When will a tax liability not be a joint liability?

The recent case of Adair & Milford [2015] addressed a number of issues, as is usually the way, but of particular interest was a question that arose in relation to the husbands tax liability.

In the first trial the Judge had found that the husband had an outstanding tax liability at the time of separation in 2012 of $220,000 and at the time of the trial in 2014 of $419,000. The husband had ceased to pay PAYG instalments in 2011. Despite this the husband had given evidence that he was paying PAYG instalments of $4,230 per week as well as $287 per week in withholding tax at the time of the trial. The effect of the husband's evidence was to mislead the wife and the Court and to wrongly inflate his expenses so that they exceeded his income - which was not the case. The trial Judge then went on to examine the husband's income and expenses and found that the husband did have the capacity to have been paying the tax liability. The Judge held: "I accept that he was making a significant contribution to the wife, the children and the mortgages but at the same time, he made no arrangement with the Australian Tax Office notwithstanding the Court was under the impression that amounts were being set aside on a weekly basis. In my view, it would not be fair now to attribute the debt to the wife."

On appeal the husband argued that the trial Judge was in error in concluding the amounts of tax owing. The Appeal Court noted that "it is beyond dispute that the husband's evidence on this topic [at the trial] was imprecise and that no criticism can be levelled at his Honour's decision to accept the husband's evidence that as at separation he was indebted to the ATO in that amount."

The Appeal Court noted that there is no principal of general application that merely because a taxation debt accrued prior to separation it must be brought to account as a joint matrimonial liability: Trustee of the Property of G Lemnos, a Bankrupt & Lemnos and Anor (2009). The Appeal Court went on to say that to their view the facts of the case amounted to "compelling circumstances" - as announced by the Full Court in Johnson and Johnson [1999] - which would enable the Court to leave one party solely responsible for his own taxation debt.

The Appeal Court stated that it would have been necessary, in order for the appeal to succeed, for the husband to have successfully challenged the weight which the trial Judge placed on the husband's misleading evidence concerning the payment of his outstanding tax and to the cavalier manner in which he conducted his finances post separation.

The Appeal Court said: "The wife having been unaware prior to separation of the husband's failure to pay his taxation liabilities as they fell due and then after separation misled into believing payments were being made, it was entirely reasonable for his Honour to focus on how after separation the husband approached this debt and to ultimately conclude that the husband could and should have paid his accrued debt and tax as it fell due."

The husband was wholly unsuccessful on his appeal. The husband was ordered to pay the wife's costs of the appeal.