Who pays the tax debt in a divorce?

Two different questions: who owes it, and who bears it

Divorce mixes up two things that the law keeps separate.

• Who owes the ATO. Australia taxes individuals, not couples. Income tax is assessed to one person. GST and PAYG withholding are owed by whoever ran the business: a sole trader, a partnership, a company or a trustee. The ATO collects from that entity or person, and a divorce does not change the name on the account.
• Who bears the cost between you. In a family law property settlement, tax debts are usually treated as liabilities of the asset pool, like a mortgage or a car loan. They reduce what is available to split, and the settlement can allocate responsibility for them. That allocation is an agreement or order between the two of you.

So if a $40,000 income tax debt is in your former partner's name and the settlement says they will pay it, the ATO will still chase them, not you. And if a debt is in your name and the settlement says your former partner will pay it, the ATO will still chase you if they do not. Your remedy is against your former partner under the orders, not against the ATO.

Can a court move the debt to the other spouse?

Technically yes, but almost never in practice. The High Court confirmed in 2018 that the family courts have power to order the Commissioner of Taxation to substitute one spouse for the other as the debtor of a tax debt. The same judgment noted there would seldom, if ever, be occasion to use it. The court must be satisfied the order is reasonably necessary to divide the property, that it is not foreseeable the debt would then go unpaid, and that it is just and equitable. In that case the transfer was refused because the spouse who would have taken on the debt was bankrupt.

What courts do far more often is order one party to pay a specific tax debt, or adjust the split of assets so that the person keeping the debt keeps more of the property to cover it. The ATO is not a party to your settlement, so it needs to be told separately if you want a payment plan on a debt you have agreed to carry.

Business debts and shared structures

Most of the painful divorce tax debts come from a business one or both of you were involved in.

Being a paper director of a former partner's company is the trap that catches the most people, and resigning during the separation does not remove liability for what fell due while you were a director. Read I was only a director on paper before you sign anything.

Practical steps that help: get all lodgements up to date before the settlement so the tax position is known, not estimated; ask that any expected tax on selling or transferring assets is factored in; and check whether a joint account is exposed to a garnishee for a debt in one name. If the business debt is beyond what either of you can pay, the rescue options page compares the formal routes.

What to do next

1. List every tax debt by the name or entity it is assessed to, and lodge anything outstanding so the figures in the settlement are real.
2. Tell your family lawyer about any directorship, partnership or trustee role, because those carry personal exposure the settlement needs to deal with.
3. For any debt that stays in your name, contact the ATO about a payment plan or interest remission rather than waiting for your former partner to pay it.

More questions: 12 Life situations questions answered · Full guide: Can't pay your tax bill