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Taxation liabilities are a part of the debts which are taken in to account in identifying the net property pool available for distribution between spouses in a property settlement after separation/divorce. A recent High Court decision has recognised the judicial power to transfer a debt owed to the Australian Taxation Office (ATO), from one spouse to another at property settlement. Commissioner of Taxation v Tomaras [2018] HCA 62 determined a property settlement as a vehicle by which a party to a marriage could effectively escape her tax debt by having it transferred to her husband.
Mr and Ms Tomaras, the first and second respondents, were married from July 1992 until their separation in July 2009.
During the marriage, the wife Ms Tomaras was issued various assessments by the Commissioner of Taxation to pay, income tax, Medicare levies, penalties, and general interest charges. The wife having failed to both pay the amounts assessed and to lodge any objections to these assessments, the Commissioner obtained default judgment against her in November 2009.
On 5th November 2013, the husband was declared bankrupt.
Just over a month later, the wife commenced property settlement proceedings in the Federal Circuit Court of Australia, seeking among others, orders to substitute the husband in her place as sole debtor of the debt owing to the ATO.
In February 2016 the Commissioner of Taxation intervened in the proceedings. The Commissioner submitted that upon a proper construction of the relevant provisions in the Family Law Act 1975 (Cth), the court did not have the power to substitute the husband in the wife’s place.
The wife relied on s 90AE of the Family Law Act 1975 (Cth) as the source that empowered the Court to make the Orders she sought. This section allows the courts to make orders directed at creditors of parties to the marriage, in altering specific terms of debts. S 90AE(1)(b) in particular allows the court to direct a creditor to change the debtor.
From the date of its commencement in 2004, the successful use of s 90AE has been limited. This obscurity is further compounded by the question of whether the Crown can be treated as a creditor in the ordinary sense espoused by the provision.
Her Honour Judge Purdon-Sulley, sought the opinion of the Full Court of the Family Court on a case stated,s 90AE(1)-(2) of the Family Law Act granted the court power to substitute the husband in the wife’s place as sought by her.
There exists a presumption that the Crown is not bound by statutory provisions expressed in general terms. As Gleeson CJ and Gaudron J put it in The Commonwealth v Western Australia (Mining Act Case) [1999] HCA 5, legislation is meant to regulate and direct the acts and rights of citizens and, in most cases, the reasoning applicable to them applies with very different, and often contrary, force to the government itself.
Bropho v Western Australia (1990) 171 CLR 1, a High Court decision in 1990, clarified room for exception. There, it was held that the presumption of Crown immunity could only be upheld if a parliamentary intent thereof could be evinced through the reading of the relevant legislation.
The tension Tomaras originates at the intersection of, on the one hand, the proper enforcement of taxation law, and on the other, the power to alter third party rights, vested in the courts by Pt VIIIAA of the Family Law Act 1975. How can these two positions be reconciled?
“The Commissioner’s invitation to single out special attributes of a tax debt as a basis for finding that the Commonwealth is not bound by Pt VIIIAA should be rejected” (91). Gordon J steers away from the concept of crown immunity, instead favouring statute-centric reasoning. Debts owed to the Crown are enforceable under tax legislation. Of course, said statutes may award special attributes or features to such debts.
However, this understanding should be advocated over some abstract conception of the Crown as a higher power not beholden to legislation. Debts owed to the Commonwealth are not awarded special consideration by simple virtue of their being owed to the Commonwealth. As such, rather than relying on the principle of crown immunity, romantic and expedient though it is, the courts must analyse Pts VIII and VIIIAA of the FLA as a holistic and collaborative set.
Pt VIIIAA effectively expands the court’s jurisdiction to make orders not only to alter the rights, liabilities, and property interests of parties to the marriage but also of third parties. S 90AD(1) provides that for the purposes of Pt VIIIAA, a debt owed by a party to a marriage is to be treated as property. As such, the debt is then covered as a property interest under s 79, alterable by the courts.
Kiefel CJ and Keane J affirm that Pt VIII of the FLA never suggests “an intention to differentiate between revenue authorities and other creditors” (3). Given that Pt VIIIAA is explicitly ancillary to s 79, any suggestion that the definition of “creditor” impliedly differs between the two is absurd.
Their Honours unanimously held that s 90AE(1) confers onST the courts power to make orders directing the Commissioner to change the debtor in relation to a tax liability. Additionally, the requirements laid out in s 90AE(3) were emphasised.
These provisions prescribe that no s 90AE(1)-(2) order may be made unless the courts are reasonably satisfied that it is (a) reasonably necessary, (b) not foreseeable that the substitution may result in the debt not being fully paid, (c) procedurally fair, (d) just and equitable, and (e) accounts for the third party and administrative considerations set out in s 90AE(4).
These s 90AE(4) considerations include taxation and social security effects. Evidently, s 90AE(4) effectively protects the executive functions of government from being overruled by judicial discretion.
Despite the dismissal of the Commissioner’s appeal, it is unlikely that Ms Tomaras would receive the outcome she wanted in her own proceedings. Her husband being bankrupt at the commencement of proceedings, it is foreseeable that an order in her favour would result in the tax debt not being paid in full, thus failing to pass the s 90AE(3)(b) threshold emphasised by the Full Court.
Although the court did not say as much, it is not only disease that can be transmitted mutually as a result of cohabitation.
Please note that this memorandum is not legal advice but may help you understand the law. If you have a query regarding testamentary discretionary trusts, contact our dedicated team at Kenmore Mediation and Law Centre on (07) 3378 4006, or at jnod@kmlc.com.au