Foster and Child Support Registrar and Anor (SSAT Appeal)
[2011] FMCAfam 808
•11 August 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| FOSTER & CHILD SUPPORT REGISTRAR and ANOR (SSAT APPEAL) | [2011] FMCAfam 808 |
| CHILD SUPPORT – Appeal from decision of SSAT – reconciliation after income estimate election – “real remaining period taxable income” – meaning – method of determination. |
| Child Support (Registration and Collection) Act 1988, ss.110B, 110K Child Support (Assessment) Act 1989, ss.4, 60, 64, 64A Income Tax Assessment Act 1997 Acts Interpretation Act 1901 |
| Federal Commissioner of Taxation v Galland (1986) 68 ALR 403 |
| Applicant: | MR FOSTER |
| First Respondent: | CHILD SUPPORT REGISTRAR |
| Second Respondent: | MS H |
| File Number: | CAC 408 of 2011 |
| Judgment of: | Halligan FM |
| Hearing date: | 22 June 2011 |
| Date of Last Submission: | 22 June 2011 |
| Delivered at: | Canberra |
| Delivered on: | 11 August 2011 |
REPRESENTATION
| Solicitors for the Applicant: | Mr Foster In Person |
| Solicitors for the Respondent: | Mr Oram |
ORDERS
The father’s appeal against the decision of the Social Security Appeals Tribunal made on 7 February 2011 is upheld.
The said decision of the Social Security Appeals Tribunal is set aside.
The matter is remitted to the Social Security Appeals Tribunal to be heard again.
IT IS NOTED that publication of this judgment under the pseudonym Foster & Child Support Registrar and Anor (SSAT Appeal) is approved pursuant to s.121(9)(g) of the Family Law Act 1975 (Cth).
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT CANBERRA |
CAC 408 of 2011
| MR FOSTER |
Applicant
And
| CHILD SUPPORT REGISTRAR |
First Respondent
| MS H |
Second Respondent
REASONS FOR JUDGMENT
Introduction
This is an appeal by Mr Foster (the appellant) under s.110B, Child Support (Registration and Collection) Act 1988 (the Registration Act) against a decision of the Social Security Appeals Tribunal (the SSAT), made on 7 February 2011. The appeal lies on a question of law only.
The respondents to the appeal are the Child Support Registrar (the Registrar) and Ms H. Ms H appeared at the directions hearing of this appeal and advised the court she did not wish to participate any further in the proceedings. She had successfully sought to be removed as a party to the SSAT proceedings.
The SSAT decision under appeal was to affirm a decision made by an objections officer on 31 August 2010 to reconcile the appellant’s estimated income of $63,145 for the period 1 October 2004 to
30 September 2005 with his taxable income, and to reassess his child support liability for the child support period 1 October 2004 to
31 December 2005 based on the reconciled child support income amount of $115,919.
As ordered at the directions hearing, the appellant served on the Registrar and the SSAT Principal Member, and filed with the court, a document setting out the questions of laws he sought to raise, as follows-
a)Whether on a proper construction of section 64(1A)(b) and section 64(1)(a) of the Child Support (Assessment) Act 1989 as it stood prior to 1 January 2008 (“the Act”) the words “real remaining period taxable income” can include income that accrues after the end of the remaining period.
b)Whether assessable income derived from a partnership accrues on the date the accounts are taken for the partnership for a financial period or, alternatively, the assessable income accrues during the financial period.
c)Whether on a proper construction of section 64(1A)(b) and 64(1)(a) of the Act, in determining the real remaining period taxable income, deductions can be offset:
i)against the total assessable income for the remaining period; or alternatively
ii)only against assessable income derived in the same part of the remaining period in which the deductions accrued; and
iii)against partnership income only as opposed to other assessable income.
Absence of papers from the SSAT
The determination of this appeal has unnecessarily been made more difficult by the unexplained failure of the SSAT Principal Member to comply with s.110K of the Registration Act, which provides-
“110K When an appeal is instituted in a court, or a question of law is referred to a court, under this Division, the SSAT Principal Member must cause to be sent to the court all documents:
(a) that were before the SSAT in relation to the proceeding to which the appeal or the reference relates; and
(b) that are relevant to the appeal or the reference.”
This has deprived the court of the opportunity to refer to documents that may explain parts of the reasons of the SSAT. Those reasons do not recite some facts that appear pertinent to the questions of law the appellant raises, for example the quantum of deductions allowable against assessable income for the 2005/2006 year of income, the inclusion or exclusion of which in the determination of the appellant’s real remaining period taxable income was an issue both before the SSAT and in the hearing of this appeal. It would have been helpful if the court had been provided with the documents the SSAT used to calculate the appellant’s real remaining period taxable income, which was the issue before the objections officer, the SSAT and on the hearing of this appeal.
Background
The broad background to the appeal is that the appellant lodged elections at different times to have his child support liability calculated on the basis of what he estimated his income would be for certain child support periods. This meant his estimated income was used to calculate his child support liability for those periods rather than his actual taxable income for a prior year adjusted for inflation. Subsequently, and relevantly for this appeal, the Registrar determined that the appellant’s actual income (relevantly for this purpose) for some of the periods covered by the appellant’s income estimates exceeded his estimated income. As a result, and as required by s.64 of the Child Support (Assessment) Act 1989 (the Assessment Act), the Registrar reassessed the father's child support liability for the relevant period based on his actual taxable income.
The father disagreed with the Registrar’s calculation of his actual income for two periods and objected to the Registrar against the decisions for each of those periods. Being dissatisfied with the decisions on his objections, he sought review of those decisions by the SSAT. He was successful in one review but not the other, and it is in relation to the SSAT decision in his unsuccessful review application that he now brings this appeal.
The appellant’s child support liability relates to his two daughters, both of whom are now over 18. It is unclear when the appellant’s liability for child support for these children commenced. It existed at January 2000.
Statutory provisions for income estimates and reconciliation
To understand the issues raised in this appeal, it is convenient at the outset to consider the provisions of the Assessment Act governing the reconciliation process where a person makes an income estimate election.
The relevant income estimate election in this case was for the period
1 October 2004 to 30 September 2005. The reconciliation process was not initially undertaken by the Registrar until 2010. Between 2005 and 2010, the relevant section governing the reconciliation process, s.64 of the Assessment Act, was replaced twice. It is conceded by the appellant and the Registrar, correctly in my view, that the provisions of s.64 in force at the end of the election period continue to govern the reconciliation process.
The SSAT decided to apply the provisions of s.64 as in force on
1 January 2008. In its reasons for coming to this conclusion, the SSAT referred to the Acts Interpretation Act 1901, but did not explicitly refer to relevant application provisions of the legislation that subsequently amended s.64. The effect of these application provisions is to preserve the operation of the prior provisions of s.64 for income estimate elections made under it, and since s.64 was not amended between October 2005 and January 2008, the SSAT has applied the correct version of s.64.
The references to and quotations from sections of the Assessment Act in this part of this judgment relate to the Assessment Act in force during the period 1 October 2004 to 30 September 2005 and immediately after that period.
A person could elect that their child support income amount for the administrative assessment of child support “for the remaining days in a child support period” be the amount the person worked out using the prescribed method. Such an election could be made either before or during a child support period. (s.60(1), (5) and (6))
As mentioned, the reconciliation process that has given rise to this appeal occurred under s.64. The SSAT set out that section in its reasons (at [47]), excluding the definitions in s.64(5), relevant provisions of which it cited later in its reasons (at [66]). It is one of the definitions in s.64(5) that is the central to this appeal. The full section at the relevant times is as follows -
“(1A) This section applies if:
(a) an election made by a person under section 60 in relation to a child support period has not been revoked at the end of the period; and
(b) the total of the person’s real remaining period taxable income and real remaining period supplementary amount is more than the total of the amounts the person estimated at Steps 2 and 3 of the Method statement in subsection 60(5) for the purposes of making the election.
(1) For the purposes of assessing the annual rate of child support payable by or to the person for days on or after the election was made but before the end of the child support period, the person’s child support income amount is taken to be (and always to have been) the amount worked out by:
(a) adding up the person’s real remaining period taxable income and real remaining period supplementary amount; and
(b) if the remaining period was not 12 months:
(i) dividing the sum from paragraph (a) by the number of days in the remaining period; and
(ii) multiplying the quotient by 365.
(2) Subsection (1) does not apply in relation to any day in the child support period in relation to which an income amount order made before the making of the election applies in relation to the person.
(3) Where an income amount order made after the making of the election applies in relation to the person and any part of the child support period, subsection (1) has effect subject to the order.
(4) The Registrar is to take such action as is necessary to give effect to this section in relation to the person (whether by amending any administrative assessment that has been made in relation to the child support period or otherwise).
(5) In this section:
real remaining period supplementary amount of a person who made an election under section 60 is the amount that would have been the person’s supplementary amount for the remaining period had the remaining period been a year of income.
real remaining period taxable income of a person who made an election under section 60 is the amount that would have been the person’s taxable income (as defined in the Income Tax Assessment Act 1997) for the remaining period had the remaining period been a year of income.
remaining period for a person who made an election under section 60 is the period the person used in applying the method in subsection 60(5) to make the election.”
“Supplementary amount” was defined by s.5. It is not relevant to this appeal.
The “remaining period” at the relevant times was, by virtue of s.60(5) and (6), defined to be either the period starting on the later of the day the person made the income estimate election or the day the child support period to which the income estimate election related started and ending 15 months after the start of the relevant child support period, or the period of 12 months if the remaining period is more than 12 months and the person making the income estimate election chose to use a remaining period of 12 months.
It was agreed by the appellant and the Registrar that the “remaining period” in this case was the twelve month period 1 October 2004 to
30 September 2005. This appears to be the period used by the SSAT as the remaining period.
It was further agreed that there was no real remaining period supplementary income to be calculated in the reconciliation process.
The only amount that had to be determined was the appellant’s real remaining period taxable income. And it is the SSAT’s determination of the appellant’s real remaining period taxable income that gives rise to the current controversy.
The SSAT’s reasons for decision
The following facts are recited by the SSAT in its Reasons -
a)On 18 August 2004, the Child Support Agency (the Agency) issued a child support assessment for the period 1 October 2004 to 31 December 2005 using a child support income amount for the appellant of $126,659, the maximum under the Assessment Act at that time (Reasons, [12]).
b)On 1 October 2004, the appellant advised the Agency that his income would be the same as a previous estimate, that is, $63,145 a year (Reasons, [13]).
c)
On 1 October 2004, the Agency issued a new child support assessment for the child support period 1 October 2004 to
31 December 2005, based on the annual child support income amount for the appellant of $63,145 (Reasons, [13]).
d)On 23 November 2004, the appellant advised the Agency of a new income estimate of $7,237.10 gross a month which was annualised to $86,845.20 (Reasons, [15]).
e)On 17 December 2004, after having clarified some matters concerning his new estimate with the appellant, the Agency issued another child support assessment for the child support period 1 October 2004 to 31 December 2005, based on a child support income amount for the appellant of $86,845.20. The Agency apparently took the view that as the estimate of income the appellant provided on 23 November 2004 was provided within two months after the assessment of income he provided on 1 October 2004, if retrospectively replaced the earlier estimate. (Reasons, [17] and [18])
f)
On 7 June 2010, the Agency advised the appellant in writing that as his actual and supplementary income for the period 1 October 2004 to 30 September 2005 was $115,919, and as this was higher that the estimate of income of $63,145 given on 30 September 2004, his child support for the period 1 October 2004 to
31 December 2005 “was reassessed accordingly” (Reasons, [20]).
g)
In determining the appellant’s objection to this decision, on
31 August 2010 the objections officer found “that the Agency was correct to reconcile (the appellant’s) actual and estimated incomes for the period (1 October 2004 to 30 September 2005) and that the correct actual income figure had been used” (Reasons, [23]).
In its Reasons, the SSAT said -
“66. … Under section 64 …, it is necessary to work out the person’s ‘real remaining period taxable income’, which is defined in subsection 64(5) as ‘the amount that would have been the person’s taxable income (as defined in the Income Tax Assessment Act 1997) for the remaining period had the remaining period been a year of income’. ‘Remaining period’ is also defined in subsection 64(5). In summary, the Tribunal considers section 64 requires the decision maker to determine the person’s actual taxable income for the remaining period as though it were a year of income. The relevant Explanatory Memorandum refers to ‘the person’s real income for the period covered by the estimate’. The legislation does not prescribe the basis upon which that income is to be ascertained. In this case the remaining period is the period from 1 October 2004 to 30 September 2005. This includes 92 days within the 2005/2006 financial year. For the 2005/2006 financial year, the Agency decided that (the appellant) received a partnership distribution of $105,695. The Tribunal considers it consistent with the legislation to determine that a proportion of this amount is taxable income of (the appellant) for that part of the remaining period that falls within the 2005/2006 year ($26,640 for 92 days), including where (the appellant) received the distribution after the end of the remaining period to 30 September 2005. The amount still represents taxable income as defined in the Income Tax Assessment Act.
67. In relation to the 2005/06 deductions, according to the Agency letter dated 17 May 2010, the Agency initially offset the work related deductions against both the partnership distribution and the dividend and investment income. It then appears that the Agency later decided that the deductions should be offset against partnership distributions only. The Tribunal considers the Agency’s revised approach to be correct.
68. (The appellant) contends that the excess work deductions for 2005/06 could be offset against income for 2004/05 and that the Agency’s approach incorrectly ‘bifurcates’ the remaining period. In his submission of 8 December 2010 he states that ‘… It is no doubt permissible to accrue losses in a particular year. The CSA has sought to compartmentalise the period 1 October 2004 to 30 June 2005 separately from 1 July 2005 to 30 September 2005 and address each discreetly (sic). The legislation requires the CSA to determine the assessable taxable income and the supplementary amount for the remaining period as though it were a year of income. It is an error to bifurcate the remaining period. The deductions are capable of being deducted from the income figure for 30 June 2005.’ The Tribunal does not accept that the Agency has adopted the incorrect approach concerning deductions. For the purposes of section 64, the deductions must be treated in the same way as income.” (Reasons, [66] - [68])
The SSAT went on to adopt the figures for the appellant’s actual taxable income for the period 1 October 2004 to 30 September 2005 as determined by the Agency, in the sum of $115,919, and to express agreement with the Agency’s calculations in the reconciliation process that it agreed should have occurred.
It is not readily apparent from the SSAT’s Reasons how the figure of $115,119 was arrived at mathematically. Nonetheless, the crux of this appeal appears sufficiently from the above passages of the Reasons.
Discussion
In my view, there are two distinct questions raised on this appeal, namely-
a)What income is to be determined to arrive at the appellant’s real remaining period taxable income; and
b)How is that income to be determined.
In my view, the parties’ submissions merged these issues into a single issue of construction of the definition of real remaining period taxable income.
As to the first issue, what income is to be determined, there is in my view no ambiguity in what income the Act requires to be determined, namely “the amount that would have been the person’s taxable income (as defined in the Income Tax Assessment Act 1997) for the remaining period had the remaining period been a year of income”. The SSAT clearly acknowledged this as the task before it at para.66 of its Reasons where, having quoted the definition of “real remaining period taxable income”, it said that “the Tribunal considers section 64 requires the decision maker to determine the person’s actual taxable income for the remaining period as though it were a year of income”. The clear inference from this passage in the Reasons is that the SSAT recognised that the “actual taxable income” is to be determined in accordance with the Income Tax Assessment Act 1997 (the Tax Act).
To the extent to which the submissions on behalf of the Registrar may have sought to suggest the definition had another meaning, by reference to apportioning income assessed by the Commissioner of Taxation for a year of income pro rata to a child support period, I reject them. In my view, these submission go to the second issue I have identified, namely how the taxable income is to be determined, not what income is to be determined.
It is this second issue, how taxable income is determined, that is the crux of the appeal in my view. The real issue is whether what the SSAT did in fact determined the appellant’s “taxable income for the remaining period as though it were a year of income” in accordance with the evidence before it.
The SSAT adopted the approach of apportioning income in a full tax year pro rata to that part of the remaining period that fell within the tax year. The SSAT said at [66] of its Reasons-
“The Tribunal considers it consistent with the legislation to determine that a proportion of this amount is taxable income of (the appellant) for that part of the remaining period that falls within the 2005/2006 year ($26,640 for 92 days), including where (the appellant) received the distribution after the end of the remaining period to 30 September 2005.”
It was submitted on behalf of the Registrar that it would cast a very heavy burden on the Agency, one it would struggle greatly to perform, to require the Agency to become an alternative Taxation Office, and perform assessments of taxable income in accordance with the Tax Act. Hence, the apportionment approach was advocated as the proper approach in determining the real remaining period taxable income.
On the other hand, it was submitted by the appellant that an apportionment approach could result in significant prejudice to a person making an election of taxable income for a period other than a year of income under the Tax Act. The appellant described three problems with the apportionment approach in the following terms-
a)“Estimates are predicated on an expected diminution of income during the period of the estimate. By using income before or after the remaining period, which by definition will be higher, and averaging it into the estimate period, the reconciling income will be skewed higher that was actually the case.
b)Rather than estimating income as though it had been a year of income, the estimator is in fact required to make an estimate on the basis of a two year period and average the estimated income. That is not what the Act requires.
c)
In the case of partnership income, it assumes the net income at
30 June is simply an aggregate of proportionate income through the year.”
Further to the first problem identified in the preceding paragraph, penalties apply if a person’s real remaining period taxable income exceeds their income estimate by 10% or more (s.64A). Thus, on the apportionment approach advocated on behalf of the Registrar, the appellant submitted that to seek to avoid incurring penalties, a person making an election would not have estimated their expected income for the remaining child support period, but rather they would have had regard to their actual and/or expected income for the year or years of income that encompass the remaining child support period.
But this is not what the section providing the method for calculation of the income estimate, s.60, required. What the income estimate methodology required was that the elector “estimate the amount that would by the person’s taxable income for the remaining period if that period were a year of income” (s.60(5), Step 2) and “estimate the amount that would be the person’s supplementary amount for the remaining period if that period were a year of income” (s.60(5), Step 3).
I accept the submission on behalf of the appellant as to the potential prejudice to a person making an income estimate of the universal adoption of an apportionment approach. Nonetheless, to the extent that the appellant’s submissions suggested the apportionment approach could not be consistent with the task of determining a person’s “real remaining period taxable income”, I reject the submission. But similarly, to the extent that the submissions on behalf of the Registrar suggested that the apportionment approach was correct in all cases, I reject that submission too.
The issue is whether in a given case a determination of an amount as a person’s real remaining period taxable income, being the person’s taxable income in accordance with the Tax Act for the remaining period as if it was a year of income, was open on the evidence before the decision maker.
If the evidence available to the decision maker did not enable the decision maker to determine a person’s real remaining period taxable income otherwise than by apportionment, then an apportionment approach in my view would be open to it. I am not satisfied that the SSAT, or for that matter the Registrar, when carrying out a reconciliation under s.64, is bound to initiate a “deconstruction” of a person’s tax returns and seek to reconstitute them as a single return for the remaining period as if it were a year of income. That may in any event not be possible on the information contained in a person’s tax returns, as appears to be the case in this matter based on the appellant’s own submissions.
I am not satisfied that an error occurs, involving a question of law or otherwise, if the SSAT, or the Registrar, adopts an apportionment approach as the prima facie method of calculating a person’s real remaining period taxable income, provided information available to it does not show that such an approach would fail to determine taxable income in accordance with the Tax Act for the remaining period as a year of income, and provided procedural fairness is afforded to the parties affected by the decision.
In other words, I am not satisfied there is necessarily any error if the SSAT, or the Registrar, adopts an approach when calculating a person’s real remaining period taxable income that casts the onus on that person to provide the necessary information to enable a calculation other than by the apportionment method.
That then leaves the question whether the method adopted by the SSAT in this matter involved legal error.
I have already commented on the difficulty created by the absence of the relevant papers from the SSAT. The appellant asserted various errors by the SSAT that meant that it failed to determine his real remaining period taxable income in accordance with the Tax Act.
It was conceded on behalf of the Registrar that the SSAT had not calculated the appellant’s real remaining period taxable income in accordance with what I am satisfied is the clear and unambiguous meaning of s.64. That concession was made on the basis that it was being submitted to me that the determination had to be either by a full assessment in accordance with the Tax Act or on an apportionment basis. However, it was also conceded on behalf of the Registrar that the SSAT did not determine the amount solely on an apportionment basis.
In this case, the SSAT has adopted the approach of “quarantining” apparently proper deductions for the period 1 July 2005 to
30 September 2005, and applying them only to the income to which they relate. This is explained in its reasons (at [67]) as follows:
“67. In relation to the 2005/2006 deductions, according to the Agency letter dated 17 May 2010, the Agency initially offset the work related deductions against both the partnership distribution and the dividend and investment income. It then appears that the Agency later decided that the deductions should be offset against the partnership distribution only. The Tribunal considers the Agency’s revised approach correct”.
The SSAT did not explain why it came to this conclusion. There was certainly no overt reference to any provisions of the Tax Act to support its decision.
If a person in a year of income derives income from various sources, in some cases incurring a loss and in other cases a profit, all the assessable income and all the allowable deductions are aggregated to arrive at the person’s taxable income. Thus, the approach adopted by the SSAT is not in accordance with the Tax Act, and it has failed to properly apply the law to the facts of which it was satisfied in determining the appellant’s real remaining period taxable income. That involves an error on a question of law.
The other specific error in the SSAT’s determination of the appellant’s real remaining period taxable income raised by the appellant relates to partnership income. Reliance was placed on Federal Commissioner of Taxation v Galland (1986) 68 ALR 403, to which the SSAT referred in its reasons. The issue raised by the appellant was as to when partnership income to which a person is entitled becomes assessable income. He submitted that it did not become assessable in his case until the end of the financial year, and hence the SSAT erred in applying his partnership income for the 2005/2006 tax year pro rata to the period 1 July 2005 to 30 September 2005.
However, there is nothing to suggest that the appellant provided the SSAT with evidence that would enable it to determine what his taxable partnership income was for the remaining child support period, other than by apportioning his taxable income pro rata as determined by the Commissioner of Taxation. The appellant conceded that he would need to provide information as to his partnership income, and in fact as to all his assessable income and deductions, for the period 1 October 2004 to 30 September 2005, to enable a comprehensive assessment of his real remaining period taxable income in accordance with the Tax Act.
One consequence of the appellant’s submissions is that where a comprehensive assessment of real remaining period taxable income in accordance with the Tax Act is not possible unless the person whose income estimate is being reconciled provides information beyond that which is available from his or her tax returns and tax assessments, that person can in effect prevent the reconciliation process required by s.64 simply by failing to provide the information. That is an approach which neither furthers the purpose of s.64, nor is consistent with the objects of the Assessment Act, whose principal object is “to ensure that children receive a proper level of financial support from their parents” (s.4(1)), and whose particular objects include “ensuring that the level of financial support to be provided by parents for their children is determined according to their capacity to provide financial support” (s.4(2)(a)).
In my view, it is precisely where a person whose income estimate is to be reconciled fails to provide sufficient information to enable the decision maker to make a full assessment of taxable income for the remaining period under the Tax Act that an apportionment approach may validly be adopted.
But in this case the SSAT adopted a partial apportionment approach and treated allowable expenses other than in accordance with the Tax Act, and hence it has fallen into legal error that infects its decision.
Decision
I am thus satisfied that in determining the appellant’s real remaining period taxable income, the SSAT’s treatment of expenses was contrary to law, in that is was not in accordance with the Tax Act.
In those circumstances, the decision appealed against must be set aside and the matter remitted to the SSAT to be heard again.
If on that rehearing the appellant provides evidence to allow a detailed assessment of his real remaining period taxable income in accordance with the Tax Act, then an apportionment approach would not be consistent with the requirements of s.64.
I certify that the preceding fifty-three (53) paragraphs are a true copy of the reasons for judgment of Halligan FM
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