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Tax and family law: Loophole exposed!

By January 29, 2019November 1st, 2021No Comments

Tax and family law is in the news.  Are you working out a property settlement after divorce? You should be aware of an “unprecedented” new ruling by the courts regarding a tax debt, which could have potential ramifications for how your assets and liabilities are distributed by the family courts…

Although it’s not expected to “open the floodgates” to spouses to try to shift their tax burden to their ex-spouse, in certain situations it may now be possible for some spouses to include their tax liability in the available property being considered during a settlement.

Previously, tax was a debt that couldn’t be passed over onto a spouse. But this ruling means that effectively the Australian Taxation Office (ATO) can pursue a spouse for payment of a tax debt incurred by their ex.  This could alleviate the debt burden from one spouse and shift it to the spouse who has capacity to pay the debt.

The tax and family law “loophole” has come to light after a divorcing couple proceeded through the Federal Circuit Court seeking alteration of property interests, and wound up in the High Court on appeal.  The case of Tomaras and Tomaras (court-appointed pseudonyms) made the news after the High Court ruled that the Family Court does have jurisdiction over debts owed to the Commonwealth. The new ruling means that if it is just and equitable to do so, the tax debt could be directly transferred from one spouse to another during a divorce property settlement.

In the matter concerning a couple who had been married for 17 years, the wife had been issued an assessment by the ATO for income tax and Medicare levies resulting in a tax debt of $250,000.  During property settlement proceedings, the wife sought an order that her ex-husband be made solely liable for that tax debt.

The tax and family law case tested if the Family Court can issue orders to the ATO–or potentially other government agencies–when determining a property settlement during a divorce.

The High Court ruled that the Family Court did have power under s90AE of the Family Law Act 1975 to order the ATO to substitute the husband for the wife in relation to the debt owed that had arisen under taxation law.

Although the ex-husband in this case had filed for bankruptcy, the High Court transferred responsibility for the wife’s tax debt to the ex-husband and, because he is unable to pay, the ATO must now absorb the debt itself.

The ATO appealed the decision but the Full Court confirmed that the Family Law Act does confer power to the Family Court which enable it to make orders to substitute one spouse for another in relation to tax debts. Such a substitution order can also only be made if it is “just and equitable” to do so.

It’s important to note that the ATO has stated in relation to the case 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”.

Experts say the tax and family law case is important because a more financially secure spouse could be forced to take on the tax debt of their ex. Although such cases are expected to be rare, the ruling does mean that the “goalposts have been shifted”.

Now, a spouse can potentially seek a substitution order to make their ex responsible for their tax debts and penalties. The tax debt can be included in the marital asset pool and can be directly transferred to the other spouse if it’s just and equitable. In other words even if you don’t have tax debt yourself, you need to be aware the courts could make an order for your ex’s tax debt to be passed to you in a property settlement.

The case highlights the need to take tax matters into account in order to make fully informed decisions about the division of your assets when going through a divorce.

For financial planning assistance, we recommend calling Michael Miller at MLC Advice Centre for advice (02) 6247 1233. You may also like to read our blog getting on top of your finances with the divorce finance checklist.

Do you need help with a family law matter? Please contact Canberra family lawyer Cristina Huesch or one of our other experienced solicitors here at Alliance Legal Services on (02) 6223 2400. Your first no-obligation conference is free.

Please note our blogs are not legal advice. For information on how to obtain the correct legal advice, please contact Alliance Legal Services.

Source: ABC

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