In an unprecedented decision regarding a couple’s divorce, High Court has found that it is possible for one spouse to transfer responsibility for tax debts onto their former partner during divorce property settlement.

The issue came to surface via the case of Mr and Mrs Tomaras, who were married from from 1992 till 2009. Mrs Tomaras was issued an assessment by ATO for Medicare levies and income tax whereas by 2014, Mr Tomaras had filed for bankruptcy. Shortly after he went bankrupt, his spouse initiated proceedings in the Federal Circuit Court seeking alteration of property interests under family law.

Mrs Tomaras’ tax debt had risen up to $250,000 during the marriage, however, she sought an order from the Federal Circuit Court that her Mr Tomaras become solely liable, the Age reported.

At the same time, the High Court found that a court has jurisdiction over debts owed to the Commonwealth and a court has power, under s90AE, to order the commissioner to substitute the husband for the wife in relation to a debt owed to the Commonwealth arising under a taxation law. Meanwhile, a substitution order should only be made where it is “just and equitable to do so” and not if it is foreseeable that the order would result in the debt not being paid in full.

“High Court also observed there will seldom, if ever, be occasion to exercise that power and adversely affect the commissioner or other creditors,” notes the ATO website.

The Full Court said s90AE(1) of the Family Law Act 1975 confers power onto the court that enables it to make an order that the commissioner be directed to substitute the husband for the wife in relation to the debt owed by the wife to the commissioner.

As a result, the tax commissioner appealed to the High Court but lost meaning that he could now potentially lose $250,000 due to the husband being bankrupt.

Why this case is so important?

According to Senior associate at HopgoodGanim Lawyers, Sophia Pippos, it highlights a very important hole in the determination of a divorce-related property dispute where as part of the settlement, one spouse could seek a substitution order and make their former partner responsible for taxation liabilities and/or penalties.

“For other spouses who may have been unwilling to share in the burden of a taxation liability accrued during the relationship,” Mrs Pippos explained, “the liability can be included in the available property and can also be transferred directly to the other spouse if, in all the circumstances, it would be just and equitable to do so”.

Even though it is rare, this discrepancy allows court to have the more financial secure spouse take on the debt if if the Tax Office decides to pursue the payment of the debt but only if the person does have capacity to pay it.