The High Court in Commissioner of Taxation v Tomaras & Ors (2018) HCA 62 (Tomaras) has confirmed the Federal Circuit Court had jurisdiction to make orders altering the property interests of parties to a marriage substituting one party for the other party as sole debtor to the Commissioner of Taxation (Commissioner) in respect of income tax liabilities owed by the first party.
The High Court’s decision demonstrates that it cannot be assumed that liability for taxation debts will remain with the original debtor when it comes to family law property settlement agreements. Therefore, parties should consider the possibility of substitution of tax liabilities, if appropriate, when negotiating and finalising these agreements.
Mr and Mrs Tomaras married in 1992 and separated in 2009. During their marriage the Commissioner issued several notices of assessment to Mrs Tomaras for various income tax liabilities. Mrs Tomaras failed to pay those income tax liabilities and did not lodge any objections against the notices of assessment. The Commissioner obtained a default judgment against her but failed to enforce it.
In November 2013, Mr Tomaras was declared bankrupt.
One month later, on December 2013, Mrs Tomaras commenced proceedings in the Federal Circuit Court against the husband seeking, relevantly, orders for the alteration of property interests under section 79 of the Family Law Act 1975 (the Act), including, pursuant to subsection 90AE(1)(b) of the Act, an order that Mr Tomaras be substituted as the sole debtor to the Commissioner in respect of her income tax liabilities.
The Commissioner was granted leave to intervene in the proceedings.
Section 79 in Part VIII of the Act, in respect of proceedings regarding property of the parties to a marriage, provides a court may make such orders as it considers appropriate altering the interest of the parties to the marriage in the property. Subsections 90AE(1)(b) and (2) in Part VIIIA of the Act go on to relevantly state:
“(1) In proceedings under section 79, the court may make any of the following orders:
(b) an order directed to a creditor of one party to a marriage to substitute the other party, or both parties, to the marriage for that party in relation to the debt owed to the creditor;
(2) In proceedings under section 79, the court may make any other order that:
(a) directs a third party to do a thing in relation to the property of a party to the marriage; or
(b) alters the rights, liabilities or property interests of a third party in relation to the marriage.
To determine what order should be made (if any), the court must take into account several matters, for example the effect of any proposed order on the ability of a creditor of a party to the marriage to recover the creditor's debt, so far as that effect is relevant (see section 90AE(3)(b) of the Act).
Original decision: Full Court of the Family Court
At the first instance, the Federal Circuit Court sought guidance from the Full Court of the Family Court (Full Court), at the urging of the Commissioner, whether the Federal Circuit Court had power under subsections 90AE(1) or (2) of the Act to order that a husband be substituted for a wife in respect of taxation debt owed by the wife to the Commonwealth of Australia.
The Full Court found that the Federal Circuit Court had the power to make such orders sought by Mrs Tomaras, however this was subject to the proviso that subsection 90AE(1) of the Act only confers the power to make an order to direct the Commissioner to substitute Mr Tomaras for Mrs Tomaras in respect of the income tax liabilities owed by Mrs Tomaras to the Commissioner.
The Commissioner unsuccessfully argued that the Federal Circuit Court has no power to make such an order under subsections 90AE(1) or (2) of the Act because it lacked jurisdiction to encompass proceedings between the parties to a marriage regarding the taxation debts owed by one or both of those parties to the Commonwealth. The Commissioner argued the common law presumption that a statute does not bind the Crown should apply.
The Commissioner appealed the decision of the Full Court to the High Court.
High Court’s decision
The High Court unanimously upheld the decision of the Full Court noting under section 90AE of the Act the Federal Circuit Court did have the power to order the Commissioner of Taxation to substitute one party to a marriage for the other party in relation to a debt owed to the Commonwealth for income tax by the first party.
The High Court rejected the Commissioner’s arguments that Parts VIII and VIIIA did not bind the Commonwealth and held the Federal Circuit Court did not lack jurisdiction to the make the order sought. Gordon J stated the following:
“…Pts VIII and VIIIAA [of the Family Law Act] disclose a legislative intent that the relevant provisions of Pt VIIIAA bind the Crown, when regard is had to: the generality of the language and the express reach of the provisions (including s 90AC); the fact that Pt VIIIAA was introduced specifically to address third parties and restrictions on the ability of a court to direct a third party to act in order to give effect to property settlements; the fact that a purpose of Pts VIII and VIIIAA is to finalise financial relationships between the parties to a marriage; and, finally, the fact that the effect of the provisions on third parties is confined in the manner described earlier.”
Whilst the High Court upheld the jurisdiction of the Federal Circuit Court to make the order under subsection 90AE(1), consideration still needed to be made whether it was appropriate to make such an order, Gordon J stated:
“The difficulties for any court faced with a request, in relation to a debt owed to the Commonwealth under a taxation law, that it make an order under s 90AE(1) that one party to the marriage be substituted for the other party as the debtor are that these (and other) aspects of the taxation law would appear to prevent a court being satisfied of the two matters identified in s 90AE(3)(b) and (d) – that it is not foreseeable that making the order would result in the debt not being paid in full; and that, in all the circumstances, it is just and equitable to make the order.
The fact that the husband in this appeal was bankrupt is reason enough not to make the order sought by the wife under s 90AE. But there are other facts, matters and circumstances which compel the same conclusion in this appeal: the inability of the husband to exercise the Pt IVC rights of objection and review (both because the time allowed to the wife for objections has long expired, and because of the difficulties identified above); the fact that the debt owed to the Commonwealth, in relation to which the Commissioner has obtained default judgment, is long overdue; and the fact that the size of that Commonwealth debt continues to increase, not just on a daily basis, but at a higher rate, because of the accruing GIC. That list is not and cannot be exhaustive. However, those facts and matters, or even some of them, compel the conclusion that a court could not be satisfied of the matters prescribed in s 90AE(3) and, therefore, the court would not be empowered to make a substitution order under s 90AE(1) in Pt VIIIAA.”
And further Edelman J noted:
“The effect of s 90AE(3)(b) is that the Crown will only be subject to the substitution of a person as its debtor where it is not foreseeable that the substitution would cause the debt not to be paid in full. Further, two of the matters in s 90AE(4) which the court must take into account are (i) the taxation effect (if any) of the order on the parties to the marriage, and (ii) any other matters raised by the third party, who must be accorded procedural fairness. Hence, if the order would have the effect of depriving a spouse of the possible exercise of rights of objection to, review of, or appeal from, the assessment, then this could be a taxation effect (s 90AE(4)(a)) or a reason of justice and equity (s 90AE(3)(d)) that would militate against making the order. Further, to the extent that an order under s 90AE(1) would have an effect on the general interest charge provisions in Pt IIA of the Taxation Administration Act, or the Commissioner's power to amend assessments, then these matters would be taken into account by the court when considering, under s 90AE(3)(d), whether it is just and equitable to make the order.”
This case shows that it is important for married and defacto spouses to be aware of the possibility that, depending upon the circumstances, the Federal Courts have power to make orders as part of a property settlement under the Act to substitute one spouse for the other spouse in relation to the taxation liabilities of the first spouse.
Any orders that are sought under section 90AE of the Act which would bind the Commissioner will need to satisfy all relevant requirements including whether the order would result in the debt being paid in full.
If you have any questions about the tax implications of the decision in Tomaras or any tax matter, please contact:
T +61 3 9611 0196
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia