CAN YOU MOVE YOUR ATO TAX DEBT BETWEEN SPOUSES IN FAMILY LAW MATTERS?

Ordinarily you may think the answer is no, however a recent High Court case found that a tax debt of one spouse can be shifted to another during a divorce property settlement.

The 2018 case of Commissioner of Taxation v Tomaras  decided whether the Family court can give orders to government agencies, such as the ATO, as part of the determination of a property dispute.

During their marriage, Ms Tomaras accumulated tax debts to the ATO of $250,000. After the breakdown of the marriage, and at the ensuring Property Settlement Court proceedings, Ms Tomaras sought an order from the Federal Circuit Court that her ex-spouse be liable for her debt.

Federal Circuit Court Judge, Purdon-Sully J, asked the following question to the Full court of the Family Court to consider:

‘Does s90AE(1))-(2) of the Family law Act (Cth) grant the Court power to make Order 8 (Husband to take ownership of Wife’s ATO debt) of the final orders sought in the amended initiating application of the wife?

The Wife sought to rely on section 90AE(2) of the Family Law Act (Cth) 1975 which specifically allows the court to make any such order that:

Directions a third party to do a thing in relation to the property of a party to the marriage; or

Alters the rights, liabilities or property interests of a third party in relation to the marriage.

The Full could said that s90AE(1) confers power onto the Court that enables it 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 Tax Commissioner appealed to the High Court and lost, where the High court found that a Court has jurisdiction over debts owned to the Commonwealth and a court has power, under s90AE, to order the Commissioner  to substitute the husband for the wife in relation to a debt owed to the Commonwealth arising under taxation law. The High Court also said a substitution order should only be made where it is ‘just and equitable to do so’ and not if it is foreseeable that the order would result in the debt not being paid in full.

This case highlights that taxation debt accrued during a relationship can be shared, or at the least be included in the property pool. And in cases where it would be just and equitable to do so, the debt can be transferred directly to the other spouse.