DEBT IN SETTLEMENT

March 11, 2019

 Paula Phelan is a Family Lawyer with Specialist Accreditation in this area from the Queensland Law Society. She has been a lawyer for 22 years and is the director of Phelan Family Law, a Rockhampton legal firm specialising in Family Law only.

 

A recent case in the High Court of Australia has confirmed that pursuant to the Family Law Act, the court has the power to assign the taxation debt of one spouse to another in the course of a property settlement.

 

In the case of Commissioner of Taxation v Tomaras, the husband and wife had been married for 17 years and during the marriage the tax office had issued several assessments requiring the wife to pay a total of over $250,000 in tax.

 

The wife did not pay and following separation the husband became a bankrupt.

 

The wife subsequently commenced proceedings for the determination of a property settlement.

 

Part of the orders sought were that the husband become solely responsible for the tax debt and that she had no further liability.

 

Under the law, the Court has the power to make decisions about the re-distribution of property in family law situations.

 

The court also has the power to bind third parties to the proceedings in certain circumstances.

 

If there is a debt owing by one of the parties to the proceedings to a creditor, the court can order that the creditor accept the other person as the contractual debtor.

 

There can be, in effect, a substitution of debtors with someone who was never a party to the original contract that created the debt.

 

The commissioner for taxation appealed against the decision of the Full Court of the Family Court of Australia that the debtor could be substituted. Their view was that the power given to the Court under the Family Law Act was not applicable with debts owed by one party to the Commonwealth of Australia.

 

The case was particularly interesting in view of the fact that the husband was bankrupt. 

 

The High Court unanimously upheld the decision and allowed the substitution.

 

They confirmed that the Family Law Act gives the court power to make orders that the Commissioner be directed to substitute the husband.

 

The High Court held that the making of the order was reasonably necessary or appropriate to affect a division of the property between the parties to the marriage.

 

 

 

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