Who is liable for tax or other debts in a relationship?

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In family law cases the parties are normally equally responsible for debts incurred during cohabitation. However, the court may, in some cases, decide that one of the parties will be responsible for a joint debt or the personal debt of the other party. This even includes tax debts owed to the Australian Taxation Office (ATO). Significantly, the Court has the power to order that the third party creditor cannot pursue one specific party, even in relation to personal debts, and must pursue the other party.

Court can order tax debts be transferred from one spouse or partner to another.

In the recent High Court Case of Commissioner for Taxation v Tomaras, the High Court has determined that the personal tax debt of one spouse can be transferred to the other spouse.

This can have significant implications, both for a party carrying a tax debt, and for their spouse.

Under the Family Law Act, the family courts are able to make orders that interfere with the interests of third parties.¹ Prior to this High Court decision, the scope of the power was uncertain if the third party was the Commonwealth Government. This is because of a general legal presumption that legislation does not intend to bind ‘the Crown’ (i.e. government).

The facts of the Tomaras case were, in summary, that Mr and Mrs Tomaras had been married for 17 years. After their separation, the ATO raised a debt of over $250,000 against Mrs Tomaras which she did not pay. The ATO did not seek to recover the debt at that stage. Some years later, Mrs Tomaras commenced family law proceedings. One of the orders sought by Mrs Tomaras was that a tax debt in her name be transferred in whole to Mr Tomaras (or rather, that Mr Tomaras be substituted as the debtor). The ATO intervened in the proceedings and opposed the transfer as the husband has been declared bankrupt.

The Judge who first heard the matter (in the Federal Circuit Court) referred the matter to the Full Court of the Family Court, posing a question to the effect of: does the Family Law Act
give the Court power to direct the Commissioner for Taxation to substitute
the Husband in relation to a debt owed by the Wife? The Full Court said “yes.”²

The Commissioner for Taxation appealed the decision to the High Court. The High Court affirmed that the family courts did indeed have the power to direct the Commissioner (or, practically, the ATO) to substitute a party to a debt.³

This decision means that a tax debtor spouse who feels that their debt was unfairly
accrued (for example, if the debt was incurred in light of accounting measures
taken by the other spouse or with respect to which you had limited control) may
be able to seek that the debt more appropriately be imposed on the spouse whose
conduct generated the debt. This scenario is one of many. The upshot being that if it is otherwise fair, as part of the division of parties’ assets to require one party to take on all or part of a tax debt currently held in the other party’s name, then the Court can do so. This might also simply mean that the more financially capable person is required to pay the debt (with no need for impropriety or other unfairness to have occurred in relation to their spouse). 

If you or your spouse hold a tax debt to the ATO incurred during your relationship, it is important to get legal advice in relation to your position as early as possible.

Don’t forget that the Court can made wide ranging orders for adjustment of property in family law matters, and this means that whether you are the registered owner of property or not, you may be entitled to benefit from it. Similarly, if you hold a liability in your name, it may be that the liability should (either in whole or in part) be instead taken on by your former partner. Read more about the approach that the Court takes to division of property.

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1. Section 90AE Family Law Act ↩︎
2. Tomaras & Tomaras & Anor & Commissioner of Taxation [2017] FamCAFC 216 ↩︎
3. Commissioner of Taxation v Tomaras [2018] HCA 62 sed1 ↩︎