Law and Law (Child support)

[2018] AATA 3808

Law and Law (Child support) [2018] AATA 3808 (8 August 2018)

DIVISION:Social Services & Child Support Division

REVIEW NUMBER:  2017/SC012720

APPLICANT:  Mr Law

OTHER PARTIES:  Child Support Registrar

Ms Law

TRIBUNAL:Member K Timbs

DECISION DATE:  8 August 2018

DECISION:

• Mr Law’s adjusted taxable income is $150,000 from 21 November 2016 to 31 December 2019;

• Ms Law’s adjusted taxable income is:

  ­    $104,000 from 21 November 2016; and

  ­    $111,000 from 1 July 2017 to 31 December 2018.

CATCHWORDS
Child support - Departure determination - Income, property and financial resources of both parents - Business income - Ground for departure established - 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

Child support assessments

1. Mr Law and Ms Law are the parents of [Child 1] (born 2005). At relevant times, the Department of Human Services made child support assessments for him. Mr Law is the parent liable to pay child support.

2. From 1 December 2016, the Department used adjusted taxable incomes of $104,000 for Mr Law and $78,937 for Ms Law. Ms Law’s adjusted taxable income was equal to her 2016 taxable income and the Department determined Mr Law’s adjusted taxable income in accordance with a decision to depart from the administrative assessment of child support (change of assessment). The annual rate was $10,980.

3. From 1 April 2017, the Department used an adjusted taxable income of $34,993 for Mr Law that was equal to his 2016 taxable income. The annual rate reduced to $1,807. It would have reduced further from 31 July 2017 when Mr Law notified he had a relevant dependent child.

4. If not for the decisions discussed below, from 1 March 2018, the Department would have used adjusted taxable incomes equal to the parties’ 2017 taxable incomes of approximately $49,000 for Mr Law and $80,000 for Ms Law. The annual rate would have been approximately $3,000 and would increase to approximately $4,200 in September 2018 when [Child 1] turns 13.

Change of assessment decisions

1. On 21 November 2016, Ms Law applied for a change to the assessment. On 24 February 2017, a decision maker determined Mr Law’s adjusted taxable income would be $134,000 from 1 December 2016 to 31 May 2019.

2. On 19 July 2017, an Objections Officer of the Department allowed Mr Law’s objection to that decision and made another decision more adverse to him that his adjusted taxable income would be $171,280 from 1 December 2016 to 31 May 2019.

Application for review

1. On 21 August 2016, Mr Law applied for review of that decision. The Tribunal heard the application for review on 22 March 2018.

RELEVANT LAW AND ISSUES TO DETERMINE

1. In the usual case, the Registrar assesses the annual rate of child support for a child support period using a formula in the Child Support (Assessment) Act 1989 (the Act). Either parent may apply to change the formula assessment (section 98B). The Registrar may change the assessment if the case meets the following three criteria (section 98C):

• There is a ground for changing the assessment (section 117(2) of the Act lists the 12 grounds).

• It is ‘just and equitable’ to make particular changes to the assessment.

• It is ‘otherwise proper’ to make those changes to the assessment.

1. To make a decision on Ms Law’s application for review, the Tribunal considered whether this case meets those criteria.

CONSIDERATION

Evidence considered

1. The Tribunal considered documents relevant to the decision under review provided by the Department, Mr Law and Ms Law.  Mr Law and Ms Law gave evidence at hearing.

Issue 1 – Is there a ground to change the assessment?

1. The first step is to decide if there is a ground for changing the assessment. Section 117(2)(c)(ia) and (ib) provides that there are grounds to change the assessment if the formula assessment:

   in the special circumstances of the case …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. When considering whether the outcome of the assessment is unjust and inequitable (unfair), the Tribunal takes into account the objects of the Act in section 4 and the primary nature of the parents’ duty to support their children (section 3).  The principal object of the Act is to ensure that children receive a proper amount of support from their parents.  The particular objects include ensuring that parents provide support for their children according to their capacity and, in particular, that parents with similar financial capacity provide similar levels of support.

3. To further those objects, the child support formula calculates the annual rate of child support for a child support period using adjusted taxable incomes. They are equal to taxable incomes and supplementary amounts (such as reportable fringe benefits) for the parents for the financial year that ended before the start of a child support period. Ordinarily, they are commensurate with the parents’ ongoing incomes and their relative capacities to support their children.

4. After determining adjusted taxable incomes, the Registrar deducts amounts for self-support and the support of any other children to calculate child support incomes for both parents.  The next step is to determine the costs of the child in the assessment according to their ages and the combined child support incomes using the Costs of the Child Table in Schedule 1 to the Act (the Table).  The Table recognises that parents spend more to support older children and ensures children share in the lifestyle of parents with higher incomes if they do not live with them. 

5. The formula then allocates a portion of the total cost of the child to each parent according to their share of combined child support income.  The annual rate of child support will be equal to the paying parent’s share of the costs of the children if they have a care percentage of less than 14%.  Otherwise, the annual rate reduces to take account of the costs that parent meets while the child is in their care.

Income

1. Mr Law worked for [Company 1] as [an occupation] until December 2013. He said he knew the position would be redundant and accepted a voluntary package after some attempt to move to another position.

2. Mr Law purchased a [franchise] in June 2014 through his wholly owned company, [Company 2]. He worked in the business full-time as its manager until September 2016 when he started full-time work for [Company 1] through an employment agency. His salary has been approximately $77,000 since then. He said that is his only income from the beginning of the 2018 financial year.

3. Mr Law had assessable income in 2017 of approximately $52,000 comprised of approximately $13,000 from [Company 2] and $49,000 for work for [Company 1]. He claimed work related car expenses and other deductions of approximately $4,000 leaving him with taxable income of approximately $49,000.

Financial resources

1. Mr Law said [Company 2] purchased the business for $615,000 and sold it in June 2017 for $780,000, which would be a capital gain of approximately $155,000. However, [Company 2] declared a capital gain in its 2017 tax return of approximately $250,000. Approximately $125,000 of that amount is taxable after application of a small business CGT concession.

2. [Company 2]’s profit and loss statements show a profit of approximately $150,000 in 2017. It does not reflect a profit from its operations because it includes income and expenses arising from the sale of the business in 2016. Those include income of approximately $250,000 (a negative expense for ‘Profit on the Sale of Business Goodwill’) and expenses of approximately $85,000 (for loss on sale of plant and equipment and ‘Expenses W/off on Business Sale’). The Tribunal disregards those entries to find that the business made a modest loss from its operations of approximately $15,000.

3. Mr Law said he had about $160,000 in 2014 from his redundancy and his property settlement with Ms Law. He said [the franchise] required him to invest $250,000 and he drew on a credit card so that he could lend the balance to [Company 2]. He said that [Company 2] paid the balance of the purchase price with a bank loan for which he was guarantor.

4. The 2017 balance statement shows no debts to Mr Law and the Tribunal finds it repaid his capital investment by the end of that financial year. It also shows he drew approximately $200,000 as a director loan during 2017 leaving [Company 2] with approximately $50,000 in cash and approximately $100,000 in debts to the ATO. Mr Law told the Tribunal that he had negotiated a payment arrangement with the ATO and the Tribunal infers he will repay [Company 2] at least $50,000 over time to satisfy that liability. He therefore has capacity to retain the balance of approximately $150,000 lent to him (although it might have to be accounted for as wages or directors fees in a later financial year to avoid tax penalties). The Tribunal notes that amount is roughly equal to [Company 2]’s 2017 profit after taking into account the sale of the business.

5. The Tribunal notes that amount was available to Mr Law in late June 2017 when [Company 2] sold the business, rather than throughout the 2017 financial year. In that case, the Tribunal finds, for the following two financial years, he had an additional $75,000 a year for his own support and that of his children. This is consistent with the discussion below of his savings.

6. The Tribunal infers the expenses related to the sale of the property are genuine expenses for tax purposes that recognise the loss [Company 2] made on capital investments in previous years. However, [Company 2] did not have to pay those expenses from its 2017 income or from the proceeds of the sale of the business. In that case, the Tribunal finds that Mr Law had access to an additional $70,000 (for expenses of approximately $85,000 less [Company 2]’s operating loss of approximately $15,000).

7. The Tribunal makes an additional allowance for financial benefits usually provided by small businesses to their owners (such as the payment of motor vehicle and telephone costs) and finds the business provided him with financial resources worth approximately $75,000 during 2017.

Assets

1. Mr Law declared only $8,000 in savings in his Statement of Financial Circumstances. However, when questioned, he told the Tribunal his wife held savings of approximately $100,000 and that he has lent a friend approximately $50,000 to invest in a business. He said this was similar to the savings he held before he operated the business through [Company 2] and submitted the Tribunal should disregard its capital gain for that reason.

2. The Tribunal suggested he had underestimated the amount he would have available after the sale of the business. It pointed out that the settlement documents show [Company 2] received approximately $444,000 after settlement after paying out its mortgage and business overdraft. Mr Law said that it was largely used to pay outstanding credit card debts a few days after the sale in late June 2017. He said he was not certain but that there might be as much as $160,000 in his wife’s account.

3. The Tribunal pointed out that, in the 2017 financial year, [Company 2] repaid a loan of approximately $90,000 to Mr Law and that he had borrowed approximately $200,000 from it. It follows that, including his wages, Mr Law took more than $300,000 out of the business in 2017 (some of which might have been to pay off personal credit cards used to pay business expenses). Mr Law then said he remembered receiving such an amount and discussing whether to buy a house with the money with his wife. The Tribunal asked why he told the Tribunal that his wife had savings of $160,000 and then said he does not know how much is in his wife’s account.

4. The Tribunal does not accept that Mr Law has no knowledge of the quantum of savings held in his wife’s name and it finds his changed evidence affects his credibility. It infers he has placed the savings in her name to avoid paying tax on interest and to avoid declaring significant savings for this proceeding. He did not fully and frankly disclose his financial circumstances and the Tribunal may make adverse inferences about them.

5. The Tribunal notes a bank statement provided by Mr Law shows [Company 2] had funds in its bank account of more than $400,000 at the end of August 2017. [Company 2] had stopped operating by that time and Mr Law said he had paid its outstanding debts by the end of the 2017 financial year. The Tribunal infers he could retain the amount in that account and that he has savings in his wife’s name of at least $400,000. This is consistent with him receiving $250,000 for repayment of his capital investment and retaining $150,000 from its capital gain.

6. Apart from those assets, Mr Law has household contents, a car and some superannuation.

Conclusion

1. From September 2016, Mr Law has had income and financial resources from his employment and from [Company 2] that put him in a similar position to a person with an adjusted taxable income of approximately $150,000. This is significantly higher than his adjusted taxable income at any relevant time and takes the case out of the usual run of cases of parents with income only from ongoing employment. The result is that Mr Law’s adjusted taxable income is not commensurate with his capacity to provide support for [Child 1] and he is obliged to pay a similar amount of financial support as others with similar capacity. The annual rates discussed are therefore not proper amounts of financial support.

2. For those reasons, the Tribunal finds that in the special circumstances of this case, the relevant annual rates are unfair to [Child 1] and to Ms Law because of Mr Law’s income and financial resources. The ground in section 117(2)(c)(ia) therefore applies.

Issue 2 – Is it fair to change the assessment?

34.  The next step is to consider whether it is just and equitable (fair) to make a particular change to the assessment.  To do this, the Tribunal considered relevant matters listed in section 117(4) and the objects of the Act discussed above.

Duty to support children

35.  Mr Law and Ms Law have a primary duty to support [Child 1] that has priority over all their other commitments except the commitments they must meet to support themselves and other people they have a duty to support (section 4).

36.  Ms Law has no other children or other persons she is obliged to support.

37.  Mr Law has a child born in July 2017 and the Department has taken her into account in the child support assessments. He is supporting his wife who is not working following the birth of the child. He might have an obligation of support for her for a short period before and after the birth but not otherwise. He told the Tribunal he is also meeting the living costs of visiting family members. However, he has no legal obligation to do so and any moral obligation does not have priority over the obligation to support [Child 1].

Income, financial resources, property and earning capacity of the child and the parties

38.  [Child 1] is a full-time student and has no income, assets or access to financial resources. He relies on the parties to meet his proper needs.

Mr Law

1. Mr Law worked full-time and managed [Company 2]’s business from September 2016 to June 2017. He has worked full-time since then. The Tribunal is satisfied he has fully exercised his earning capacity at all relevant times.

2. The Tribunal is satisfied Mr Law has income from that employment of approximately $77,000 from September 2016 and has found he has income and financial resources from [Company 2] with a value of approximately $75,000 during the 2017, 2018 and 2019 financial years. To ensure the annual rate is similar to others in similar circumstances, the Tribunal proposes to vary his adjusted taxable income to $150,000 from 21 November 2016 when Ms Law applied for a change of assessment to the end of the 2019 financial year.

Ms Law

Income and earning capacity

1. Ms Law has worked full-time [for] [Company 1] at all relevant times. The Tribunal finds that she is fully exercising her earning capacity.

2. Ms Law’s 2017 PAYG payment summary shows it paid her wages of approximately $82,000 and she provided a payslip showing her salary in January 2018 was approximately $89,000. Her year-to-date earnings indicate her salary had increased to that level from 1 July 2017.

Financial resources

1. In 2015, Ms Law and her brother, [Mr A], set up [Company 3]. Ms Law said that she lent the company approximately $80,000 and her brother contributed a similar amount. They were guarantors for a loan of $270,000, which was the balance of the purchase price for a [franchise].

2. Ms Law said she set up the business and invested the money for her brother’s benefit and that the business did not provide her with any income or financial benefits. She said she was not actively involved in the business apart from ‘paying bills sometimes’ and that her brother managed it. (She later said he managed it with his girlfriend.) She firstly said she resigned from her directorship and transferred her shares as soon as [Company 3] bought the business. She then confirmed information in the Tribunal papers that she remained a director until late 2016. However, she claimed that there was a delay because [Mr A] argued with ASIC about the cost of changing the company records. She did not dispute Mr Law’s assertion that ASIC changed the records shortly before she applied for a change of assessment.

3. The Tribunal noted that if she paid bills then she might still be a signatory to [Company 3]’s accounts. She firstly said she was no longer a signatory but she has access to its credit card. The Tribunal then asked her when she stopped being a signatory and she said she was never a signatory. The Tribunal then asked her why she said she had stopped being a signatory. She then said that she was a signatory to the account until she resigned as director and ceased to be a shareholder.

4. The Tribunal pointed out that the bank records available to it indicated [Company 3] paid her significant sums throughout 2016. It suggested it might infer that it continued to do so because she had failed to provide her bank records. She said that the payments made throughout 2016 were for repayment of her loan to the company or for expenses she met for the company. She said the company had repaid its loan and that it did not continue to make similar payments during 2017 and 2018.

5. After hearing, Ms Law provided bank statements for 2017 and early 2018. They do not show any significant transfers from [Company 3]. However, they show transfers from [Mr A] that Ms Law marked as being for ‘saving for a home’ or ‘home loan’. At hearing, Ms Law had firstly confirmed her advice to the Department that she and her brother planned to buy a home together. The Tribunal suggested the business’ profits would help pay for that joint purchase. She said that was not the case and changed her evidence. She said the initial plan was to purchase a home together but they now intend to purchase separate homes. The Tribunal asked why she had just confirmed they would jointly purchase a home and she said she meant that they were looking at buying separate properties at the same time. The Tribunal finds her explanation for the inconsistency lacks any logical basis and is unconvincing.

6. The Tribunal prefers her original evidence given to the Department and to the Tribunal that she and [Mr A] intend to purchase a home together. It finds transfers marked for that purpose were from income generated by the business (and an additional business it has purchased) and that they are a financial resource for Ms Law. The net value of the transfers is approximately $19,000, including $4,000 she identified as a birthday gift. This takes account of a transfer back to [Mr A] of approximately $26,000. [Company 3] might not have recorded payment of these amounts to Ms Law. However, the Tribunal is satisfied that she continued to benefit from her original investment in it and that these transfers are a financial resource for her to be used to jointly purchase a home with [Mr A]. It values the financial resource at approximately $8,500 (approximately half of the total amount transferred to her).

1. On the bank statement, Ms Law marked a transfer of $5,000 to her cousin as a loan in November 2016 and a transfer of the same amount as repayment in January 2017. There are six other deposits in the 2017 calendar year made at ATMs or branches near Ms Law’s home totalling $13,300. Ms Law has either not explained the transactions or marked them as repayment of the loan to her cousin. In the absence of evidence of another loan or an explanation of the source of the income, the Tribunal infers it was also generated by the business and available to Ms Law for her support and for the support of [Child 1].

2. In that case, the Tribunal finds Ms Law had income and financial resources of approximately $21,800 during the 2017 calendar year in addition to her income from employment. She did not dispute Mr Law’s evidence that [Company 3] has purchased another business and the Tribunal infers it is profitable and has continued to provide her with similar income and benefits throughout the 2018 calendar year. However, the Tribunal accepts that Ms Law was involved in the business largely for the benefit of her brother and has a limited role in the business operations. She is no longer legally entitled to repayment of her capital investment and does not generate any significant income from her personal exertions. It infers it will not continue to provide her with similar financial benefits throughout the 2019 calendar year.

3. At hearing, Ms Law told the Tribunal that regular deposits of $1,500 were from her sister. She said she gave her the money because she does not trust herself not to spend it. The Tribunal did not find Ms Law to be a witness of credit. However, Mr Law did not dispute the evidence and the Tribunal accepts those deposits are not income available to her to meet her own needs and those of [Child 1].

4. To ensure she provides a similar amount of financial support for [Child 1] as others with similar capacity, the Tribunal proposes to increase her adjusted taxable income to $104,000 ($82,000 + $22,000) from 21 November 2016 and to $111,000 ($89,000 + $22,000) for the 2018 calendar year.

Property

1. At hearing, Ms Law said she has $100,000 from her property settlement with Mr Law in a progress saver account. She did not disclose that asset in her Statement of Financial Circumstances or provide statements for the account before hearing in accordance with the Tribunal’s directions. After the hearing, she provided a bank statement that confirms that information.

[Child 1]’s proper needs

1. [Child 1] has the usual needs of a child of his age. He has no special needs and attends a public school. If the Tribunal made the proposed determinations, the Costs of the Child under the Table would be approximately $22,000 and would increase by approximately $5,000 when [Child 1] turns 13 in September 2018.  The Tribunal is guided by the Table and finds that Ms Law must spend that amount to meet his proper needs.  

Hardship/necessary commitments

1. If the Tribunal made the proposed determinations, Mr Law would be responsible for meeting approximately 60% of those costs until July 2017 when he has a relevant dependent child. The proportion reduces to approximately 55% from then. The annual rate would be approximately $13,000 until July 2017. It would reduce to approximately $12,000 and then increase to approximately $15,000 when [Child 1] turns 13. The Tribunal is satisfied that is a proper contribution to the cost of meeting his usual expenses having regard to both parents’ income and financial resources.

56.  Mr Law has the usual expenses to meet for himself and his youngest child. Neither has any special needs. He is also meeting expenses for his wife but he expects she will return to work soon. If the Tribunal makes the proposed determination, he might have to budget carefully to meet his household expenses and a higher rate of child support from his ongoing salary. However, he has significant savings that he could draw on and the Tribunal is satisfied he and his youngest child would not suffer hardship if the Tribunal made the proposed determinations.

57.  Ms Law has an above average income and the Tribunal is satisfied that, if necessary, she could meet her expenses and provide for [Child 1]’s basic needs without a contribution from Mr Law. They would not suffer objective hardship if the Tribunal did not make the proposed determination. That does not weigh against making the proposed determinations because both parents have an obligation to provide financial support for him according to their capacity.

Conclusion

58.  If the Tribunal made the proposed determination, the annual rate of child support would be a proper contribution to the cost of meeting the child’s needs having regard to the parents’ income and financial resources.  Making the determinations would be in line with their duty of support for [Child 1] and would not cause hardship to them, [Child 1] or Mr Law’s youngest child. In that case, the Tribunal is satisfied it is fair to the parties and their children to make the proposed determination.

Issue 3 – Is it otherwise proper to make the proposed determinations?

59.  The final step is to decide whether it is otherwise proper to depart from the administrative assessment.  To do this the Tribunal must consider the effect the determination will have on the cost to the community of supporting children through payment of family tax benefit.  It must decide whether this is a proper outcome given parents have the primary responsibility to support their children.

60.  Ms Law receives family tax benefit and the rate would reduce if Mr Law paid a higher rate of child support in accordance with the proposed determinations. The Tribunal finds it is otherwise proper to make the determinations in that case.

CONCLUSION

61.  The Tribunal has found there is a ground to change the assessment and that it is just, equitable and otherwise proper to make the proposed determination.  In that case, it will set aside the decision under review and substitute the decision to make that determination.

DECISION

The Tribunal sets aside the decision under review. It substitutes the decision that:

• Mr Law’s adjusted taxable income is $150,000 from 21 November 2016 to 31 December 2019;

• Ms Law’s adjusted taxable income is:

  ­    $104,000 from 21 November 2016; and

  ­    $111,000 from 1 July 2017 to 31 December 2018.