Am I responsible for my partners tax debt?
In a recent ABC article by Laura Lavelle, ‘Revenge debt’ is being used as a weapon — it’s a growing problem Millie learned the hard way, the ABC explores a case in which “Millie” (a fictitious name) lost her house because of her ex-partner’s tax debt.
Millie’s ex de-facto partner failed to file tax returns for many years. He finally did so, after separation. His tax debt became Millie’s problem after the Judge found that it was a joint liability of the relationship.
As a result of the Orders made, Millie had to sell her family home to pay out her former partner.
In this article, we look at how upcoming changes in Family Law to come into effect in June 2025 aim to better protect vulnerable spouses when it comes to tax debts and financial matters during divorce proceedings.
The Treatment of Tax Debt in Divorce
The treatment of tax debt in property matters may have a significant impact on the asset pool of separating spouses. The asset pool is determined by adding together all assets and liabilities of the parties. Tax debts incurred by either party prior to separation are generally counted as the liabilities of both parties at least in the first instance. The Family Court must take the tax debts into account when determining the equitable distribution of the matrimonial pool.
Factors taken into Account
The Court considers a range of factors in determining how to allocate tax debt to achieve a fair outcome. If both partners benefited from unpaid taxes, for example by enjoying the benefits of the income that was not taxed, the court may take this into account and distribute the liability accordingly. However, situations where one spouse incurred tax debts without the other’s knowledge or consent could lead the court to adjust the debt distribution, effectively shielding one party from the other’s personal debts.
In Millie’s case above, the judge made a 15 per cent adjustment of the total property pool in Millie’s favour. This took into account that her ex-partner had accumulated an “unnecessary” tax debt and not made any real attempt to reduce it. It also likely took into account the fact that she owned her house before the relationship started. [1]
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[1] We are relying on the information as provided in the ABC article as there is no case reference provided.
Upcoming Changes: Recognising Existing Debts and Protecting Vulnerable Spouses
In June 2025 changes will be introduced under the Family Law Act 1975 (Cth) (FLA)that will impact how the Court will approach matters like Millie’s. The changes include clarifying the court’s approach to property settlements, including specifying that existing personal liabilities of either party should be considered.
The amendments also make clear that economic or financial abuse may constitute family violence and provide a non-exhaustive list of examples. Some listed examples include:
- Unreasonably denying the family member the financial autonomy that the family member would otherwise have had, such as by:
(i) forcibly controlling the family member’s money or assets, including superannuation; or
(ii) sabotaging the family member’s employment or income or potential employment or income; or
(iii) forcing the family member to take on a financial or legal liability, or status; or
(iv) forcibly or without the family member’s knowledge, accumulating debt in the family member’s name;
- unreasonably withholding financial support needed to meet reasonable living expenses…[2]
The new section to be introduced to the FLA, section 79(5) (e) from June 2025 reads that the matters for the Court to consider regarding contributions by either party include:
“ (e) any liabilities incurred by either of the parties to the marriage or both of them, including the nature of the liabilities and the circumstances relating to them”
The new section, it appears, may have assisted Millie in her case by placing a focus on the manner in which the debt was incurred by her ex-partner. Depending on the circumstances, the Court may then have found Millie should not have to had equal responsibiity to meet that debt.
The impact of family violence is also specifically referenced as relevant when assessing a party’s contributions to the property pool and to the welfare of the family (for example, if they were not allowed to work), and when assessing their current and future circumstances (for example, if they have ongoing counselling or rehabilitation costs).
Seeking Professional Advice
Given the complexity of tax debt in family law matters, individuals should seek professional legal advice.
If you are concerned about the impact of your new partner’s liabilities on your finances, you may wish to consider entering a Binding Financial Agreement.
If you would like to speak to us about your options please contact us for your free 30 minute initial consultation.
Or contact us: Email: [email protected] or
Phone: +61 2 61983384
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[2] Federal Register of Legislation – Family Law Amendment Act 2024
