to intervene in the proceedings.

2. RELEVANT LEGISLATION
Pursuant to section 79 of the FLA, the Court has the power to re-distribute matrimonial property between the parties to a marriage. The Court also has the power to bind third parties to the proceedings in particular circumstances. Section 90AE of the FLA provides the Court with the power to make orders directed to a creditor of one party to substitute the other party in relation to a specific debt owed to that creditor, provided that the criteria listed in s 90AE(3) and s 90AE(4) are met.

3. CASE STATED
At the first instance, Purdon-Sully J asked a question of law for the opinion of the Full Court of the Family Court:

Does s 90AE(1)-(2) of the FLA grant the court power to make order 8 of the final orders sought in the amended initiating application of the wife?
Order 8 of the orders sought by the wife stated as follows:

Pursuant to section 90AE(1)(b) of the Family Law Act 1975 (Cth), in respect of the wife’s indebtedness to the Commissioner of Taxation for the Commonwealth of Australia [for] taxation related liabilities in the amount of $256,078.32 as at 9 August 2016 plus General Interest Charge (GIC), the husband be substituted for the wife as the debtor and the husband be solely liable to the Commissioner of Taxation for the said debt.

4. THE FULL COURT ANSWERED THE QUESTION IN THE AFFIRMATIVE
The Full Court answered in the affirmative,however this was subject to the proviso that s 90AE(1) confers power only to make an order that the Commissioner be directed to substitute the husband for the wife in relation to the debt owed by the wife to the Commissioner.
The Commissioner appealed to the High Court.

5. DECISION OF THE HIGH COURT
The High Court unanimously upheld the decision of the Full Court noting that s 90AE(1) conferred power on the court to make an order that the Commissioner of Taxation be directed to substitute the husband for the wife in relation to the taxation liability.

The High Court further held:
“it [was] otherwise inappropriate to answer the question without it being found, or agreed, that, within the meaning of s 90AE(3), the making of the order is reasonably necessary, or reasonably appropriate and adapted, to effect a division of property between the parties to the marriage, and it is not foreseeable at the time that the order is made that to make the order would result in the debt not being paid in full; and without the court being satisfied that, in all the circumstances, it is just and equitable to make the order.”

Written by Eliza Fitzgerald, Solicitor, Family Law.