Karsten and Millstone (Child support)

[2020] AATA 4292

Karsten and Millstone (Child support) [2020] AATA 4292 (30 June 2020)

DIVISION:Social Services & Child Support Division

REVIEW NUMBER:  2020/PC018460

APPLICANT:  Mr Karsten

OTHER PARTIES:  Child Support Registrar

Ms Millstone

TRIBUNAL:Member M Martellotta

DECISION DATE:  30 June 2020

DECISION:

The Tribunal sets aside the decision under review and, in substitution, decides that for the period 1 August 2019 until a terminating event for the child [Child 1], Mr Karsten’s adjusted taxable income is varied to $75,500 per annum.

CATCHWORDS

CHILD SUPPORT – departure determination – income, property and financial resources of both parents – benefits derived from business – costs of the children include private education – decision under review set aside and substituted

Names used in all published decisions are pseudonyms. Any references appearing in square brackets indicate that information has been removed from this decision and replaced with generic information so as not to identify involved individuals as required by subsections 16(2AB)-16(2AC) of the Child Support (Registration and Collection) Act 1988.

REASONS FOR DECISION

BACKGROUND

1. Mr Karsten and Ms Millstone are the parents of two children[1] who are children for the purposes of the administrative assessment of child support subject to this review. Mr Karsten and Ms Millstone have each at various times, been assessed as the parent liable to pay child support.[2]

   [1] [Child 2] born [in] 2001 – the administrative assessment in his case ended on 8 November 2019. [Child 1] the other child was born [in] 2005.

   [2] [Child 2] was recorded as being in Mr Karsten’s primary care from the date of separation (27/10/2017) [Child 1] was recorded as in Mr Karsten’s primary care until January 2017 when she was in Ms Millstone’s primary care and above primary care from 15 April 2018

2. On 26 July 2019 Ms Millstone lodged a change of assessment application with the Department of Human Services[3] – Child Support.  Her application was on grounds 4, 8A and 8B.

   [3] Now known as Services Australia

3. In terms of the grounds to establish reason 4, Ms Millstone is required to show that the assessment is unfair due to the income, earning capacity, property and financial resources of the children.  For reason 8A Ms Millstone is required to demonstrate that the parent’s income, property and financial resources make the administrative assessment unfair. To establish reason 8B Ms Millstone is required to demonstrate that Mr Karsten’s earning capacity makes the administrative assessment unfair.

4. At the time of the change of assessment application according to the Department the relevant assessments had been in place:

   ·    For the period 25 July 2019 to 31 July 2019 the assessment was based upon a 2017/18 adjusted taxable income of $24,398 for Mr Karsten and a 2017/18 nil tax declaration from Ms Millstone. Ms Millstone was liable to pay a fixed annual rate of $1,416 per annum.

   ·    For the period 1 August 2019 to 8 November 2019 the assessment was based upon a 2018/19 nil income tax declaration for Ms Millstone and a 2018/19 ATI of $33,254 for Mr Karsten. An annual rate of $251 was payable by Ms Millstone.

   ·    For the period 9 November 2019 to 31 October 2020 the assessment was based upon a 2018/19 ATI of $33,254 for Mr Karsten and a 2018/19 $nil tax declaration for Ms Millstone. Resulting in an annual rate of $1,853 payable by Mr Karsten.[4]

   [4] At this point the eldest child is no longer part of the assessment.

5. On 14 November 2019 Child Support decided that reason 8A had been established as a ground to depart from the assessment and varied the determination so that for the period 1 August 2019 to 31 July 2021 Mr Karsten’s ATI was varied to $82,946.  Mr Karsten objected.

6. On 5 February 2020 Child Support decided to vary the assessment so that:

   ·For the period 1 August 2019 until a terminating event for the child [Child 1] Mr Karsten’s ATI is varied to $82,669.

   ·On 1 September 2020 and annually thereafter the amount will be increased in line with the Consumer Price Index for the month of June for the city of Perth.

7. Mr Karsten lodged an application with the tribunal seeking independent review of this decision. The tribunal held a hearing on 11 June 2020. It was attended by both parties who participated by telephone conference.  The tribunal and the parties had been provided with the following documents; Child Support provided documents (425 pages), Mr Karsten’s documents (A1-A71) and Ms Millstone’s documents (B1-B10).

ISSUES

1. The statutory provisions relevant to this review are contained in the Child Support (Assessment) Act 1989 (the Act).

2. Child support legislation is interpreted by the Department with the aid of the Child Support Guide (the Guide). The tribunal is not bound by law to apply the policy as set out in the Guide but, provided the policy is consistent with the legislation, it is required to have regard to it and in the ordinary course follow it.[5]

   [5] See Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634.

3. The issues for the tribunal to determine in this case are:

   ·Does a ground for departure exist; if so

   ·Would it be just and equitable as regards the children, the liable parent, and the carer entitled to child support; and otherwise proper to make a particular determination to depart from the administrative assessment of child support; and

   ·Is it otherwise proper to make a particular departure determination?

CONSIDERATION

Issue 1 – Is there a ground to depart from the administrative assessment?

1. The rate of child support payable by a liable parent is usually based on an administrative assessment calculated using the relevant formula under Part 5 of the Act. This involves the application of a statutory formula, which takes into account factors such as the number of children, the age of each child, the level of care provided and the income of each parent. The income used in the calculation has a number of components making up the adjusted taxable income (ATI), which is worked out using section 43 of the Act.  The general approach is that the Registrar will utilise a parent’s ATI as assessed by the Australian Taxation Office (ATO) for the last relevant year of income.

2. Part 6A of the Act allows for a departure from an administrative assessment (a process commonly known as a change of assessment). The liable parent or a carer may apply to the Child Support Registrar (“the Registrar”) for a determination to depart from the child support administrative assessment under Part 6A of the Act (section 98B).  Section 98C of the Act provides that the Registrar may make a determination to depart from the formula assessment and as noted, establishes a three step process.

3. The grounds for departure from the administrative assessment are set out in subsection 117(2) of the Act.  Only one ground is required in the special circumstances of the case to depart from the administrative assessment and thereby satisfy the requirements of subsection 117(2) of the Act.[6]  In this matter the only ground contested at hearing was whether a ground for departure is established pursuant to reason 8A.

Reason 8A – Income, property and financial resources of the parties

[6] The phrase “special circumstances of the case” is not defined in the Act. However the Family Court has held that “it is intended to emphasise that the facts of the case must establish something special or out of the ordinary” (Gyselman and Gyselman (1992) FLC92-279). Likewise, in Phillippe and Phillippe (1978) FLC 90-433 the Court held that “special circumstances” are “facts peculiar to the particular case which set it apart from other cases”. 

1. Subparagraph 117(2)(c)(ia) of the Act provides a ground for departure exists where, in the special circumstances of the case, application of the provisions of the Act relating to the 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 because of the income, property and financial resources of either parent.

2. Mr Karsten says that Child Support have incorrectly set his income for child support purposes, in particular, he objects to the inclusion of depreciation amounts and other amounts which have been included.  He says that his income should be based on what he is paid each week and any profits of his business, which is operated through the structures of a private company and a family trust.

3. Mr Karsten provided the following evidence:

   a)He owns [a] business which operates through the structure of a private [company].  He is the sole director and shareholder of the company.

   b)The company is also the trustee of the Karsten Family Trust.  He and the two children are the beneficiaries of the trust however there have been nil distributions made to any of the beneficiaries.

   c)The business operated prior to separation. Post separation the business ceased for a period of time.  Mr Karsten used money from the family law property settlement to re-establish the business in March 2018. He used the money to buy equipment and to rent premises. According to his written submissions, Mr Karsten says he chose to lend the company money from the settlement (about $300,000) and does not see why the depreciation on equipment purchased on this basis should be included in the assessment of his income and financial resources.

   d)Mr Karsten advised that amounts noted as depreciation for the motor vehicles in the company financials are ‘book entries’ in the sense that the company does not actually set aside these amounts.

   e)Mr Karsten also obtained an unsecured loan of $50,000 from a friend’s [company]. He used those funds to also re-establish the business.  He has no other association with that company and his business pays back an interest only loan.

   f)He does not receive any director fees from the company.  As an employee of the company he receives weekly wages of $670. The only other amount that he would have use of is the post-tax profit of the company. Taking the wages and the company profit for the last relevant financial year would result in him having an income of about $42,000 for child support purposes.

   g)The company operates its own bank account.  All receipts and costs are paid into and out of that account.  He does not access any of those funds for his personal use.

   h)He has a personal bank account that his wages are paid into. He bought a car for the company and the company made about four payments of $340 to reimburse him for that purchase but the company cannot afford to pay back the balance of the cost.

   i)Mr Karsten also operates a Mastercard.  He said that that card has always been used for the business (even though it is in his name).  He would estimate that perhaps 10% of the card is used for personal purchases the rest is company related.

4. The tribunal reviewed financial information provided in relation to the business. The financial statements for the Karsten Family Trust show and the tribunal finds that in 2017/2018 the business received income of $101,067 and less expenses made a loss of $4,730. The tribunal also finds that figures for the 2018/2019 financial year show total income of $567,976 less expenses resulting in a profit of $8,775. The 2019 return for the trust shows total depreciation expenses of $32,534 for plant and equipment and for motor vehicles. At hearing Mr Karsten agreed that there was an error in the depreciation schedule as it included a vehicle which had been sold and this was not correctly recorded.

5. The company bank statements were consistent with Mr Karsten’s evidence that he did not access those funds for personal expenses. Likewise a review of the credit card showed that it predominately was utilised for business related expenses with repayments made by the business although there were some personal expenses listed as well.  Based on the statements provided the tribunal averaged and finds that Mr Karsten expended about $15,000 per month, accepting his evidence that about 10% of that expenditure constituted personal expenses which are met by the business in paying down the credit card means that he would derive a personal benefit of about $1,500 per month or $18,000 per annum.

6. Mr Karsten’s personal income tax return for 2018/19 confirms an ATI of $33,254 for Mr Karsten.

7. Ms Millstone told the tribunal that she is not employed and is financially supported by her fiancée. She confirmed that prior to separation she was assigned income and dividends from the business but she did not actually receive those amounts. According to Child Support information the ATO ruled that she was not required to lodge a return for the 2017/18 financial year.  Her Statement of Financial Circumstances does not disclose any sources of income. She stated that she does not pay for anything and that deposits into her personal bank account are provided by her partner. There was no evidence before the tribunal which suggested that Ms Millstone had access to income or financial resources not disclosed by her.

8. As noted, Mr Karsten’s main submission was his objection to the inclusion of depreciation expenses by Child Support. It is a long established principle of law that when a person conducts their business or profession through an intermediary such as a company, it is proper to lift the corporate veil to determine the value of the entity to that person.[7] These principles have been affirmed by the Family Court,[8] with regard to the determination of a parent’s income for child support purposes and in these cases, effective control of the businesses was found to rest with the person conducting the business and generating the income and not the intermediary. 

   [7] See in particular Stein [1986] FAM CA 27; and Ashton [1986]Fam CA 20 . In Ashton, the Court stated that “this Court is not bound by formalities designed to obtain advantages and protection for the husband who stands in reality in the position of the owner”. 

   [8] In cases such as Carey and Carey (1994) FLC 92-489.

9. It is also recognised that parents who run their business through entities may also personally benefit from certain costs being met through business expenses.  The tribunal was satisfied that policy set out at 2.6.14 of the Guide is consistent with relevant legislation:

   Expenses partly for business purposes & partly for private purposes

   Where an expense is partly business and partly private the expenses must be apportioned for taxation purposes. Parents who are self-employed or who operate a business might claim expenses that may otherwise be considered private as a legitimate income tax deduction. Examples include the fixed-costs component of telephone expenses such as the rental and connection fees, home office expenses or motor vehicle expenses. These deductions are generally not available to parents who derive income solely from salary and wages.

10. In terms of depreciation the Guide notes the following:[9]

    Depreciation represents the loss or expense attributed to the use of business property or equipment. It is an entry in the business account that is not necessarily an expense that is actually incurred by the business. The aim of depreciation is to spread the cost of a capital asset (e.g. motor vehicle, plant and equipment, machinery, building) over the period of its useful life, with a portion of the cost being expensed each financial year.

    A claim for depreciation can mean that a parent has financial resources available to them that are not necessarily reflected in their taxable income or the resources of the business. In cases that involve depreciation, the Registrar will determine whether receiving a benefit through claiming depreciation expenses results in a parent having greater financial resources or income than his or her taxable income would indicate. The Registrar will consider a parent's complete financial situation including the business' overall financial position and the individual circumstances of the case.

    [9] 2.6.14

11. At hearing Mr Karsten said that depreciation should not be considered a financial asset in his case because he had utilised funds from the property settlement to re-establish the business.  As the tribunal understood her submissions, Ms Millstone disputed this assertion stating that Mr Karsten had not had to expend money on the repurchase of capital equipment and motor vehicles to the extent claimed. Mr Karsten was unable to state with any precision the cost re-capitalising of the business stating that it was about $300,000 however as noted he also said that he accessed an interest free loan from a friend to help pay for capital costs.[10]

    [10] According to the depreciation schedule, the capital cost of acquiring plant and equipment and motor vehicles total about $167,600

12. At hearing Mr Karsten stated that the depreciation of $15,399 for the vehicles was a ‘book entry’ for tax purposes only so that it was not an actual expense incurred by the business. He also agreed that included in that schedule was a vehicle that had been sold and was left in the schedule by error. On balance taking into account the evidence the tribunal concluded that only this proportion of the depreciation expenses constitutes a financial resource relevant to the assessment.

13. As noted, Mr Karsten agreed that included in the assessment of his income and financial resources for the purposes of child support that the business profit ($8,775) and his personal income ($33,254) should be utilised. The tribunal agrees.  The tribunal however also included that also relevant is the personal benefit derived from personal purchases on the credit card ($18,000) and that proportion of the depreciation that relates to the motor vehicles which Mr Karsten said constitute a book entry, namely $15,399. This results in income and financial resources in 2018/19 of $75,428.

14. As noted, the administrative assessment in place at the time of the change of assessment application utilised Mr Karsten’s personal income but did not take into account other financial resources available to him due to the operation of his business. The tribunal concluded that the income and financial resources available to Mr Karsten significantly differs from the ATI utilised in the administrative assessments and as such would result in changes to the amount of child support payable. 

15. The tribunal concluded that its findings in relation to Mr Karsten’s ATI of $75,428 would result in a significant change in the level of child support that is payable by him.  For this reason, the tribunal concludes that a ground of departure exists because in the special circumstances of the case, application of the provisions of the Act relating to the 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 children because of the income, property and financial resources of Mr Karsten.

Issue 2 – Is it just and equitable to make a particular departure determination?

1. As the tribunal is satisfied that there is a ground to depart from the assessment of child support as set out above, the next step for the tribunal is to consider whether it is just and equitable as regards the children and the parental parties to make a particular determination in accordance with sub-subparagraph 98C(1)(b)(ii)(A) of the Act.  This in turn requires the tribunal to consider the matters set out in subsection 117(4) of the Act: which is discussed in the following paragraphs.[11]

Proper needs of the children

[11] The tribunal notes the Federal Magistrates Court case of Tyagi & Meares (SSAT Appeal) [2008] FMCAfam 886 which directs that in considering the matters set out in subsection 117(4) the section need not be “slavishly followed, each of the relevant factors listed in … should be considered”.

1. In determining the proper needs of the children it is necessary to have regard at a broad level to the manner in which the children are being, and in which the parents expect the children to be, cared for, educated or trained, and also any other needs of the children. There was no evidence presented in this regard and the tribunal was satisfied that this was not a relevant consideration.

Income, earning capacity, property and financial resources of the children

1. In having regard to the income, earning capacity, property and financial resources of the children, the tribunal must disregard any entitlement of the children or the carer entitled to child support to an income tested pension, allowance or benefit (subparagraph 117(7)(b)(ii) of the Act).

2. Whilst this was a ground raised by Ms Millstone in her original application (as pertaining to the income of their son who works for his father) she did not present any submission or evidence at hearing.  In this regard the tribunal noted the conclusion reached by Child Support that as the child’s earnings were below the maximum rate for youth allowance payable for a child under 18 years of age, then there was no basis to depart from the assessment on this ground. [12] In the circumstances, the tribunal concludes that there is no basis for any adjustment pursuant to this consideration.

Other party receiving money, goods and property for the benefit of the children

[12] In this regard the undisputed finding was that the child would need to earn a gross income of at least $343.10 per week and the child received on average $244.46 gross per week.

1. Neither party made submissions in this regard and as such the tribunal concludes there is no basis for any adjustment pursuant to this consideration.

The income, property and financial resources of each parent who is a party to the proceeding

1. In this matter the tribunal has found that Mr Karsten earns income from his business as [an Occupation 1].  The tribunal has also found that Mr Karsten derives benefit from financial resources available to him by operating the business through a company structure and that based on its findings that in 2018/19 he had relevant income and financial resources of about $75,428.

2. According to his Statement of Financial Circumstances Mr Karsten states, and the tribunal finds, that:

   a)He owns property (where he resides) valued at $400,000 subject to a mortgage of about $300,000.

   b)He does not own any other significant assets other than a motor car ($8,000) and home contents ($25,000).

   c)He has superannuation valued at $86,471.

3. Ms Millstone has told the tribunal that she is not employed and has not worked since the separation. She is financially dependent on her fiancé and lives in his home. She states that he pays all the costs of the household.  She declined to provide any details of household expenses on the basis that these were matters which related to her partner and he did not wish to disclose this information. [13]According to information she did provide, Ms Millstone states that she owns no property or assets. She does not hold any superannuation.

   [13] The tribunal noted authorities regarding the duty of parties to provide full and frank disclosure regarding their financial affairs and it is open to the tribunal to draw adverse inferences from failures to so disclose.

4. On the available evidence however there was nothing to suggest that Ms Millstone held any property, financial resources or derived income from sources other than as stated by her.

Earning capacity

1. A ground for departure exists if, in the special circumstances of the case, the 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 because of the earning capacity of either parent (subparagraph 117(2)(c)(ib)).

2. Subsection 117(7B) of the Act provides:

   (7B)    In having regard to the earning capacity of a parent of the child, the court may determine that the parent's earning capacity is greater than is reflected in his or her income for the purposes of this Act only if the court is satisfied that:

   (a)    one or more of the following applies:

   (i)  the parent does not work despite ample opportunity to do so;

   (ii)  the parent has reduced the number of hours per week of his or her employment or other work below the normal number of hours per week that constitutes full-time work for the occupation or industry in which the parent is employed or otherwise engaged;

   (iii)    the parent has changed his or her occupation, industry or working pattern; and

   (b)         the parent's decision not to work, to reduce the number of hours, or to change his or her occupation, industry or working pattern, is not justified on the basis of:

   (i)     the parent's caring responsibilities; or

   (ii)    the parent's state of health; and

   (c)         the parent has not demonstrated that it was not a major purpose of that decision to affect the administrative assessment of child support in relation to the child.

3. Mr Karsten submitted at hearing that the tribunal should consider Ms Millstone’s earning capacity.  In effect he stated that she was previously employed and that she has chosen now not to work despite having the ability to do so.  As noted, Ms Millstone told the tribunal that prior to separation she had been attributed with income and dividends from the then business of which she was a co-director at the time, but that she never actually received any income, to suggest that she was previously employed and had an earning capacity on this basis was factually incorrect. She stated that she was engaged in home duties and caring for her child.

4. Ms Millstone did not make any submissions at hearing regarding Mr Karsten’s earning capacity.

5. In this matter the tribunal was satisfied that on the available evidence that there was no basis to consider the earning capacity of either parent as a relevant consideration in the assessment.

The commitments of each parent who is a party to the proceeding that are necessary to enable the parent to support himself or herself, or any other child or another person that the person has a duty to maintain

1. The tribunal is satisfied taking into account the relevant costs of self-support utilised in the assessments and based upon evidence provided at hearing that neither party has extraordinary costs of self-support that are relevant to the assessment.

Any hardship that would be caused

1. Mr Karsten stated that the assessment at its current level was causing him financial hardship as he tried to re-establish the business. It had created arrears which he could not afford to pay.  Ms Millstone stated that she believed Mr Karsten had capacity to meet the child support as assessed and that his failure to make payments meant that her fiancé was supporting their child.

Conclusions

1. As noted, the tribunal can vary the rate of child support payable or it can vary some of the variables that are used in the administrative formula.  In this matter the tribunal came to the same conclusion as reached by the Department namely that Mr Karsten’s ATI as utilised in the administrative assessments is not an accurate reflection of his income and financial resources available to him.

2. Ms Millstone lodged a change of assessment application on 26 July 2019. The tribunal may not (without the leave of a court) depart from an assessment for a period which is more than 18 months prior to the date of application (subsection 98S(3B) of the Act). In this matter the tribunal considered it is not appropriate to amend the assessment to any period prior to the beginning of 1 August 2019.

3. The tribunal in this matter is proposing to make a determination which varies Mr Karsten’s ATI to $75,500 for the period from 1 August 2019 to a terminating event in relation to the remaining child of the assessment. Utilising this figure would result in a weekly child support liability of about $218 and will also result in some downward adjustments to the current level of arrears owed by Mr Karsten under the existing departure utilising an ATI of $82,669.[14]

   [14] The assessment decreases from about $250 per week (and based on the current care arrangements for the remaining child) There will also be an adjustment in relation to the period that the older child was still part of the assessment.

4. In proposing a departure in these terms, the tribunal takes into account the circumstances of both parties and the competing submissions put forward by the parties.  In this regard the tribunal notes that the parent’s son (who is employed by the business) resides with Mr Karsten and the youngest child with Ms Millstone. Mr Karsten noted in his financial statement that he estimates his average weekly expenses are about $535 and that even on his own suggested income of $774 this leaves about $240 per week available for payment of child support.

5. As for the duration of the change in assessment the tribunal considered that it is appropriate that the departure apply until a terminating event applies in relation to the remaining child of the assessment and a departure in these terms provides some stability and certainty until such time that the youngest child ceases to be an assessable child. Clearly should circumstances substantially change the change of assessment process is available to the parties.

6. The tribunal concluded that for all of the above reasons, in the special circumstances of this case, it was just and equitable to make a departure determination from the administrative assessment issued in accordance with the Act so that for the period 1 August 2019 until a terminating event for the child [Child 1], Mr Karsten’s adjusted taxable income is varied to $75,500 per annum.

Issue 3 – Would it otherwise be proper to make a particular departure determination?

1. The final step is for the tribunal to determine whether it is “otherwise proper” to make a particular departure determination.  Subsection 117(5) requires the tribunal to take into account whether the proposed departure is proper in the context of public interest and welfare expenditure of the community.  A prime objective of the legislation is that parents are obliged to support their own children to the extent of their real capacity and such obligation should be unnecessarily abrogated to the public welfare system.

2. According to her Statement of Financial Circumstances, Ms Millstone is not in receipt of family tax benefit and the proposed departure from the administrative assessment will have no impact upon the public purse. In this case the tribunal finds that the requirements under paragraph 117(5)(a) of the Act are met.  The tribunal concludes that it is otherwise proper to depart from the administrative assessment.

DECISION

The Tribunal sets aside the decision under review and, in substitution, decides that t for the period 1 August 2019 until a terminating event for the child [Child 1], Mr Karsten’s adjusted taxable income is varied to $75,500 per annum.