The High Court has recently ruled that the Family Court has the power under the Family Law Act to direct the Australian Tax Office to transfer the tax debt of one spouse to the other spouse as part of a property settlement.
In the case of the Commissioner of Taxation v Tomaras, the High Court dismissed an appeal from the ATO disputing that the Family Court had the power to make orders binding the Commissioner.
The High Court found that the Family Law Act does confer the power to substitute one party for the other as a debtor. Specifically s90AE allows the Court to make orders binding third party creditors so that the Court can transfer debts owed by either spouse to the other or to both spouses when settling the property.
The High Court determined that the Family Court should consider whether the "making of the order is reasonably necessary, or reasonably appropriate and adapted, to effect a division of property between the parties to the marriage, and it is not foreseeable at the time that the order is made that to make the order would result in the debt not being paid in full; and without the court being satisfied that, in all the circumstances, it is just and equitable to make the order."
This judgement is a good example of why we always go through all assets and liabilities in any mediation where a property settlement is being negotiated. You cannot assume that, for example, a debt incurred by one party will be their sole responsibility following a separation. The asset pool as a whole must be considered as part of any property settlement.
If you have questions about the implications this case may have on your circumstances, we encourage you to obtain independent legal advice. If you need help finding a specialised family lawyer, please feel free to contact me.