Rolston and Hawley (Child support)

[2019] AATA 568

Rolston and Hawley (Child support) [2019] AATA 568 (7 February 2019)

DIVISION:Social Services & Child Support Division

REVIEW NUMBER:  2018/BC014047

APPLICANT:  Mr Rolston

OTHER PARTIES:  Child Support Registrar

Ms Hawley

TRIBUNAL:Member J Thomson

DECISION DATE:  7 February 2019

DECISION:

The Tribunal sets aside the decision under review and, in substitution, decides that for the period 1 July 2017 to 30 June 2020, Mr Rolston’s adjusted taxable income is varied to $126,500.

CATCHWORDS

CHILD SUPPORT – departure determination – income, property and financial resources of the applicant - business income - 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 Rolston and Ms Hawley are the parents of [Child 1], born 2002, and [Child 2], born 2005. Mr Rolston is recorded as having 0% care of [Child 1] and 38% care of [Child 2]. Ms Hawley is recorded as having 100% care of [Child 1] and 62% care of [Child 2].

2.On 4 December 2017, Ms Hawley applied to the Department of Human Services – Child Support (the Department) for a change of assessment on the ground commonly referred to as Reason 8A.

3.On 23 January 2018, Department decision maker, [Mr A] made a decision setting Mr Rolston’s adjusted taxable income for child support purposes for the period 4 December 2017 to 31 December 2019 at $150,000.

4.On 15 February 2018, Mr Rolston objected to [Mr A]’s decision of 23 January 2018, and on 19 April 2018, a Department objections officer disallowed Mr Rolston’s objection and affirmed the original decision of [Mr A] dated 23 January 2018.

5.On 11 May 2018, Mr Rolston sought review of the objections officer’s decision of 19 April 2018.

6.The Tribunal heard the matter on 23 October 2018. Both parents attended the hearing in person and gave affirmed evidence. The Tribunal had before it documentation provided by the Department, Mr Rolston and Ms Hawley. These documents were admitted into evidence and marked Exhibits 1, A and B.

7.At hearing, Mr Rolston handed up copies of the financial statements for his company, [Company 1] for the financial year ended 30 June 2018. These documents were admitted into evidence and added to Exhibit A. Ms Hawley was afforded the opportunity to peruse those documents at hearing and comment upon them during the course of the hearing.

The Legislative Framework

8.The rate of child support payable by a liable parent is usually based on an administrative assessment under Part 5 of the Child Support (Assessment) Act 1989 (the Act).  A formula is used. It takes into account variables including each parent’s adjusted taxable income for the last relevant year of income, the number of children, and the level of care provided by each parent. Part 6A of the Act allows for a departure from the administrative assessment (a process commonly known as a “change of assessment”). Under subsection 98C(1), the Registrar may make such a departure determination if three matters are established:

·One, or more than one, of the grounds for departure referred to in subsection 98C (2) exists (subparagraph 98C(1)(b)(i));

·A departure is just and equitable as regards the children and each parent (subparagraph 98(1)(b)(ii)(A)); and

·It is otherwise proper to make a departure decision (sub-subparagraph 98C(1)(b)(ii)(B))

9.Subsection 98C(2) provides that the grounds for departure are the same as the grounds set out in subsection 117(2) of the Act.

10.If satisfied that a ground or grounds exist and that it would be just and equitable and otherwise proper to make a particular determination, the Registrar may make one of the determinations prescribed in section 98S of the Act. It permits a range of determinations, including varying the rate of child support payable, the adjusted taxable income or the cost percentage for a child.

Grounds for departure

11.Subparagraph 117(2)(c)(ia) - commonly referred to as Reason 8 - provides as a ground for departure:

(c) that, in the special circumstances of the case, application in relation to the child of the provisions of this Act relating to administrative assessment of child support would result in an unjust and inequitable determination of the level of financial support to be provided by the liable parent for the child…..

(ia) because of the income, property and financial resources of either parent; or….

12.The words “in the special circumstances of the case” are not defined in the legislation. Whilst it is not possible to define with precision the meaning of that term, it is intended to emphasise that the facts of the case must establish something which is special or out of the ordinary. That is, the intention of the legislation in subsection 117 (2) must be guided by the qualification that the Tribunal will not interfere with the administrative formula result in the ordinary run of cases. In Gyselman v Gyselman (1992) FLC 92-279, it was held that “special circumstances” were “facts peculiar to the particular case which set it apart from other cases”. The Tribunal will consider whether the application of the administrative assessment would result in an unjust and inequitable determination of child support payable, having regard to the evidence relevant to the parents’ financial position.

ISSUES

13.The issue which arises in this case is:

·      Mr Rolston’s income, financial resources and property available to him for child support purposes.

CONSIDERATION

14.In reaching its decision, the Tribunal has considered the affirmed evidence of Mr Rolston and Ms Hawley, the evidence contained in the documentation provided by the Department (Exhibit 1), Mr Rolston (Exhibit A), and Ms Hawley (Exhibit B), together with submissions made by Mr Rolston’s accountant, [Mr B] in relation to [Company 1’s] financial accounts for the financial years 2016–17 and 2017–18.

15.The period under consideration in the objections officer’s decision, the subject of this review, is 4 December 2017 to 31 December 2019. The Tribunal may also consider Mr Rolston’s income, property and financial resources for the 18-month period prior to the date of Ms Hawley’s application for change of assessment lodged on 4 December 2017 if it considers that appropriate.

16.Mr Rolston’s evidence at hearing was to the following effect.

17.He is the sole director and shareholder of [Company 1] through which he operates [a] business from his residential property, situated on acreage at [Town 1], south of [City 1]. He gave evidence that he has storage facilities constructed on this property in which he stores the company’s [equipment].

18.He gave evidence that up until approximately four years ago he operated a business trading as [Business Name 1], specialising in [specific operations]. That business has now been absorbed into his current [business] operated by the company, and income derived from that source is returned through [Company 1].

19.Mr Rolston provided copies of the financial reports for the company for the financial years 2016–17 (see Exhibit 1, pages 53 to 6), and at hearing, handed up copies of the companies 2017–18 financial reports. These documents were admitted into evidence and appear at pages A77 to A91 of Exhibit A. These are the primary documents evidencing Mr Rolston’s income from the business activities of the company he controls for the period 1 July 2016 to 30 June 2018.

20.The profit and loss statement for the company for the year ended 30 June 2017 reflects total income of $187,870.74 less expenses totalling $172,990.52, resulting in a net profit before tax of $14,880.22. Included in the expenses is the item “salaries – associated persons” reflecting the salary drawn by Mr Rolston of $60,000 per annum.  This is reflected in his Statement of Financial Circumstances at page A2 of Exhibit A. The comparative profit and loss figures for the previous 2015–16 financial year reflect a similar salary of $60,000 paid to Mr Rolston in that financial year.

21.Other items of particular interest to the Tribunal at hearing listed in the company’s expenses for the 2016–17 and 2017–18 financial years were depreciation, hire/rent of plant and equipment, interest, motor vehicle, rates and land taxes, and travel, accommodation and conferences.

22.Depreciation amounts claimed in the 2016–17 and 2017–18 financial years were $10,126, and $6,125 respectively. Depreciation is generally regarded as a non-cash expense item, and is essentially an allowance for the purchase of placement equipment. While some percentage of the amounts claimed may have been used for the replacement of some items of equipment used in Mr Rolston’s company’s [business], not all of the depreciation allowance claimed would have been expended. Accordingly, the Tribunal intends adding back 60% of the amounts claimed for those financial years to the company’s after tax profits for the 2016–17and 2017–18 financial years.

23.Mr Rolston also gave evidence that amongst the company’s assets listed in its depreciation schedules for the 2016–17 and 2017–18 financial years were two large trucks, one of which is a prime mover with a trailer, and the other, a tip [truck]. The company also lists a [specified] wagon. Mr Rolston said all of these vehicles were leased by the company.

24.Mr Rolston conceded in evidence that he did have some personal use of the company’s [wagon] transporting his son, [Child 2], to and from school, and taking him on holidays. He also acknowledged that the registration, fuel and other running costs for this vehicle were claimed by the company is an expense in the profit and loss statements for the 2016–17 and 2017–18 financial years. The Tribunal will therefore ascribe 20% of the amounts claimed for this item in the profit and loss statements for those years to personal use, and add back the relevant amounts to the company’s after tax profits for those years.

25.Mr Rolston also gave evidence that in or about September 2013 he sold the [tip truck], (which he said he owned), to his parents for $40,000 to raise funds to complete the property settlement he had concluded with Ms Hawley. A photograph of the vehicle appears at 63 of Exhibit 1. He said the vehicle was used in the company’s business operations prior to its sale to Mr Rolston’s parents, and since that sale, has been leased back from them to the company at a rental of $1,000 per month, which is paid by the company, as reflected in its [bank] statements before the Tribunal.

26.Mr Rolston acknowledged that there is no formal written leasing agreement between his parents and him or the company with respect to this vehicle.

27.To the extent that the vehicle has been listed in the company‘s depreciation scheduled for the past two financial years and was an income earning asset alienated by Mr Rolston for the personal benefit of facilitating his family law property settlement with Ms Hawley, resulting in a consequential financial impost on the company of $1,000 per month, the Tribunal considers an adjustment to the item, hire/rent of plant and equipment of $12,000 should be applied and that amount added back to the after tax profit for the 2016–17, and 2017–18 financial years.

28.Mr Rolston also gave evidence that the company leases [various equipment] for use in its business operations, which are not reflected as assets in the company’s balance sheet or depreciation schedule, the rental/leasing charges in respect of which are paid by the company and brought to account under the heading, “Hire/rental of plant and equipment”.

29.In his evidence to the Tribunal, Mr Rolston acknowledged that the company pays the local authority rates on his [Town 1] residential property from which the company conducts its business operations and on which it stores its plant and equipment. Rates and land tax deductions claimed in the 2016–17 and 2017–18 financial years amounted to $3,366.74, and $3,510.37 respectively. The Tribunal considers these deductions a personal benefit to Mr Rolston, and accordingly, will add back those amounts to the after tax profits for the 2015–16, 2016–17 and 2017–18 financial years.

30.Ms Hawley challenged the deductions claimed by the company for hire/rent of plant and equipment amounting to $54,174.24 for the 2016–17 financial year and $61,091.77 for the 2017–18 financial year. She made reference to the extensive range of plant and equipment listed in the company’s depreciation schedules for those years and questioned the need to hire additional equipment, given the nature of the company’s [operations].

31.With Mr Rolston’s authority, the Tribunal questioned his accountant, [Mr B] regarding the composition of these deductions and whether an itemised schedule of those deductions could be provided. [Mr B] advised that Mr Rolston provides him with copies of the company’s bank statements in which he highlights the relevant items of plant and equipment hire/rental charges. He said a similar procedure was adopted for the items, travel, accommodation and conferences.

32.However, as no schedule evidencing a breakdown of the hire/rental of plant and equipment charges has been provided by Mr Rolston or his accountant, the Tribunal is not satisfied that sufficient evidence has been provided to substantiate the extraordinarily high expenses claimed for the hire/rental of plant and equipment by the company, but makes no finding with regard to that expense item in light of the findings set out below.

33.Mr Rolston gave evidence that the interest deductions claimed in the company’s 2016/17 and 2017–18 profit and loss statements represent an apportionment of his residential mortgage payments on his [Town 1] property to reflect the company’s use of the storage shed facilities on the property for its plant and equipment. He said that, of the total home loan mortgage debt of $946,284.96, $532,758.43 was ascribed to Mr Rolston personally, and $413,526.53 (43.7%) was ascribed to the company for the use of the storage facilities on the property. Copies of [Home Loan] bank account statements were provided by Mr Rolston – see pages A17 to A19 of Exhibit A.

34.Mr Rolston’s accountant confirmed that this was the basis for the calculation of the interest components for those deductions. However, he also acknowledged that there was no corresponding loan reflected in the company’s balance sheets for those financial years reflecting those interest deductions.

35.While these deductions may be considered legitimate deductions for income tax purposes, the Tribunal considers they afford a considerable personal benefit to Mr Rolston in assisting him in the servicing of his total residential mortgage debt of $946,284.96, for which he is personally liable to his bank. Accordingly, the Tribunal will add back those deductions to the after tax profits of the company for the 2016–17 and 2017–18 financial years.

36.The profit and loss statements for the 2016–17 and 2017–18 financial years reflect the claiming of travel and the associated accommodation and conference expenses for the 2016–17 financial year only. [Mr B] advised that Mr Rolston was obliged to source work in [City 2] and other country locations involving extended travel and overnight accommodation. The Tribunal has cited items in the bank statements provided by Mr Rolston reflecting the travel and accommodation expenses claimed in the company’s 2016–17 profit and loss statement at page 53 of Exhibit 1 and is satisfied that those expenses were for legitimate business purposes..

37.The company’s 2016–17 and 2017–18 profit and loss statements and balance sheets reflect retained profits of $38,588.76 and $49,004.98 respectively. The Tribunal considers these retained profits represent a financial resource available to Mr Rolston as the sole director and guiding hand of the company, and the sole shareholder in the company to whom its profits would be distributable, and accordingly, will add those amounts back to the profits of the company for those financial years.

38.Ms Hawley challenged a number of funds transfers from the company’s bank account to Mr Rolston’s [credit card] account. Mr Rolston gave evidence that he used his credit card to pay for a number of legitimate company related expenses, for which he reimbursed his account from company funds. However, he also acknowledged he transferred amounts from the company’s bank account to his personal [banking account], and his [Platinum Visa credit card account] to meet his personal needs from time to time.

39.The Tribunal’s review of copies of the company’s  [Business account] bank statements at pages 163 to 176 of Exhibit 1, and pages A29 to A37 of Exhibit A reflect the regular payment of Mr Rolston’s weekly salary of $1,846 to his [personal bank account], the monthly rental payments of $1,000 with respect to the [tip] truck to his parents, and a $6,000 payment to his [home loan account]. The account also reflects regular fortnightly payments of $1,195.80 to Mr Rolston’s [personal account] which Mr Rolston said in evidence reflect the company’s “interest” contributions to his [Home Loan] account. The Tribunal also noted a number of other substantial funds transfers to Mr Rolston’s personal and credit card accounts.

40.The Tribunal’s review of copies of Mr Rolston’s bank statements for his [personal bank account] identified corresponding deposits and transfers of payments from his [personal bank account] to his [Home Loan account]  (see pages 157 to 171 of Exhibit 1). However, the Tribunal was not able to identify corresponding entries in the [Visa Platinum] credit card bank statements he provided at pages A38 to A 76 of Exhibit A, reflecting the top-up transfers from the company’s [account].

41.As noted above, the Tribunal intends adding back the following expense items to the company’s after tax profits for the 2016–17 and 2017–18 financial years:

2016–17 financial year adjustments.

Depreciation: $6,075.60 (10,126 X 60 /100 = $6,075.60)

Motor vehicle expenses: $987.50 ($4,937.51 X 20 /100 = $987.50)

Interest charges: $19,371.41

[Tip] truck hire charges: $12,000 (monthly hire charges $1,000 X 12 = $12,000)

Rates & land taxes: $3,366.74

Total add back adjustments: $41,801.25.

2017–18 financial year adjustments.

Depreciation: $3675 ($6,125 X 60 /100 = $3,675)

Motor vehicle expenses: $433.91 ($2,169.57 X 20 /100 = $433.91)

Interest charges $18,901.86

[Tip] truck hire charges: $12,000 (monthly hire charges $1,000 X 12 = $12,000)

Rates & land taxes: $3,510.37

Total add back adjustments: $38,521.14

42.The profit before income tax reflected in the 2016–17 profit and loss statement at pages 53 and 54 of Exhibit 1 was $14,880.22. After deducting income tax attributable to that operating profit of $4,464, an operating profit after income tax of $10,416.22 results. Adding back the expenses adjustments of $41,801.25 referred to above the adjusted operating profit after tax for the company is $52,217.47.

43.The income available to Mr Rolston for the 2016–17 financial year would therefore have been his salary of $60,000 paid to him by the company plus the after-tax adjusted profit of $52,217.47 referred to in the preceding paragraph, and the undistributed retained profits reflected in the profit and loss statement at the beginning of the 2016–17 financial year of $38,588.76, a total of $150,806.23 (rounded down to $150,806).

44.The profit and loss statement for the 2017–18 financial year at pages A81 and A82 of Exhibit A reflected a Loss from Ordinary Activities after Income Tax of ($21,016.29). Adding Back the Expenses Adjustments of $38,521.14 referred to above results in an operating profit of $17,504.85

45.The income available to Mr Rolston for the 2017–18 financial year would therefore have been his salary of $60,000 paid to him by the company plus the adjusted profit of $17,504.85 and the undistributed retained profits reflected in the profit and loss statement at the beginning of the 2017–18 financial year of $49,004.98, a total of $126,509.83 (rounded up to $126,510).

46.The administrative assessment in place prior to Ms Hawley’s application for a change of assessment on 4 December 2017 required Mr Rolston to pay an annual rate of child support of $7,818 for the period 1 September 2017 to 17 November 2018 based on his 2016–17 adjusted taxable income of $59,765, and Ms Hawley’s 2016–17 adjusted taxable income of $27,448, based on two children in the mixed age category.

47.The Tribunal has found that the income and financial resources available to Mr Rolston for the 2016–17 financial year was $150,806, and the income and financial resources available to him for the 2017–18 financial year was $126,510. This makes the administrative assessment unjust and inequitable, the case is special, and a ground for departure established.

Just and equitable

48.The requirement to consider whether a departure would be just and equitable directs attention to what is fair to the parents and their children. Regard must be had to a variety of factors such as the needs of the children, the parents’ commitments and any hardship that would be caused by departing or not departing from the formula.

49.The Statement of Financial Circumstances provided by Mr Rolston reflects a gross weekly income of $1,440.02, based on a weekly salary of $1,153.85, annualised to $60,000, which is the salary he receives from the company, as reflected in its financial statements referred to above, plus a modest return from his [shares].

50.He lists his [Town 1] property and improvements which he values at $1.1 million, savings of $2,728, a [wagon] valued at $20,000, his interest in the company at $173,000, household contents to a value of $2,000 and other personal items comprising motorbikes, quad bikes and a campervan, collectively valued at $15,000. At hearing, he gave evidence that the [utility] motor vehicle he listed in his statement as an asset has since been sold. Consequently, the total value of his assets as at the date of hearing was approximately $1,312,728.

51.According to his statement, he has no superannuation. He listed liabilities totalling $953,766.96 comprising [Visa] credit card debt of $4,482, mortgage debt totalling $946,284.96 which, although he asserted in evidence that $413,526.53 of that debt was the company’s liability, the Tribunal has found is, in reality, his debt pursuant to his [Home Loan] reflected in the bank statements he provided at pages A17 to A19 of Exhibit A. He also lists a tax liability of $3,000. At hearing, he gave evidence that the tax debt has since been discharged, and accordingly, his liabilities at hearing were $950,766.96

52.He reported a personal average weekly expenditure totalling $1,888, which included $1,550, listed as maintenance payments/child support, which seems inaccurate.

53.With respect to his schedule of average weekly household expenses, consistent with his evidence regarding the payment of the local authority rates and charges on his [Town 1] residential property by the company, he conceded that the amount of $68 allocated for Council rates and levies should be deleted. He also conceded that his motor vehicle expenses were paid by the company and accordingly, the items for petrol, maintenance, and registration should be deleted. Otherwise, the remaining items were unremarkable, and his adjusted average weekly household expenses amounted to $1,029.

54.The evidence suggests that Mr Rolston resides alone in the former matrimonial home at [Town 1]. Although he gave evidence that he depends upon his parents to provide meat and household cleaning agents, and grows his own vegetables, the evidence at hearing and his Statement of Financial Circumstances do not suggest that he is suffering any degree of hardship.

55.Ms Hawley’s Statement of Financial Circumstances dated 23 May 2018 reflects that she is currently unemployed, and receiving newstart allowance, Centrelink family payments and child support, totalling an estimated $800 per week. She reports no other income earners in her household, no real property assets, modest bank savings, and a [motor vehicle] valued at $4,500. She gave evidence that [the vehicle] she received as part of her family law property settlement was sold some years ago as it was no longer economically viable to maintain. She lists household contents to a value of $2,000 and her total assets amount to a value of $7,500.

56.Her superannuation entitlement is listed as $7,883.71 and her liabilities and personal weekly expenditure are recorded as nil. At hearing, Ms Hawley increased her estimate with respect to children’s activities from $75 per week to $120 per week, taking her average weekly household expenses to an estimated total of $1,235. Mr Rolston did not challenge Ms Hawley’s Statement of Financial Circumstances, and the Tribunal does not consider any of the items listed in her average weekly household expenses schedule remarkable.

Conclusions

57.The Tribunal has found that Mr Rolston had income and financial resources available to him for child support purposes from the company during the financial years 1 July 2016 to 30 June 2017 and 1 July 2017 to 30 June 2018 amounting to $150,806 and $126,510 respectively. The evidence at hearing was that he derives significant personal benefits from the company in the form of contributions to his [Home Loan] mortgage, local authority rates and charges, motor vehicle expenses, and regular injections of cash to his [personal] and credit card accounts.

58.Although the financial reports provided by Mr Rolston’s accountant reflect a decrease in total trading income from $262,481.82 in the 2016–17 financial year to $195,158.90 in the 2017–18 financial year, sales for the 2017–18 financial year were less than for the previous financial year, and the evidence at hearing does not suggest that the company’s capacity to generate income at the current level of $126,510 into the future is in doubt.

59.Mr Rolston was assessed to pay child support for the period 1 September 2017 to 17 November 2018 at the annual rate of $7,818, based on his 2016–17 adjusted taxable income of $59,765. The Tribunal has found that the income and financial resources available to him for the financial year 1 July 2016 to 30 June 2017 amount to $150,806, and for the financial year 1 July 2017 to 30 June 2018, the income and financial resources available to him amounted to $126,510. As these amounts are not reflected in the income used in the administrative assessment, the Tribunal has found the assessment unjust and inequitable, and a ground for departure from the administrative assessment is established.

60.Ms Hawley lodged her application for a change of assessment on 4 December 2017. The Tribunal has the power to consider a change of assessment for a period of up to 18 months prior to the date of Ms Hawley’s change of assessment application. In the circumstances, the Tribunal considers it just and equitable to backdate the departure to 1 July 2017.

61.The Tribunal will therefore set aside the decision under review, and in substitution, vary Mr Rolston’s adjusted taxable income for the period 1 July 2017 to 30 June 2020, to $126,500. The effect of this income variation will result in Mr Rolston being required to pay Ms Hawley child support at the annual rate of approximately $23,582 for the period 1 July 2017 to 30 June 2020. The Tribunal is satisfied that such an outcome will not cause hardship to either parent or the children.

62.Ms Hawley’s 2016–17 adjusted taxable income used in the assessment is $27,448. Having regard to her financial circumstances as set out in her Statement of Financial Circumstances referred to above, the Tribunal is satisfied no change should be made to her income used in the assessment.

Otherwise proper

63.The requirement to consider whether a departure would be otherwise proper directs attention to what is fair to the community. It is necessary to consider the effect of any departure from the administrative assessment on entitlements to income-tested pensions, allowances and benefits. Parents rather than the community have the primary duty to maintain a child. Varying the income of Mr Rolston on which child support is calculated from that used in the assessment, based on his income and financial resources as set out above, which are not reflected in the administrative assessment, will result in an appropriate apportionment of financial responsibility between the parents and the community. Such a result would be otherwise proper.

DECISION

The Tribunal sets aside the decision under review and, in substitution, decides that for the period 1 July 2017 to 30 June 2020, Mr Rolston’s adjusted taxable income is varied to $126,500.