Many clients come to see a family lawyer wanting to talk about issues related to the Australian Tax Office (“ATO”), while others haven’t turned their minds to their own tax affairs for some time.
Generally, we find there is a misunderstanding about the role and power of the ATO in family law property settlements.
Family Law Property Settlements
In deciding whether, and if so how, to divide up a couple’s net assets after a separation, the Family Court must identify and value the parties’ assets and liabilities to determine their net asset pool.
Any tax due to be paid to the ATO, whether as a result of a tax assessment then in existence or tax due on undeclared income or unlodged tax returns, would be a liability that would be included in determining the parties’ net asset pool. For most parties, no issues arise in relation to the ATO and tax liabilities. However, that is not always the case.
Many of us may know of someone who runs a cash business and perhaps does not declare all of their income to the ATO, or perhaps someone who uses illegal means to evade tax. If such a person separates from his or her partner, that partner may think that he or she could gain some tactical advantage in property settlement negotiations by threatening to report the ex-partner to the ATO for tax avoidance or evasion.
While we do not mean to suggest that appropriate tax should not be paid to the ATO, such a course of action, notwithstanding how tempting it might seem, is a “double-edged sword” and is generally not advisable.
The reason is that the Family Court will treat both parties to the relationship as having benefitted from the use of the undeclared, untaxed income, such that the ensuing tax liability, including any interest and penalties, would be treated as a liability to be paid from the parties’ assets, before the net assets are divided between the separating parties’, thereby effectively reducing the entitlement of the reporting partner.
Also, taking such a step would bring to light that the other (non-reporting) partner, in fact, contributed more income to the relationship than his or her tax returns would suggest. This could, in turn, result in that partner receiving a greater percentage of the net assets than might otherwise have been the case.
The Power of the Family Court and the ATO
It is not always up to the parties to decide for themselves what to do about undeclared or unpaid tax. If the parties’ are unable to negotiate a property settlement between themselves, their case will come before a Judge for decision. In that event, if the Judge finds that there is an issue of undeclared income, tax avoidance or tax evasion, the Family Court has the power to refer the matter to the ATO based on its duty to ensure that revenue laws are abided by. Then, not only will the tax have to be paid, but the ATO is likely to impose the full range of its available interest and penalties because the taxpayer did not voluntarily declare the undeclared income.
If you are the person who may have some undeclared income to report to the ATO, it is almost always going to be in your interest to make the necessary declaration to the ATO early on in property settlement proceedings, and certainly before any Family Court hearing to avoid any referral of the matter to the ATO as well as any other consequences the Family Court may impose as a result of either of the parties failure to make full and frank disclosure of their financial affairs to the Court in accordance with the Family Court Rules.
Unpaid and unassessed tax is a liability to be taken into account when calculating a separating parties’ net assets and how those assets are to be divided between them. If one or both partners in a property settlement have undeclared income, it is generally in their best interests to voluntarily declare that income to the ATO, rather than risk having the Family Court involve that ATO in the property settlement proceedings.
If you need assistance or advice on how to proceed contact Frichot and Frichot today or complete the form below to request an Introductory Consultation.