Slater and Slater
[2009] FMCAfam 589
•17 July 2009
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| SLATER & SLATER | [2009] FMCAfam 589 |
| FAMILY LAW – Application brought in respect of concluded property proceedings – wife seeks orders compelling husband to file income tax return – can order sought be characterised as enforcement of orders earlier made – husband seeks dismissal of application – whether court has jurisdiction to deal with application. |
| Family Law Act 1975, ss.79A, 80, 80K, 106A Federal Magistrates Court Rule Order 25B Family Law Rules Order 33 |
| Re: The Taxpayer and the Commissioner of Taxation [1999] AATA 1025 DeBijl v Federal Commissioner of Taxation [2004] AATA 1237 |
| Applicant: | MS SLATER |
| Respondent: | MR SLATER |
| File Number: | ADC 3050 of 2007 |
| Judgment of: | Brown FM |
| Hearing date: | 19 May 2009 |
| Date of Last Submission: | 19 May 2009 |
| Delivered at: | Adelaide |
| Delivered on: | 17 July 2009 |
REPRESENTATION
| Counsel for the Applicant: | Ms Dickson |
| Solicitors for the Applicant: | Ouwens Lawyers |
| Counsel for the Respondent: | Mr Gillam |
| Solicitors for the Respondent: | Von Doussas |
ORDERS
The application filed 7 April 2009 and the response filed 15 May 2009 are dismissed.
IT IS NOTED that publication of this judgment under the pseudonym Slater & Slater is approved pursuant to s.121(9)(g) of the Family Law Act 1975 (Cth).
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT ADELAIDE |
ADC 3050 of 2007
| MS SLATER |
Applicant
And
| MR SLATER |
Respondent
REASONS FOR JUDGMENT
Introduction
The applicant wife, Ms Slater characterises these proceedings as being related to the enforcement of property orders earlier made between the parties.
The respondent husband, Mr Slater asserts that the wife’s proceedings are fatally misconceived, as the court has no authority to make the orders which she seeks. As such, the husband contends that the wife’s application filed 7 April 2009 should be dismissed and she should pay his costs.
The parties married in October 2000 and separated on 9 October 2006. During their marriage, the parties formed a partnership “[Mr & Ms Slater]” which operated an excavating business.
Following the end of the parties' marriage, the husband commenced proceedings in this court on 7 June 2007 relating to the division of the parties’ property and arrangements for the care of their two children, [X] and [Y].
These various proceedings, particularly those relating to the children, have engendered a great deal of heat between the parties, who are not well disposed to one another.
At the time of the institution of these proceedings, the parties had sold their most significant asset, which was their former matrimonial home. At the time, it was clear that their pool of assets was not a large one and, certainly from the husband’s perspective, there were many pressing debts, particularly those which related to the excavation business.
In his affidavit, filed in support of his initiating application, the husband deposed as follows:
“I worked on a full-time basis throughout the marriage as a [tradesman] earning approximately $80,000.00 per year. For several years the wife and I were in partnership together for my work [as] a [tradesman] however we did not make a profit. The partnership known as [Mr & Ms Slater] is still trading. The partnership is running at a loss. The wife has refused to resign or to sign any necessary documentation to enable me to try and earn an income.”[1]
[1] See paragraph 39 of the husband’s affidavit filed 7 June 2007
In his initial application, the husband sought orders to ensure the urgent payment of a number of partnership debts, including taxation liabilities from the proceeds of sale of the former matrimonial home, which were then being held in an interest bearing account.
In her answering affidavit, the wife deposed that she undertook “all administrative and book work in relation to [Mr & Ms Slater]” between May 2002 and May 2005.[2] It was her position that the parties separated on 9 October 2006, a fact confirmed by the husband.
[2] See wife’s affidavit filed 22 June 2007
In addition, the wife deposed as follows:
“The husband has prepared BAS statements for the October to December 2006 period and the January to March 2007 period. I have not agreed to the contents of the BAS statements as I have not been provided with all details and all documentation in relation to the figures contained therein. I have obtained advice from an accountant in relation to business affairs and have been advised not to sign or approve any further documentation in relation to the partnership.”[3]
[3] ibid at paragraph 133
In June of 2007, both parties seemed to have agreed that there was a pressing need to finalise financial arrangements between them, particularly that their remaining assets be divided and the partnership brought to a conclusion. It was and remains the wife’s position that she had had nothing to do with the partnership after the parties had separated.
This was the background to the making of orders on 25 June 2007. These orders dealt with the division of proceeds of sale of the former matrimonial home and the sale of the parties’ other significant asset, a boat.
The orders are expressed to be made in the light of the provisions of section 81 of the Family Law Act 1975, which direct the court, so far as is practicable, to make the orders which will “finally determine the financial relationships between the parties to the marriage [concerned] and avoid further proceedings between them.
The orders also provided as follows:
“1.3That the partnership between the parties trading as “[Mr & Ms Slater]” (“the partnership”) be dissolved within 3 days of the date of these Orders (“the settlement date”) and that the wife do transfer and assign to the husband all her estate and interest in the assets of the partnership and do execute an election pursuant to Section 70-100 and/or Section 41-55 of the Income Tax Assessment Act 1997 to cause the assets of the partnership to be transferred to the husband at tax values.
1.4That the husband do indemnify and keep forever indemnified the wife with respect to all debts and any other liabilities whether past, present or future of the partnership.
1.5That on or before the settlement date the husband take all such steps as shall be necessary, and shall execute all such documents as shall be necessary, to ensure that the wife is released from all personal guarantees given by the wife in her capacity as partner of the partnership.
1.6That the husband do retain as his sole property all assets previously owned by the partnership.”
Regrettably, the controversy regarding the financial affairs of the partnership for the financial year ending 30 June 2007 remains between the parties. These proceedings relate to the taxation return for the business, which the husband has filed and which has had significant financial implications for the wife, particularly so far as her receipt of social security is concerned.
Background
It is the wife’s position that she did not receive any income from the partnership for the year ending 30 June 2007. It is her case that her sole source of income for this financial year was Centrelink entitlements.[4]
[4] See wife’s affidavit filed 7 April 2009
The wife further asserts that the husband “froze” her access to the parties’ joint bank account, from which the partnership was also operated, from November 2006 onwards.
The husband does not agree with this assertion. It is his position that the wife withdrew a sum of at least $12,183.11 from the partnership account prior to 30 June 2007.[5] On this basis, the husband asserts that the wife “derived an income” from the partnership during the 2007 financial year.
[5] See husband’s affidavit filed 15 May 2009 at paragraph 15
At some stage after the orders of 25 June 2007 had been made, the husband instructed his accountant, [R] to prepare an income tax return for [Mr & Ms Slater] and other related documents in respect of the business.
The profit and loss statement for the year ending 30 June 2007 indicated that [Mr & Ms Slater] had a total income of $182,743.32 and total expenses of $126,579.22 (including depreciation expenses of $41,804.00) leaving a net profit of $56,164.10.
Nominally this profit was divided equally between the husband and wife in the profit distribution summary, which had been prepared. The income tax reconciliation provided by the accountants was as follows:
“Taxable Profit / (Loss) $98,921
Distribution:
Non-Primary Total
Mr Slater $49,461 $49,461
Ms Slater $49,460$49,460
$98,921 $98,921”
On this basis, [R] prepared an individual tax return for the wife for the year ending 30 June 2007, which indicated a taxable income of $49,006 for her, on which it was estimated she would pay tax of $10,786.85.
Ms Slater was sent the income tax return, which had been prepared by [R] and was asked to execute it. She declined to do so. The return in question was apparently due to be lodged on or before 15 May 2008.
On 15 May 2008. the husband’s former solicitors wrote to the wife’s former solicitors as follows:
“We refer you to paragraph 1.3 and 1.4 of the property settlement order. Our client acknowledges that he will have to pay any taxation liability for your client arising from the partnership tax return.”
The wife’s current solicitors responded to this letter on 6 June 2008. They advised that Ms Slater did not accept that the income tax return in question was accurate, as she did not receive any of the income attributed to her. On this basis, she was not prepared to sign an inaccurate tax return.
Ms Slater reiterated this position in letters dated 22 December 2008 and 25 February 2009. In particular, her solicitor wrote as follows:
“Our client cannot be expected to sign a taxation return attributing a taxation liability for moneys she has not received. As you will be aware, there are significant penalties administered by the Australian Taxation Office with respect to erroneous returns. The whole of the income is to be attributed to your client.”
The orders of 25 June 2007 provided for the wife to transfer to the husband the plant and equipment of the excavating business, at its taxation value, so that he could continue in business as a sole trader.
The total value of this plant and equipment, for accounting purposes, as at 30 June 2007, was $140,959.00, which was depreciated by $41,797.00.
As per the order, the accountants allocated the sum of $99,162.00 to the husband, in his taxation records, as the value of the depreciated plant and equipment, which had been transferred to him pursuant to the court order.
The decline in value was divided equally between the partnership and the husband. [R] explained the effect of this as follows:
“We confirm that the result of this election is that the taxable income of the partnership is increased due to the split in the reduction in value. The outcome of this is that the taxable partnership distribution to you and Ms Slater is also increased.
However, due to the decline in value attributable to Mr Slater as a sole trader continuing business after the dissolution of the partnership, Mr Slater is able to include as deduction in his individual income tax return an amount of $20,898.00.
We confirm our opinion that under the relevant legislation that you are not entitled to include a deduction for this amount.”[6]
[6] See letter from [R] to the wife dated 13 March 2008 being exhibit RS2 to the wife’s affidavit filed 7 April 2009.
The husband confirms that the wife was unwilling to sign the various documents, which had been forwarded to her by [R]. He was being pressed by the Australian Taxation Office to attend to the taxation affairs of the business. In addition, due to the fact that he had not paid [R] their professional fees, they ([R]) were unwilling to continue to act as his accountants.
In all these circumstances, [R] were apparently unwilling to lodge the taxation documents in question without Ms Slater’s specific authorisation. As a consequence, Mr Slater sought accounting advice elsewhere and was told that it was permissible for one partner to a partnership to lodge a partnership tax return.
As a consequence of this information, the husband obtained a proforma partnership tax return and completed it himself transposing the data to it which had been prepared by [R], particularly the profit and loss statement for the year ending 30 June 2007. In particular, in the return, a net income of $98,921.00 was distributed equally between the husband and wife.
In the return, the husband has indicated the business name of the main business of the partnership as being [K.E.]. The orders of 25 June 2007 also deal with a company known as [K.C.].
Pursuant to those orders, the wife was to resign from any position she held in that company and transfer all her shares in it to the husband. Thereafter, the husband was to indemnify her in respect of “any past, present or future income tax liability of the wife” arising from that company.
The husband does not accept that order 1.3 of the orders made on 25 June 2007 has the effect of making him alone liable for all personal income tax likely to be levied by the Australian Taxation Office, as a result of the operation of the partnership during the financial year ending 30 June 2007.
In this regard, he points to how the indemnity, in order 1.7, regarding [K.C.], has been drafted, which specifically relates to past taxation liabilities, whereas order 1.3 does not.
It is also Mr Slater’s current position that he did not authorise his previous solicitor to indicate to the wife’s previous solicitor that he would pay any tax assessed as being the wife’s personal liability as a result of the filing of the 2007 partnership return.
It appears to be the case that the wife has not filed a personal tax return for the year ending 30 June 2007. Accordingly, the only record of income attributable to her from the partnership arises from the return completed by Mr Slater alone.
Between 1 July 2006 and 30 June 2007, the wife received a family tax benefit in the sum of $8,144.42. The wife deposes that Centrelink is currently debiting $150.00 per fortnight from her entitlements until such time as she has filed an income tax return for the year ending 30 June 2007.
It is the wife’s position that she cannot file such a return until the controversy about the partnership income has been resolved. She is aggrieved that her entitlements are being significantly curtailed because of the attribution to her of income which she did not receive.
In this context, it is the wife’s position that the ball is in the husband’s court and he should file an amended partnership tax return, which indicates that he received all of the income from the partnership for the year in question.
On the other hand, it is the husband’s position that the wife should file a tax return for the year ending 30 June 2007, which sets out what she says is her income and thereafter, if any tax is levied against her, which she believes is unwarranted, it is open to her to seek redress from the Australian Taxation Office administratively.
The applications
The wife commenced these proceedings on 7 April 2009. She seeks the following orders:
“That to give effect to the consent orders for property settlement made on the 26th June 2007 that the husband do within seven [7] days do all such things and do sign all such things necessary to accurately reflect the taxation returns for the partnership between the parties as “[Mr & Ms Slater]” (“the partnership”) for the year ended 30th June 2007.
That the husband do reimburse the wife for all monies the wife has remitted to Centrelink as a result of the husband erroneously attributing income to the wife from the partnership for the year ended 30th June 2007 of which she did not receive.
That should the husband fail to comply with these Orders or refuse or neglect to execute any document to give effect to the terms hereof at the expiration f seven [7] days, a Registrar or Deputy Registrar of the Family Court of Australia upon proof by affidavit of such refusal or neglect is hereby appointed to execute any such document necessary to give effect to the terms of these Orders and do all such things necessary to give full effect to these Orders.
That the husband do pay the wife’s costs of and incidental to this application.”
The husband responded to this application on 15 May 2009. He seeks the following orders:
“That the Applicant’s application be dismissed.
That the Respondent have his costs of an incidental to this Application.”
Legal principles applicable
Counsel for the wife did not point to any specific legislative provisions in support of her position or raise any particular legal authorities. Rather, she relied on what she saw as the justice and equity of the wife’s situation.
Essentially, it is the wife’s position that it is inequitable and unjust that her Centrelink payments have been compromised by the erroneous tax return filed by the husband and it is unjust for the husband to maintain to the tax authorities that she has had the benefit of income which she has not actually received.
In these circumstances, it is her case that the interests of justice dictated that it is the husband who should take the necessary steps to remedy the situation and, given the provenance of the orders made in respect of the division of the parties’ property and the various indemnities which followed, this is the appropriate forum in which to seek such a remedy.
Part VIII of the Family Law Act 1975 deals with property, spousal maintenance and ancillary agreements arising in respect of applications by the parties to a marriage. Section 79A(1)(c) of the Act reads as follows:
“(1) Where, on application by a person affected by an order made by a court under section 79 in property settlement proceedings, the court is satisfied that:
…
(c)a person has defaulted in carrying out an obligation imposed on the person by the order and, in the circumstances that have arisen as a result of that default, it is just and equitable to vary the order or to set the order aside and make another order in substitution for the order;
…
the court may, in its discretion, vary the order or set the order aside and, if it considers appropriate, make another order under section 79 in substitution for the order so set aside.”
Section 80 sets out the general powers of the court arising under Part VIII. The powers are wide ranging and include authority to make any order which the court thinks is necessary to do justice to the parties concerned [section 80(1)(k)].
As previously indicated, counsel for the wife has characterised these proceedings as relating to enforcement. This engages the provisions of order 25B.05 of the Federal Magistrates’ Court Rules, which deals with the enforcement of obligations. The order concerned incorporates order 33 of the Family Law Rules 1984.
Order 33 rule 2(1) sets out various types of obligations to which order 33 applies. In the context of this case, the only relevant sub-rule is order 33 rule 2(1)(b) which reads as follows:
“(b)an order that a party pay maintenance or other money for the benefit of the other party, or if of a child, made under:
(i)the Act; or
(ii)the Child Support (Registration and Collection) Act 1998”
In this particular case, although the wife is seeking the reimbursement of her deducted family tax benefits, she is not seeking the payment to her of a specific sum of money arising from the application of the orders of 25 June 2007. Accordingly, I do not think that it can be said that the wife is seeking to enforce an obligation, on the husband’s part, to pay her money.
Accordingly, the powers created by Order 39 rule 3(9), which include garnishment, seizure and sale of personal property; sequestration; and other ancillary powers; do not appear to be applicable in this case.
Although the wife does not put it specifically as such, I take it that she contends that the husband has defaulted in carrying out his obligations to her arising under orders 1.3 and 1.4 of the orders made on 25 June 2007, specifically to indemnify her in respect of all debts, past, present and future arising from it. As such, the court is empowered to make the orders which she seeks pursuant to section 79A.
The husband’s position is that the orders of 25 June 2007 have resolved all matters in issue between the parties regarding matrimonial property and no further orders should be made. It is further his case that the applicable taxation legislation required him to file a taxation return for the partnership.
An obligation which he has now discharged, after taking appropriate accounting advice, particularly regarding the taxation implications of “roll over relief” arising from the transfer of plant and equipment from the wife to him.
As such, the husband contends that, if the wife is aggrieved by his actions and their taxation and social security implications for her, she should take up those grievances with the relevant authorities, particularly by filing her own taxation return for the year in question. Accordingly, he contends that this case is not about the enforcement of any obligation, which he owes to the wife arising from the orders in question.
Although neither the wife nor the husband specifically referred to the provisions of section 79A, by necessary implication, the husband opposes any setting aside or alteration to the orders made on 25 June 2007. In these circumstances, no doubt it would be his contention that the wife should have specifically make an application to the court pursuant to the powers contained in the section.
Counsel for the husband relies on a number of taxation authorities, which deal with the issue of partnership income and particularly whether a partner did or did not receive his or her full profit entitlements for the tax year in question.
In Re: The Taxpayer and the Commissioner of Taxation[7] it was held to be of no consequence, for income tax purposes, that the applicant in question did not withdraw her full profit entitlements from the partnership concerned. A similar view was taken in DeBijl v Federal Commissioner of Taxation.[8]
[7] Re: The Taxpayer and the Commissioner of Taxation [1999] AATA 1025
[8] DeBijl v Federal Commissioner of Taxation [2004] AATA 1237
Accordingly, it is the husband’s position that it is of no moment that the wife did not specifically receive the income attributed to her in the partnership income tax return, which he filed for the year ending 30 June 2007.
It is his case that the partnership was not formally dissolved until the court orders of 25 June 2007 and as such it was neither illegal nor inappropriate for taxation purposes for the income to be distributed in the way in which it was, particularly given previously depreciated plant and equipment had been transferred to him by the wife and the business in question was ongoing and the wife had previously received income from it.
In addition, it is the husband’s case that the indemnity provided by order 1.4 of the orders has no application to the taxation situation of the parties themselves as individuals. Essentially, it is his position that the taxation liability of the parties is not a liability of the partnership itself, rather it relates to each of the parties as individuals.
The rationale of his position being that the partnership is an instrument to distribute income between the parties and the liability to pay tax on that income is an individual one rather than one strictly arising from the partnership itself. In this regard, the husband points to the specific wording of the indemnity made in respect of the Slater Family Trust and [K.C.] in the orders in question.
Conclusions
I found this to be a dispiriting case because of the apparent inability of the parties themselves and their respective legal advisors to find a practical solution to the problem created without recourse to further litigation.
I would have thought the first thing the wife would have done would have been to file a personal tax return for the year in question detailing what she asserted was her correct taxable income. In my view, the duty to file a correct income tax return is a duty which resides solely within the taxpayer concerned.
The wife asserts she earned a particular level of income in the financial year in question. Surely she should formally convey this information to the Tax Commissioner for determination by the Australian Taxation Office rather than demand that the husband should file another tax return. Then, if necessary, the ATO may adjudicate the issue.
Similarly, if the wife is aggrieved that she has not received her proper entitlements to Social Security, she should take up these issues with the Commonwealth Government Departments concerned, if necessary through a review of the administrative decisions made concerning her.
In my view, the issues created by this case are ones which can be corrected only by the revenue and social security authorities rather than by the court itself. In reaching this issue I am influenced by my view that the court should only make orders which it is fundamentally capable of enforcing pursuant to its legislative mandated powers, particularly pursuant to Order 33.
I am not currently convinced that the powers available to me under the Family Law Act are sufficient to enable me to compel the husband to file a tax return, particularly one which specifies the amount of income which he has received. In my view, the completion of such a return is fundamentally an accounting exercise rather than one of jurisprudence.
I reach this view because I do not know how such an order can ultimately be enforced. The ordinary manner in which a document may be executed, over the obstruction of any recalcitrant party, is through the operation of section 106A of the Family Law Act.
Pursuant to this section, if a person has been directed by the court to execute a deed or instrument and either refuses to or neglects to comply with such a direction, the court may appoint another person, usually a Registrar of the court, to execute the deed or instrument concerned.
In this case, I do not think it would be an appropriate use of judicial authority, whether delegated or otherwise, for the court to nominate a person, other than the taxpayer concerned, to attest or declare what that taxpayer’s taxable income was for any given period.
In effect, direct the nominee to declare what the taxpayer’s financial circumstances were for the period in question. Such a delegate cannot directly know what are the personal fiscal circumstances of the taxpayer concerned and so attest to the truthfulness of those circumstances.
True it is that I could make an order simpliciter directing the husband to file an amended tax return and, in the event of his non-compliance, potentially deal with him for being in contempt of the court’s order. Theoretically, I suppose, if Mr Slater refused to sigh the documents in question, he could be confined until he did so.
But Mr Slater has filed a tax return. He has asserted to the tax commissioner what he believed his income position was for the year in question. Whether his view is correct or not or has been based on erroneous material or is legally untenable is an issue which the Taxation Commissioner has the resources to resolve.
Ms Slater has a different view of the matter. In my view she should take this up with the Australian Taxation Office which can adjudicate on the issue and, more importantly has the power to enforce its adjudications by its assessment of any taxation liability.
To use the contempt power, in effect to compel Mr Slater to recant his view about his taxation situation seems to me to be a draconian response to the issue and, as such, an inappropriate use of judicial authority. Accordingly I propose to dismiss the wife’s application.
Both parties sought an award for costs in the event of success in either of their respective applications. The wife has been ultimately unsuccessful. As such the husband seeks costs.
I am satisfied that the wife is not a person of strong financial means. In addition, in my view, the husband has played some role in creating the current impasse, which seems to have been amenable to solution through administrative channels. In these circumstances, I do not propose to make any order as to costs.
For all these reasons, the orders of the court will be as set out at the commencement of these reasons for judgment.
I certify that the preceding eighty-two (82) paragraphs are a true copy of the reasons for judgment of Brown FM
Associate: P Smith
Date: 17 July 2009
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