Rusani and Halici (Child support)

[2024] AATA 2309

Rusani and Halici (Child support) [2024] AATA 2309 (3 June 2024)

DIVISION:Social Services & Child Support Division

REVIEW NUMBER:  2023/SC026847

APPLICANT:  Mr Rusani

OTHER PARTIES:  Child Support Registrar

Miss Halici

TRIBUNAL:Member D Tucker

DECISION DATE:  3 June 2024

DECISION:

The decision under review is affirmed.

CATCHWORDS

CHILD SUPPORT – change of assessment – income and financial resources – father’s use of company funds and assets for personal expenses and use – director’s loan and retained profit – tribunal’s findings similar to those made by objections officer – 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

1. Mr Rusani (the father) and Miss Halici (the mother) are the separated parents of [Child 1], born 4 April 2010, and [Child 2], born 22 May 2014, aged 13 and 9 years respectively (the children).

2. The child support assessment began on 16 January 2020 and is currently registered for collection by Services Australia – Child Support (Child Support).

3. For child support purposes the mother has 80% care and the father 20% care.

4. 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 that considers variables including each parent’s adjusted taxable income (ATI) for the last relevant year of income, the number of children and the level of care provided by each parent.

5. However, part 6A of the Act allows for decision makers to depart from this formulaic assessment via a process commonly known as a “change of assessment”.

6. Under subsection 98C(1) a change of assessment can be made only if:

   a.    a ground (or more than one ground) for departure exists; and

   b.    departure from the administrative assessment would be:

   i.   just and equitable as regards the children and each parent; and

   ii. otherwise proper.

7. Subsection 98C(2) of the Act prescribes grounds that must be established to depart from the formula assessment. These grounds match those set out in subsection 117(2). If the Registrar (or Tribunal in their stead) is satisfied that one or more of these grounds are established, and 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. These include varying the rate of child support payable, the parents’ ATI, or cost percentages.

10 May 2023 –change of assessment

1. On 5 January 2023 the mother applied for a change of assessment based on the ground known as Reason 8A, which refers to parents’ income and financial resources. The mother claimed that the father’s ATI was under assessed.

2. The father’s liability was calculated based on his annual income estimate of $89,938 for the 2022/23 financial year, and an estimate of $11,991 for the mother.

3. On 10 May 2023 DM [A] found Reason 8A established in relation to the father and varied the assessment by setting his ATI at $175,903 for the period 5 January 2023[1] to 4 January 2026. This increased the father’s child support liability to $24,374 from 5 January 2023 to 3 April 2023, and to $26,892 from 4 April 2023 – the date that [Child 1] turned 13 and the amount prescribed by the formula for her costs of care increased.

   [1] The date of the mother’s application for a change of assessment.

10 July 2023 – objection decision

1. On 23 May 2023 the father objected to DM [A]’s change of assessment decision. The father argued that his income had been overestimated, and the mother’s income had been underestimated, as she receives income from her business, a rental property, and her partner. He also contended that his child support liability had been considered during his property settlement with the mother.

2. The objections officer found that Reason 8A was established in relation to the father, and set his income as follows:

   ·   From 5 January 2023 to 29 February 2024, the father’s ATI is $182,253.

   ·   From 1 March 2024 to 31 May 2025, the father’s ATI is $187,721.

   ·   From 1 June 2025 to 31 January 2026, the father’s ATI is $193,353.

3. The impact on the assessment was to increase the father’s annual rate of child support as follows:

   ·   For the period 5 January 2023 to 3 April 2023, from an annual rate of $24,374 to approximately $25,242.

   ·   For the period 4 April 2023 to 30 June 2023, from an annual rate of $26,892 to approximately $27,808.

   ·   For the period commencing 1 July 2023, from an annual rate of $22,162 to approximately $22,852.

   ·   As a result, as at the date of the objection decision, additional arrears of child support were created for the father of approximately $436.32.

The father’s application for independent review

1. On 21 August 2023 the father applied for further review by this Tribunal. The father and mother gave affirmed evidence via telephone at a directions hearing on 1 February 2024 and at a further hearing on 5 March 2024. The Tribunal considered written and oral submissions from the parents and relevant documents provided by Child Support.

ISSUES

1. The issues which arise in this case are:

   ·      Does a ground exist for departing from the administrative assessment? And, if so,

   ·      Would it be just, equitable and otherwise proper to do so?

CONSIDERATION

Does a ground exist for departing from the administrative assessment?

Reason 8A – the father’s income and financial resources

1. To find Reason 8A established in relation to the father, the Tribunal must be satisfied that his income, property, and financial resources make the child support assessment unfair.

2. The mother contends that the father’s financial resources are greater than the income he declares for tax purposes because he uses company funds to meet many of his personal expenses. The mother pointed out that the level of the father’s personal expenditure suggests the same. For example, he is paying for his wedding, which will be held overseas, and renovating his residence.

3. The mother explained that prior to separating from the father she handled the accounts for the father’s company and knows that he habitually pays for personal expenses from business accounts.

4. It is a well-established principle in the Family Court that the taxable income of a person who is self-employed may not be an accurate reflection of their earning capacity and financial resources for child support purposes (DJM and JLM [1988] FamCA 97; Scott v Scott [1994] FLC 92-457; Carey v Carey [1994] FLC 92-489). Parents who are self-employed via a private company structure can enjoy financial benefits unavailable to PAYG earners. For example, determining their taxable earnings, claiming depreciation without matching actual capital expenditure in the same year, and to deduct expenses associated with such things as a home office, motor vehicles, telephones, and internet access from which they may receive a benefit. These advantages can simultaneously reduce a person’s tax liability while defraying their living expenses.

5. The father’s company, [Company], employs around five staff. The father is the sole director and shareholder. He decides what amounts the Company will pay him in wages, accumulate as a loan owed to him, and retain as profits. The Company’s financial resources are available to the father. The Tribunal’s task is to decide to what extent they should be considered a financial resource for child support purposes.

6. The father explained that operating his business keeps him busy and day to day he does not have the time to carefully segregate his personal and business expenditure. He relies upon his bookkeeper and his accountant to do this for tax purposes. Consequently, he could not comment on the details of the financial reports they prepared.

7. However, the father was adamant that his personal income was no more than $90,000 per year, conceding that it probably included the $9,611 of director’s fees that appear in the Company’s 2022/23 profit and loss statement. He also estimated that around 15% of the use of his Company vehicle and telephone was personal.

8. During the change of assessment process the father provided the Company’s 2021/22 income tax return (ITR), but not a profit and loss statement, a balance sheet or depreciation schedule. Child Support reviewed the father’s bank statements and concluded that he paid for a significant amount of his personal expenses from the Company’s business account, including flights, telephone payments, fuel, gym membership, council rates, overseas hotels, golf club expenses, alcohol, entertainment, groceries, and pharmacy items. Child Support found that over a three-month period the father met a total of $24,552 of personal expenses from the business account. Annualised, this was equivalent to around $100,000 per year. When this was added to his declared wages, it gave him an annual income of $168,208.

9. DM [A] used ATO small business benchmarks regarding profitability to estimate that the net profit of the father’s business would be around $163,871 (76% of the gross business income). DM [A] also added back $1,600 for electricity, $432 for private telephone use, and $10,000 for private motor vehicle use and discretionary spending, to calculate a total income of $175,903. In DM [A]’s view, this was a conservative estimate.

10. The objections officer made the following findings:

    ·   The net rental income the father received from an investment property was not significant for child support purposes.

    ·   As the father’s business address and residence are the same, it was reasonable to assume that his personal electricity use and rent was paid for by the Company.

    ·   The Company’s finances improved in 2022/23 and there was a retained profit of $54,855.

    ·   From 2021/22 to 2022/23 a director’s loan to the Company increased by about $60,000.

    ·   The father is the sole director and shareholder of the Company and the Company’s retained profit should be regarded as his financial resource.

11. In evidence is the father’s individual ITR for the years 2021/22 and 2022/23 and ITRs and financial reports for the Company for 2021/22 and 2022/23.

12. Also in evidence is a letter from the father’s accountant, [Mr B], dated 27 July 2023. The points made by [Mr B] include the following:

    ·   The father does not own an investment property. The only rent he has received is from briefly holiday letting his primary residence in 2023.

    ·   The father does not own any motor vehicles but has access to three vehicles owned by his company, which are [Vehicles 1-3].

    ·   While the father’s business and residential address are the same, the Company does not pay for his rent, mortgage or electricity. The rent expense of $36,363 was for a factory unit that the Company used to garage vehicles and store supplies.

    ·   The Company’s 2022/23 ITR submitted to the ATO shows a loss of $38,109.

    ·   The father’s financial resources are confined to his salary of $70,000.

13. The role of the Tribunal is not to conduct a forensic audit (Podmore & Pillai [2011] FMCAfam 952 and Frost and Frost [2011] FMCAfam 1311). Rather, it is to determine from the available evidence before it, the financial resources available to the parties for child support purposes, such that a fair decision can be made in respect of the child support liability.

Personal use of Company resources

1. The Tribunal accepts the evidence provided by the father and his accountant that the only rental income he received in any relevant period was from holiday letting his own dwelling, and it was not a significant amount. The Tribunal also accepts the company is not paying rent or a mortgage for the father’s private residence or for his personal electricity use.

2. The Tribunal reviewed the statements from the Company’s bank account for the three-month period from 5 February 2023 to 5 May 2023. Consistent with the father’s evidence, in addition to company expenses, such as wages, they show personal spending on items including gym fees, takeaway food, groceries, eating out, and liquor totalling $3,037, equivalent to $12,148 per annum ($3,037 x 4). Vehicle costs, such as petrol, are not included in this figure (discussed further below).

3. The Company bank account also shows expenditure on airfares and overseas rental cars between February and May 2023 totalling $3,097. The Tribunal will assume that these were annual expenses, rather than quarterly.

4. When annualised, these personal expenditures from Company funds total $15,245 ($12,148 + $3,097).

5. In addition, the father receives a financial benefit from his personal use of a Company owned vehicle and telephone. According to the Company’s 2022/23 profit and loss statement, it spent $23,727 on motor vehicle running costs (not including depreciation). The Tribunal notes that the Company owns and operates three vehicles, one of which is a truck. The Tribunal finds that the father’s personal use of company vehicles is worth no less than $8,000 in running costs. The ATO allows 25% per annum of most cars based on estimates of their useful life, on a diminishing value basis. The Tribunal finds it likely that the father’s personal use of Company vehicles, including running costs and depreciation, is no less than $11,000 per annum.

6. The Company also spent $2,250 on telephone charges and internet access which the father uses for business and personal purposes. The Tribunal will add back $1,000 of this amount to the father’s income to account for the personal benefit he receives from it.

7. Together, the net value of the father’s personal use of the Company’s funds and assets is $27,245 ($15,245 + $11,000 + $1000).

8. The gross equivalent of this amount, calculated using the father’s marginal tax rate of 32.5%, is around $40,000 (rounded down). The Tribunal finds that this amount must be added to his ATI to get a true picture of his financial resources.

Alienated income

1. According to the Company’s 2022/23 ITR it had a total income of $828,455, with total expenses of $860,196, resulting in a loss of $31,741.

2. However, the Company’s expenses included depreciation of $178,248 as an instant asset write-off. This contrasts with 2021/22, when the Company had depreciation of only $51,005. The Tribunal notes that this depreciation figure accounts for most of the difference between the Company’s total expenses in 2022 versus 2023.

3. The father thought it likely that the assets depreciated in 2022/23 consisted of two vehicles he had personally owned – [Vehicles 2-3] – which he had sold to his company. The father asserted that $178,248 was a realistic estimate of their value as [Vehicle 3] alone was worth $140,000.

4. There is no evidence that the father received any payment from the Company for these vehicles. This instant asset write-off was a book-entry, rather than an out-of-pocket expense for the Company. To get a true picture of the Company’s profitability for child support purposes, the Tribunal will substitute the depreciation figure used in 2021/22 of $51,005. When this is done, the Company has expenses of $349,523 and a gross profit of $95,502 for 2022/23.

5. This is an increase of $102,260 from the loss of $6,758 in 2021/22, which is reflected in an increase of $56,894 in the Company’s current assets (from $48,428 to $113,999) and an increase of $55,025 in the director’s loan owed to the father (from $40,735 to $95,760).

6. The Company’s profitability will wax and wane from year to year, and it must therefore hold cash reserves. The father told the Tribunal that he needs to retain a minimum of $100,000 in the Company for this reason. The Tribunal accepts this and will therefore not consider the increase in the Company’s current assets as a financial resource available to him.

7. However, the Tribunal finds that the increase in the director’s loan owed to the father is a financial resource available to him and must be considered as such for child support purposes. The Tribunal reckons the father’s annual income in 2022/23 as follows:

   $86,452 – his gross earnings per his tax return        

   $55,025 – the increase in the director’s loan owed to the father

   $41,000 – gross value of his personal use of company funds and assets

   $182,477 – TOTAL

8. As this income is significantly more than the income reflected in the assessment prior to the change of assessment the Tribunal finds that Reason 8A is satisfied and provides grounds for a departure from the administrative assessment.

Would a departure from the administrative assessment be just and equitable?

1. Once a reason for departing from an administrative assessment has been established, the Registrar (or the Tribunal in their stead) must consider the amount and duration of any proposed change and the factors listed in subsection 117(4) of the Act which are relevant to a particular case. These include the parties’ respective earning capacities, the needs of the children, the parents’ commitments and any hardship that would be caused by departing or not departing from the formula assessment and any other relevant matters.

The mother’s income

1. DM [A] also reviewed the mother’s income using her most recent ITR and BAS and bank statements. These, along with the fact that she continued to qualify for jobseeker payments, corroborated her 2022/23 income estimate of $11,991.

2. The mother indicated in her Statement of Financial Circumstances that she receives parenting payment single which is not included as part of her ATI for the purpose of the child support assessment. In the absence of any evidence to the contrary, the Tribunal is satisfied that the mother’s ATI is fairly reflected in the assessment. As noted by DM [A], the mother would need to be earning around $75,000 annually before her income would significantly affect the assessment.

Other matters

1. The father told the Tribunal that he found the child support formula unfair, because it penalises paying parents who choose to work hard to increase their income. The father also observed that there was no guarantee that the child support that he paid was used for the benefit of the children.

2. The Tribunal gained the impression that the father loves his children dearly and would not hesitate to provide for them. His grievance is based on his sense that he is paying child support to support the mother, rather than for the benefit of his children.

3. As the Tribunal explained to the father, there is no perfect system or guarantee that child support payments always directly benefit the children of the assessment. However, there is no evidence or suggestion that the mother was not caring for the children appropriately. He is correct in observing that a person’s child support liability increases in proportion to their income. However, this is how the legislation is designed to work and the Tribunal is satisfied that there is nothing unjust or inequitable about its operation in this instance.

4. The father’s accountant, [Mr B], echoed the father’s claim that the liability resulting from the objections officer’s decision exceeded the father’s ability to pay. The father told the Tribunal that it was so onerous he could be forced to close his business. Given its findings about the father’s financial resources set out above, the Tribunal finds these concerns are unfounded.

5. Neither parent has offered arguments or evidence that there are health problems that significantly affect the cost of the children’s care.

6. Given their ages, there is no question of the children having income, earnings, property or financial resources that affect the child support assessment.

7. The Tribunal is satisfied that no hardship would be caused to the children or the parents, or any other child or person that the liable parent has a duty to support, by the making of, or the refusal to make, a determination.

8. After carefully considering all the relevant circumstances of the case, the Tribunal is satisfied that this is a just and equitable sharing of the financial cost of meeting the children’s needs.

Is it otherwise proper to make a change to the administrative assessment?

1. Subsection 117(5) requires the Tribunal to take into consideration the following matters:

   (a)the nature of the duty of a parent to maintain a child (as stated in section 3) and, in particular, the fact that it is the parents of a child themselves who have the primary duty to maintain the child; and

   (b)the effect that the making of the order would have on:

   (i)    any entitlement of the child, or the carer entitled to child support, to an income tested pension, allowance or benefit; or

   (ii)    the rate of any income tested pension, allowance or benefit payable to the child or the carer entitled to child support.

2. 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. The mother is in receipt of income-tested benefits, so departing from the administrative assessment will ensure that the apportionment of financial responsibility between the parents and the community is appropriate. The determination is otherwise proper.

Conclusion

1. The Tribunal’s findings about the father’s and mother’s ATIs are for all practical purposes identical to those made by Child Support’s objections officer in their decision.

2. Like the objections officer, the Tribunal also finds it appropriate to increase the father’s ATI each year in accordance with the child support inflation factor of 3%.

3. The Tribunal also finds it is appropriate to commence the departure period from the date of the mother’s application, rather than an earlier date. The mother was aware of her right to apply for a change of assessment and the onus was upon her to do so if she believed the assessment was unfair.

4. The Tribunal also finds it appropriate to set a departure period of three years to give the parents continuity and certainty. The parents are free to seek another change of assessment in the meantime.

5. Based on these considerations, the Tribunal will affirm the objection decision of 10 July 2023.

DECISION

The decision under review is affirmed.