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Australian Tax Office intervenes in a Family Court dispute

The Australian
6 February 2007

The Australian Tax Office has intervened in a Family Court dispute
By Susannah Moran

The tax office has lost a court bid to force a woman to sell the family home and use the proceeds to meet part of her husband's $12.5 million tax bill.

But it has been successful in intervening in a property dispute between the couple and obtaining money to help pay off a tax debt the wife knew nothing about.

The decision by the Full Court of the Family Court has wide ramifications for family court matters. The Australian understands a number of parties were waiting on the results of the case.

The controversial matter played out in the Family Court, where the Australian Tax Office intervened to make a claim on the only substantial asset the pair had left - the family home, which was in the wife's name and where the couple's four young children were living.

The names of the parties are confidential and pseudonyms were used in the case.

The Family Court found in 2007 that the house should be sold and the expected $4.75 million proceeds be split equally between the wife and the tax office. The tax office wanted the entire proceeds but the Full Court of the Family Court recently dismissed the tax office's subsequent appeal.

"At times, (the lawyer) for the commissioner, seemed to put the argument on his client's behalf as highly as that, as a matter of principle, the commissioner ought receive priority, not only over any other unsecured creditor, but above the claims at family law of the spouse of the debtor spouse," the judges noted.

But they noted the tax office's "essential argument" was that both the husband and wife had "received the benefit of the monies upon which tax was unpaid, in particular in respect of the purchase of the former matrimonial home". The tax office should therefore receive the proceeds of sale to help pay the tax debt.

Neither of the couple had substantial assets when they met, the court heard, but the husband soon started a business that became highly successful. The husband began using offshore accounts to avoid paying tax, a practice he continued for 10 years.

The court heard that the couple led an "extravagant in the extreme" lifestyle – travelling first class on frequent overseas trips, driving luxury cars and buying a boat worth more than $1 million.

The wife was occupied with home matters and raising the children, although she helped out in the business for a time.

The couple separated, and in February 2006 the wife applied for a property settlement. In the same month, the husband got his lawyers to contact the tax office about making a voluntary disclosure about his offshore activities.

One of the issues in the case was whether or not the wife knew of her husband's activities. She said she had no knowledge of the non-disclosure of income to the tax office but he said she did, or ought to have known.

The judges preferred the evidence of the wife.

One of the arguments put forward by the tax office argued that if a person had the benefit of money or property as a result of their partner's dishonesty, then they should share equally the burden of any debt created.

But the Full Court said a spouse's knowledge of any tax debt was an important factor when applying its discretion.

The Full Court also noted that the wife actually received less than she would have otherwise, because the husband had sold cars, a boat and property in Britain and spent more than $1million on legal fees in dealing with his tax affairs.

"Whilst commissioner of taxation was unsuccessful in the relation to this appeal, the most recent judgment points out that the wife did not do as well as she would have done had the husband's debt to the tax office not existed," said lawyer Jo-Anna Moy, who acted for the wife in the proceedings.

"She (had to) share part of her husband's debts regardless of her knowledge of how they were incurred or even their existence.

"While each matter turns on its facts, spouses should be aware they may be responsible for debts incurred by their spouse regardless of their knowledge or even control over how it was incurred."

FCA 2009 4 Commissioner of Taxation & Worsnop & Anor

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