High Court rules against ATO, finding tax debts can be shifted between spouses

A recent High Court case has found that a tax debt of one spouse can be shifted to another during a divorce property settlement, which lawyers say is unprecedented and could leave the richer spouse with the debts of their former partner.

The case of Commissioner of Taxation v Tomaras concerns whether the Family Court can give orders to government agencies — in this case the ATO — as part of the determination of a property dispute.

After the breakdown of a marriage, one spouse, who had incurred a $250,000 tax debt during the marriage, sought an order from the Federal Circuit Court that her (bankrupt) partner become solely liable for the debt.

The Full Court said s90AE(1) of the Family Law Act 1975 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. The tax man could now potentially be out of pocket by $250,000 because the husband is bankrupt.

The ATO was contacted for comment about whether it plans to pursue the tax debt but said, “due to privacy and secrecy reasons, we are unable to comment on the tax affairs of individuals or entities”.

Senior associate at HopgoodGanim Lawyers, Sophia Pippos, said the case highlights the importance of spouses being aware that they may ultimately be responsible for another spouse’s taxation liabilities and/or penalties.

“It now may be open to the spouse, as part of their property settlement, to seek a substitution order,” she said.

“For other spouses who may have been unwilling to share in the burden of a taxation liability accrued during the relationship, the liability can be included in the available property and can also be transferred directly to the other spouse if, in all the circumstances, it would be just and equitable to do so.”

The facts of the case

Mr and Mrs Tomaras were married from 1992 to 2009.

During their marriage, the ATO issued an assessment against Mrs Tomaras involving 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 under family law.

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.

In response, Mrs Tomaras sought an order to substitute Mr Tomaras for herself as the debtor.

The High Court found that a court has jurisdiction over debts owed 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 a taxation law.

The ATO notes on its website that the “High Court also observed there will seldom, if ever, be occasion to exercise that power and adversely affect the commissioner or other creditors”.

The court 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.

The fallout from the High Court decision

Family law specialist with Forte Family Lawyers, Jacky Campbell, said the floodgates have not opened to allow people another way to avoid paying tax.

“In some circumstances the debt could be shifted, but only if the person does have capacity to pay the debt,” she said.

“I don’t think the floodgates have opened for people to avoid paying debts or to make these types of applications.”

If the wife is still pursuing her application, it will now be decided by the Family Court, the High Court having given guidance as to the law, she said.

Special counsel with Barry Nilsson lawyers, Allison Caputo, said it may also mean that tax liabilities arising out of discretionary trust distributions — where spouses once elected to shared income — could be affected.