Tax, What Tax?!

March 2019 | Les Stubbs

One of the most important benefits and advantages of consulting a specialist family lawyer is to be properly advised on your legal rights and obligations before a potential problem arises from the breakdown of your relationship.

A significant concern for many separating or separated people is the tax consequence of their separation. In our complicated taxation system in Australia, tax arises in so many circumstances – for example on your income, however that may be derived, on property, on shares, on your superannuation, etc. Without proper legal and accounting advice, you often don’t know when and where, and how, tax arises and is then assessed. It can be a nightmare.

A common example is where business people “split” their income with their partner, who may not be working or who is on a lower income, to reduce income tax. This may commonly occur by setting up a trust from which income is distributed to family members, to take advantage of lower tax brackets.

So far, so good – but who pays the tax on the income received? You expect that it is paid by the trust, and it usually is in “good times” – but what happens if the “good times” end and the couple separate? What happens if a husband, for example, continues to “split” his higher income with his wife who is not working and is caring for their children full time, so as to reduce his income tax, and then he refuses to pay the tax on the income paid to his wife?

The simple answer is that an assessment is issued by the ATO to the wife as the “income earner”, as she is the one required to lodge a tax return for the income “split” to her, even if she never received that income personally. If the wife doesn’t have the money to pay the tax liability, what does she do? She is legally required to pay it under the income tax laws.

It is well known by all family lawyers that a tax liability of one of the spouses can be taken into account in a property settlement between both spouses if they separate. In a decision just last month, the High Court of Australia in Commissioner of Taxation v Tomaras, confirmed that a court can “substitute” one spouse for the other, that is, they can order one of them to pay the tax liability of the other.

The ABC reported this as “unprecedented” and as potentially “opening the floodgates” to avoid paying tax. It isn’t. it simply confirms the law as it has existed since 2003. Not only can a tax liability be taken into account as part of a property settlement, the liability to pay it can also be transferred directly to the other spouse.

But, the provision to do so is and has always been, that it must be just and equitable to do so. The principal question will be whether the tax liability can be paid. What is unlikely is that a court will ever order that a spouse who cannot pay the tax take the liability to pay it from a spouse who can afford to pay it. In other words, it cannot be used to make the ATO “miss out”. The burden is simply being shifted as a part of the overall property settlement.

So what is the result? In the example above, the husband who “split” his income with his wife who is at home caring for the children, and did not pay her the income nor pay the tax on it, can be ordered to pay her tax, including any interest and penalties arising.

The importance of this case is to highlight that you should always get specialist advice if you separate.