Debts in Family Law matters
In a recent case of Cao & Trong (2022) FedCFamC1F 754 (4 October 2022) the Court considered debts of the parties which exceeded the value of the matrimonial asset pool available for distribution.
The parties were in a relationship for 13 years and had three children together. The parties lived a “very opulent lifestyle, buying and selling real estate in Melbourne’s most expensive suburbs and educating their children at Melbourne’s finest private schools.”
The debts consisted of tax debt owing to the Australian Taxation Office (“ATO”) and a child support debt owed by the Husband from an assessment of child support (through a Binding Child Support Agreement) to Services Australia - Child Support Agency (“CSA”).
The main asset of the parties was net sale proceeds of their former matrimonial home which totalled just over $3M.
The Husband had taxation liabilities amounting to $7M. The debt owed to the CSA was about $250,000. These debts clearly exceeded the sum available for distribution between the parties from the sale proceeds of the former matrimonial home.
Despite the significant debt to the ATO, the Wife sought the full sale proceeds of the home be paid to her. The ATO and CSA sought that they receive a “rateable distribution” of the whole sale proceeds. The Husband sought that the ATO receive all the funds.
One issue the Court had to determine was whether the taxation debt was the Husband’s sole debt or a joint debt of the Husband and the Wife. The Court found that the Wife knew about the Husband’s taxation issues which were incurred during the relationship and she enjoyed the benefits of not paying taxation over several years of the relationship. In fact, the lack of payment to the ATO helped to fund the parties’ extravagant lifestyle. As such, the Court determined that the taxation debt was a joint debt.
The Court held that it was not just and equitable for the Husband or the Wife to receive any distribution of the sale proceeds of their former matrimonial home. The ATO and CSA were awarded the entirety of the sale proceeds of the former matrimonial home. The parties did not receive any of the sale proceeds of their former matrimonial home.
It is noted that the Wife received $664K in prior partial property settlement orders and $300K in jewellery purchased during the relationship.
How does this decision and the concept of debts generally apply in family law matters?
Usually debts accrued during the relationship, which both parties have benefited from will be a “relationship debt” even if the debt is only in one person’s name.
Debts are to be paid (or taken into account) before there is a distribution of assets between the parties.
Even if one or both of the parties do not agree to debts being paid, the Court can order the debts be paid prior to any distribution to the parties.
Even if one party is not aware of a debt, it can be included as a liability in the asset pool for distribution/payment prior to any distribution of assets between the parties.
During relationships there can be good and bad economic times. Both parties must share in the benefits and negatives of economic times during relationships.
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