A parent can apply for a change of assessment in special circumstances if their necessary expenses significantly affect their capacity to support the child.
A parent can apply for a change of assessment in special circumstances if his or her capacity to support the child is significantly reduced by their legal duty to maintain another person.
Context
Parents and non-parent carers can apply for a change of assessment in special circumstances if the child support assessment is unfair because of the income, property, financial resources or earning capacity of one or both parents of the child for whom child support is payable.
Legislative references
Sections 3(2), 66, 98E, 98C, 98S, 117(2)(c) and 117(4) to 117(9) Child Support (Assessment) Act 1989
Fringe Benefits Tax Assessment Act 1986 (FBTAA)
Income Tax Assessment Act 1936 (ITAA)
A New Tax System (Fringe Benefits Reporting) Act 1999 (Fringe Benefits Reporting Act)
Explanation
There may be a reason for changing the assessment if, in the special circumstances of the case, the assessment of child support results in an unjust and inequitable level of financial support to be provided by the payer for the child because of either parent’s:
The circumstances in which CSA (or a court) can take into account a parent’s earning capacity have been limited from 1 July 2006.
Either parent can apply for a change of assessment using this reason. CSA can also initiate a change of assessment using this reason.
Additional income, property or financial resources
Unfair or 'unjust and inequitable' assessment based on taxable income
Low income from a family business
Alienation of income and a 'corporate veil'
Self employment and business expenses
Salary packaging, fringe benefits and Defence Force benefits and allowances
Lump sum payments received by a parent
Social security payments to the payer or payee
The phrase 'special circumstances of the case' is not defined in the Assessment Act. The Family Court has held that 'it is intended to emphasise that the facts of the case must establish something which is special or out of the ordinary' (Gyselman and Gyselman (1992) FLC 92-279).
A child support assessment is generally calculated using the parents’ most recent taxable income. CSA will be satisfied that there are special circumstances if a parent's current income is not adequately reflected in the child support assessment (whether it is more or less than the income used).
CSA can also be satisfied that there are special circumstances if one parent has substantial property or financial resources that have not been properly taken into account in the child support assessment (Ross and McDermott (1998) FLC 98-003).
Although a parent’s most recent taxable income is used in the child support formula, CSA can look beyond the parent’s taxable income when considering an application for a change of assessment. Income, earning capacity, property and financial resources which do not necessarily form part of a parent's taxable income can be added to or excluded from a child support assessment (Carey and Carey (1994) FLC 92-489).
Additional income, property or financial resources
Each application will be determined according to the individual circumstances of the case.
However, there is a range of circumstances that may form the basis of an application under this reason. It may be that a parent:
From 1 July 2008, under the new Child Support Scheme, a broader range of income will be used in determining the adjusted taxable income for a parent in the formula assessment (see Chapter 2.4.4).
This includes:
This means it will not usually be necessary to apply under this reason to have these factors considered. That is, they may already be taken into account in the parent’s adjusted taxable income used in the child support formula.
In some cases, a parent's financial circumstances or the issues associated with the case may be too complex to be determined by CSA. In these cases CSA may refuse to change the assessment and recommend that the parent apply to a court for an appropriate determination of the level of child support (section 98E).
When making a decision under this reason, CSA must disregard any entitlement the payee might have to an income-tested pension, allowance or benefit (apart from any tax-free pension or benefit that forms part of a parent’s adjusted taxable income). Generally, CSA must also disregard the income, earning capacity, property and financial resources of any person who does not have a duty to maintain the child. However, CSA will consider whether a parent has capacity to earn or derive additional income including a consideration of assets that do not produce, but are capable of producing, income (section 117(7A)).
Unfair or 'unjust and inequitable' assessment based on taxable income
Once CSA has determined that the parent's income, earning capacity, property and financial resources are not reflected in the child support assessment, it must decide whether this produces an unfair result. This includes consideration of the parent’s total financial circumstances and whether the income used in the assessment correctly reflects their capacity to support their children. It also includes comparison of any change in the parent's income against any change in the parent's commitments and expenditure from the time of the application (Ross and McDermott (1998) FLC 98-003).
If CSA finds that there is a discrepancy between the child support assessment and the income, property and financial resources of the parent, it will also consider the extent of the discrepancy before deciding whether or not the assessment produces an unfair result. In this sense, 'unjust and inequitable level of child support', is narrower than the 'just and equitable' elements under section 98C of the Act.
Examples
CSA may determine that a parent has an income that is marginally greater than the child support income amount but, overall, it does not render the assessment unjust and inequitable. Similarly, it may be established that a parent has property which does not produce an income but, overall, the value of the property does not render the assessment unjust and inequitable.
In some cases a parent might have substantial property and assets but a low income used in the child support assessment. CSA may consider the parent's property and assets, as well as any income, in deciding the appropriate rate of child support to be paid (Abela and Abela (1995) FLC 92-568 and Bendeich and Bendeich (1993) FLC 92-355).
CSA will take into account that child support is intended to meet the day-to-day needs of the child, when considering a parent's capacity to contribute to supporting a child.
It is not sufficient for a parent to say that they are unable to pay child support because their assets produce little or no income or will only produce income at some point in the future. CSA will consider whether the parent has the capacity to restructure their financial affairs to produce an income stream from which to contribute to child support. In these cases, CSA may:
CSA does not have to identify any specific source, property or asset from which a parent should meet the obligation to contribute to the support of the child. CSA need only consider the parent's financial resources as a whole, including any capacity to borrow against the assets (Dwyer v McGuire (1993) FLC 92-420).
Low income from a family business
A parent who receives a low taxable income from a family business may have access to additional financial resources, or alternatively he or she may have an additional earning capacity.
In determining the parent’s financial resources, CSA may consider the following factors:
CSA may determine that a parent's income is greater or lower than the amount upon which they have been assessed. Alternatively, CSA may decide that the parent's financial resources give the parent a greater capacity to contribute to the financial support of the child than is indicated by the assessment.
Alienation of income and a 'corporate veil'
A reduction of a parent's taxable income by alienation of personal services income or other income will result in an artificially reduced or increased child support liability.
Generally, income is alienated when the income generated or derived by a person is attributed to others and, consequently, reduces the first person's taxable income. Personal services income, or income derived through personal exertion, can be defined as income that an individual earns predominantly as a direct reward for their personal efforts. Personal services income paid to a company, trust or partnership is also alienation of income.
If a parent is involved in alienation of his or her personal services income, this may indicate that he or she has additional income or financial resources that make the current child support assessment unjust and inequitable (section 117(2)(c)(ia)).
The Australian Taxation Office (ATO) has a published view in respect of the taxation consequences of arrangements that seek to alienate a person's taxable income. The ATO may make decisions concerning these arrangements for the purposes of taxation legislation and may have regard to the principles outlined in the publications. CSA may consider these principles in deciding whether such arrangements exist but can make a different decision about how they should be treated for the purposes of the child support legislation.
Many of the concepts relating to alienation are based on the term 'personal services income'.
Some common examples of income from personal services are:
Where personal services income is included in the taxable income of people other than the person who earned it the ATO considers that the tax avoidance provisions apply to cancel any tax benefits (Part IV of the Income Tax Assessment Act 1936). If the ATO is satisfied that such an arrangement was entered into primarily, or predominantly, to avoid liability for income tax by the means of the splitting of income, then the arrangement will be ineffective for income tax purposes. The tax benefit arising out of the arrangements will be removed.
Where incorporation does not reduce personal income
In certain circumstances the ATO accepts that interposing a company, trust or partnership has no adverse taxation effects. For example, the incorporation of a professional practice that does nothing more in relation to income tax than reduce a professional person's income by the amount of an appropriate superannuation cover.
A professional practitioner may operate through a trust structure provided that the trust structure achieves the same result for income tax purposes as an incorporated professional practice. The ATO requires that the professional practitioner be the sole beneficiary of the trust.
CSA will have regard to these principles in determining whether such arrangements exist but may make a different decision to that of the ATO about how the arrangements should be treated for the purposes of the parent’s child support assessment.
How CSA identifies income that is alienated
In determining whether personal services income has been alienated through a company, trust or partnership, CSA will consider the following factors:
Where are the ATO's views on alienation of income found?
The following publications are available on the ATO’s website at the following address:
http://law.ato.gov.au/atolaw/index.htm
How these issues apply to a change of assessment decision
Whether company, trust or partnership income is derived from the personal exertion of a parent needs to be examined in each case. The primary issue is the extent of the connection between the parent and the income derived and the services rendered by the interposed entity.
Income other than personal services income
There may be cases involving corporate, trust or partnership arrangements which involve the alienation of income other than personal services income (e.g. rental income). In these cases CSA will examine the structure of the company, trust or partnership. CSA may take into account any relevant taxation ruling or guideline which has been issued by the ATO, but may make a different decision on how the facts are applied to child support.
CSA will consider whether the arrangement alienates income which should properly have been included in the parent’s adjusted taxable income (known before 1 July 2008 as the child support income amount) (in respect of companies refer to Stein and Stein (1986) FLC 91-799, in respect of trusts refer to Harris and Harris (1999) FamCA 1228 and also Ashton and Ashton (1986) FLC 91-777; in respect of partnerships refer to Dwyer v McGuire (1993) FLC 92-420). CSA may conclude that a company or trust is the alter ego of the parent; or that a company or trust is a sham for the purposes of the Assessment Act or that a partnership is ineffective.
In relation to a company structure, CSA can consider the following factors:
In relation to a trust structure, CSA can consider the following factors:
In relation to a partnership, CSA can consider the following factors:
Income in the form of undistributed profits
A parent may be retaining profits in a company, trust or partnership structure instead of distributing them to themselves or others. This has the effect of reducing the parent's taxable income.
Self employment and business expenses
A parent may be involved in a business as a sole trader in person or under a trading name. A business may deduct certain expenses from income for tax purposes and as a result legitimately may have a reduced income or may even run at a loss. These deductible expenses can result in a child support assessment that does not take into account the full financial resources available to the parent. In these cases, assessing child support on the basis of taxable income can result in an unjust and inequitable level of child support.
Common examples of business expenses include:
If the tax deductible business expenses provide a personal benefit to the parent, this may make the child support assessment 'unjust and inequitable'. CSA will consider whether the parent has a greater financial capacity than is indicated by his or her taxable income, either as a direct result of the deductions or of having certain personal costs defrayed by being tax deductible.
Salary and wage earner offsetting business losses
A parent who is a salary or wage earner may operate a business as well as receiving a salary or wage. Expenses relating to the business activity may legitimately be offset against salary or wage income for tax purposes. This can result in a reduced taxable income, which will in turn affect the child support assessment.
However, when considering a change of assessment application, CSA may decide that the offsetting of business expenses has led to a taxable income which does not accurately reflect the parent's full capacity to contribute to the support of the child from his or her income, property and financial resources (Bassingthwaite v Leane (1993) FLC 92-410 and Humphries and Humphries (1993) FLC 92-430).
In determining the parent's income and financial resources CSA can consider the following:
Expenses partly for business purposes and partly for private purposes
Where an expense is partly business and partly private the expenses must be apportioned for taxation purposes. Parents who are self-employed or who operate a business might claim expenses that may otherwise be considered private as a legitimate income tax deduction. Examples include the fixed-costs component of telephone expenses such as the rental and connection fees, home office expenses or motor vehicle expenses. These deductions are generally not available to parents who derive income solely from salary and wages.
If CSA concludes that, as a result of the deductions, the parent has additional income or financial resources that are not taken into account in the child support assessment, a reason to change the assessment may be established.
Salary and wages paid to relatives or associated persons
A parent who operates a business may legitimately pay wages or salaries to employees. However, if the employee is a related person, such as the parent's new spouse, de facto partner or a family member and the payments exceed the reasonable value of the work performed, CSA may treat the income of that employee as the income of the parent. In deciding whether to treat part or all of such salary and wage payment as the parent's income, CSA will consider the following matters:
Depreciation represents the loss or expense attributed to the use of business property or equipment. A claim for depreciation can result in a parent having additional 'cash in hand' that may be considered a financial resource. In cases that involve depreciation, CSA will determine whether receiving a benefit through claiming depreciation expenses results in a parent having greater financial resources or income than his or her taxable income would indicate. CSA will consider a parent's complete financial situation and the individual circumstances of the case. If the amount claimed as depreciation is used or set aside for replacing equipment then this is unlikely to provide the parent with additional financial resources. On the other hand, if the parent spends the benefit of depreciation on day-to-day living expenses or recreational expenses this is likely to be a reason for changing the assessment.
CSA can also consider the asset that is the subject of the depreciation expense, whether the asset is used for both business and private activities and whether the written down value is a reflection of market value. A luxury car leased as a work vehicle might also be used for private purposes.
The principles above apply equally to any business in which there is substantial expenditure on the acquisition or development of plant and equipment. A parent may claim that capital investment is warranted at present as it will produce a higher income and therefore higher child support in the future. In each case CSA will consider the parent's complete financial situation and the individual circumstances of the case as well as the extent of the capital investments.
Prior year losses and capital losses
For taxation purposes some deductions may be claimed during a year even though there has not yet been any direct expense in that year.
Example
Where a taxpayer has a tax loss (more deductions than income) they may be able to deduct that loss from income received in later years.
There are also special rules for capital losses. They may be carried forward indefinitely to be deducted against any future capital gain.
In either case, the result is that a person may have a lower taxable income in a future year and therefore a lower (or higher) assessment of child support.
In these cases CSA will determine the parent's capacity to contribute to the financial support of the child. CSA may consider the relationship between the loss and the actual expenditure.
Example
Capital gains losses from 1999 may be carried forward and offset against a capital gain in 2007. As the loss occurred 9 years earlier a parent may have additional financial resources in 2007. The parent has received a benefit in that year without incurring the related expenditure. CSA may decide that the parent has income and or financial resources that are not reflected in the parent's taxable income.
However, it is possible that parents may have made arrangements with creditors to repay an outstanding debt caused by the earlier loss. Any repayments will be taken into account in deciding whether there is a reason to change the assessment.
If the debts or losses have been dealt with in a family law property settlement CSA will consider the terms of the settlement in deciding whether there is a reason to change the assessment.
More complex structures involving businesses
Parents may use a number of different structures to minimise their taxable income. For example, a parent may operate one business as a sole trader but operate associated activities through a company and trust structure. Sometimes the structure used during the parents' relationship is different to the structure used after the relationship has ended. A business may have operated as a family business, as a partnership or as a sole trader during the relationship. After the relationship ends a parent may restructure the business as a company or trust which produces a lower taxable income although the business activity had not changed.
Where there has been an historic pattern of earnings at a particular level and a restructuring results in a lower level of taxable income CSA may assess the level of child support with reference to the earlier income.
Parents may use complex business structures in order to minimise their adjusted taxable income. Where the issues raised by the application for change to an assessment are too complex CSA can refuse to change the assessment and recommend that the parent apply to a court having jurisdiction under the Act (section 98E).
Changes that reflect a parent's financial circumstances
Where a parent's financial circumstances are not complicated, and the financial element can be easily identified and isolated CSA may increase the parent's adjusted taxable income.
Example
If business income is reduced by $10,000 as a result of depreciation and that amount is then used for day-to-day personal expenses the depreciation amount may be considered as an additional resource and added back to the parent's adjusted taxable income.
Where a parent's business provides a new spouse, partner or family member with a level of income that is disproportionate or unjustified given the work performed and the person’s skills or experience, CSA may add back the proportion of the income which exceeds a reasonable level of remuneration.
Some taxation incentives for the improvement of primary production properties provide deductions by allowing a percentage of the cost or a write-off over a period of time. Examples include the costs of conserving or conveying water, deductions for telephone costs over a 10-year period and outright deductions for measures that prevent land degradation.
Proof of this kind of expenditure alone will not establish a reason to change a child support assessment. However, if the parent has developed a capital structure of primary production that results in the parent being asset rich/income poor, he or she may have additional financial resources and a greater capacity to contribute to the financial support of the child.
Primary producers can be subject to extreme fluctuations of income that are not usual in ordinary businesses and are outside the control of the farmer. Farmers are able to average their income out over a period of five years for taxation purposes, to reduce the impact of marginal tax rates. Additionally, Farm Management Deposits (FMDs) provide farmers with a tax effective way to save money during good years to be used during bad years. By depositing an amount in the FMD, a farmer can reduce his or her taxable income for that year, which would in turn affect the rate of child support payable. The FMD amounts are assessed as taxable income when they are withdrawn in a subsequent year (as long as they remain invested for 12 months).
In deciding whether the FMD provides the primary producer parent with additional income or a financial resource that makes the child support assessment ‘unjust and inequitable’, CSA will consider the primary producer’s surrounding financial situation.
If, for example, the parent makes an FMD in a good year, after a history of low taxable incomes due to poor yields and drought, it would not generally be appropriate to simply add the FMD back into the person’s income for child support purposes. If it is likely that the parent will withdraw this deposit over the next few years, the withdrawn amounts will be included in his or her taxable income at that time, and taken into account in the assessment of child support in the normal course of events. However, in some cases, it may be appropriate to take account of the income that was paid into the FMD before it is withdrawn, through the inclusion of smaller income amounts over a number of child support periods.
Conversely, if a parent who is a primary producer has had a history of medium to high incomes and is constantly topping up their FMD without making withdrawals (thus reducing their taxable incomes over a number of years), this may indicate that the scheme is merely being used to lower taxable income artificially. In these cases, increasing the parent’s adjusted taxable income by the full amount of the particular deposit is likely to be the most appropriate action.
Salary packaging, fringe benefits, Defence Force benefits and allowances
Salary packaging is an arrangement whereby an employee receives remuneration from their employer by way of a total package, made up of various benefits plus a component paid as salary. Usually the employee has some flexibility in the way that their salary is packaged. Depending upon the nature of the salary package, and whether the benefits are reportable fringe benefits, the person’s adjusted taxable income may not be an accurate reflection of their overall remuneration from their employment.
A fringe benefit is a benefit that is provided to an employee or an associate of the employee (such as a family member) as part of the employment arrangement. An employee can be a current, future or former employee. The term 'benefit' is broad and includes any right, privilege, service or facility.
Common examples of fringe benefits provided from employment are:
An employer has to pay tax on the taxable value of a fringe benefit. The taxable value of a fringe benefit is usually reduced by the amount of any payment by the recipient or employee towards the fringe benefit. There are specific valuation rules for each category of a fringe benefit (Part III FBTAA).
Income derived by the provision of a fringe benefit within the meaning of the FBTAA is exempt income and is not taxable income (section 23L of the Income Tax Assessment Act 1936 - the ITAA).
Employers are required to report on an employee's group certificate all fringe benefits with a total taxable value of more than $1,000 a year (section 135P of the FBTAA). The 'total taxable value' means the amount that the employer paid or assigned as the value of the benefit. However, the 'grossed up taxable value' (which is the total taxable value as determined by the employer multiplied by a figure pre-determined by the ATO) will appear on the employee's group certificate. The 'grossed up taxable value' will be a larger amount than the 'total taxable value'.
For child support assessments commencing after 30 June 2000, the reportable fringe benefits total included in an employee's group certificate (being the 'grossed up taxable value') is included in the parent's adjusted taxable income and used to calculate the child support assessment.
It is therefore unlikely that a parent’s reportable fringe benefits will be a special circumstance that will warrant a further increase in their child support assessment after 1 July 2000.
In some cases a parent may consider lodging an application to change the child support assessment on the basis that their income, earning capacity, property and financial resources are not properly reflected in the child support assessment because such fringe benefits have been included. The fact that fringe benefits have been included in the adjusted taxable income will not, in itself, be a reason to change the assessment. In order to show a reason to change an assessment a parent must show that other circumstances affect their capacity to provide financial support for the child or that the nature of the fringe benefit received does not provide them with an actual, additional financial resource.
In deciding if the benefit provides the person with an additional financial capacity CSA can consider the individual circumstances of the case including:
A parent may apply for a change of assessment solely because a fringe benefit does not provide him or her with an additional financial capacity. If the parent would have incurred the same kind (or similar kind) of expense but would not have incurred the expense to the extent reflected by the amount of the reportable fringe benefit, and the amount is significant, this may make the assessment ‘unjust and inequitable’. CSA may reduce the adjusted taxable income by the difference of the reportable fringe benefit and the estimated expenditure.
CSA may also give consideration to Reason 7 ('necessary commitments in supporting oneself') and decide whether it is appropriate to change the child support assessment for a short period to enable the parent to rearrange his or her salary package or financial affairs. In deciding what is an appropriate period CSA will consider the individual circumstances and the parent's commitments in supporting himself or herself.
Benefits that are not 'reportable fringe benefits'
Some benefits are expressly excluded from the definition of a fringe benefit and do not give rise to any fringe benefit tax liability (section 136(1) of the Fringe Benefits Tax Assessment Act 1986 ‘the FBTAA’). Examples include:
CSA will not ‘gross up’ the value of a benefit of this type. CSA will consider whether the parent could restructure their remuneration package to take the benefit as wages and be in a position to use those monies to meet the child's needs. The final decision will depend on the circumstances of the case and any other reasons under consideration.
Treatment of Defence Force Benefits exempt from fringe benefits reporting
Certain benefits provided by the Australian Defence Force (ADF) to its personnel are exempt from the fringe benefits reporting requirements. These benefits are provided to ADF members in recognition of the need for service mobility and the effect this can have on the members' families. The benefits that are excluded from reportable fringe benefit requirements include:
The benefits listed above are not reported to the ATO, and are therefore not included in the parent's adjusted taxable income. Other ADF allowances are reportable. They are those that have clear personal benefit such as subsidised home loans, private use of official cars or free travel which is not part of reunion travel.
CSA will take into consideration Government policy regarding the exemptions from reportable fringe benefits. CSA will not change an assessment solely because one parent is in receipt of ADF allowances or benefits which are not reportable fringe benefits. However, in cases where other reasons or circumstances exist, CSA may take into consideration the receipt of ADF benefits and allowances when deciding whether it is fair or just and equitable and otherwise proper to make a particular change to the child support assessment.
Defence Force Allowances – non-taxable
Australian Defence Force personnel serving in war-like zones receive tax-free salary and additional allowances in the nature of travel allowances paid as compensation for the increased cost to personnel of serving in a war-like zone.
Tax-free payments to Defence Force personnel are not included in a parent’s adjusted taxable income and are not therefore taken into account under the usual formula provisions. This may give rise to a change of assessment application from the other parent. If there are no other circumstances peculiar to the case, CSA will increase the parent’s adjusted taxable income by the amount of their tax exempt salary, but will not gross-up the value of that salary. CSA will generally not include the value of any additional non-taxable allowances in the parent’s adjusted taxable income.
If the parent applying for a change to the assessment raises other grounds, or the other parent makes a cross-application CSA will consider all aspects of the case and consider whether it would be just and equitable and otherwise proper to make a different type of change.
Defence Force Allowances – taxable
Defence Force personnel posted to remote localities in Australia may receive a District Allowance ‘paid in recognition of the higher than normal cost of living in adverse circumstances, including the need to use air-conditioners more than other posts’. The allowance is taxable and the amount received is greater if the recipient has dependants. This allowance is included in the parent’s adjusted taxable income for the purposes of calculating their child support assessment. CSA will not change an assessment solely because one parent is in receipt of a District Allowance.
Lump sum payments received by a parent
Where a parent receives a substantial amount of money (a 'lump sum') that would otherwise not form part of his or her income amount used for child support purposes, and therefore is not included in the assessment of child support, the lump sum may be taken into account in deciding whether the assessment should be changed.
Such payments may arise as a consequence of the parent:
In each case it will be necessary to decide whether receiving the money makes the amount of child support payable unjust and inequitable.
A relevant factor (but not the sole factor) is whether or not the payment results in one parent being in a better financial position compared to the other parent. However, the fact that there is a discrepancy in the parents' financial positions does not automatically mean that there is a reason to change the assessment (Hampson and Lightfoot (1997) FLC 92-775). It will depend on the circumstances of each case.
Where a parent has drawn money as a lump sum from his or her superannuation fund, CSA will consider whether that superannuation entitlement was taken into account in any property settlement between the parents. It may be unjust for a parent to have his or her child support assessment based on a taxable income which includes a lump sum payment having regard to the earlier distribution of superannuation and property between the parents (Carey and Carey (1994) FLC 92-489).
However, if the parent has a low current income and is making an inadequate contribution to child support CSA may still consider any superannuation received by the parent in deciding that parent's capacity to contribute to the financial support of the child. CSA will also take into account whether the superannuation has been drawn prior to retirement because of severe financial hardship.
Where a lump sum is received because of compensation for a personal injury there may be a reason to change the assessment because the payment compensates the parent for past loss of wages or a reduction of future earning capacity (Harris and Harris (1991) FLC 92-254).
Where the amount of compensation is set by way of private settlement it can be difficult to establish the portion of the compensation which relates to loss of wages or a decrease in future earning capacity. In these cases a decision by Centrelink concerning the period during which the parent is precluded from applying for social security benefits can be of assistance.
The cost of the parent's future needs may be increased and a part of the compensation, if not all, may need to be preserved to meet those costs. The parent's cost of meeting their future needs will need to be ascertained to decide the extent to which the parent's capacity to contribute to the financial support of the child has been increased because of the compensation payment.
Amounts received as a windfall (e.g. a distribution from a deceased estate or success in a lottery or other gambling venture) are not assessable as taxable income. They do not form part of the adjusted taxable income and are not taken into account in a formula assessment.
There may be a reason to change an assessment if it is likely that a windfall will increase the parent's capacity to contribute to the financial support of the child.
The decision will depend on the circumstances of the case and any other reasons under consideration.
Can property or financial resources be invested for future capacity to pay child support?
In some cases a parent, who may have financial or capital resources, may claim that they should be able to invest those resources now in the expectation that they will be available to support the child in the future. Assessment of child support is intended to ensure that parents contribute to the day-to-day needs of the child (Dwyer and McGuire (1993) FLC 92-420). It is not sufficient for a parent to say that they are in a different situation to a wage and salary earner, for example, because their income has been converted to - or is tied-up in - real estate or other assets. In these cases, CSA will decide whether the parent has a capacity to restructure their financial situation to provide current financial support for the child.
Social security payments to the payer or payee
When considering the payee’s income, earning capacity, property and financial resources CSA will disregard the payee’s entitlement to an income-tested pension, allowance or benefit (section 117(7A)) except when the income tested pension, allowance or benefit would form part of the payee’s adjusted taxable income in an ordinary formula assessment.
Social security payments made to the payer will be taken into account when considering the payer’s income, earning capacity, property and financial resources, with the exception of Family Tax Benefit payments paid for any children in the payer’s care (including a child for whom the payer is liable to pay child support).
Unemployment and under-employment
Unemployment and under-employment
A parent who becomes unemployed may lodge an estimate of his or her reduced future income, (e.g. a government benefit) which will affect the rate of child support payable.
An estimate will only affect the parent’s child support assessment from the date that it is lodged. An estimate is not available to a parent whose income reduces, but is still at least 85% of their adjusted taxable income. In cases where an estimate is not available, or was lodged late, the assessment will not reflect their reduced income and might be unjust and inequitable. These may be special circumstances that would warrant a change of assessment.
Earning capacity
If the assessment is affected by a parent’s reduced income, there may be special circumstances to justify changing the assessment to take into account the parent’s earning capacity.
When can CSA take into account a parent’s earning capacity?
From 1 July 2006, CSA can only determine that a parent’s earning capacity is greater than is reflected in his or her income used in the child support formula if it is satisfied about all of the following three matters:
1. The parent is either:
AND
2. The parent’s decision about his or her work arrangements is not justified by either:
AND
3. The parent has failed to show that the decision about his or her work arrangements was not substantially motivated by the effect this would have on the child support assessment (section 117(7B)(c).
CSA must be satisfied that all three compulsory criteria are satisfied before it can change an assessment to take into account a parent’s earning capacity, rather than his or her actual income.
If the parent’s circumstances satisfy only one or two of the criteria, CSA cannot make a decision based on the parent’s earning capacity.
CSA must also be satisfied it would be possible for the parent to increase his or her income by changing his or her work arrangements. That is, work must be available for the parent in his or her area and the parent must have the necessary qualifications and experience to perform that work.
Not working; working reduced hours; or has changed industry, occupation, or working pattern
This is the first of the three compulsory criteria for an earning capacity decision.
When considering the first criterion CSA must be satisfied that the parent:
It is possible that a parent will meet more than one of these sub-criteria.
Except where the parent does not work, a parent who has not reduced his or her income cannot be found to have a higher earning capacity.
Example
A parent who refuses a promotion at work, maintaining his or her income at the same level, will generally not be found to have a higher capacity to earn.
Some reductions in income will not satisfy this criterion.
Example
A reduction from regular overtime to a standard working hours week or loss of bonuses which required additional effort beyond that required of a standard employee, cannot be considered as founding a parent’s additional earning capacity.
Does not work despite ample opportunity
(section 117(7B)(a)(i))
A parent who is not working is one who is not engaged in work for remuneration, or in self-employment for profit.
A person can be said to be not working despite ‘ample opportunity’ to work if he or she has had offers of employment and refused them without adequate reason. Alternatively, if the person is not seeking work but there are job vacancies for which he or she is suitably qualified in their local area, this could also constitute ample opportunity to work.
Weekly hours of work reduced below the full-time standard for that occupation or industry
(section 117(7B)(a)(ii))
This sub-criterion may apply when a parent is still employed and has remained in the same occupation or industry. The relevant factor is that the parent now works less hours than they did previously. The fact that his or her hours have reduced is not in itself sufficient – the reduction must put those hours below the usual full time standard for the occupation.
The parent should be able to provide information about the usual full-time standard hours for their particular industry or occupation. Alternatively, CSA could obtain information from the person’s employer.
Changed industry, occupation, or working pattern
(section 117(7B)(a)(ii))
This sub-criterion may apply when the parent is still employed, but has changed jobs, or rearranged his or her hours of work, or pattern of work. It is implicit that this change in industry, occupation or working arrangements has resulted in a lower income.
For a parent to change his or her occupation or industry requires a greater change than simply moving between employers or jobs. There needs be something in the nature of a change in career, or of working in the same type of job but in an entirely different field.
A parent who has changed his or her working pattern may still be in the same job, or employed in the same occupation or industry. What is relevant is whether the person has changed his or her hours of work, for example, by choosing not to work nights or weekends.
A parent may change his or her working arrangements, for example, to being a consultant or sub-contractor rather than an employee. In these situations CSA is satisfied that there has been a change in their working pattern.
If the CSA is satisfied that the parent meets the first criterion (i.e. because he or she meets one or more of the three sub-criteria discuss above) it may be appropriate to make a decision to base the assessment on that parent’s earning capacity. However, CSA may only make a decision of that type if the parent’s circumstances also meet the remaining two compulsory criteria discussed below.
Decision not justified by the parent’s caring responsibilities or state of health
This is the second of the three compulsory criteria for an earning capacity decision.
When considering this criterion CSA must be satisfied that the parent’s decision not to work, to reduce the number of hours, or to change his or her working pattern is not justified on the basis of:
This is an objective test. The CSA must consider whether an ordinary, reasonable person would consider the parent’s decision to be justified, rather than whether the parent who made the decision considers that their decision was justified. It is also important to note that if the parent’s caring responsibilities or state of health do not adequately justify the parent’s decision about his or her work arrangements, then CSA must then consider the third criterion below, relating to the parent’s purpose in making that decision.
Parent’s caring responsibilities
(section 117(7B)(b)(i))
The type of caring responsibilities that might justify a parent’s decision to change his or her working hours will only be a personal responsibility to care for another person. Caring responsibilities include responsibilities to persons other than the parent’s own children, such as their own parent, a new partner or step-children, elderly relatives or friends.
CSA will take into account the following factors when considering whether the parent’s decision to change their working arrangements because of their caring responsibilities is justifiable.
CSA will weigh up the evidence about these and any other relevant matters in order to decide whether it is satisfied that the parent’s caring responsibilities are such that they justify his or her decision to change his or her working arrangements.
The parent who is primarily responsible for care of the children for whom child support is payable may not be employed, or may be working part-time in order to accommodate his or her child care responsibilities. Where this is a longstanding arrangement (e.g. one that existed prior to separation, or since the children were born) the parent primarily responsible for care of the children may not have an additional earning capacity, because his or her ability and opportunity to undertake paid employment is diminished by their child care responsibilities and their absence from the workforce.
A parent who has been in the workforce may cease work, or reduce his or her work commitments to accommodate their responsibilities to care for a child. The child for whom the parent provides direct care could be the child from a former relationship (for whom child support is payable), or a child of a new relationship. In such cases, the parent (whether he or she is the payer or payee in the case) may still have an unexercised earning capacity that makes the assessment unfair. CSA may consider the following relevant facts over and above those considered in other earning capacity cases:
If the parent’s caring responsibilities do justify his or her decision about his or her working arrangements, then CSA must not make a decision to base the child support assessment on the parent’s earning capacity. However, if the parent’s caring responsibilities would not preclude work, or additional work, CSA must proceed to consider the third criterion below, namely, the parent’s purpose in making the decision about his or her working arrangements.
(section 117(7B)(b)(ii))
As with a parent’s caring responsibilities, if a parent has health problems, this may mean that he or she does not have an earning capacity that makes the assessment ‘unjust and inequitable’. If the Registrar is satisfied that the parent’s state of health is such that he or she does not have an unexercised earning capacity that makes the assessment ‘unjust and inequitable’, it will not be necessary to consider whether the parent’s circumstances satisfy the criteria in section 117(7B).
CSA will take into account any evidence that the parent presents about his or her state of physical and mental heath. It would usually be expected that a parent who claims to have made a decision to change his or her work arrangements because of his or her health will have been diagnosed by a qualified medical practitioner; treated for the condition and have made that decision based on medical advice. Therefore, the parent would usually be able to provide medical certificates or reports from his or her treating doctor, and/or reports from any specialist to whom the parent was referred.
The following factors are relevant in considering whether the parent’s decision about his or her working arrangements is justified on the basis of the parent’s state of health:
CSA will weigh up the evidence about these and any other relevant matters in order to decide whether it is satisfied that the parent’s state of health is such that it justifies his or her changed work arrangements. If the parent’s state of health does justify his or her decision about his or her working arrangements, then CSA must not make a decision to base the child support assessment on the parent’s earning capacity. However, if the parent’s state of health would not preclude work, or additional work, CSA must proceed to consider the third criterion below, namely, the parent’s purpose in making the decision about his or her working arrangements.
Purpose of the parent’s decision about working arrangements
This is the third of the three compulsory criteria for an earning capacity decision.
When considering this criterion CSA must be satisfied that the parent has failed to demonstrate that affecting the assessment of child support was not a major purpose of his or her decision to not work, to reduce hours or change his or her occupation, industry or working pattern (section 117(7B)(c).
The test is framed as a ‘rebuttable presumption’. The starting point is that affecting the child support assessment is presumed to be a major purpose of the parent’s decision about his or her working arrangements. The parent can rebut this presumption by demonstrating, to CSA’s satisfaction, that affecting the child support assessment was not a major purpose of his or her decision.
This is a subjective test. The CSA must consider what the parent’s purposes were in making the decision about his or her working arrangements and whether a major purpose was to affect the child support assessment. It is not necessary that CSA is satisfied that the parent’s decision was objectively reasonable, but the reasonableness of the decision is a factor for CSA to consider in deciding whether it is satisfied that the parent has demonstrated that affecting the child support assessment was not a major purpose in his or her decision.
In considering the reasonableness of the decision, it needs to be kept in mind that this policy on earning capacity is intended to be flexible enough to allow parents to make decisions about their work and life, for example, choosing to pursue a different career. It is not the intention to micro-manage a parent’s life on the basis he or she may have made a better decision about employment than he or she did in fact make.
The provision refers to ‘a major purpose’ not ‘the major purpose’. This means that the parent can have more than one major purpose in making the decision. A major purpose does not have to be the dominant purpose. It is more than a ‘significant purpose’. A suitable test would be whether affecting the child support assessment was one of the most important factors in the parent’s mind at the time of making the decision about his or her working arrangements.
The usual way for a parent to rebut the presumption would be to show that there were other factors that he or she considered which were the major purpose and that affecting the child support assessment was not a major purpose. CSA will ask the parent to explain:
CSA will also take into account any other relevant information that is already available in CSA’s records, including:
In particular cases, CSA may also contact the parent’s employer or former employer to establish what reason the parent gave when he or she notified the employer of his or her decision.
If the parent cannot demonstrate that affecting the child support assessment was not one of the major purposes in the decision, he or she will fail to rebut the presumption and it may be appropriate for CSA to make a decision to base the assessment on that parent’s earning capacity.
It is more likely that a parent will be found to have a higher capacity to earn where he or she has voluntarily made a change resulting in a reduction in his or her income. Where a parent has made a change involuntarily, such as being made redundant, he or she will be unlikely to be found to have a higher capacity to earn where he or she has made reasonable efforts to resume income earning activities. Documentation which should be available to CSA to substantiate claims relating to unemployment includes:
A parent might decide to leave their employment (or reduce their hours of employment) in order to undertake a course of study. If the parent cannot demonstrate to CSA’s satisfaction that affecting the assessment of child support was not a major purpose of his or decision to undertake study, it maybe appropriate to base the child support assessment on the parent’s earning capacity, rather than the parent's reduced income.
CSA can consider the following relevant factors:
Even if CSA is satisfied that affecting the child support assessment was not a major facto in the parent’s decision, failure to resume work following the anticipated course of study may leave the parent open to a further consideration of his or her earning capacity.
Change of occupation or industry
A parent’s decision to change occupation or industry while maintaining full-time employment, resulting in a reduction in income, is not likely to lead to a finding of an increased earning capacity, especially if the parent’s previous employment was dangerous or required significant travel and time away from home.
What is a parent’s earning capacity
In respect of the earning capacity of the unemployed or under-employed parent, CSA may enquire as to the 'ability of' and 'opportunity for' that person to seek and gain employment (DJM and JLM (1998) FLC 92-816). CSA will consider the parent's qualifications, skills, age and employment history.
Examples
A parent who has been caring for children and has not been in the paid workforce for many years may have difficulty entering the workforce.
A parent who has been in the same job for 20 years, and is made redundant, may have similar difficulty.
On the other hand, a parent who is qualified in an occupation in high demand would be expected to enjoy considerable flexibility in their choice of employment.
The other relevant consideration is whether or not there are any special, local or other factors that affect a parent's capacity to secure employment. Opportunities for employment vary from place to place and between occupational groups.
In determining the extent of the parent's earning capacity, CSA may consider the following (Scott and Scott (1994) FLC 92-457):
CSA must weigh up the individual factors of each case in deciding whether a parent who has ceased work, or reduced his or her hours, has the ability and opportunity to earn a greater amount, and whether that additional earning capacity makes the child support assessment unfair.
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