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Spouses may now be liable for their ex’s unpaid taxes

December 19, 2017

Summary

The Family Court has the power to substitute one spouse for the other in relation to their outstanding tax liability with the ATO pursuant to section 90AE of the Family Law Act 1975 (Cth) (“the Act”).

 Section 90AE(1)(b) provides the Family Court with the power to direct a creditor of one party to a marriage to substitute the other party, or both parties, in relation to a debt owed to a creditor.

Previously, it has been murky as to whether the ATO falls under the definition of ‘creditor’ for the purposes of section 90AE.

Tomaras [2017]

In Tomaras & Tomaras and Official Trustee in Bankruptcy and Commissioner of Taxation [2017] FamCAFC 216 (“Tomaras”), the Applicant had failed to pay a number of ATO assessments over her seventeen year relationship with the First Respondent.

The Applicant sought orders that the First Respondent be substituted for her in relation to her debt with the ATO and that he be solely liable for that debt.

The ATO intervened and in short, argued that section 90AE did not expressly bind the Crown.

The solicitors for the Applicant argued that the ATO was already deemed a creditor for the purposes of section 79 of the Act (being the section that gives the court powers to alter property interests) and so it ought to be a creditor for section 90AE as well.

The Full Court held that the ATO did fall under the definition of creditor for the purpose of section 90AE.

The Full Court did note however that the success of the substitute would be influenced by the recoverability of the debt when deciding whether to substitute a party. In this case, the First Respondent was bankrupt in 2013.

Importance

Spouses need to be mindful that they may ultimately be responsible for their ex-spouses tax liabilities and penalties.

Spouses may now seek that their ex-spouse be substituted for their outstanding tax liabilities instead of otherwise being paid from the available property pool as part of a final property settlement.

Solicitors can no longer assume tax liabilities fall in the hands of the original tax paying party.

Such substituted orders may lend themselves as another creative tool to effect property settlement.

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