Question
of the week Question of the week

Curious. Interesting. Informative.

19 August 2016

For better, for worse

Family Law
Federal

Asked

My client is being asked to pay 50% of her husband's income tax liability. In the case of Johnson & Johnson [1999] FamCA 369, the court held that:

The benefits indirectly gained by the wife in having the pool of assets otherwise increased as a result of the availability of funds which would otherwise have been paid out in tax also have to be considered.

My client's particular circumstances are such that she received little or no 'benefits indirectly'.

Johnson is a relatively old case and not on AustLII (it's also a WA case). Are you aware of any precedent where Johnson has been rebutted or at least reduced such that my client's liability is less than 50%?

Many thanks.

Answered

Thanks for the question.

It’s not looking good for the wife.

The more recent case of Lemnos (Trustee of the property of G Lemnos, a Bankrupt & Lemnos and Anor [2009] FamCAFC 20) was a bankruptcy case and also referred to the case of Johnson as it also dealt with the wife’s apparent knowledge of the tax avoidance and what impact that factor should have on the wife’s liability for taxation liabilities and penalties. This Full Court case ultimately followed Johnson and said:

Although in the instant case it is accepted the husband was “on a frolic of his own” we do not accept that the wife’s lack of knowledge or complicity in the husband’s wrongful deductions is determinative of whether she should ultimately share responsibility for the payment of primary taxation on his income earned during the marriage. In our view, to adopt their Honours’ description, the proposition that spouses should generally “take the good with the bad” has even more force when applied to allocation of responsibility for primary taxation.

And the court goes on to say:

We do not suggest that the “principle” identified in Johnson is of universal application. The Full Court itself allowed for the possibility of “compelling circumstances” leading to a different outcome. In this matter, however, the trial Judge appears to have given no consideration to the significance of the fact that the wife had undoubtedly enjoyed the benefits flowing from the income taxation deductions. This was, in our view, a necessary matter for his Honour to have considered alongside his finding that the wife was not complicit in the husband’s conduct.

Both the court in Lemnos and the court in Johnson allowed for the possibility of 'compelling circumstances' but don’t set out what those compelling circumstances would be. In this case, can it really be argued that the wife received little or no direct or indirect benefit from this income which has resulted in the taxation liability?

In terms of strategy, we are not sure why the argument is about 50/50 on the tax liability. Is it a 50/50 case where all assets and liabilities are being divided equally? Why is an asset-by-asset approach being taken to the treatment of the husband’s taxation liability? Why not accept that the liability is included in the asset pool, and then assess the contributions and work out the percentage division as a whole? It may work out better for the wife (depending on the asset pool overall). 

Regards

Mentor