By Alexandra Moles, Partner & Olivia English, Associate 

In the family law jurisdiction, legislation and case law are rapidly developing to respond to an epidemic of violence in intimate partner relationships. However, intricate and complex acts of financial and economic abuse and the many different ways this can impact people are often overlooked.

A report by the Inspector-General of Taxation and the Taxation Ombudsman (IGTO) has explored how Australia’s taxation system is being weaponised to inflict financial abuse, how the Australian Tax Office (ATO) and other agencies are currently managing these issues and what can be done to improve processes and legislate solutions to prevent financial abuse in the taxation system.

Financial abuse can have longstanding detrimental impacts on victim-survivors if such abuse is not properly addressed including for example when giving effect to a property adjustment following separation, or in the resolution of a child support dispute. This article explores two key types of financial abuse in the taxation system which are encountered in family law matters, being:

1. the accrual of tax debts without a victim-survivor’s knowledge and/or by coercive means; and
2. child support is underpaid due to a failure to lodge timely and accurate tax returns and/or are left unpaid on an ongoing basis.

Accrual and creation of tax debts

Research has uncovered that perpetrators exercising complete control over a family’s finances, usually liaising alone with a tax agent on behalf of both parties, have the ability to inflict significant taxation debts upon a victim-survivor through manipulation of the taxation system. It is not uncommon for victim-survivors to become aware of their own outstanding taxation debts for the first time after separation, in turn revealing a form of abuse that they may not have even been aware was being perpetrated against them during the relationship.

Some examples of methods utilised to commit financial abuse in the tax system include:

1. Making victim-survivors directors of companies (without their knowledge or an understanding of what that means or by exercising duress) of which they have minimal/no control;
2. Allocating dividends and/or distribution payments from companies, partnerships or trusts to the victim-survivor, to minimise tax liabilities payable by the perpetrator or maximise tax liabilities paid by the victim-survivor or reduce the perpetrator’s assessable income or maximise the victim-survivor’s income (and vice versa);
3. Lodging or amending the victim-survivor’s tax returns without their knowledge or consent (which may include fraudulent or inaccurate details); and
4. Diverting tax refunds away from the victim-survivor.

Once taxation debts have been created in the name of the victim-survivor, they can be very difficult to extinguish. The current legislation provides limited redress with strict eligibility criteria which merely manages the debt, for example by deferral of deadlines for payment or deferral of recovery proceedings, establishing payment plans over time and reducing/waiving interest and penalty charges. However, each of these options assumes that the victim-survivor will remain responsible for the debt inflicted on them.

Presently, permanent removal or waiver of the taxation debt may occur in very limited circumstances, where:

1. The victim-survivor challenges a director penalty notice on the grounds that they did not partake in the management of the company: A director penalty notice (DPN) can be issued by the ATO where company tax debts (such as PAYG Withholding Tax, Goods and Services Tax and Superannuation Guarantee Charges) are unpaid, making the director/s personally liable to repay those amounts to the ATO. The ATO has discretion as to whether to issue a DPN and can consider the taxpayer’s circumstances in advance of doing so. However, once the director’s penalty has crystallised, the taxpayer’s ability to have the penalty withdrawn/removed is limited to proving the defence that they did not partake in the management of the company. In financial abuse cases, this can occur where a perpetrator has impersonated the victim-survivor to appoint them as a director of the company, or where the victim-survivor has been coerced/pressured to execute documentation to appoint them as a director.

The taxpayer to whom the DPN is addressed has only 21 days to respond, which is an incredibly short time frame for victim-survivors to obtain advice (if they can afford to do so) and collate the necessary evidence to prove the defence, made even more challenging in circumstances where the victim-survivor was not aware of the tax debt (or even their directorship of the company) until they received the DPN (and in such circumstances they may not even receive this notice). Not only does the creation of this penalty create a personal taxation debt which is payable by the victim-survivor, but it also can deprive them of any taxation refunds they would otherwise legitimately be entitled to, which must be automatically credited to the outstanding debt.

2. Release of tax debts on grounds of serious hardship: A victim-survivor may apply to the ATO to be released from limited types of personal tax liabilities due to serious hardship. This can be challenging to prove, particularly where the victim-survivor’s access to supporting evidence or knowledge of how the debts accrued may be limited.

3. Waiver of tax debts: A victim-survivor can apply to the Department of Finance to waive their tax debts, which is a discretionary power held by the Minister of Finance and delegated to officials within the Department, as opposed to the ATO. This is an option which is generally only explored after all other avenues to discharge the debt are explored with the ATO.

The early stages of separation is a crucial period to manage the potential impacts that can be caused by taxation debts accrued through financial abuse. Family lawyers should be alert to the markers of financial abuse at the outset, and to refer victim-survivors to obtain advice from tax agents and accountants. In circumstances where financial abuse may be present, the following preliminary steps should be promptly undertaken by or on behalf of victim-survivors:

1. Secure access to their online accounts for myGov and the ATO portal, and utilise the enhanced security measures offered by the ATO to protect their accounts;
2. Contact the tax agent (appointed with or without their consent) to obtain copies of taxation documents lodged on their behalf during the relationship, or otherwise obtain copies of these documents which may be available on the ATO portal and to protect their privacy and ensure their private information is no longer provided to their former spouse; and
3. Complete a search on the Australian Securities & Investments Commission’s (ASIC) register to confirm whether they are a director of any companies, or included in any partnerships, that they may not have previously been aware of.

During family law matters, including under pre-action procedures, the process of exchanging disclosure (in accordance with each parties’ obligations to provide full and frank disclosure pursuant to s 71B of the Family Law Act 1975 (Cth) (the Act)) can reveal the extent of any taxation debts payable and the financial health of any companies/entities in which the victim-survivor has been unwittingly involved. Any such debts can then be properly accounted for in the matrimonial property pool and addressed in the property adjustment effected between the parties.

Section 90AE of the Act also provides the Court with the power to make orders directed to a creditor of one party to substitute the other party in relation to a specific debt owed to that creditor, provided that the criteria listed in s 90AE(3) and s 90AE(4) are met. The High Court decision of Commissioner of Taxation for the Commonwealth of Australia v Tomaras & Ors [2018] HCA 62 confirmed this also applies to taxation liabilities.

Child support

Child support assessments are calculated by Services Australia utilising income information reported through lodged tax returns from both parents, and the payment of outstanding child support liabilities can be recovered from refunds generated following lodgement of tax returns by the child support payer.

Victim-survivors have reported that perpetrators are failing to lodge their tax returns or are under-reporting their income to the ATO using some of the strategies discussed in this article, which in turn improperly minimises the child support entitlements of the victim-survivor and/or denies them repayment of outstanding liabilities which have accrued. Manipulation of the child support assessment by the perpetrator can also impact the victim-survivor’s entitlements to Family Tax Benefits, and may result in debts accruing with Centrelink. This ongoing form of financial abuse pushes victim-survivors into further hardship and distress and creates an ongoing abusive dynamic.

There are presently limited mechanisms available to victim-survivors to address these issues, and it has been identified by the IGTO that more collaboration between government agencies is required to enforce lodgement of tax returns and assist vulnerable persons in the child support system.

Pending these changes being given effect to, recipients of child support can report non-lodgement of tax returns to the ATO and/or make an application to the Child Support Registrar to change the child support assessment on the basis that it does not reflect the payer’s income.

An option is also available to a victim-survivor to enforce payment of an outstanding child support liability in family law proceedings. Section 113 of the Child Support (Registration and Collection) Act 1988 (Cth) grants power to the child support payee to seek orders to recover payment of the outstanding child support debt directly from the payer in proceedings already on foot between the relevant parties in the Federal Circuit and Family Court of Australia. However, this process can be complex and should be completed with the assistance of an experienced family lawyer.

Understanding the legal options available to you to address financial abuse in a family law matter is critical to ensuring ongoing impacts of domestic violence are minimised. If you’re seeking advice in relation to your family law matter, Mills Oakley Family Law Brisbane will be happy to assist. Please contact the team on 07 3010 8021.