In a significant development for both family and taxation law, the High Court has recently found that Family Courts have the power to make orders that shift a tax liability from one party to the other, in divorce proceedings.
A husband and wife married in July 1992. They separated 17 years later in July 2009. Whilst they were married, the wife incurred a tax liability of more than $127 000, with a further general interest charge of more than $128 000. In November 2013, the husband was declared bankrupt, and in December of that year, the wife commenced proceedings against the husband in the Federal Circuit Court. In those proceedings, the wife sought an alteration of the property interests between the husband and wife. Amongst other things, the wife sought to have all her tax debts and liabilities up to the tax year ending 30 June 2009 transferred to her husband. In February 2016, the Commissioner was granted leave to intervene in proceedings to challenge this order.
What was the issue?
In Commissioner of Taxation v Tomaras  HCA 62 (‘Tomaras’), the question for the High Court was whether s 90AE(1)-(2) of the Family Law Act (1975) (Cth) allowed the Family Court to make an order that substituted the wife as the debtor for the husband, thereby making the husband solely liable for the debt to the ATO. Section 90AE is found in Part VIIIAA of the Act. This Part concerns orders and injunctions that bind third parties. Simply put, the issue therefore before the High Court was whether Part VIIIAA of the Act was binding on the Commonwealth.
Why was this the issue? – The Commissioner’s argument
The Commissioner argued that although he was generally considered to be a third party and creditor under the Act, the Commissioner was not a creditor for purposes related to Part VIIIAA (orders and injunctions that bind third parties). The Commissioner contended that he was not bound by s 90AE. In making this argument, the Commissioner relied upon the common law presumption that a statute does not bind the Crown. Part VIIIAA of the Act is silent on this matter.
However, this argument raised by the Commissioner was unanimously rejected by the High Court. The High Court found an apparent intention within the Act to treat the Commissioner as a creditor, that is subject to orders made pursuant to s 90AE of the Act.
What are the implications of this decision?
The most obvious implication from this decision is that in divorce proceedings, the Family Court can now transfer the tax liability of one person to the other in a property settlement. However, s 90AE will not be able to be used as a loophole for people to avoid paying tax debts. In Tomaras, the High Court explicitly stated that an order under s 90AE can only be made in relation to a tax debt if:
- It is not foreseeable at the time that the order is made that to make to order would result in the debt not being paid in full; and
- The court is satisfied that, in all the circumstances, it is just and equitable to make the order.
More significantly, it is unclear from Tomaras whether the rights of a taxpayer, in relation to a tax debt, transfer from one individual to another following an order made under s 90AE. If these rights are extinguished when an order is made under s 90AE, this will potentially leave individuals in a somewhat absurd position of being liable for a tax debt for which they have no right to appeal or review.
If you would like any further information into the issues raised in this case, please contact us on (02) 8035 8900.