Appeal allowed – make sure you know who owes the tax debt

This was an appeal decision where the Court set aside the original decision requiring the parties to be jointly liable for a tax debt of a corporation.

The relevant considerations

The relevant considerations were:

• The parties were in a de facto relationship from 2011 to 2019.
• The parties were both self-represented at the trial in March 2024. The Husband owned shareholdings in a corporation used to conduct a small business.
• The trial Judge:
  • Determined to ignore the debts owed by the parties to the corporation because neither party had the capacity to pay, and to treat the corporation as being of no value.
  • Included the corporations tax debt as a personal debt of the parties, quantifying it at $170,628. The parties’ debts exceeded the value of their assets by taking the corporation tax debt into account.
  • Ordered that the parties use the net proceeds of the sale of a property to pay the corporation’s tax debt.
  • The Husband appealed the decision.
• It was determined in the appeal that:
  • The corporation’s tax debt could never be the parties’ debt in any circumstances. It was and would remain the exclusive liability of the corporation. The Court further stated in the appeal that 'While there is no doubt the Court has the power to order parties to discharge a debt owed by one or both of them to a third party, equally, there can be no doubt the Court is not empowered to order the parties to pay a debt owed by one third party (in this instance the corporation) to the second third part (in this instance, the Australian Taxation Office)'.
  • The corporation must bear liability for its own debt, whatever consequences that might hold for its solvency.

Issues to note

1. It is common for family law proceedings to include debts of corporations in consideration of the overall property pool available for division. It is important that financial advisers and family law solicitors fully consider the impacts of how the property pool is structured, the relevant parties that should be joined to the proceedings and carefully structure orders.

Oldham & Krantz (No 2) [2024] FedCFamC1A