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In a recent Full Court decision (October 2017) of Tomaras & Tomaras and Commissioner of Taxation, the Full Court was asked to determine a question stated in relation to proposed Consent Orders that a Husband and Wife had sought by way of property settlement at the end of their marriage.

The Family Court has powers in some circumstances to make Orders that can be said to directly affect a third party creditor.  In particular the Court has powers to substitute one spouse to be liable for the other spouse’s debt, provided certain conditions are met under the Act.

In this particular case, the Wife and Husband agreed that the Wife’s debt to the Commissioner of Taxation (some $250,000.00) were passed to the Husband in that he would be substituted for the debt.  Proper notice was given to the Commissioner of Taxation who opposed to the making of such an Order.

In dealing with the case stated, the Full Court had to examine whether the Commissioner of Taxation was firstly bound by the relevant provisions of the Family Law Act.  This is because there is a presumption that statutory provisions in general terms, do not bind the crown.

The Full Court determined that the Crown presumption did not apply as the Crown could certainly benefit for such provisions (for instance, the substitution of such a debt could allow a more financially wealthy party to assume the debt, rather than an impecunious spouse).

The Full Court also held that the Commissioner of Taxation was a creditor in relation to the third party provisions of the Family Law Act.

Before Husbands and Wives get too excited about substituting the other for their substantial tax debts, one must keep in mind that there are several criteria to be satisfied before any creditor has their debt substituted as part of a matrimonial property settlement.

In particular, the third party cannot have any of its substantive rights or property interest altered under any circumstances.  In addition, the third party must be afforded procedural fairness (i.e given sufficient notice about the proposed Order) and further, if it is not foreseeable at the time, that the Order would result in the debt not being paid in full – in other words, if there is any doubt about the debt being paid in full by the substitute party, then the Court would not make the Order.

There was also a legal argument about whether the substituted debtor would assume the rights of the other spouse, under the Income Tax Assessment Act (including rights to objection etc) and whilst that was not determined finally – the Full Court seemed to be of the view that such rights would also pass to the substituted debtor.

The decision is certainly interesting and it is another example of the wide reaching powers of the Family Court in relation to third parties and in particular, third party creditors in relation to matrimonial property settlements.

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