Separation and Tax Debts
9 April 2019
By Lisa Wagner & Prue Hawkes
Can the Family Court direct that my ex take my tax debt?
The High Court of Australia was recently asked a question as to whether a party to a marriage could be substituted for the other in relation to a Tax Debt under section 90AE of the Family Law Act (“The Act”). The Commissioner of Taxation (“The Commissioner”) intervened in the matter to suggest that the Family Courts did not have power under the relevant section.
In accordance with procedural requirements the question was reverted from the Federal Circuit Court to the Full Court of the Family Court of Australia (“The Full Court”). The Commissioner was not satisfied with the answer provided by the Full Court and appealed to the High Court of Australia (“The High Court”).
The specific question posed to the High Court was, “Does section 90AE(1)-(2) of the Family Law Act 1975 (Cth) grant the court power to make Order 8 of the final orders sought in the amended initiating application of the wife?”
The order sought by the wife was in the following terms:
“Pursuant to section 90AE(1)(b) of the Family Law Act 1975 (Cth) in respect of the [Wife’s] indebtedness to the Commissioner of Taxation for the Commonwealth of Australia [for] taxation related liabilities in the amount of $256,078.32 as at 9 August 2016 plus General Interest Charge (GIC), the [husband] be substituted for the [wife] as the debtor and the [husband] be solely liable to the Commissioner of Taxation for the said debt”.
Section 90AE(1)(b) of the Act allows the Court to direct a creditor of the parties to substitute one party of the marriage for the other in relation to a debt owed to that creditor. The Commissioner submitted that as a Commonwealth body they should not be bound in the same way as other third-party creditors. That submission was rejected by both the Full Court and by the High Court, although it was conceded by the High Court that the circumstances under which a party should be substituted for another pursuant to section 90AE of the Act in relation to a tax debt would be rare when considering the criteria set out under section 90AE(3)(b) and (d).
By way of background, the husband and wife were married in 1992 and separated in July 2009. On 5 November 2009 the husband was declared bankrupt. On 12 November 2009 the wife had a default judgment made against her for $127,669.36 with General Interest Charges (GIC) continuing to accrue such that by August 2016 the total amount owing to the Commissioner was $256,078.32.
There is a general principal when interpreting legislation that the Crown should not be bound. Although this is the starting point for interpreting legislation, the ultimate question is whether that presumption is rebutted and, if so, the extent to which the legislation intends to bind the Crown. Holding to this principle, the Commissioner submitted that section 90AE of the Act should not bind the Crown, and accordingly the Family Courts did not have the necessary jurisdiction to make the orders sought by the Wife.
In reviewing the statutory framework of the Act, The High Court noted that the Act had been expanded over the years to specify that a debt owed by a party was to be included as ‘property’ of the marriage for the purposes of the Act. The Act makes provision for a debt to be transferred and describes a creditor as a relevant third party to proceedings under the Act.
The Commissioner accepted that they were a creditor for the purposes of some sections of the Act but not for the purpose of section 90AE. This submission was rejected by the Court.
The High Court said that the operation of section 90AE could leave the Commissioner ‘no worse off’ and noted that the operation of section 90AE of the Act should protect Commonwealth Revenue and would not ‘disrupt’ the operation of taxation law.
When considering the facts of this case, in particular the husband’s bankrupt status, it is helpful to understand the criteria that a court must look to when making an order under section 90AE as sought by the wife.
Section 90AE(3) of the Act relevantly states:
“(3) The court may only make an order under subsection (1) or (2) if:
- the making of the order is reasonably necessary, or reasonably appropriate and adapted, to effect a division of property between the parties to the marriage; and,
- if the order concerns a debt of a party to the marriage – it is not foreseeable at the time that the order is made that to make the order would result in the debt not being paid in full; and
- the third party has been accorded procedural fairness in relation to the making of the order; and
(d) the court is satisfied that, in all the circumstances, it is just and equitable to make the order…” (emphasis mine)
When considering subsections (3)(b) and (d) it is clear that in this case the Court could not be satisfied that the tax debt would be repaid by the husband and so the Court would not be empowered to make the order for substitution sought by the Wife under section 90AE of the Act.
An alternative power for the Court to substitute a party for a tax debt is set out in section 80(1)(f) which allows a court to make an order that “payments be made directly to a party to the marriage, to a trustee to be appointed or into court or to a public authority for the benefit of a party to the marriage” (emphasis mine).
An order directing payment under section 80(1)(f) requires that some form of liquid asset exists to meet this payment, or that assets are readily saleable for the purpose of satisfying the payment. If the funds or assets are not available for an order directing payment pursuant to section 80(1)(f) the High Court notes that it is unlikely, even requires the conclusion, that the criteria in section 90AE(3)(b) could not be met and therefore an order under that section would be precluded.
The High Court concluded that although section 90AE of the Act confers the necessary power to make an order directing the Commissioner to substitute one party for another in respect of a tax debt the Court cannot answer that question in any specific case without directly addressing the factors set out in section 90AE(3) which require, amongst other things, a consideration of whether that debt can be paid in full and that it is otherwise just and equitable to make the order.
Doolan Wagner Family Lawyers offer specialist family law advice in St Leonards on Sydney’s North Shore. If you have recently separated or have a family law enquiry, please contact us on (02) 9437 0010 or firstname.lastname@example.org to discuss your matter in complete confidence. We have a team of experienced and caring professional family lawyers available to help you in this difficult time.
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