Treatment of future contingent tax liabilities in Family Law cases

In a case decided in the middle of 2016, the Full Court of the Family Court of Australia was asked to decide whether the original trial Judge made an error by refusing to deduct a calculation of the taxation payable by the husband in connection with future dividends that were likely to be paid by a company to enable the husband to meet complying loan obligations pursuant to Division 7A of the Income Tax Assessment Act.

Ultimately, the Full Court reversed the trial Judge’s decision and varied the trial Judge’s Orders to increase the sum of money payable to the husband in recognition of the probable future tax obligations.

However, the Full Court did confirm that the trial Judge got it right that in the circumstances of that particular case it was inappropriate to deduct the full amount of the asserted future income tax obligations directly from the matrimonial asset pool.

This case represents a useful affirming of the principles that were set down in a case in 1998 by the name of Rosati to the effect that generally contingent liabilities should not be deducted from the quantum of the matrimonial asset pool but may be given weight in connection with the division of the ascertained pool.

The extent of the contingent liability in connection with income tax that may arise in the future in the husband’s hands as a result of the payment of non-cash dividends to enable the husband and other entities in the group to meet certain Division 7A obligations was uncertain but was estimated to be around $500,000.00. It is the uncertainty and the estimation that led the Court to take it into account but not deduct it from the overall matrimonial asset pool.

Ben Farmer

26 June 2017