Cottle and Cottle - [2005] FMCAfam 185

FEDERAL MAGISTRATES COURT OF AUSTRALIA

COTTLE & COTTLE

[2005] FMCAfam 185

CHILD SUPPORT – Departure from administrative assessment – special circumstances – income earning capacity, property and financial resources – ceasing employment to commence business – failure to adequately explain financial dealings and profitability of business.

Child Support (Assessment) Act 1989, s.117(2)(c)

Black and Kellner (1992) FLC ¶92-287
Briese and Briese (1986) FLC ¶91-713
Chang v Su (2002) FLC ¶93-117
DJM v JML (1998) FLC ¶92-816
Efthimiadis and Efthimiadis (1993) FLC ¶92-361
Gilmour and Gilmour (1995) FLC ¶92-591
Giunti and Giunti (1986) FLC ¶91-759
Gyselman & Gyselman (1992) FLC ¶92-279
Oriolo and Oriolo (1985) FLC ¶91-653

Savery and Savery (1990) FLC ¶92-131

Stein and Stein (1986) FLC ¶91-779
Suiker and Suiker (1993) FLC ¶92-436
Tate v Tate (2000) FLC ¶93-047
Weir and Weir (1993) FLC ¶92-338

Applicant:

DARREN GEOFFREY COTTLE

Respondent:

ELLEN COTTLE

File No:

MLM 3319 of 2003

Delivered on:

22 April 2005

Delivered at:

Melbourne

Hearing Date:

25 February 2005

Judgment of:

Riethmuller FM

REPRESENTATION

Counsel for the Applicant:

Mr S.G. Blewett

Solicitors for the Applicant:

Mirabellas

Counsel for the Respondent:

Ms S.S. Buchanan

Solicitors for the Respondent:

Victoria Legal Aid

ORDERS

The applicant’s application for a reduction in the rate of child support be dismissed.
The respondent’s cross-application to vary the annual rate of child support be allowed, and Mr Cottle’s child support income amount be set at $60,000 per annum for the period 5 July 2004 to 30 September 2005.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLM 3319 of 2003

DARREN GEOFFREY COTTLE

Applicant

and

ELLEN COTTLE

Respondent

REASONS FOR JUDGMENT

This is an application to depart from a child support assessment. The application in this matter was prompted by enforcement proceedings brought by the Child Support Agency to enforce child support arrears payable by Mr Cottle with respect to the children of parties.

Background

The parties lived together for around 10 years from 1988 to 1998. There are two children the subject of the child support assessment, Rohan Cottle born 9 October 1992 and Jay Cottle born 3 June 1995. There has been a child support assessment in force since the time of separation.
The history of the matter is well set out in the decisions of Senior Case Officers made pursuant to Part 6A of the Child Support Assessment Act. There have been a number of decisions in this case.
The first departure decision was made on 3 March 1999. That was an application by Mr Cottle to reduce his child support assessment (from

1 July 1997 to 30 November 1997) on the basis of his necessary commitments in supporting himself. The application was refused on the basis that Mr Cottle had, at that time, estimated that his taxable income would be $40,000 per annum, when in fact his taxable income for the period was $64,546, considerably greater than the estimated amount. Thus, his child support rate had been substantially under assessed as a result of the estimate. In addition, the decision recounts that Mr Cottle had full use of a company car until July 1998.
The next decision was made on 9 April 2001. This was also an application by Mr Cottle for a reduction in his child support assessment. The parties had entered into a child support agreement for the period 1 December 1997 until 1 December 2000. Pursuant to that child support agreement, the annual rate of child support was set at $8712, approximately $167 per week. At the end of the agreement period the parties were unable to agree upon a further assessment amount. As a result the agency calculated an assessment based upon Mr Cottle's 1999/2000 taxable income of $84,930. This resulted in child support payable at the rate of approximately $338 per week. No doubt the lack of ability to reach a further agreement was in part based upon the wife's realisation that at least for the five months of 1 July 2000 to 1 December 2000 she was receiving child support at a considerably lower rate than a standard formula assessment, having regard to the income amount of Mr Cottle.
A similar situation appears to have arisen throughout the terms of the agreement. In the 1997/98 financial year, Mr Cottle earned $64,546, and yet the agreement was equivalent to a formula assessment on the income on the part of Mr Cottle of $42,500 (at least during the periods before the birth of Mr Cottle's subsequent child). In 1998/99, Mr Cottle earned $100,157.
Shortly after the formula assessment recommenced (following the expiration of the agreement) Mr Cottle ceased his employment and purchased a business that provided driving instruction for motor vehicle drivers. Mr Cottle has not seen the children since Christmas, having told them that Mrs Cottle believes he should pay more child support and that it is best to them if they stay home (at their mother’s) until the child support dispute is resolved.
In the decision of 9 April 2001, a senior case officer declined to alter the formula assessment (for the period 2 December 2000 until 16 February 2001) (based upon Mr Cottle's taxable income) and thereafter set child support at the rate of $726 a month on the basis of a conservative estimate of Mr Cottle's ongoing earning capacity, having regard to his previous earnings.
On 21 January 2002, Mrs Cottle applied for a departure from the child support assessment. This application was heard on 18 March 2002, as a result of which a senior case officer set Mr Cottle's child support income amount at $53,000 per annum (resulting in a child support assessment of around $700 per month).
The senior case officer took this course, having regard to the previous circumstances outlined above, and the then current circumstances of Mr Cottle. At that time Mr Cottle stated that he had purchased ‘Moonee Ponds Driving School’ which runs courses for licences for busses and trucks and associated vehicles. He told the senior case officer at that time that the business would be struggling to pay him a wage of $30,000 per annum, although he had stated on his response from that he would be earning around $35,000 per annum. He advised the senior case officer he had borrowed a considerable sum to purchase the business and was hopeful that in time the business would generate a higher income.
The senior case officer was satisfied that Mr Cottle had the capacity to earn a higher amount and that he should be assessed upon a child support income amount of $53,000 per annum.
The decision from the senior case officer at that time set Mr Cottle’s child support income amount at $53,000 until 31 March 2003.
Mrs Cottle again applied for a departure on 2 May 2003. The senior case officer who considered that application set Mr Cottle's income at $53,000 per annum from 1 April 2003 to 30 June 2004. The senior case officer effectively made findings substantially the same as the previous senior case officers.

The Law

The considerations relevant when determining whether to depart from an administrative assessment are set out in section 117 of the Act. The approach is set out in Gyselman & Gyselman (1992) FLC ¶92-279. In Gyselman the Full Court of the Family Court said (at 79,078):
As we have already indicated, the exercise under s 117 involves three steps. The first, which we have already examined, is whether one or more of the grounds in sub-section (2) has been made out. The legislation then requires the Court to consider whether any proposed order is ‘just and equitable’ and ‘otherwise proper’.
Earlier, at page 79,065 the Court said:
Whilst it is not possible to define with precision the meaning of that term [‘special circumstance’], as a generality it is intended to emphasize that the facts of the case must establish something which is special or out of the ordinary. ... That is, the intention of the Legislature is that the Court will not interfere with the administrative formula result in the ordinary run of cases. ... In Savery's case (1990) FLC ¶ 92-131 (p 77,897), Kay J ... said that ``special circumstances'' were ``facts peculiar to the particular case which set it apart from other cases''.
It is clear that each of the three steps must be addressed by the court, namely:
a)whether one or more of the grounds of departure in section 117 is established; and if so:
b)whether it is ‘just and equitable’ within the meaning of section 117(4) to make a particular order; and
c)whether it is ‘otherwise proper’ within the meaning of section 117(5) to make a particular order.
The grounds of departure relied upon in this case are said to fall within s.117(2)(c)(i) which provides:
(2)For the purposes of subparagraph (1)(b)(i), the grounds for departure are as follows:
(c) that, in the special circumstances of the case, application in relation to the child of the provisions of this Act relating to administrative assessment of child support would result in an unjust and inequitable determination of the level of financial support to be provided by the liable parent for the child:
(i) because of the income, earning capacity, property and financial resources of either parent or the child; or
I am mindful of the comments of the Full Court in DJM v JML (1998) FLC ¶92-816, particularly that:
17.40 ... Child support and child maintenance orders are governed by legislation which emphasises and prioritises the obligation of parents to support their children and seeks to ensure that the level of financial support is to be measured according to the parent's “capacity to provide financial support”.
17.41 Property adjustment orders have far less focus and are arrived at on the basis of what is “appropriate” after weighing up many competing factors. Spousal maintenance is governed by a test of what is proper having regard to the reasonable ability of the liable spouse to meet the needs of the other.
17.42 In our view there can be different answers to the same question about earning capacity depending on which head of power is sought to be exercised.
17.43 A judge [or federal magistrate] might reasonably say that a parent should be working longer hours or in more lucrative employment to meet child support obligations. A spouse is only required to support the other spouse to the extent that he or she is reasonably able to do so. This requirement does not impute the same degree of compulsion about it that the child support and child maintenance tests express. Thus a parent may be required or expected to work long hours or at more than one job if the parent has the capacity and opportunity to do so, and if the children need greater support than they would receive if the parent was only to work shorter hours. At the same time it might not be reasonable to expect an estranged spouse to avail himself or herself of such opportunities so as to provide maintenance for the other spouse. In the latter case it is a question of what is reasonable in the circumstances.
In this case it is agreed that the child support formula results in an assessment that is ‘just and equitable’ and ‘otherwise proper’ if an appropriate income amount is struck. In this case there is obvious need of Mrs Cottle for assistance in financially supporting the children as her income is only around $378 per week. In circumstances where there is nothing out of the ordinary about the parties’ circumstances and obvious financial need on the part of the children, such an agreement (relying upon the legislatively fixed standards) appears a sensible way to limit hearing costs.

The evidence

At the hearing of this application, Mr Cottle gave evidence that he ceased his employment as a result of the pressures that employment was placing upon him. He stated that he had to travel and that he believed that this, in part, caused the breakdown of his first marriage. He also stated that his current wife was having a child and had suffered some postnatal depression and that he wished to be home more often.

I note, however, that the active pursuit of self employment appears to follow the end of the last child support agreement. He did not make any provision for child support for the children the subject of this application during the start-up phase of his business. Whilst in many cases persons simply do not have the financial resources to make such provision this must be viewed in the context of the present case where the agreement between the parties allowed Mr Cottle a period of some considerable time at a significantly reduced rate of child support.
Mr Cottle's evidence did not go a long way to clarifying his income position. He provided draft financial statements for the 2003/2004 financial year which showed a net loss of $52,789. These statements are difficult to reconcile with the partial year financial statements which included a profit and loss statement for the period 1/7/2003 to 29/2/2004 (exhibited to Mr Cottle's affidavit) which showed a net profit from operations of $71,783.34, with a note that there was a finance repayment figure of approximately $48,000 that had to be deducted from this net profit. If the company continues to trade at this level of profit over 12 months, the year’s profit would be around $107,675, less the finance repayment figure of $48,000, leaving around $60,000 in profits. The reasons for the differences in the partial year and full year statements were not adequately explained.
If the finance repayment figure is not a one off payment but recurrent, it is nonetheless a profit for a partial year of some eight months of approximately $23,000, and equivalent to around $34,500 per annum.
Part of the documents showed that Mr Cottle also receives a base salary of $21,538. His evidence was also that he and his wife have the use of a company motor vehicle and that at least a small amount of expenses (estimated at $1700 per annum) that are of a private nature appear to be met by the company Visa Card. If one adds the profits, the base salary and the fringe benefits (which I conservatively estimate have a value of at least around $5,000 per annum) this comes to a total of between $60,000 and $85,000 per annum
A review of the draft balance sheet for the company as at 30 June 2004 showed that recently Mr Cottle had purchased another business, Camelot Driving School, and that this had been added to the balance sheet. Camelot Driving School was purchased for $95,000, and the debt appears in non-current liabilities. The corresponding entry for goodwill for Camelot Driving School (in the sum of $94,500) appears in the intangible assets column.
A current liability of $90,443 appears for the first time on this balance sheet (in comparison to previous year’s balance sheet) described as ‘leased assets realisation holding account’. This results in the company showing on its balance sheet an excess of liabilities over assets of some $52,781. Mr Cottle was not able to explain this part of the financial statement and did not provide an affidavit from (nor call) his accountant). By agreement of the parties, a sheet was tendered later in the trial that sets out some explanation, apparently from the accountant. It provides that further adjustments need to be made to the draft balance sheet to the effect that it ought to show that assets exceeded liabilities by $32,000. This roughly corresponds with the reduction in debt of the company throughout the period of its operation (The company's ‘business booster’ loan was in the sum of $177,837 as at 30 June 2001, and had reduced to $132,766 by the end of June 2004).
Despite apparently large losses on the face of the document, it appears that in reality the company has slowly but steadily been improving its asset position over time.
Mr Cottle did not produce any projections or other calculations to demonstrate what he believed the future profitability of the company would be. Nor did he produce any such financial documents related to the businesses that he purchased or the representations made about their profitability at the time of purchase.
Mr Cottle was adamant that he believed the businesses were businesses that would make money in the future but that to date they have not generated income of the level upon which he has been assessed to pay child support. He has made no attempt to sell the businesses or even obtain an indication of their value or saleability from a business broker. Rather, he has purchased another similar business, Camelot Driving School, in recent times.
Mr Cottle’s confidence was difficult to reconcile with the partial year profit and loss statement that he tendered for the period 1 July 2004 to 31 January 2005 which showed a net trading loss for that period of $25,312. Mr Cottle explained this statement on the basis that there were some carry-over expenses from the heavy vehicle driving business which has been ceased ($15,000 to $20,000) and said that trading is generally poor during December and January when the schools are on holidays (as a large part of his business relates to training school children).
Mr Cottle said that Camelot Driving School, at the time that he purchased it, was showing a profit of $65,000 per annum or thereabouts, operating by providing a program to 30 schools. He stated that it now provides the program to some 40 schools. It is difficult to reconcile the financial figures with this information given by Mr Cottle.
In the financial information tendered late in the trial, it appears that the lease payments that would have to be met by the business on the motor vehicles have now been reduced by two-thirds. This would mean that the leasing charges would reduce by between $40,000 and $60,000 per annum. Therefore the company would be $40,000 to $60,000 a year more profitable.
In this case there was a lack of clear evidence about the financial status of the business of Mr Cottle. Whilst it is not clear that there is a deliberate withholding of documents, Mr Cottle has not presented clear evidence as to the business. It appears to have been the case that Mr Cottle genuinely didn’t understand his businesses books and records, however called no witness that did understand them. Indeed, late in the trial information was sought by Mr Cottle’s solicitors, from his accountant, due to the unexplained discrepancies in financial statements involving tens of thousands of dollars. That limited information was forthcoming.
In this context I am mindful of the comments of the Family Court on issues relating to disclosure:
a)In Stein and Stein (1986) FLC ¶91-779 Evatt CJ and Nygh J said
Failure to disclose information may lead the Court to draw adverse inferences against the person who does not discharge the obligation to disclose the information, if there is material on which such an inference can be based. But we would be reluctant to find that a Judge who exercised discretion on the basis of material put to him by the parties had erred by not insisting on the production of additional financial information when neither party had sought such information.
An example of a case in the latter category referred to by Evatt CJ and Nygh J is Efthimiadis and Efthimiadis (1993) FLC ¶92-361.
b)In Giunti and Giunti (1986) FLC ¶91-759 the court made the point that:
It is obviously desirable as a general principle that the Court should first of all identify the pool of assets available and evaluate it. If each party complies with his or her obligation to make a full and substantive disclosure of their financial affairs: see Briese and Briese (1986) FLC ¶91-713 , affirmed by the Full Court in Oriolo and Oriolo (1985) FLC ¶91-653 , there is no problem although there may be disputes as to valuation.
However if, as here, one party fails to fulfil that obligation, is it open to that party then to rely on the absence of satisfactory evidence to prevent the making of an order against him or her which otherwise justice and equity would require? It would be simple, if that were the case, to evade the jurisdiction of this Court, not by outright refusal which would attract sanctions, but by obfuscation and evasion.
c)In Briese and Briese (1986) FLC ¶91-713 Smithers J said
The Regulations and now the Rules, are not intended as a vehicle to mask the true position, or as an aid to confusion, complexity or uncertainty. They are not intended as the outer limits of the obligation of financial disclosure but as providing avenues towards disclosure. The need for each party to understand the financial position of the other party is at the very heart of cases concerning property and maintenance. Unless each party adopts a positive approach in this regard, delays will ensue with the consequent escalation of legal, accounting and other expenses, always assuming that a party has the strength to continue the struggle for information and understanding.
d)In Gilmour and Gilmour (1995) FLC ¶92-591 Ellis, Finn and Maxwell JJ applied these principles to child support, saying:
In any application for a departure order under the Assessment Act (including an order that would have the effect of decreasing the amount payable under an earlier departure order) the applicant, of course, carries the usual onus of making out his or her application to the court. Further, there can also be no doubt, in our view, that a party to proceedings under the Assessment Act has the same duty to make a full disclosure of his or her financial affairs as does a party to financial proceedings under the Family Law Act, and that where in such proceedings the court is satisfied that there has been a deliberate non-disclosure by one party, it is open to the court to make findings in favour of the other party (see Weir particularly at page 79,593).

Similar comments are made in a variety of cases that have been reported: see, for example, Tate v Tate (2000) FLC ¶93-047. Oriolo and Oriolo (1985) FLC ¶91-653; Suiker and Suiker (1993) FLC ¶92-436; Black and Kellner (1992) FLC ¶92-287; Weir and Weir (1993) FLC ¶92-338; and Chang v Su (2002) FLC ¶93-117.
This case was adjourned in the past to allow Mr Cottle to provide proper evidence about his financial affairs and the profitability of the business.

Conclusions

Application

I am not satisfied that Mr Cottle has made a full and frank disclosure of the true trading profitability of the business, nor the extent to which it is a true financial resource. If, as the trading statements initially appeared to indicate, the business was continuing to lose money, it is difficult to understand why Mr Cottle would not have taken steps to sell the business and find employment. Indeed, having regard to principles in DJM (supra) and the facts of this case, it appears to me that Mr Cottle’s income and earning capacity was the income amount he was able to earn in employment.
Mr Cottle appears to have an unshakable confidence in the business. He gave estimates of significant income in the future. The estimates given were without any financial plan or calculation.
I do not accept that the business has been as unprofitable as suggested by Mr Cottle. Doing the best that I can on the figures provided, it appears to me that the business generates a reasonable income for Mr Cottle, and has over time slowly become a greater asset.
I am not satisfied that Mr Cottle has demonstrated that his income earning capacity, property and financial resources (when one has regard to the material relating to the business, and the ancillary benefits the business provides) result in the current child support assessment being unjust or inequitable. Indeed, for the last financial year and the current financial year it appears that the figures set by the CSA for Mr Cottle’s income amount are an under estimate of his true income earning capacity and financial resources
In the circumstances, I dismiss the application by Mr Cottle.

Cross-application

Mrs Cottle has filed a cross-application seeking an increase in the child support assessment for the period 5 July 2004 to 30 September 2005.
The application of the wife seeks:
1.That the Child Support income amount for the current period set by the Senior Case Officer Griffin is appropriately taking into account the Applicant Father’s demonstrated earning capacity, assets, income and financial resources.
2.That the Child Support income amount for the period since 1 December 2000 set by Senior Case Officer Siegel is appropriately taking into account the Applicant Father’s demonstrated earning capacity, asset, income and financial resources.
3.That there be no change to the arrears recorded with the Child Support Agency. That the Application for Departure Order filed by the Applicant Father be struck out with our legal costs awarded against him.
4.That there be an Order made for the Departure from Assessment for the period 5 July 2004 to 30 September 2005.
Doing the best that I can, on the material before me it appears that Mr Cottle has an income and earning capacity of at least $60,000 per annum. This is a ‘special circumstance’ under the Act in the context of this case.
In this case the parties agreed that the formula assessment based upon the income earning capacity, property and financial resources of Mr Cottle would be ‘just and equitable’ and ‘otherwise proper’. It is clearly ‘otherwise proper’ that the assessment be based upon the income and earning capacity of Mr Cottle.
I find that setting Mr Cottle’s child support income amount at $60,000 per annum for the period sought by the wife, 5 July 2004 to

30 September 2005 is ‘just and equitable’ and ‘otherwise proper’. Thereafter it is appropriate that the case be considered again by the Child Support Agency, by which time the current financial year’s trading figures ought to be available in an accurate form.
In the circumstances, I allow the wife's application and set Mr Cottle's child support income amount at $60,000 per annum for the period requested.

I certify that the preceding forty-five (45) paragraphs are a true copy of the reasons for judgment of Riethmuller FM

Associate:

Date: