In the recent judgment decided by the Family Court of Australia, Tomaras & Tomaras and Anor and Commissioner of Taxation  FamCAFC 216, the Court was asked the question whether section 90AE(1) to (2) of the Family Law Act 1975 (Cth) (“the Act”) granted the court power to substitute one party for the other in relation to a tax liability.
What does Section 90AE of the Act say?
Section 90AE of the Act confers jurisdiction on the Court to make an order binding on a third party, which can include an order directed to a creditor to substitute one party for the other party (or both parties) for a debt owed by the that party to the creditor.
This question arose in this case, because the wife was significantly indebted not to any ordinary creditor, but rather, to the Crown itself. Specifically, the Commissioner of Taxation for the Commonwealth of Australia (“the Commissioner”) for the sum of $256,078.32 plus general interest charges.
Facts of the Case
In that matter, the parties married in 1992 and separated in 2009. During the marriage, the Commissioner issued assessments requiring the wife to pay income tax and the Medicare Levy. The wife failed to pay the amounts assessed, and also failed to lodge any objection to the assessments. In 2009, the Commissioner obtained a default judgment against the wife, but did not enforce the judgment.
In November 2013 the husband became bankrupt.
The wife brought proceedings in the Federal Circuit Court of Australia against the husband. In those proceedings, the wife sought an order in relation to her tax liability payable to the Commissioner. She sought that the respondent husband (and by inference, the bankrupt estate) be substituted for her as the debtor, and that the husband be solely liable to the Commissioner for the tax liability.
In February 2016 the Commissioner was given leave to intervene in the proceedings, and the matter was sent from the Federal Circuit Court of Australia to the Family Court of Australia to answer the question of whether the Court had been granted the power to make the order sought pursuant to section 90AE(1) to (2) of the Family Law Act 1975 (Cth).
What was the outcome of the Case?
The Commissioner argued that it should be presumed that section 90AE of the Act does not apply to the Crown.
In consideration of both parties’ submissions in the matter, the Court considered a variety of complex issues, which included some of the following (without limitation):
- Whether or not it should be presumed that section 90AE of the Act applies to the Crown;
- Does the Court’s power exist where there may be evidence to say that a debt, that is unconnected with particular assets, could be seen as not reasonably necessary or appropriate and adapted to effect a division of property?;
- How should the other sub-provisions of section 90AE of the Act and the Explanatory Memorandum be interpreted?;
- Do the alternate powers which allow the Court to achieve a similar outcome mean that section 90AE should be interpreted as not being intended to bind the Crown? Such alternate powers include, for example, the power under section 80 of the Act that allows the Court to order one party pay a liability owed by the other party;
- Assuming the Court had the power to make the Order sought by the wife, would this impact taxation laws and create “absurdities” in the application of the taxation scheme because of the potential transfer of the objection, review and appeal rights associated with the tax debt?
While not without comment, the three Justices that handed down the decision unanimously affirmed the question – and held that the Court did indeed have the power to make the order sought by the wife, to substitute herself for her husband in relation to her tax liability.
What does the Decision in this Case Mean?
The decision affirms the Family Court’s broad powers to make wide-reaching orders. We know that the Family Court has powers to split superannuation and “dismantle” discretionary trusts. This decision confirms that the Court also has the power to “substitute” a tax liability.
This may have particular relevance where a party going through a separation has accrued a significant tax liabilities, perhaps arising out of income received through a family trust. We consider it may be possible for an unjust and unequitable circumstance to arise where a homemaker who has no stable income becomes liable for a tax liability for trust distributions (made with the intent of minimising tax payable by the couple before separation), that he or she is not able to pay.
While the decision is clear that this power exists, as at the date of the publication of this article, there has not yet been a published decision on whether or how the Court has exercised this power. For example, when the matter is returned back to the Federal Circuit Court of Australia, the Court may need to consider further questions such as:
- Is a substitution “reasonably necessary or reasonably appropriate and adapted to effect a division of property”?;
- Whether the Commissioner (and their likelihood of recovery of the tax debt) will be adversely affected by such an Order; or
- How should the tax liability be split in the context of the general four-step process for property splits.
Separation is a difficult time, and the additional financial pressures of debts can add further stress to your circumstances. Please feel free to contact one of our Business Development Officers to make an appointment with one of our lawyers if you would like to discuss some of your concerns.