Tax debts – courts power to substitute debtors

Tax debts – courts power to substitute debtors

Commissioner of Taxation v Tomaras [2018] HCA 62 (13 December 2018)

  1. KIEFEL CJ AND KEANE J. We agree with Gordon J that under  s 90AE  of the Family Law Act 1975 (Cth) (“the Act“) the court has power to order the Commissioner of Taxation to substitute one party to a marriage for the other in relation to a debt owed to the Commonwealth for income tax. Accordingly, the appeal must be dismissed. Gratefully adopting her Honour’s summary of the factual background, the relevant legislation, and the reasons of the Full Court of the Family Court of Australia, we proceed to explain our reasons for that conclusion.
  2. Since the decision of this Court in Bropho v Western Australia[1] it has been settled that the presumption of statutory construction that general words in a statute do not bind the Crown may be displaced without the use of express words or words of necessary intendment. If the legislative provision in question, when construed in context, discloses an intention to apply to the circumstances of the particular case, then effect must be given to that intention. In this case the intention of the Act is not in doubt.
  3. Within Pt VIII of the Act, a court considering the exercise of its jurisdiction in property settlement proceedings under s 79 must, by reason of s 75(2)(ha), take into account the effect of any proposed order on the ability of a creditor of a party to the marriage to recover the creditor’s debt. Nothing in Pt VIII of the Actsuggests an intention to differentiate between Commonwealth, State and Territory revenue authorities or an intention to differentiate between revenue authorities and other creditors. Further, s 80(1)(f) provides that a court exercising its powers under s 79 may “order that payments be made … to a public authority for the benefit of a party to the marriage”. It is not disputed that this provision contemplates the making of an order that one party to a marriage pay the taxation liability of another to a revenue authority. Thus it is apparent that, in Pt VIII of the Act, the term “creditor” is apt to include the Commonwealth and indeed any other revenue authority.
  4. Within Pt VIIIAA of the Acts 90AA states that the object of that Part is to allow the court to make an order in relation to the property of a marriage under s 79 of the Act that is directed to, or alters the rights, liabilities or property interests of, a third party. Within Pt VIIIAA s 90AE(1)(b)  provides that in proceedings under s 79, the court may make “an order directed to a creditor of one party to a marriage to substitute the other party … to the marriage for that party in relation to the debt owed to the creditor”. Part VIIIAA is thus explicitly ancillary to s 79 of the Act.
  5. Given that Pt VIIIAA is ancillary to Pt VIII, a suggestion that a “creditor” in Pt VIIIAA is different from a “creditor” in Pt VIII would be difficult to sustain. Nothing in the language of Pt VIIIAA affords any support to such a suggestion. Further, nothing in the extraneous materials referred to by the parties targets a mischief that might be remedied only by giving “creditor” a narrower scope in Pt VIIIAA than it has in Pt VIII.
  6. It must be understood, however, that the power of the court under Pt VIIIAA to make an order directed to a third party is not at large. The power to make an order under s 90AE(1) is conditioned by  s 90AE(3).  Such an order may be made only if, among other things:

“(a) 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

(b) if the order concerns a debt of a party to the marriage – 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

(d) the court is satisfied that, in all the circumstances, it is just and equitable to make the order”.

  1. Some statutes may differentiate between ordinary creditors and revenue authorities. In such cases the general consideration of equality before the law, which tends against the application of the presumption that the Crown is not bound by a statute, can be seen to have been displaced in favour of the public interest specifically associated with governmental functions such as the protection of the revenue[2]. The Act is not such a statute.
  2. Any concern for the protection of the revenue – Commonwealth, State or Territory – is met by the terms of  s 90AE(3)(b).  If this condition is not satisfied, the power to make an order under  s 90AE(1)(b)  is not enlivened. The observance of this condition by the court is apt to ensure that the interests of the revenue authorities, and other creditors for that matter, are not adversely affected by the making of an order under  s 90AE(1)(b).  The scope of this power should not be distorted by attributing to the Parliament an unfounded apprehension that the courts cannot be trusted to ensure that the statutory conditions upon which the power may be exercised are satisfied.
  3. Given that, so far as appears from the record in the present case, the husband is a bankrupt and the wife is solvent, it is not possible to see how the condition in  s 90AE(3)(b)  could be satisfied in this case. More generally, it is difficult to see how any case where there is a real prospect that the substitution of one spouse for another as the debtor of the revenue authority would create or enhance a risk of non-payment would not fall foul of s 90AE(3)(b) of the Act.
  4. It might also be suggested that the prospect that an order for substitution might render the substituted party liable for a revenue debt without the benefit of rights of objection available exclusively to the other party to the marriage as “the taxpayer” under the relevant revenue legislation would mean that the condition in  s 90AE(3)(d)  is not satisfied. This suggestion raises a question of no little complexity. The circumstance that the income tax liability of the substituted party could not be contested by that party would not necessarily make it unjust or inequitable to order substitution. It may be, for example, that any challenge to the tax liability asserted by the Commissioner would clearly be resolved in favour of the Commissioner. In such a case, an inability to contest the tax liability would not occasion substantial injustice to the substituted party. However, it will rarely be the case that a court trying proceedings between the parties to a marriage will be able responsibly to come to a firm view as to the likely outcome of such a contest.
  5. As a practical matter, where a real question arises as to whether a party to a marriage would be substantially prejudiced by an order for substitution, the better course for the court would usually be to conclude that it cannot be satisfied that the condition in  s 90AE(3)(b)  could be met. In the present case, given that on the material in the record the condition in s 90AE(3)(b) could not be satisfied, it is unnecessary to reach a conclusion in relation to  s 90AE(3)(d). 
  6. For those reasons, we agree with the terms of the answer proposed by Gordon J to the question posed by the stated case.
  7. As to the procedure adopted in this case, we would observe that it is regrettable that the primary judge was invited by the parties to state a question of law for the Full Court. While the primary judge cannot fairly be criticised for acceding to the course proposed by the parties, it would have been more efficient, in terms of the administration of justice, if the wife’s application for substitution had been allowed to proceed to a determination on the merits. Given the difficulty confronting the wife’s application for substitution by reason of the condition in  s 90AE(3)(b) , the question stated for the opinion of the Full Court was unlikely ever to be of other than academic interest.

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