Joint business debt

Q: My wife and I have decided to separate. I work and my wife runs a small business from our home as a sole trader. We do not have significant assets so I thought our separation would be straightforward. However, I have just learnt that my wife has not been paying the correct tax for her business. She now owes significant money to the IRD and will likely also have to pay interest and penalties as a result. I had no idea as I am not involved with the business. Do I have to take on her debt and the additional costs if we separate? What happens if we have more debt than assets to divide?

At the end of a relationship, relationship property will be divided according to the rules of the Property (Relationships) Act 1976 (PRA). Relationship assets are classified as either relationship property or separate property. The same is true of debts, which will be classified as either relationship or personal debt.

In most cases relationship property will be divided equally between parties. The value of relationship property is calculated by first deducting any relationship debt owed by either or both spouses/partners.

When is a debt a relationship debt?

The PRA defines a relationship debt to be one that has been incurred:

  • By the spouses or partners jointly; or
  • In the course of a common enterprise carried on by the spouses, whether alone or together with another person; or
  • For the purpose of acquiring, improving, or maintaining relationship property; or
  • For the benefit of both spouses or partners in the course of managing the affairs of the household; or
  • For the purpose of bringing up any child of the relationship.

This definition is broad and can capture a lot of spending that incurs debt.

Read the rest of the article on the NZ Herald.