Tax Debts in Family Law

Tax Files in filing cabinet

The recent case of Snipper & James and Anor [2018] FamCA 7 (12 January 2018) offers an example of how the Court may treat the taxation liabilities of one or both parties to a matrimonial property settlement, and shows it is never to be assumed that the party incurring the tax debt will be solely liable for it, when all other circumstances of the case are taken into account.  

In this case the facts were rather extreme. The wife had a tax debt of $113,161.00 and the husband had tax-related liabilities of $2,013,218.00. The asset pool (excluding the tax debts) was $1,284,142.00.  

The Australian Taxation Office intervened in the family law proceedings and sought orders for payment of the taxation liabilities owed by the parties.

The Court found that a significant portion of the husband’s tax-related debt (which comprised a mixture of primary, interest and penalty taxation liabilities) incurred before the parties separated in November 2011. The wife’s tax liabilities were also largely incurred prior to separation.

Ultimately the Court ordered that the wife should pay her own tax debt of $113,161.00 in addition to $200,000.00 (or around 10%) of the tax debt owing by the husband direct to the Australian Taxation Office on his behalf.

Due to the fact that the wife had benefited from the husband’s high-level earnings both prior to separation and post-separation (through significant payments for child support and spousal maintenance), the Commissioner for Taxation’s position was that she must essentially “take the good with the bad” and bear some responsibility for the husband’s tax debt.

The Court agreed – to a certain extent. Having already awarded the wife 95% of the asset pool (excluding the tax liabilities) on account of her family’s significant contributions to the marital assets in addition to her future needs factors (such as remaining primary carer to the three children of the marriage), the Court ultimately ordered that it was just and equitable for the wife to bear this level of responsibility for the husband’s tax liabilities and that indeed she had the capacity to do so.

Shelley O’Connell

January 2019