High Court rules tax debt can be passed to spouse in divorce property settlement
In 2018, Australia’s High Court ruled that a tax debt of one spouse can be shifted to the other during a divorce property settlement. This has significant implications, with the decision meaning that the wealthier spouse could be forced to pay the debts of their former partner during a matrimonial or de facto property dispute.
Wife seeks order for bankrupt husband to pay her tax debt
The legal issue in the High Court case centred around whether the Family Court can give orders to government agencies (in this case, the tax office), as part of the determination of a property dispute.
The matter arose from a divorce property dispute in which the wife, who had incurred a tax debt of $250,000 during the marriage, sought an order from the Federal Circuit Court that her husband – who was bankrupt – become solely liable for the tax debt. (See Commissioner of Taxation v Tomaras  HCA 62.)
Earlier the Full Court of the Family Court had said that under Section 90AE (1) of the Family Law Act 1975 it had the power to order Commonwealth agencies to substitute one party in the relationship for another when it came to debts. The tax office appealed this decision to the High Court.
High Court decides whether substitution order can be made under Family Law Act
The High Court was not asked to make a decision on the facts of this case, that is, whether the debt should be transferred to a bankrupt person. They were only asked to decide a question of law – whether an order could be made under the Family Law Act to alter ownership of a debt owed to the Commonwealth.
In its decision, the High Court said a substitution order should only be made where it is “just and equitable to do so”, but not if it is foreseeable that the order would result in the debt not being paid in full.
Decision applies to all family law property disputes where spouse requests their tax debt be transferred
In light of the High Court’s decision, it was unlikely Ms Tomaras would receive her substitution order, as her husband is bankrupt and the tax debt would not be repaid if the husband was substituted for the wife.
However, this decision will now apply to all applications for a substitution order where one spouse wishes to pass on their tax debt and other Commonwealth liabilities (eg debt to Centrelink) to their partner.
Tax debt can be legally transferred to you during a family law property dispute
Spouses or de facto partners who are separating must be aware that under the law, their partner’s tax debts and other financial liabilities could be transferred to them.
Whether you have a tax debt, or you’re the spouse with no such liabilities, it is wise to obtain expert legal advice if you’re separating. This will ensure you are protected in any property settlement arrangements.