The High Court has recently decided that the debt of one spouse may be transferred to the other during a divorce property settlement. In the case of Commissioner of Taxation v Tomaras, it was decided that the Family Court can give orders to the Australian Tax Office (ATO) as part of the determination of a divorce-related property dispute.
In this case, Mr and Mrs Tomaras were married from 1992–2009, during which time Mrs Tomaras accrued debts of $250,000 owing to the ATO. After the breakdown of their marriage, Mr Tomaras became bankrupt. In December 2014, Ms Tomaras commenced proceedings in family law, and when the Taxation Commissioner intervened, seeking the $250,000. Ms Tomaras sought orders to substitute her ex-husband for herself as the debtor.
This recent High Court case then decided that the Family Court could indeed make the order Ms Tomaras sought. This was due to s90AE(1) of the Family Law Act 1975 which allows the Court to make an order binding a third party – in this case, the ATO. The order bound the ATO to substitute the husband for the wife in relation to the debt. Here, it did not make a difference that the husband was bankrupt, and that the Taxation Commissioner is now potentially $250,000 out of pocket.
Cases like this are unlikely to be common, as they will only occur when one spouse has been unwilling to share the burden of taxation during the relationship, and in cases where it would be ‘just and equitable’ to make this order. This will only occur when the person who originally owed the debt is unable to pay it. Nevertheless, spouses should be aware that they may be responsible for their partner’s taxation penalties and/or liabilities, even after separation.
If you have any queries relating to divorce property settlements, or any of the issues featured in this article, please do not hesitate to contact us on 02 8917 8700 or fill out the enquiry box and we will get back to you ASAP.