Tax Commission not paid in full – Wife received net assets in preference to those assets being available to pay Husband’s outstanding taxation liability

18/02/2020

In James & Snipper & Anor (namely Commissioner for Taxation) (2018) FAMCAFC 235 3 December 2018 the Full Court of the Family Court on an Appeal from the original Decision considered the apportionment of the taxation obligations of the separated spouses, namely Husband and Wife, and a claim by the Commissioner of Taxation for payment of outstanding taxation due by the Husband.

The facts were:

1. The Husband and Wife had been in a 21 Year relationship.
2. The Husband and Wife had 3 children born respectively in 2002, 2004 and 2010 (“the Children”).
3. As at the time of separation in 2013 the Husband owed approximately $300,000 to the Australian Taxation Office.
4. The Commissioner obtained Judgment against the Husband for $881,482 in August 2014 and at the time of the hearing, that Debt had been reduced to $604,000 however interest in the sum of $168,000 had accrued on that Judgment Debt.
5. The net assets of the Husband and Wife (excluding taxation liabilities) at the time of the hearing, was in the order of $1,280,000.
6. At the time of the Hearing the Wife’s outstanding Taxation liability was approximately $113,000 and the Husband’s outstanding Taxation liability was $2,000,000 of which approximately $770,000 related to outstanding taxation the subject of the Judgment.
7. In those circumstances the total liabilities including Taxation liability exceeded the total assets by approximately $840,000. 
8. The Husband was earning approximately $500,000 per year. 
9. The Wife’s family contributed approximately $2,500,000 to the parties during the relationship. 
10. The Husband gambled and lost in excess of $1,000,000 over a period.
11. The Wife’s mother funded a company in which the Husband was a one third shareholder.  The Husband’s shareholding in the company was valued at $383,000 however after a debt due to the company the value was in the order of $175,000.
12. The Wife was working for the company without being paid.
13. By way of Expert Evidence the Wife’s reasonable remuneration if she had been paid by the company was in the order of $52,860 plus Superannuation of approximately $5,000 per year.
14. The Commissioner of Taxation was joined as the Second Respondent in the proceedings at his request.

Many issues arose in this case. 

The Primary Judge found:

• The contributions from the Husband’s and Wife’s personal exertion over the 21 years of their relationship and marriage and post separation were equal. 
• However, taking into consideration the Wife’s contribution of about $2,500,000 from outside the marriage, the assessment of the Wife’s contribution was found by the Court to be approximately 80% of the total net assets of the Husband and Wife (Excluding Taxation Liabilities).
• Having regard to other adjustments pursuant to the Family Law Act there was further adjustments in favour of the Wife of 15%. 
• In those circumstances but for the Husband’s taxation liability, the Wife was to receive an allocation of 95% of the net assets and the Husband was to receive 5% of the net assets.

The Commissioner argued that the appropriate amount to be paid by the Wife to the Commissioner in partial payment of the Taxation Liability of the Husband was $600,000.

The Trial Judge ordered that the Wife pay to the Commissioner the full amount of her taxation debt of approximately $113,000 from her share of the net property and ordered the Wife to pay $200,000 (effectively from her allocated assets as referred to above) to the Commissioner in partial discharge of the Husband’s debts outstanding taxation debt.

The Trial Judge found the Wife received substantial benefit from the Husband post separation. The Husband’s failure to pay his taxation liabilities enabled the Wife to enjoy a handsome lifestyle even after separation from the Husband.

The effect of the Court’s decision was that:

• The Wife would receive an allocation of net assets which would not be available to the Husband to pay his outstanding taxation liability; and
• The Husband would receive a minor allocation of net assets (excluding his taxation liability).

The Husband Appealed on numerous grounds in relation to Property matters.  There was also a separate Appeal in relation to Children matters.  The Full Court of the Family Court dismissed the Appeal and found against the Husband and the Commissioner as to the allocation of the assets between the Husband and Wife and the obligation of the Wife to pay further moneys to the Commissioner of Taxation to reduce the taxation liability of the Husband.

The Trial Judge did not provide the basis of the calculation as to the $200,000.  One of the bases for Appeal was that the Trial Judge did not provide adequate reasons to explain why the Wife was ordered to contribute $200,000 and not some higher figure of the taxation debt owed by the Husband to the Tax Commissioner.  This was dismissed.  Part of the basis for dismissal was that the Commissioner did not provide adequate reasons as to why the Courts at the first instance should have ordered that $600,000 be paid.

The Full Court of the Family Court noted the Trial Judge eventually settled on the figure of $200,000 as payable by the Wife because the sum represented about 10% of the Husband’s entire Taxation Debt and about 18% of the Wife’s Assets (once she had paid her own Taxation Debt).  The Full Court held that the process fulfilled the requirements of sufficient reasons in accordance with the Authorities sighted by the Husband.  The Full Court found it was unnecessary for the Trial Judge to synthesize every fact and every Submission to rationally explain the outcome.

There were also other issues on appeal.

Each of these matters were dismissed by the Full Court on Appeal.

This does raise the issue as to what is the appropriate Order when Liabilities exceed the total Assets available for distribution as between the Husband and Wife.

In this particular case the Order was such that the Wife received Net assets and the Husband was left in a position of having a net liability in particular to the Commissioner of Taxation. 

There are many lessons to be learnt from this particular case.  This is not the first case, nor will it be the last, that one spouse has failed to pay income tax and each of the parties have received Financial Support as a result thereof.  Different conduct by the parties would probably have led to a different outcome.

Watson & Watson are highly experienced in relation to Family Law and Commercial matters.  There are many matters that we have provided second opinion/s and assisted a party to solve their particular issue.  Debt by one or both parties can hinder or prolong an equitable outcome when it comes to financial/property settlement.  Please contact Richard Watson Senior Family Law Solicitor or his Personal Assistant Shereen Da Gloria to discuss your matter and seek timely advice.

This is only a preliminary view and is not to be taken as legal advice without first contacting Watson & Watson Solicitors on 9221 6011.