High Court rules against ATO, finding tax debts can be shifted between spouses

A recent High Court case has found that a tax debt of one spouse can be shifted to another during a divorce property settlement, which lawyers say is unprecedented and could leave the richer spouse with the debts of their former partner.

Key points:

• The case looks at whether the Family Court can give orders to the ATO as part of the determination of a divorce-related property dispute
• The Tax Commissioner appealed to the High Court and lost. The tax man is now potentially out of pocket $250,000 because the husband is bankrupt
• Lawyers say the case has shifted the goalposts and one spouse may be responsible for another spouse’s taxation liabilities and/or penalties

The case of Commissioner of Taxation v Tomaras concerns whether the Family Court can give orders to government agencies — in this case the ATO — as part of the determination of a property dispute.

After the breakdown of a marriage, one spouse, who had incurred a $250,000 tax debt during the marriage, sought an order from the Federal Circuit Court that her (bankrupt) partner become solely liable for the debt.

The Full Court said s90AE(1) of the Family Law Act 1975 confers power onto the court that enables it 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.