Mrs Tomaras, during her marriage with Mr Tomaras, incurred a $250,000 taxation debt. They subsequently divorced in 2009 and, later that year, the Commissioner of Taxation obtained a default judgement against Mrs Tomaras.
In December 2013, Mrs Tomaras commenced proceedings in the Federal Circuit Court seeking an Order or alteration of property interests pursuant to s79 of the Family Law Act (“FLA”). Mr Tomaras had been declared bankrupt the month prior to when the proceedings commenced.
In February 2016, the Commissioner of Taxation was granted leave to intervene in the proceedings in the Federal Circuit Court. Mrs Tomaras was seeking an Order pursuant to s90AE(1)(b) of the FLA to substitute Mr Tomaras to be solely liable for Mrs Tomaras’ taxation debt.
In December 2018, the matter went to the High Court of Australia to determine whether the FLA confers the power 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.
High Court’s Decision
The High Court determined that while the Family Court could indeed make the Order, it is unlikely to do so in Tomaras’ case as the husband is bankrupt.
Section 90AE(3)(b) states the Court may make an Order under s79 binding a third party if it is not foreseeable at the time that the order is made, that to make the order would result in the debt not being paid in full. It is very unlikely to satisfy this point as he clearly does not have capacity to pay.
The Court determined, at paragraph 32 of the High Court judgement, that the Court has jurisdiction over debts owed to the Commonwealth; and the Court has the power under s90AE to make Orders for the Commissioner to substitute the husband for the wife in relation to a debt owed to the Commonwealth arising under a taxation law. But these reasons will also show that there will seldom, if ever, be occasion to exercise that power.
Paragraph 86 of the judgement explains the difficulties that the Court faces if it is to ever make an order for substitution. It has to essentially jump through two high thresholds. Firstly, ensuring that the other party has capacity to pay the liability and, secondly, it is just and equitable to make the Order.
While the judgement caused publicity after it appeared that the High Court allowed the shifting of a tax liability from a wife to a bankrupt husband, the case is more of an academic exercise on the Family Court’s jurisdiction. The net effect of the decision in the case of Tomaras and Tomaras is zero as the Family Court is unlikely to grant the order as her ex-husband is bankrupt and does not have capacity to pay the debt.
It appears that the Commissioner of Taxation sought the High Court’s opinion on discovering the limit of power that the Family Court has in respect of granting orders transferring tax liability debts from spouse to spouse.
While the Court determined that the Family Court does indeed have the power to make such an order, it will be rarely (if ever) used.
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