Can I Be Liable for My Partner’s Tax Debts? Part 2
A recent decision of the High Court has established that the Federal Circuit Court has the power to ‘substitute’ a tax liability, that is, order that the tax debts of one partner be reassigned to the other – even when one of the partners is bankrupt.
In Commissioner of Taxation v Tomaras, the High Court established that the Federal Circuit Court has the power to make orders that compel the Australian Taxation Office.
In Tomaras, one spouse who incurred a roughly ~$250,000 tax liability during the course of the marriage, applied to the Court to have the tax liability reassigned to the other spouse, under a provision in the Family Law Act 1975 that permits the Court to make orders substituting one party for another with regard to debts generally.
Tomaras’ argument was ultimately successful, and the High Court affirmed that the Federal Circuit Court has the power to reassign tax debts or ‘substitute’ debtors – even when, as in this case, one of the parties is bankrupt.
So What Does This Mean?
Though the result of this case is a potential loss for the Tax Office, there was a net gain for taxpayers.
Spouses who have inherited or otherwise become liable for their partner’s tax debts can now be confident that the family courts will be able to assess their situation and, if necessary, reassign the debts to the partner responsible.
Alternatively, if one spouse is financially better off than the other, then it is possible for them to be assigned the tax debts of a partnership as part of property settlement where it is ‘just and equitable’ to do so.
This case also offers protection to spouses who may incur large income tax debts, possibly without even being aware of it.
An example of this is a homemaker who may incur a significant personal tax debt from passive distributions made from a family trust, but who may lack the ability to pay back such a debt.
The possibility of tax debts being reassigned to wealthier partners increases the chance that the full tax liability can be recovered.
It’s always important to be on top of your tax situation to avoid nasty surprises from the Tax Office.
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Related Blog: – Can I Be Liable for My Partner’s Tax Debts? Part 1