Pellegrino and Cabrera (Child support)

Pellegrino and Cabrera (Child support) [2020] AATA 4780 (16 September 2020)

DIVISION:Social Services & Child Support Division
REVIEW NUMBER:  2019/SC016023
APPLICANT:  Mr Pellegrino
OTHER PARTIES:  Child Support Registrar
Ms Cabrera

TRIBUNAL:Member H Schuster
DECISION DATE: 16 September 2020
DECISION:

The decision under review is affirmed.

CATCHWORDS

CHILD SUPPORT – child support agreement – whether condition to terminate a binding child support agreement was met – whether the liable parent’s income exceeded the amount specified in the agreement – condition not met – decision under review affirmed

Names used in all published decisions are pseudonyms. Any references appearing in square brackets indicate that information has been omitted 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

This is a review of the decision of the objections officer made on 1 February 2019 regarding the termination of the registration of a binding child support agreement (BCSA) entered into by Mr Pellegrino and Ms Cabrera on 11 May 2017. The original decision made by the Child Support Registrar (the Registrar) on 7 September 2018 was to terminate the BCSA with effect from 16 July 2018. On 1 February 2019 an objections officer set aside that decision and decided the BCSA could not be terminated.
Mr Pellegrino and Ms Cabrera are the separated parents of [Child 1], [Child 2] and [Child 3]. On 11 May 2017 Mr Pellegrino and Ms Cabrera, both legally represented, entered into a BCSA under which Mr Pellegrino was required to pay periodic child support to Ms Cabrera. The Registrar accepted and registered the BCSA from 11 May 2017.
On 18 July 2017 Mr Pellegrino first approached the Registrar regarding the interpretation of a termination clause in the agreement. A “terminating event” was defined in the BCSA to occur if “The Father’s income” is less than $250,000 per annum” or he was “unable to earn an income permanently as a consequence of illness or disability and any insurance income is less than $250,000 per annum”. Mr Pellegrino asked the Registrar to terminate the enforcement of the BCSA on the basis that it had terminated because his income had reduced to less than $250,000 per year.
On 26 March 2018 the Registrar decided that the conditions to terminate the agreement had not been met. That decision was eventually reviewed and affirmed by the Administrative Appeals Tribunal (AAT) on 6 November 2018 on the basis that, as at July 2017, Mr Pellegrino’s income for 2017/18 could not be readily ascertained and thus no determination could be made that his income had reduced.
On 20 July 2018 Mr Pellegrino asked again for the termination of the BCSA on the grounds that his income, as defined in the BCSA, had reduced to $229,908 in respect of the 2017/18 financial year. In calculating his income Mr Pellegrino’s income was stated by Mr [A], of [Accounting firm 1], to be comprised of the following items provided for in the BCSA:
a.Salary: (Taxable income is $17844)              $162,583
b.Director’s fees:   $0
c.Distributions from trust:   $15,416
d.Dividends from any company, public or otherwise               $0
e.Benefits paid on behalf of the father by any entity:
i.Telephone      $641
ii.Utilities           $0
iii.Motor vehicle expenses          $1,135
iv.Travel $0
v.Household and living expenses        $0
vi.Superannuation contributions            $15,445
vii.Entertainment $0
viii.Director’s Loan          $34,688          $51,909
f.Monies distributed by trust to 3^rd parties:                  $0
Total               $229,908
On 7 September 2018 the Child Support Registrar determined that the BCSA as terminated with effect from 16 July 2018.
Ms Cabrera objected to the decision on the basis that the “father’s income from all sources” as defined in the BCSA had not been demonstrated to be less than $250,000. On 1 February 2019 the objections officer allowed the objection. The objections officer found that a franking credit of $17,176 and interest of $2,020 also needed to be added as income items and thus determined that Mr Pellegrino’s 2017/18 income was at least $249,154. The objections officer found that the Registrar could not be satisfied that Mr Pellegrino’s income from all sources did not include at least an additional $846, particularly given that some of what may otherwise be considered personal expenses were paid for by Mr Pellegrino’s employer, which is a company ultimately controlled by him.
Mr Pellegrino applied to the Administrative Appeals Tribunal (the Tribunal) for review. After an initial hearing the Tribunal sought written submissions about the interpretation of the BCSA for the purpose of the child support agreement requirements set out in Division 2, Part 6 of the Child Support (Assessment) Act 1989 (the Assessment Act). After receipt of the submissions a final hearing was held on 17 January 2020 which was attended by both parties who were represented. The Tribunal also heard from Mr [A], Mr Pellegrino’s accountant, and Mr [B], an accountant retained by Ms Cabrera to provide an opinion about the calculation of Mr Pellegrino’s income. Mr Pellegrino and Ms Cabrera were represented, respectively, by Ms [C] and Ms [D], of counsel. Following the hearing The Tribunal allowed time to each party to provide final submissions.
Ms [D]’s final submissions were received 3 February 2020. Ms [C]’s submissions were received on 17 February 2020.

ISSUES

The statutory provisions relevant to this review are contained in the Assessment Act.
The issues which arise in this case are:
· Whether a termination clause contained in the BCSA between the parties is a clause to which the Registrar can give effect and, if so,
· Whether the conditions were met, as at 17 July 2018 for the termination of Mr Pellegrino’s liability to pay periodic child support under the BCSA.

CONSIDERATION

It is common ground that the agreement entered into on 11 May 2017 by the parties is a BCSA which meets the conditions set out in section 80C of the Assessment Act for acceptance and registration by the Child Support Registrar.
The agreement provides for the father, Mr Pellegrino, to make periodic payments of child support to Ms Cabrera for the three children of $400 per week per child (indexed) as well as payment of private school fees, education costs, family health insurance and medical costs.
The amount payable under the agreement is not in dispute, rather, Mr Pellegrino’s position is that a terminating event, under the BCSA, has occurred and the Registrar should cease collecting the child support payable under the BCSA.
The relevant terms of the BCSA
The agreement contains the following clauses relevant to the dispute:

Clause 3 of the BCSA deals with the term of the agreement. Relevantly, clause 3.2.2 provides that “this agreement will be terminated:- … upon the occurrence of a terminating event.” [23]
Terminating event is defined in clause 1.14 of the agreement and relevantly states that:
1.14 "Terminating Event" occurs if:
1.14.1 The Father's income is less than $250,000 per annum;
1.14.2 The Father is unable to earn an income permanently as a consequence of illness or disability and any insurance income is less than $250,000 per annum.

The father’s income is defined in Clause 1.13:
1.13 “Father's Income” means the father’s income from all sources including:
1.13.1     Salary;
1.13.2     Director's fees;
1.13.3     Distributions from trust;
1.13.4     Dividends from any company, public or otherwise;
1.13.5 Benefits paid on behalf of the father by any entity, for example telephone, utilities, motor vehicle expenses, travel, household and living expenses, superannuation contributions and entertainment
1.13.6 Any monies distributed from any trust or company at the father's direction to a third party who is not a genuine employee of the business or company operated by the husband.

Mr Pellegrino’s argument is that his income, as defined in the BCSA was less than $250,000 in 2017/18 and thus the terminating event defined in clause 1.14 had occurred on 30 June 2018.
Ms Cabrera’s submission was, given the wide definition of “Father’s income” in clause 1.13, it had not been demonstrated that Mr Pellegrino’s income was less than $250,000 in 2017/18.

Can the Child Support Registrar give effect to the termination clause in the BCSA?

The first issue that arises is whether a BCSA can be terminated on the basis of terms included in the agreement, particularly whether clauses in 3.2 2 and 1.14 can be given effect.
Pursuant to section 80D of the Act a binding child support agreement may only be terminated by:
a) a clause inserted in new binding child support agreement which terminates the existing agreement,
b) a written termination agreement which complies with section 80D(2) of the Act, or
c) a court order setting aside the agreement or
d) the agreement being terminated under section 80D(2A) of the Act’s in circumstances where the receiving parent ceases to be ineligible carer.
As the parties in this case have not entered into any new agreements or obtained a court order, and as there has been no change in care, the BCSA cannot be terminated pursuant to section 80D of the Act.
Can the agreement be terminated, or liability under the agreement be ended by a term included in the agreement? Section 84 sets out the provisions which may be included in a BCSA:
(1) An agreement is a child support agreement only if it includes one or more of the following kinds of provisions:
(a) provisions under which a party is to pay child support for a child to another party in the form of periodic amounts paid to the other party;
(b) provisions under which the rate at which a party is already liable to pay child support for a child to another party in the form of periodic amounts paid to the other party is varied;
(c) provisions agreeing between parties any other matter that may be included in an order made by a court under Division 4 of Part 7 (departure orders);
(d) provisions (the non-periodic payment provisions) that state:
(i) that a party (the liable party) is to provide child support for a child to another party otherwise than in the form of periodic amounts; and
(ii) that the annual rate of child support payable for the child by the liable party under any relevant administrative assessment is to be reduced, in the manner specified under subsection (6), by the amount of child support to be provided by the liable party;
(e) provisions (the lump sum payment provisions) that meet the requirements of subsection (7) and that state:
(i) that a party (the liable party) is to provide child support for a child to another party in the form of a lump sum payment (including by way of transfer or settlement of property); and
(ii) that the lump sum payment is to be credited against the amount payable under the liable party’s liability under the relevant administrative assessment;
(f) provisions under which a party is to provide child support for a child to another party otherwise than in the form of periodic amounts and that are not non-periodic payment provisions or lump sum payment provisions;
(g) provisions under which the liability of a party to pay or provide child support for a child to another party is to end from a specified day.
(2) The agreement may include more than one kind of provision in relation to different parts of a child support period and different child support periods.
Other kinds of provisions not to have effect
(3) If the agreement also includes provisions of a kind not referred to in subsection (1), those provisions do not have effect for the purposes of this Act.
(4) Subsection (3) does not affect the operation of provisions of the kind referred to in that subsection for any other purpose.
The plain reading of section 84 is that subsection 84(1) is an exhaustive list of the categories of terms which may included in a BCSA so as to have effect for the purposes of the Act. Thus, unless the terminating event clause 1.14 falls into one of these categories it cannot be given effect by the Registrar in administering the collection of child support under the BCSA, pursuant to subsection 84(3).
The Tribunal sought submissions from the Registrar on whether clause 1.14 was a provision which could be given effect under subsection 84(1). The Registrar submitted that:
… two separate arguments could be made to establish that clauses 3.2.2 and 1.14 of the Agreement are covered by subsection 84(1) of the CSA Act.
The first argument relies on paragraph 84(1)(g) of the CSA Act … It is unclear what the word ‘liability’ is intended to refer to in this paragraph. However, the Registrar submits that it could reasonably be argued to refer to the relevant child support agreement (as opposed to, or in addition to, the underlying administrative assessment which gives effect to the terms of the agreement).
On this basis, clauses 3.2.2 and 1.14 of the Agreement could be said to have effect by virtue of paragraph 84(1)(g) of the CSA Act.
Alternatively, it could be argued that the relevant clauses have effect by virtue of paragraph 84(1)(a) of the CSA Act, which refers to:
…provisions under which a party is to pay child support for a child to another party in the form of periodic amounts paid to the other party…
It is clear that this paragraph covers provisions of an Agreement which specify rates of payment and establish who the liable and entitled parties are. However, it may be that the paragraph was also intended to cover provisions which set out the temporal aspects of the obligation established by the Agreement.
Mr Pellegrino’s counsel was of the view that the “liability” referred to in paragraph 84(1)(g) was the liability to pay periodic child support under BCSA. The submission was that the “specified date” need not be a fixed date, but could be a date on which a particular condition was first satisfied. For the purpose of this case, it was argued the “specified date” was the date on which Mr Pellegrino’s income for a particular financial year could be determined with certainty, that is on 30 June 2018 in respect of the 2017/18 financial year.
Ms Cabrera in submissions made to the Child Support Registrar and the Tribunal argued that clause 1.14 should not be given effect on the basis that it does not provide for a date on which the terminating event could be said to have occurred.
The Tribunal accepts the Applicant’s contention that a ‘specified date’ for the purpose of paragraph 84(1)(g), may be a date on which a specified event happens, or as in this case, the date of effect when a particular fact can be established with reasonable certainty.
The underlying assumption by the parties in their 2018 proceeding before the AAT and in submissions made during since the “Father’s income” had to be quantified on a per annum basis, it referred to income derived in a full financial year ending on 30 June. This seems reasonable and in keeping with normal accounting and business practices of Mr Pellegrino. The father also agrees that the clause was one which both parties agreed to and there was no evidence that the agreement was entered into in bad faith. Furthermore, the Tribunal agrees with Mr Pellegrino’s submission that the agreement was one which placed a significant financial burden on him which he would unlikely to be able to meet if his income was reduced.
On balance, the Tribunal accepted the Registrar’s submission that clause 1.14.1 can and should be given effect if it is found that Mr Pellegrino’s income had reduced to less than $250,000 per year.
The Tribunal agrees that the Registrar may treat Mr Pellegrino’s liability under the BCSA as having ended on the day on which the income for a financial year ending on 30 June could be ascertained with some degree of certainty. The date may be 30 June of the financial year but, depending on the operation of the business, the Tribunal finds that the date may also be a later date, depending on the accounting practices adopted and the time at which Mr Pellegrino’s income could be determined with a high degree of accuracy.
For the purpose of this review, the Tribunal must determine whether Mr Pellegrino’s income, as defined in the BCSA, was less than $250,000 for the 2017/18 financial year. Mr Pellegrino submitted that his income was under this amount, Ms Cabrera’s submissions were that the income far exceeded that limit.

Determining the father’s total income for 2017/18

Sources of Mr Pellegrino’s income

Mr Pellegrino is director and sole employee of [Company 1] Pty Ltd ([Company 1]) which is wholly owned by the Pellegrino Family Trust (the Trust). The Trust, in turn, is controlled by the trustee, Pellegrino Pty Limited (PPL) which is wholly owned and controlled by Mr Pellegrino.
The Tribunal is satisfied that Mr Pellegrino is the sole controller of PPL, [Company 1] and the Trust, albeit wearing different hats. From the 2017/18 financial statement and evidence of the parties, it is apparent that whatever income Mr Pellegrino derives ultimately comes from the income [Company 1] is able to generate as neither the Trust nor PPL had any independent sources of income in the relevant financial year. It was not disputed that Mr Pellegrino ultimately controlled the manner in which [Company 1] spent its income: he made the decisions regarding how much salary to pay himself, what expenses would be met by the business, and what dividends, if any, should be paid out of its gross income. [Company 1] is legally owned by PPL as trustee of the family trust. Again, the manner in which the Trust spends its funds is also a matter wholly within the control of Mr Pellegrino. The trustee company, PPL derives no direct income and paid no dividends and there is no claim that it was a source of income for Mr Pellegrino in 2017/18.
The parties made extensive submissions in relation to the manner both in which the term “Father’s Income” should be interpreted and what items in the accounts of [Company 1] and the Trust could be said to form part of the “Father’s Income” in 2017/18.
Income of Mr Pellegrino, [Company 1] and the Trust for tax purposes in 2017/18
Mr Pellegrino, in his personal capacity, received a salary from [Company 1] of $163,123 and in addition received gross interest of $2,070 in 2017/18.
In the same financial year [Company 1] earned gross income of $396,085 and claimed expenses of $318,976 of which $163,123 comprised Mr Pellegrino’s salary (Folio A68-A69). Mr Pellegrino acknowledged that some of [Company 1]’s other expenses appearing in the annual income statement had been incurred in a way that represented a personal benefit to him and acknowledged that these were to be added to his salary and interest for the purpose of the BCSA.
[Company 1]’s 2017/18 accounting profit before income tax was $77,110. Of this amount, $20,317 was paid in taxes. Of the after-tax income of $56,793, $45,282 was distributed to the Trust by way of dividend (with a franking credit of $17,176 passed on to the Trust) and the remaining $11,511 was retained by the company.
The 2018 income of the Trust was declared as $62,458, being dividends of $45,282 and a franking credit of $17,176. Expenses of $47,042 were claimed, of which $46,268 comprised interest paid on a loan from the [Bank 1]. A significant issue between the parties, and ultimately the deciding issue, is the manner whether the interest expenses paid by the Trust were a financial benefit to Mr Pellegrino such that they should be included in his income for 2017/18.
Interpretation of “Father’s Income” for the purpose of the BCSA
As noted above, for the purpose of the termination clause in 1.14.1 of the BCSA Mr Pellegrino’s income must be determined by considering the items set out in the definition of “Father’s Income” at clause 1.13 of the BCSA:
·     Salary;
·     Director’s fees;
·     Distributions from trusts;
·     Dividends form any company, public or otherwise;
·     Benefits paid on behalf of the father by any entity, for example telephone, utilities, motor vehicle expenses, travel, household and living expenses, superannuation contributions and entertainment;
·     Any monies distributed from any trust or company at the father’s directions with a third-party who is not a genuine employee of the business or company operated by the husband.

Although the parties differed as to how this definition should be applied to Mr Pellegrino’s sources of income in 2018, there was consensus that “Father’s Income” was not equivalent to Mr Pellegrino’s individual taxable income for the year. However, there is considerable disagreement between the parties about how widely the term “Father’s Income” casts the net over financial resources at Mr Pellegrino’s disposal or under his control, as well as how the accounts of [Company 1] and the Trust should be interpreted to arrive at an income amount.

Mr Pellegrino’s interpretation of “Father’s income”

Mr Pellegrino’s argument was that the definition “Father’s income” should be interpreted giving “express terms their plain and ordinary meaning, unless doing so would result in manifest absurdity”. It was argued that the term income, defined in the Macquarie Dictionary should be adopted, that is “returns that come in periodically, especially annually, from one’s work, property, business etc; revenue; receipts”; relevantly to this review, the period being the 2017/18 financial year.
The Tribunal’s attention was drawn to clause 2.19 of the BCSA wherein the father, noting that he was not presently in receipt of a director’s fee from [Company 1], noted he “anticipated that he will be receiving an income of not less than $250,000 per annum”. Mr Pellegrino’s salary from [Company 1] in 2016/17 had been $250,541. Mr Pellegrino said that the amount of child support payable under the agreement was not payable without causing him hardship unless his income was at least $250,000.
Mr Pellegrino accepted that his income could not be determined by looking at his tax return alone. Apart from the distribution from the Trust, he acknowledged [Company 1] paid some expenses which resulted in a personal benefit to him which should be regarded as income for the BCSA.
Mr Pellegrino argued that his assessable income, for the purpose of the BCSA, was $197,290 [Folio A139]. However in a report and at the hearing, Mr [A], Mr Pellegrino’s accountant, stated that he had identified an additional sum $8,871 as expenses incurred by [Company 1] which could be treated as a benefit to Mr Pellegrino and fall within the income definition in the BCSA. In summary, following final evidence of Mr [A], Mr Pellegrino’s submission was that his income should be assessed on the basis of the following items:

Salary	162,583
Net distribution from the Trust	15,416
Telephone expenses paid by [Company 1]	641
Motor vehicle expenses paid by [Company 1]	1,135
Gross interest	2,070
Superannuation contributions made by [Company 1]	15,445
Additional expenses identified at hearing	8,817
Total	$206,107

Ms Cabrera’s interpretation of “Father’s income”

Ms Cabrera’s submission was that the definition of “father’s income” in the BCSA was an inclusive rather than exclusive one. It should be interpreted by having regard to the intention of the BCSA which was to assess Mr Pellegrino’s child support liability based on the underlying expectation that income derived from [Company 1] could be accounted for in different ways at the direction of Mr Pellegrino and that, therefore, the clause 3.2.2. definition was intended to capture all of that income, however Mr Pellegrino chose to spend it.
Ms [D] for Ms Cabrera submitted that the term should be interpreted so widely as to include all moneys available for use or distribution by [Company 1] which could be applied to his benefit, if needed.
Ms [D]’s submission did allow for [Company 1] deducting business expenses from gross takings, however, she went considerably further and it was submitted that “Father’s Income” included “all resources available to the applicant, in the context of his ability to organise the affairs of [Company 1], the trust and his personal income at his discretion, for taxation or any other purposes”. In the final analysis, Ms Cabrera’s submission was that Mr Pellegrino’s total income comprised not just gross or net business income from the profit and loss statement of [Company 1] and dividends flowing from this, but also included retained earnings and an accumulated franking account balance. This was notwithstanding that both retained earnings and the franking account balance were not wholly or even predominantly incurred in 2017/18 but formed the sum of current year and past years amounts. It was suggested that the company had large cash amounts reflected in the amounts retained and available to the company, or Mr Pellegrino, to spend as required.
Thus, Ms Cabrera’s submission was that the “Father’s Income” should be determined as follows [Folio B30]:

Retained earnings in [Company 1] from 2017/18	486,041
Retained franking account balance	246,561
Salary and superannuation paid to Mr Pellegrino	178,604
Other benefits	10,006
Dividends distributed to the Trust	45,282
Total	$966.494

The Tribunal found it difficult to accept that either party could have intended income to be defined as encompassing “any financial resource”. The ordinary meaning of the term income is well understood and the interpretation advanced by Ms Cabrera significantly departs from it. Such an interpretation is not supported by the actual terms of the BCSA which express the “Father’s Income” on an annual basis. Cash in the bank as at 30 June may be a financial resource at that time but it is not ‘income’ in the sense of having been an amount received in a defined income period. Furthermore, the Tribunal is satisfied, particularly in the context of a property settlement which dealt with distribution of assets, that Mr Pellegrino would not have agreed to such a broad interpretation of ‘income’. If a broader interpretation of ‘income’ was intended by both parties, the Tribunal has no doubt the clause would have been drafted differently. The Tribunal finds that neither the retained earnings balance nor [Company 1]’s accumulated franking credits of [Company 1] accounts could be taken to be income items incurred in the 2017/18 year.
However, the Tribunal agrees with Ms Cabrera’s position that the definition of “Father’s Income” in clause 3.2.2 of the BCSA is not an exclusive definition. The Tribunal finds the categories listed seem to be aimed at capturing receipts of income over a financial year which Mr Pellegrino, either in his capacity of director of [Company 1] or de facto trustee of the Trust, may distribute or use as he sees fit.
Thus, the Tribunal found it more appropriate to focus on the gross income and expenses of [Company 1], which is the true source of any income of the father. All other amounts transferred to the Trust, PPL, Mr Pellegrino or potential other beneficiaries flow from the net pre-tax profit of [Company 1] and decisions made by him about how to deal with those funds.
Determining the Father’s Income based on financial statements for 2017/18
As noted above, in the final analysis there was no real dispute between the parties that the following items formed part of the father’s income for the purpose of the BCSA:

Salary	162,583
Telephone expenses paid by [Company 1]	641
Motor vehicle expenses paid by [Company 1]	1,135
Gross interest	2,070
Superannuation contributions made by [Company 1]	15,445
Additional expenses identified at hearing	8,817

The Tribunal agreed that all of these items fell within the categories of income contemplated by the BCSA income definition.
Ms Cabrera made submissions that the expenses claimed by [Company 1] should be more closely examined by reference to actual receipts and bank statements. Mr [B], for Ms Cabrera, submitted that certain items, including the amount of the director’s loan and other items, though legitimate accounting entries, reflected deliberate decisions to account for items in such a way as to minimise Mr Pellegrino’s taxable income and on that basis a large number of items should be included. To analyse Mr Pellegrino’s financial circumstances on the basis suggested by Ms Cabrera would require a level of forensic accounting that is entirely unreasonable to expect an administrative decision maker to undertake.
The Tribunal found Mr Pellegrino and Mr [A] to be credible, though not unbiased, witnesses in relation to pertinent facts and did not consider there to be any prima facie evidence that would have allowed it to treat the financial statements of [Company 1] as being inherently unreliable. That is, the Tribunal accepts that items listed as income and expenses of the company were reflective of the financial operation of the business and form a legitimate basis on which the income derived by Mr Pellegrino for the purpose of the BCSA can be determined.
As noted by both parties, that does not mean that all expenses deducted by [Company 1] were amounts which flowed out of the company without any benefit to Mr Pellegrino. After all, Mr Pellegrino himself acknowledged that some claimed business expenses(for telephone, motor vehicles, gross interest, etc.) were of personal benefit to him and thus were taken as income items for the BCSA.
The Tribunal determined that it was reasonable to consider whether the benefit of any other expense items could legitimately be said to flow to Mr Pellegrino directly. The only other expense the Tribunal found to form a direct benefit to Mr Pellegrino was the expense of $19,231 described as “provision for annual leave”. Given that this amount was set aside ultimately to flow directly to Mr Pellegrino, in the same way that superannuation contributions were, the item should be added to Mr Pellegrino’s income for the 2017/18 financial year.
The Tribunal also finds that the whole of the net pre-tax income of [Company 1] of $77,110 should be regarded as an income amount for the purpose of the BCSA. This recognises that [Company 1] is the primary source of income available to Mr Pellegrino from “all sources”. It is a more realistic measure of funds ultimately available to meet his child support obligations, as it is not affected by any discretionary choice to record a profit rather than to increase his own salary by the profits he ultimately generated and controlled through [Company 1]. In other words, Mr Pellegrino’s gross available income is the whole of [Company 1]’s net profits.
The Tribunal is not suggesting that such a calculation would be appropriate in every circumstance but given the requirement to assess Mr Pellegrino’s income from “all sources”, and taking into account the legal and de-facto arrangements of the business structure, it is fair to recognise that all income trickling down to the Trust, and eventually to Mr Pellegrino, in 2017/18 was derived from [Company 1] alone and the manner in which the income was ultimately accounted for was driven by decisions made primarily for tax purposes.
Although assessing the pre-tax profit of [Company 1] may seem unorthodox, clause 3.2.2. of the BCSA does not specify that income is to be determined on a pre- or post-tax basis. At all relevant times the parties have argued on the basis that Mr Pellegrino’s gross salary was an income amount for the purpose of the BCSA. It seems to logically follow that other income derived by him indirectly should also be assessed on a gross basis. In any case, if all of the post-tax income had been passed on as a dividend it would have been passed on with the matching franking credit which is a significant financial benefit.
The Tribunal thus concludes that Mr Pellegrino’s income from ‘all sources’, in accordance with clause 3.2.2. of the BCSA, included the following:

Interest received in personal capacity	2,070
Salary from [Company 1]	162,583
Expenses incurred by [Company 1] forming a benefit to Mr Pellegrino:
Telephone expenses paid by [Company 1]	641
Motor vehicle expenses paid by [Company 1]	1,135
Superannuation contributions made by [Company 1]	15,445
Additional expenses identified at hearing	8,817	26,038
Provision for Annual Leave	19,231
[Company 1]’s net profit before income tax	77,110
Total	$284,962

Director’s loan

The Tribunal notes that the final income figure relied on by Mr Pellegrino, $206,107, is significantly different from the initial income declared by Mr Pellegrino to the Registrar in his initial request for termination of the BCSA, which was $229,908 [Folio A24]. On 16 July 2018, Mr [A] provided a summary of Mr Pellegrino’s income which included a director’s loan of $34,688 as an item of income. However, in the financial statement of [Company 1] for 2018 a director’s loan of only $14,362 is recorded. Mr [A] gave evidence that the initial loan figure of $34,688 was found to be wrong and was amended in the final accounts.
While the Tribunal accepts that the 2017/18 financial statements of [Company 1] are the best available evidence of the size of the director’s loan, the revision of the original income figure puts into question the father’s argument that the terminating event occurred on 30 June 2018. It appears that the change of the loan amount may be due more to accounting decisions made about how to account for income and expenses of [Company 1] rather than to corrections of the actual financial position. The Tribunal notes that if the factual situation, that is, having reasonable certainty about the actual income amount of the father, could not be determined until the final accounting decisions were, it may affect the date from which the terminating event could be said to have occurred.
In any event, the father’s final position was that the director’s loan should not be included in the “Father’s Income” at all. It was argued that the director’s loan of $14,362 was a loan which complied with Division 7A of the Income Tax Assessment Act 1936 and was subject to the loan agreement requiring Mr Pellegrino to repay the amount to the company within seven years. On that basis, Mr Pellegrino submitted, the director’s loan could not be said to form part of his income, just as money borrowed from a bank would not be regarded as forming part of one’s income.
The Tribunal acknowledges that there is a loan agreement between Mr Pellegrino and [Company 1], but also agrees with the mother’s submission that the loan arrangement is far from an arms-length arrangement and the eventual repayment of the loan may be structured in a number of different ways and may, ultimately (though not without tax consequences) never occur. A loan from a company to its controller is a source of financial benefit which may or may not be required to be reimbursed.
It must be noted that Mr Pellegrino received significant annual loans from [Company 1] in the three years prior to 2017/18. Part of those loans was repaid by way of Mr Pellegrino paying a lump sum into the company and crediting other amounts so as to reduce the loan balances.
Mr Pellegrino is required to pay interest on the director’s loan (which increases the pre-tax profit of the company and ultimately the dividends). Mr [A]’s evidence suggested that this was done by means of a book entry by debiting the company income and crediting the loan account.
The Tribunal notes that one of the methods by which the loan balance is reduced included a decision by Mr Pellegrino to pay himself an $8,000 bonus but not take the payment in cash.
In future years Mr Pellegrino may pay himself a higher salary but debit the loan account for some of the earnings: this might have tax consequences but would not ultimately change the amount of income he may have available from [Company 1] in the year by way of fees earned. Thus, without breaching either tax or accounting rules, the controller of a structure that includes a company and a trust can indeed affect the income that they may distribute to themselves.
Ultimately the Tribunal found it unnecessary to determine whether the director’s loan amount incurred in 2017/18 was an income source for Mr Pellegrino as the more appropriate measure was the company’s net profit plus any expenses borne directly by [Company 1] but forming a benefit to Mr Pellegrino.
Treatment of expenses of the Trust
It follows from the above, that it is unnecessary to deal with the treatment of the franking credit (essentially a tax savings) passed on from [Company 1] to the Trust, nor is it necessary to deal with the net distribution of the Trust to Mr Pellegrino or the retention of some of the earnings by [Company 1]. Again, the amount of allocation of income of [Company 1] to various purposes is a matter within Mr Pellegrino’s discretion but ultimately does not reduce the financial benefit he gains from [Company 1] on an annual basis which is available for meeting his child support expenses.
That is not to say that any expenses incurred by the Trust are irrelevant to Mr Pellegrino’s overall income. The Trust is a part of the business structure through which Mr Pellegrino incurs income and pays tax. In operating a Trust, expenses are incurred which should be allowed as legitimate business expenses of the Trust, in the same way that business expenses incurred by [Company 1] were regarded by both parties as legitimate business deductions. The question arises whether every expense claimed by the Trust was an expense legally incurred by the Trust.
The 2017/18 profit and loss statement of the Trust shows the expenses incurred were:

Accounting Fees 3,520

Filing fees 254

Interest paid 43,268

$47,042

The Tribunal accepts that accounting and filing fees of $3,774 are reasonable business expenses which ought to be deducted, in the same way as such costs arising for [Company 1] were allowed.
The parties wholly disagreed about the treatment of the interest paid by the Trust to the [Bank 1] on a loan which is recorded as a liability of the Trust of $909,020 [Folio A46].
The [Bank 1] loan recorded as a liability of the Trust in the 2017/18 accounts is based on a loan agreement made in February 2016 (after separation but before a property settlement) between Mr Pellegrino and Ms Cabrera (under her former married name) and the [Bank 1].
Mr Pellegrino’s evidence was that prior to 2016 there had been an existing business loan, secured over the former family home, to which he and Ms Cabrera were parties. In 2016 that loan was refinanced and increased to $909,200 to allow him to buy out a former business partner and thus assume full control of [Company 1]’s shares which were held by the Trust. The loan contract was entered into by Mr Pellegrino and Ms Cabrera, in their personal capacity because the bank offered them a lower rate of interest than if the money was borrowed by PPL as trustee.
Ms Cabrera submitted that the terms of the loan contract are such that the loan cannot be taken to have been incurred by the Trust and, on that basis, the payment of the interest on that loan cannot be regarded as a business expense, as it was payable by Mr Pellegrino in his personal capacity.
The Tribunal notes that for the [Bank 1] loan to be regarded as a loan owed by the Trust, it would have to be based on an agreement between [Bank 1] and PPL, who at all relevant times was the trustee of [Company 1]. There is no reference in the loan agreement either to PPL or the Trust and on a purely legal basis the Trust is not liable to pay the interest rising under this loan.
The Tribunal asked on what basis the loan was listed as a liability of the Trust. The submissions made for Mr Pellegrino were that he in effect passed on the proceeds of the loan to the Trust which then used the funds to purchase the shares in [Company 1] and also took over the responsibility for repayment of that loan. However, it was acknowledged that no written agreement existed and the actual terms about the transactions arising from this were not explained by the evidence provided to such an extent that the Tribunal was satisfied that the Trust had legally incurred the interest expense.
The Tribunal thus finds that, based on all available evidence, the legal obligation to repay the [Company 1] business loan ultimately fell to Mr Pellegrino in his personal capacity. Thus, any interest owed on the loan would not be a business expense of the Trust, nor is it a business expense of [Company 1], which means that payment of the interest expense by the Trust was a payment made at the direction of Mr Pellegrino, thus payment of a personal expense.

The Tribunal finds that the interest expenses on the [Bank 1] business loan should be added to Mr Pellegrino’s income under the definition of income used in the BCSA.
Final assessment of Mr Pellegrino’s total 2017/18 income for the purpose of the BCSA
In accordance with the reasons set out above, the Tribunal determines Mr Pellegrino’s income, pursuant to clause 3.2.2. of the BCSA, as follows:

Interest received in personal capacity	2,070
Salary from [Company 1]	162,583
Expenses incurred by [Company 1] forming a benefit to Mr Pellegrino:
Telephone expenses paid by [Company 1]	641
Motor vehicle expenses paid by [Company 1]	1,135
Superannuation contributions made by [Company 1]	15,445
Additional expenses identified at hearing	8,817	26,038
Provision for Annual Leave	19,231
[Company 1]’s net profit before income tax	77,110
Less accounting and filing fees of the Trust	(3,774)
Total	$283,258

In conclusion, the Tribunal finds that Mr Pellegrino’s income for the purpose of clause 1.14.1 of the BCSA exceeded $250,000 for the 2017/18 financial year and, consequently no terminating event had occurred on or about 30 June 2018.
This means that the objection decision made by the Registrar is affirmed and Mr Pellegrino’s application is unsuccessful.

DECISION

The decision under review is affirmed.

[2020] AATA 4780

16 September 2020

Key Legal Topics

Areas of Law

Family Law

Administrative Law

Legal Concepts

Statutory Construction

Jurisdiction

Judicial Review

Procedural Fairness

Accounting Fees	3,520
Filing fees	254
Interest paid	43,268
$47,042