High Court Decision: Wife Tax Debt Can Shift to Bankrupt Husband in Divorce Proceedings

In the recent case of Commissioner of Taxation for the Commonwealth of Australia v Tomaras & Ors [2018] HCA 62, the High Court ruled against the Australian Tax Office (ATO), unanimously finding that the court can direct the Commissioner of Taxation (the Commissioner) to shift a tax debt from one spouse to another.

Background of the case

Mr and Mrs Tomaras were married for 17 years from 1992 to 2009. During the marriage, Mrs Tomaras incurred a $217,669.00 tax debt with respect to income tax and Medicare levies.

In 2009, before the marriage ended, the Commissioner obtained a default judgement against Mrs Tomaras for the unpaid debt.

Four years later Mr Tomaras became bankrupt.

Mrs Tomaras subsequently sought an order for her bankrupt ex-husband to become solely liable for her entire tax debt.

The order was sought pursuant to section 90AE(1)(b) of the Family Law Act 1975 (Cth). This section states:

(1) In proceedings under section 79 [alteration of property interests], 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;

Decision of the Full Court

The Full Court ultimately decided that the court does have the power to direct the Commissioner to substitute one spouse for the other with respect to a tax debt, provided that:

  1. The order is one of substitution, so that the original debtor doesn’t lose the right to object; and
  2. In making the decision, the court must consider the prospects of recovery of the debt.

Decision of the High Court

The Commissioner appealed to the High Court. The High Court unanimously upheld the decision of the Full Court, finding that section 90AE(1)(b) does allow the court to direct the Commissioner to transfer the tax debt of one spouse to the other during proceedings to alter property interests.

Does this case open the floodgates?

This case raises the questions regarding whether the floodgates have been opened to allow separating parties to shift their tax debts to avoid payment. Family Law specialist, Jacky Campbell, told the Australian Broadcasting Corporation (ABC) that she did not think the floodgates had been opened as the debt will only be shifted if the other spouse has better capacity to pay.

Mrs Tomaras’ case will still need to be decided by the Family Court with direction from the High Court as to the application of the law. The fact that Mrs Tomaras’ ex-husband is bankrupt is likely to heavily influence the judge’s decision.

Despite this, this case is an important warning to separating parties that there is a  possibility that taxation debts could be included in the available property during proceedings to alter property interests.

Do you need commercial law advice in connection with a family matter?  Call us on (02) 4929 7002, email us or complete an enquiry form.