In family law negotiations and court proceedings, parties are required to disclose their assets, debts, income, superannuation and financial resources.
But what happens if your ex-spouse receives cash income that is not declared to the ATO and does not appear on their tax return? What if they haven't even lodged a tax return?
Not only can it be extremely difficult to prove that a person works for cash and has been receiving undeclared income, but allegations of undeclared income can also have unexpected consequences for both parties.
Rarely will a person receiving cash payments keep records of their undeclared income that can be produced in Court. Even rarer is finding a witness prepared to give clear and detailed evidence of their direct knowledge that someone is failing to declare income to the ATO.
The ATO and the Family Court have certain powers to deal with misbehaving income earners and the outcome of exercising their powers can affect a property settlement.
Allegations made in Court must be investigated
A person may allege their ex-spouse works for cash and has had years of undeclared income during their relationship. They might even have copies of mocked up receipts, text messages or emails of their spouse failing to declare income during their relationship and will produce it all in Court, believing it will give them a strategic advantage. Surely their ex-spouse will accept the deal that is being offered to them when faced with a potential tax evasion charge? Rarely does this particular situation play out quite so cleanly.
If the parties are engaged in family law court proceedings and an allegation of tax evasion is made, the Court must advise the ATO of undeclared income or tax avoidance, if they believe those issues are present. This can lead to an assessment of a substantial amount of unpaid taxes becoming payable. The unpaid tax debt, if it was accrued during the relationship, is likely to be included in the pool of assets thereby reducing the overall asset pool available for division. This is because both parties enjoyed the benefits of the undeclared income during the relationship, so both parties suffer the tax consequences.
If the ATO becomes involved, they will apply with full force all the penalties and interests provisions that are available to them, further increasing the potential debt, because this information was not provided to them voluntarily. The ATO will also request that that any amounts owed to them are paid first, before the parties can begin division of their remaining assets.
In family law proceedings, the Court may make an inference about a person's credibility due to their failure to properly disclose all of their financial circumstances to the other party and to the Court. The Court might also make a costs order against a person due to their failure to voluntarily declare their income.
Failure to lodge tax returns
The non-lodgement of tax returns can also create issues when it comes to a property settlement. A person might allege their ex-spouse has not filed a tax return for many years in an attempt to discredit them and highlight their secrecy. If the ex-spouse subsequently lodges their returns after the couple have separated but before the property settlement is finalised, any tax refund or deficit becomes an asset or liability accumulated during the relationship and may be included in the asset pool for division.
An unexpected consequence family lawyers sometimes see, when an ex-spouse makes an allegation of failing to lodge tax returns and declare income against the other, is that the misbehaving spouse might be able to prove that in fact, they made a greater financial contribution to the relationship than previously thought, even after deducting the tax owed. This may give them a greater entitlement to the total asset pool.
To avoid the embarrassment of being reported to the ATO and incurring penalties and interest, you should always report all income to the ATO. If you suspect your ex-spouse has income which has not been declared or that they have not lodged tax returns for many years, contact an experienced family lawyer for advice about the best way to handle the situation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.