Can I be liable for my partner’s tax debts? Part 1


Quite often in Family Law property settlement, clients ask the question, ‘what forms the net asset pool?’ Generally the simple answer is all of the parties’ assets minus their liabilities. But this becomes more complicated when liabilities are in dispute, such as whether you should be held liable for your partner’s tax debts.


A common question that the Family Court faces when dealing with property settlement is who is responsible for the debt of the relationship.  In all but the most exceptional of circumstances, tax debt owed to the Australian Taxation Office will constitute a liability of the relationship and therefore be included when calculating the net asset pool available for division.

When will partners not be liable for the debts of the relationship?

Ordinarily, the Family Court will treat both parties to the relationship as having benefitted from the non-payment of tax, and accordingly, tax liability arising as a consequence of non-payment must be paid from the parties’ assets prior to division of the relationship asset pool.


However, in Kowaliw and Kowaliw, the Court held that debts of a relationship are to be shared by the parties, except:


  • Where one of the parties has embarked upon a course of conduct designed to reduce or minimize the effective value or worth of the assets; or
  • Where one of the parties has acted recklessly, negligently or wantonly with matrimonial assets, the overall effect of which has reduced or minimized the value.

Applying the Kowaliw Priciples

More recently, the issue of tax avoidance in property settlement was raised in Commissioner of Taxation v Worsnop.  In particular, the Court discussed the issue of whether an ‘innocent’ spouse should bear the burden of a tax liability of which they were not aware despite enjoying the property and lifestyle benefits brought about by non-payment of tax.  The debt was incurred by the husband and his company, which allowed the Commissioner of Taxation to intervene in the Family Court proceedings. The wife had no knowledge nor any reason to be aware of her husband’s tax avoidance.


The Court held the debts to the Australian Taxation Office were not taken into account in determining the available asset pool because the conduct was within the exceptions outlined in Kowaliw.  The Court gave significant weight to the wife’s knowledge (that is, lack of knowledge) of the tax avoidance and held that she was denied the ability to make a choice regarding the tax evasion, that is, likely demanding her husband pay tax.  

Non-inclusion of tax liability when calculating net asset pool

This decision supports the notion that a non-liable partner is not automatically required to suffer the burden of their partner’s debt, particularly when they are ‘innocent’ by way of non-complicity and ignorance.  When tax avoidance becomes an issue in family law proceedings, the Commissioner of Taxation’s interests must be balanced against those of the ‘innocent’ partner; they cannot be automatically considered when seeking alteration of property interests.


For more information regarding property settlement and matters of tax controversy, please contact one of our experienced staff at Bambrick Legal today.

 

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Can I be liable for my partner’s tax debts? Part 2