While there is no doubt that a taxation liability of one spouse can be taken into account as part of a property settlement, the Full Court has recently confirmed that one spouse can be substituted for the other spouse in terms of a liability owing to the Australian Taxation Office.
The Full Court in Tomaras & Tomaras and Official Trustee in Bankruptcy and Commissioner of Taxation  FamCAFC 216 has expressly held that the ‘substitution provisions’ in section 90AE of the Family Law Act 1975 (Cth) (the Act) confer power on a Court to substitute one spouse for the other as the party liable for a taxation debt.
In delivering its decision, the Full Court rejected the arguments raised by the Commissioner of Taxation for the Commonwealth of Australia (the Commissioner) that the Crown is not bound by statute in so far as taxation liabilities. The presumption that legislation does not bind the Crown was confirmed to only apply if the particular provisions impose an obligation or restraint on the Crown. It was found by the majority that section 90AE(1) only confers a benefit on the Crown and therefore the presumption does not apply.
This recent decision should serve as a warning to any party whose spouse has outstanding taxation liabilities or who has failed to lodge taxation returns. The party without the liability may ultimately be substituted as the liable tax payer in the event of a property settlement.
Facts of the case
During her 17 year marriage (1992-2009) with Mr Tomaras (the first respondent), Ms Tomaras (the applicant) was issued assessments by the Commissioner requiring her to pay income tax. The applicant failed to pay the amounts assessed and failed to lodge any objection to the assessments.
In December 2013, the applicant sought orders in the Federal Circuit Court (under section 79 of the Act, including orders pursuant to section 90AE(1) of the Act) to substitute Mr Tomaras for herself in respect of the indebtedness to the Commissioner, and that the first respondent be solely liable for the debt.
The Commissioner was granted leave to intervene and the primary Judge stated a case for the opinion of the Full Court of the Family Court of Australia. The Full Court was required to determine whether section 90AE of the Act (which relates to the binding of third party creditors in respect of orders made under section 79), confers power on a Court to make the final orders sought by the applicant. That is, to make an order substituting one party to a marriage for the other party in relation to the debt owed to the Crown.
After various arguments were made, their Honours held that the Court does have power to make the orders sought by the applicant on the proviso that the Act only confers the power to direct the Commissioner to substitute the first respondent for the applicant in relation to the debt owed to the Commissioner.
The majority (Thackray & Strickland JJ) held that the presumption that legislation does not bind the Crown as laid out in the High Court decision of Bropho v State of Western Australia (1990) 171 CLR 1 did not apply in respect of section 90AE, because the provision does not impose an obligation or restraint on the Crown, but a benefit.
This is because under section 90AE(3) an order can only be made in certain circumstances including that it must not be foreseeable, at the time of the order, that the debt will not be paid in full. Consequently, the provision could only put the Crown in a better position, unless the spouse is unable to meet the obligation for an unforeseen reason. Although the Full Court ultimately reached a unanimous decision, Aldridge J did not agree that 90AE ‘benefited’ the Crown.
Despite the majority’s view that the presumption did not apply from the outset, their Honours, along with Aldridge J, unanimously rejected the Commissioner’s contention that section 90AE of the Act was not intended to bind the Crown because it did not expressly recognise that intent, despite the Act doing so in section 116C. The Court held that the fact a statement made in part of the Act expressly provides Crown immunity for that provision does not provide support for the proposition that other provisions in the Act must be taken as excluding the Crown from their scope.
The Court also held that the fact the provision would not be “extraordinarily ineffective” if taken not to bind the Crown, is not definitive when determining whether it does bind the Crown, but is one factor to consider (distinguishing this case from the facts of Bropho).
Why is this decision important?
Where a non-financial spouse ends a relationship with significant personal taxation liabilities, it may be open to the spouse as part of their property settlement to seek a substitution order rather than the liability remaining in their sole name or being paid from the available property.
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 case highlights the importance of spouses being aware that they may ultimately be responsible for another spouse’s taxation liabilities or penalties arising, for example, from their failure to lodge taxation returns or meet payment of taxation liabilities.
The principles of the case are important. However, the fact the husband was bankrupt should not be overlooked insofar as the ultimate property settlement is concerned. The trial judge (Purdon-Sully J) will be required to consider sections 90AE(3)(b) and (4)(e) of the Act. The fact that the Australian Tax Office may not be able to recover the tax liability will loom largely and the wife’s success before the Full Court may prove to be a futile victory for her.
Outcomes from the case
This case demonstrates that when it comes to tax liabilities:
- Parties should consider substitution of taxation liabilities as an option when drafting orders sought or negotiating settlements. However, note that the order should be phrased in such a way as to direct the Commissioner to substitute one party for the other as opposed to stating that a party be solely responsible for the debt.
- It cannot be assumed that the tax liability will remain with the original tax payer in property settlement proceedings.