Your Liability for Your Spouse's Tax Avoidance
When the Family Court is asked to determine a Family Law property settlement for a married or de facto couple, one of the issues that must be addressed is who is to be responsible for debt.
Johnson & Johnson
In the case of Johnson, the Husband, over a 20 year marriage, had been substantially responsible for the financial dealings of the parties. He had engaged in activity which was found to involve tax avoidance and as such, by the time the matter came before the Court, there was a liability, including penalties owed to the Australian Tax Office. The Court found that the Wife had received indirectly the benefits of having a greater pool of assets available than would have been the case if the appropriate tax had been paid at the appropriate time. While there was no suggestion that Mrs Johnson had been directly involved in the avoidance process, the Court held that a just outcome “demanded that the Wife take the good with the bad”. The Court further held “absent any suggestion that the husband was on a frolic of his own and acting contrary to the wife’s express wishes, we see no reason for his Honour [that is, the Trial Judge] to have left the husband to shoulder the burden of the tax penalties”, alone.
Thus, the Wife was found to have the same degree of responsibility as the Husband in meeting the monies owed to the Tax Department, including the penalties.
Trustee of the Property of Lemnos & Lemnos
In the case of Lemnos, the parties were married for 31 years and had four adult children at the date of their separation. The Husband was a solicitor and had actively engaged in managing the financial affairs of the family. His activities were subject to an investigation by the Australian Tax Office in 2002 and he had to pay further income tax for the years 1991-2002. It was found, during that period, he had impermissibly claimed tax deductions of $3,396,333.00 with respect to properties, one of which was his principal place of residence. At the time of the appeal hearing, the debt to the Tax Office including interest and penalties was $5.7 million. The majority decision of the Appeal Court was that:
The wife’s lack of knowledge or complicity in the husband’s wrongful deductions is not determinative of whether she should ultimately share responsibility for the payment of primary taxation on his income earned during the marriage. The Trial Judge erred in determining that the Wife ought to be excused from sharing the burden of the primary taxation liability.
It is not unusual in a family situation for one of the parties to be primarily the major breadwinner and, therefore, responsible for financial management. However, the non-active financial spouse needs to be aware of the risk they are running and the potential exposure to liability that their trusting nature may attract.
For more information
In the Marriage of Kowaliw  FLC 91-092