Many clients come to see a family lawyer wanting to talk about issues related to the 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 determine what is in the pool of the parties’ assets and liabilities.
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 pool of net assets. For most parties, no issues arise in relation to the ATO and tax liabilities. However, that is not always the case.
Many of us would 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 couple.
Also, taking such a step would bring to light that the other partner, in fact, contributed more income to the relationship than his or her tax returns would suggest. That could result in that person 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 couple cannot work out a property settlement between themselves, their case will come before a Judge to be decided by him or her. In that event, if the Judge finds that there is an issue of undeclared income, tax avoidance or tax evasion, the Court has the power to refer the matter to the ATO. 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 Tax Office early on in the proceedings, and certainly before any Family Court hearing.
Unpaid and unassessed tax is a liability to be taken into account when calculating a separating couple’s net assets and how those assets are to be divided between them. If one or both partners in a separating couple have undeclared income, it is generally in their best interests to voluntarily declare that to the ATO, rather than risk having the Family Court get the Tax Office involved in the case.
If you need assistance or advice on how to proceed please contact us on 02 6201 7243 or email [email protected]