Tax Debts and Property Settlements

In a matrimonial property settlement when tax debts of either the husband or the wife exceed the value of the net asset pool, the deciding judge has the discretion to deal with the matter in any way that results in a just and equitable outcome for the parties.  This can include decisions that result in forgiving the debt or ordering payment of part or all of one parties debt by another.

In the recent Family Court of Appeal case of Snipper & James and Anor [2018] FamCA 7 Watts J considered a 21 year marriage where the total tax owing between the Husband and Wife left a net deficit of $842,237.00.  The tax debts, which were incurred both during and after the relationship were $2,013,218 to the Husband and $113,161.06 to the Wife.

When considering the appropriate division of the property pool, the Court found that that the parties held traditional roles, however that the wife also made significant contributions through gifts from her parents (bringing in about $2.5 million from outside the marriage).  The court also found that the Husband gambled more than $1 million dollars.  Leaving aside the taxation debts, the court found in favour of the wife 80/20 on contributions before making a further adjustment to the wife for 75/2 factors of 15 %.  This meant that Justice Watts determined that the wife should receive 95% of the property pool and the husband 5%.

In this case his Honour exercised his discretion to vary from the ordinary course of “assessing the assets, assessing the liabilities and dividing the net proceeds” given that deducting the whole taxation debt would mean that the wife would receive no assets because of the Order.  The court did not consider that such an outcome was just and equitable.

To protect the interests of the Australian Government and ensure the tax owing by the husband was not lost, the Australian Commissioner of Taxation intervened in the case, seeking that the wife be obligated to pay half the husband’s debt from her share of the property settlement.  The reality of this situation was that if the Commissioner did not intervene, there was a risk that none of the debt would be paid, given the Husband’s limited entitlement.

Case law dictates that there is no rule of priority as between the Commissioner and the wife but that the rights of both parties must be balanced in any decision.

The Commissioner argued that the wife benefited from the taxation liability during the relationship and after, in that the income earned by the husband was used to a substantial degree to support the wife and the children.

The court accepted that the wife benefited, however not to the extent sought by the Commissioner.

The court found that it was just and equitable that the wife pays her income tax liability and 10% of the husbands income tax liability ($200,000.00) from her share of the property settlement.

The power of the court is wide ranging and third-party creditors, like the Commissioner in this case, can and do seek leave to intervene to protect their interests in property settlements.