Sexually transferred debt- the right to substitute a party for a tax liability in a property settlement

While there is no doubt that a taxation liability of one spouse can be taken into account as part of a property settlement, the Family Court has recently confirmed that one spouse can be substituted for the other spouse in what is commonly referred to as sexually transmitted debt. This in terms of a liability owing to the Australian Taxation Office.

In Tomaras & Tomaras and Official Trustee in Bankruptcy and Commissioner of Taxation, the Wife and Husband agreed that the Wife’s debt to the Commissioner of Taxation (approximately $250,000) was to be passed to the Husband, in that he would be substituted for the debt.  Proper notice was given to the Commissioner, who opposed the making of the Order.

The Commissioner was granted permission to intervene in the couple’s property settlement proceedings, resulting in the matter being referred to the Full Court of the Family Court of Australia.

In dealing with the case, the Full Court had to examine whether the Commissioner of Taxation was firstly bound by the relevant provisions of the Family Law Act.  This is because there is a presumption that statutory provisions in general terms, do not bind the Crown.

The Full Court determined that the Crown presumption did not apply as the Crown could certainly benefit from the provisions of sexually transmitted debt (for instance, the substitution of such a debt could allow a more financially wealthy party to assume the debt, rather than an impecunious spouse).

sexually transmitted debt

Why is this decision important?

Where a non-financial spouse ends a relationship with significant personal taxation liabilities, it may be open to that spouse as part of their property settlement, to seek a substitution order rather than the liability remaining in their sole name or being paid from the available property.

For other spouses who may have been unwilling to share in the burden of a taxation liability accrued during the relationship, the liability can be included in the available property and can also be transferred directly to the other spouse if it would be just and equitable to do so. This case highlights the importance of spouses being aware that they may ultimately be responsible for another spouse’s taxation liabilities or penalties arising from their failure to lodge taxation returns or meet payment of taxation liabilities.

The principles of the case are important, but before Husbands and Wives get excited about substituting each other for pending tax debts, the Commissioner must be afforded procedural fairness (i.e given sufficient notice about the proposed Order) and further, if it is not foreseeable at the time, that the Order would result in the debt not being paid in full – in other words, if there is any doubt about the debt being paid in full by the substituted party, then the Court could not make the Order.

This case demonstrates that when it comes to tax liabilities:

  • Parties should consider substitution of taxation liabilities as an option when drafting orders sought or negotiating settlements. However, note that the Order should be phrased in such a way as to direct the Commissioner to substitute one party for the other as opposed to stating that a party be solely responsible for the debt; and
  • It cannot be assumed that the tax liability will remain with the original tax payer in property settlement proceedings.

Financial planners and/or accountants should be consulted early in negotiations to advise as to the most tax-effective way in which the ability to substitute parties to a taxation liability should be undertaken.

At Rostron Carlyle Rojas Lawyers we pride ourselves in understanding the needs of our clients and helping them to navigate a property settlement that minimises their exposure to taxation and disruption to their professional lives, wherever possible.

If you require family law advice, please contact Tuskeen Jacobs or Renée Kinman, Queensland Law Society Accredited Family Law Specialists on (07) 3009 8444 to arrange an initial consultation.

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