Written by Brett Hartley, 6 September 2022
Tax is a complex subject and I do not profess to be an expert to tax or any form of revenue law. However, in everyday family law property settlements, the incident of tax often is underestimated and/or is overlooked by clients, practitioners, and their advisors.
Here are some important things to know and some things you probably did not know about the treatment of tax in the area of family law:-
- A tax debt is not property – The Family Law Act only allows an alteration of an interest in property. It does not allow alterations of interests in liabilities, except when a third party is joined in proceedings and even then, the Family Court has limited powers to substantively effect a third party’s rights. People often think you simply divide up tax liabilities and other liabilities as you would interest in property, but that certainly is not the case;
- What is just and equitable dictates the treatment of tax debts. Yes, only in the Family Court can you have a test or a rule such as this. What it really means, is that if you are to deduct tax debts from the value of matrimonial property interests then you can only do so if it is just and equitable to do it. The fact that a tax debt exists does not mean automatically that it is taken up in the Family Court settlement.
- A crystalised tax debt that is already due and owing is not always deducted from the value of property available for division – following on from the above, the Family Court does not automatically take up all existing tax debts. In most cases they will be but if a tax debt, for instance is recklessly incurred by one party (e.g division 7A implications), then the Family Court can always decide that that liability should rest with one party or should be ignored or even discounted when looking at the net value of assets available for division.
- Capital Gains Tax (CGT) inherent in a property is not normally taken up unless it is inevitable that the property must be sold to effect an Order or its sale is inevitable in the near future. Once again, it is hard to believe, but only in the Family Court can you have a rule like this. Even though a piece of property will be valued for the purpose of Family Court proceedings, the fact that the notional tax (i.e capital gain) on the sale of that property is not taken up, is very concerning. There are some instances where the tax can be taken up but as a general rule, it is not taken up unless a sale is inevitable.
- Tax on retained earnings – as above, going to Trial in the Family Court with substantial retained earnings on the Balance Sheet, is a recipe for disaster. Once again if the tax is not actually being incurred and it does not have to be inevitably incurred in the short-term future, then it may not be taken up.
- Tax debts incurred pre separation and post separation – it might be surprising to know that there really is no difference. There is no line in the sand and because a tax debt is incurred after separation, this may only represent one factor in determining whether it is just and equitable to take up the debt. Generally speaking, debts incurred after separation will usually fall with the spouse who incurred them, but not always. Likewise, debts incurred before separation will usually have the flavour of some sort of matrimonial quality about them, but once again, it is not a set hard or fast rule.
Generally, the Court has directed that the determination to whether a tax liability should be taken up at any given time, depends upon the following:-
- The nature of the tax liability – has it crystalised? Is it latent tax or notional tax, or is it contingent in nature?
- What are the circumstances surrounding the incurring of the tax debt? What actions gave rise to the tax? When did those actions take place? Was a tax debt incurred in relation to property built up during the marriage;
- Regarding the nature and circumstances of the tax debt, and other relevant overall factors of the particular matter, can it be said that taking up the tax debt is just and equitable.
If you require assistance in your family law matter, please do not hesitate to contact Brett Hartley or one of our experienced family lawyers.