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5.2.8 Reason 8A - a parent's income, property & financial resources

Context

A key object of the CSA Act is that children receive an appropriate level of support from both their parents (1.1.P.10), based on their parent’s financial capacity. It is also an object of the CSA Act that in parents with like financial capacity should provide like amounts of child support (1.1.C.60).

A child support assessment (1.1.C.70) is generally based on each parents' ATI (2.4.4.20)(1.1.A.20). Where, in the special circumstances of the case, a parent's financial capacity (ATI) is not adequately reflected in the child support assessment an application may be considered under this reason.

A parent’s financial capacity may be more or less than the income used because of their income, property and financial resources.

The Registrar can also initiate a change of assessment (1.1.C.50) using this reason. This is known as a Registrar-initiated change of assessment (5.6.2).

Act references

CSA Act section 98C, section 98E, section 98S, section 117(2)(c)(ia), section 117(4) to (9)

Income Tax Assessment Act 1936

Fringe Benefits Tax Assessment Act 1986

Income Tax Assessment Act 1997

A New Tax System (Fringe Benefits Reporting) Act 1999

On this page

Grounds for departure

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 (1.1.P.40) for the child because of either parent's income, property and financial resources (CSA Act section 98C(2) and section 117(2)(c)(ia)). Income, property and financial resources which do not necessarily form part of a parent's ATI can be added to or excluded from a child support assessment (David George Carey Husband and Tracey Louise Carey Wife (1994) FLC 92-489).

The Registrar must disregard the income, property and financial resources of any person who does not have a duty to maintain the child (CSA Act section 117(7A)).

The phrase 'special circumstances of the case' is not defined in the CSA Act. The Family Court 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).

It will not usually be necessary to apply under this reason to have the components of ATI considered as they should already be taken into account.

A parent is able to make an estimate of income (2.5.1) to be used in their child support assessment if their estimated income is 85% or less than their ATI for the last relevant year of income (1.1.L.10). A parent's ability to make an estimate of income will therefore be considered before the Registrar will consider a change to the assessment under this reason. If an estimate of income is unable to be accepted because the estimate is not 85% or less than the parent's ATI, the Registrar will generally not be satisfied that the reduction in income alone constitutes a special circumstance.

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:

  • has substantial property but low ATI
  • has legitimately arranged their financial affairs to minimise tax
  • receives income which is not assessable or is exempt from tax, or
  • received a lump sum payment that is not included in their ATI.

In some cases, a parent's financial circumstances or the issues associated with the case may be too complex to be determined by the Registrar. In these cases the Registrar may refuse to change the assessment (CSA Act section 98E).

Additional income

Although a parent's ATI is used in the child support formula (1.1.C.110), the Registrar can look beyond this income when considering an application for a change of assessment. Where a parent receives income and they have paid no, or negligible, tax on that income, the Registrar may calculate the equivalent gross value of that income. This grossed-up income will be taken into account in deciding whether there is a reason to change the assessment.

Additional property or financial resources

The Registrar can 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).

When making a decision under this reason, the Registrar 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.

Unfair or unjust and inequitable assessment

Once the Registrar has established the reason, a decision must be made as to whether this produces an unfair result. This includes consideration of the parent's total financial circumstances and whether the ATI 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 the Registrar finds that there is a discrepancy between the child support assessment and the income, property and financial resources of the parent, the extent of the discrepancy will also be considered 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 CSA Act section 98C.

Example: The Registrar may determine that a parent has an income that is marginally greater than their ATI 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.

Asset rich but income poor

In some cases a parent might have substantial property and assets but a low ATI used in the child support assessment. The Registrar may consider the parent's property and assets, as well as any income, in deciding the appropriate rate of child support to be paid (Amanda Jane Abela Applicant/Wife and Philip James Abela Respondent/Husband (1995) FLC 92-568 and Bendeich and Bendeich (1993) FLC 92-355).

The Registrar 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. The Registrar 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, the Registrar may:

  • identify the relevant assets, determine ownership of such assets and enquire as to any structures designed to divest assets
  • consider whether the assets are income-producing assets and, if so, when such income will be produced
  • ascertain the value of the assets
  • ascertain the parent's ability to convert the assets, or some of the assets, to cash
  • consider the parent's ability to finance their lifestyle, and
  • consider the impact of any property settlement on the parent's assets.

The Registrar 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. The Registrar need only consider the parent's financial resources as a whole, including any capacity to borrow against the assets (Alan Patrick Dwyer Father and Jeannete Anne McGuire Mother (1993) FLC 92-420).

Can property or financial resources be invested now to provide for a 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 or be made available to the child on inheritance. Assessment of child support is intended to ensure that parents contribute to the day-to-day needs of the child (Alan Patrick Dwyer Father and Jeannete Anne McGuire Mother (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, the Registrar will decide whether the parent has a capacity to restructure their financial affairs to provide current financial support for the child.

Low income from a family business

A parent who receives a low taxable income (1.1.T.20) from a family business may have access to additional financial resources, or alternatively they may have an additional earning capacity (5.2.9).

In determining the parent's financial resources, the Registrar may consider the following factors:

  • Past or current ability to maintain a particular lifestyle and acquire assets
  • Identification of additional benefits obtained from the business
  • Whether or not the business has been structured to minimise a parent's income including: the degree of control which the parent has over the business or the person who is entitled to the profits of the business, or whether income splitting is occurring, and
  • The person who actually does the work of the business.

The Registrar may determine that a parent's income is greater or lower than the amount upon which they have been assessed. Alternatively, the Registrar 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 & a 'corporate veil'

A reduction of a parent's ATI 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 their personal services income, this may indicate that they have additional income or financial resources that make the current child support assessment unjust and inequitable.

The 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 their publications. The Registrar 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:

  • salary and wages
  • income derived by a professional person who practises on their own account without professional assistance
  • income payable under a contract where the payment under the contract relates wholly or principally to the labour of the person concerned, and
  • income derived by a professional sportsperson or entertainer through the exercise of their particular skills.

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 (Income Tax Assessment Act 1936 Part IV). 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.

The Registrar 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 the Registrar identifies income that is alienated

In determining whether personal services income has been alienated through a company, trust or partnership, the Registrar will consider the following factors:

  • Nature of the parent's activities
  • Extent to which the income depends upon the parent's own skill and judgment
  • Extent to which the company's assets, or trust's assets, are used to derive the income
  • Number of employees and others engaged in the income-producing activity
  • Time at which the company, trust or partnership was established, and
  • Any other relevant matters.

Where are the ATO's views on alienation of income found?

The following publications are available on the ATO's Legal Database.

  • IT 2121: Family companies and trusts in relation to income from personal exertion. This sets out the way in which the Commissioner will deal with such arrangements, the features of such arrangements and some relevant case law.
  • IT 2330: Income splitting. This ruling is concerned with partnerships that involve professional services.
  • IT 2503: Incorporation of medical and other professional practices deals with companies which have been incorporated to take over the activities of professional practices. Whilst this ruling refers to incorporation of medical and other professional practices, the Commissioner applies similar principles to other cases in which personal services income is derived through an interposed company or trust.
  • IT 2639: Income Tax: Personal services income
  • TR 94/8 Income Tax: Whether business is carried on in partnership (including 'husband and wife' partnerships). This states that the question is one of fact and it outlines factors that will be taken into account by the Commissioner. In particular, the existence of a partnership is evidenced by the actual conduct of the parties towards one another and towards third parties during the course of carrying on a business.
  • TR 2001/7 Income Tax: The meaning of personal services income
  • TR 2001/8 Income Tax: What is a personal services business
  • TR 2003/6 Income Tax: Attribution of personal services income, and
  • TR 2003/10 Income tax: Deductions that relate to personal services income.

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 that involve the alienation of income other than personal services income (for example, rental income). In these cases the Registrar will examine the structure of the company, trust or partnership. The Registrar may take into account any relevant taxation ruling or guideline that has been issued by the ATO, but may make a different decision on how the facts are applied to child support.

The Registrar will consider whether the arrangement alienates income that should properly have been included in the parent's ATI (known before 1 July 2008 as the child support income amount) (in respect of companies refer to Stein, H.M and Stein, B.A (1986) FLC 91-779, in respect of trusts refer to Harris and Harris (1999) FamCA 1228 and also Ashton, T.M. and Ashton, P.L.A (1986) FLC 91-777, in respect of partnerships refer to Alan Patrick Dwyer Father and Jeanette Anne McGuire Mother (1993) FLC 92-420). The Registrar 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 CSA Act or that a partnership is ineffective.

In relation to a company structure, the Registrar can consider the following factors:

In relation to a trust structure, the Registrar can consider the following factors:

  • the trust deed
  • the settlor, the trustee and the beneficiaries of the trust
  • whether the arrangement only gives the appearance of creating legal rights or obligations or whether the arrangement was never intended to create such rights or obligations
  • whether any income from the trust has been applied directly or indirectly for the benefit of the parent
  • whether the parent has actual control of the assets of the trust and the income, and
  • any other relevant factor.

In relation to a partnership, the Registrar can consider the following factors:

  • the parties' mutual intention to act as partners is essential in demonstrating the existence of a partnership
  • the terms of any written or oral partnership agreement
  • the parties' conduct including the extent to which all the parties are involved in the conduct of the business or partnership, their contributions to the capital and asset base of the partnership, etc.
  • the amount of distribution to the parent and the partners including any entitlement to a share of the net profits, etc.
  • the amount of any salary paid to a parent and the partners and the reasonableness of any salary
  • that there is a 'joint' nature to the parties' conduct including the existence of bank accounts, business accounts, liability for business debts, ownership of business assets, etc.
  • other indications of a business partnership including separate and distinct business records, a registered business name and features indicating that there is public recognition of the partnership, etc., and
  • any other relevant factor.

Income in the form of undistributed profits

A parent or a third person may retain profits in a company, trust or partnership structure instead of distributing the profits to themselves or others. This may have the effect of reducing the parent's taxable income and could mean that the child support assessment is unfair.

In a change of assessment, the Registrar may consider including some or all of the following in the parent's ATI:

  • any undistributed profits from, and retained earnings in, a company
  • any increase in the parent's partnership capital accounts and/or current accounts from a share of partnership-earned profits, and
  • undistributed trust profits if the parent is a beneficiary of the trust or a trustee.

Self-employment, business expenses & losses

A parent may be involved in a business as a sole trader in the person's name or under a registered business name. A parent who operates a business as a sole trader is personally liable for all business debts and entitled to all business profits, is required to declare all income from the business in their personal tax return, and is responsible for any tax payable on the business income. A sole trader may or may not pay themselves a wage from the business. Alternatively, they may take drawings whereby goods or money are withdrawn from the business profit for personal purposes.

A business may be able to 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.

When considering business expenses and losses in a change of assessment, it will be necessary to examine the full financial position of the business to determine any personal financial resources available to the parent from the business.

What are business expenses?

Common examples of business expenses include:

  • expenses that are partly business and partly private, for example, telephone, home office or motor vehicles
  • salary and wages paid to employees
  • depreciation of property, plant and equipment
  • capital deductions related to primary production, and
  • prior year losses and capital losses.

If the tax deductible business expenses provide a personal benefit to the parent, this may make the child support assessment unjust and inequitable. The Registrar will consider whether the parent has a greater financial capacity than is indicated by their taxable income, either as a direct result of the deductions or of having certain personal costs defrayed by being tax deductible.

Salary & 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, the Registrar 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 their income, property and financial resources (Bassingthwaite, CF v Leane, BA (1993) FLC 92-410 and Humphries and Humphries (1993) FLC 92-430).

In determining the parent's income and financial resources the Registrar can consider the following:

  • Nature of the business activity
  • Parent's qualifications for running such a business including the parent's previous business experience and skill
  • Parent's financial situation prior to establishing the business
  • Income which the business is likely to produce or is producing
  • Time at which the business was established
  • Asset to which the business expenses relate
  • Income available to the parent through salary and wages, and
  • Any other relevant matters.

Expenses partly for business purposes & 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 the Registrar 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 & wages or business profits 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, the Registrar 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, the Registrar will consider the following matters:

  • The number of hours worked by the employee
  • The duties performed and qualifications of the employee to perform the work
  • Whether the rate of remuneration is proportional to the employee's contribution, and
  • The usual amount paid for the type of work undertaken in a commercial arrangement at arm's length.

In most cases where an employee receives salary or wages, pay as you go (PAYG) tax withholdings are paid by the business to the ATO on the employee's behalf. In other cases, regular entries may be made in the business's account ledger to reflect the employee's contribution to the business. Where an employee is related to the parent and the business fails to properly account for their contribution and business profits are later attributed to that employee, the Registrar may determine that those profits be treated as income of the parent.

Depreciation

Depreciation represents the loss or expense attributed to the use of business property or equipment. It is an entry in the business account that is not necessarily an expense that is actually incurred by the business. The aim of depreciation is to spread the cost of a capital asset (for example, motor vehicle, plant and equipment, machinery, building) over the period of its useful life, with a portion of the cost being expensed each financial year.

A claim for depreciation can mean that a parent has financial resources available to them that are not necessarily reflected in their taxable income or the resources of the business. In cases that involve depreciation, the Registrar will determine whether receiving a benefit through claiming depreciation expenses results in a parent having greater financial resources or income than their taxable income would indicate. The Registrar will consider a parent's complete financial situation including the business' overall financial position and the individual circumstances of the case.

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 ATI.

Before depreciation expenses can be taken into account as income or a financial resource personally available to the parent, the underlying nature of the depreciation expense must be determined. If the amount claimed as depreciation is used or set aside for replacing equipment (for example, a capital replacement fund) or is actually accounted for as part of ongoing business activities (for example, to repay a loan on a depreciating asset or to otherwise reduce business debt), then this is unlikely to provide the parent with additional financial resources. Similarly, if the business operates at a loss even after accounting for depreciation expenses, these expenses will not be available to the parent as a personal financial resource. On the other hand, if the parent spends the benefit of depreciation on day-to-day living expenses or recreational expenses this will most likely be a reason for changing the assessment.

The Registrar 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.

Other capital expenses

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 the Registrar 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 & 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 the Registrar will determine the parent's capacity to contribute to the financial support of the child. The Registrar may consider the relationship between the loss and the actual expenditure.

Example: Capital losses from 2011 may be carried forward and offset against a capital gain in 2019. As the loss occurred 8 years earlier, the parent may have additional financial resources in 2019. The parent has received a benefit in the later year without incurring the related expenditure. The Registrar may decide that the parent has income and or financial resources that are not reflected in the parent's taxable income for 2019.

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, the Registrar 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 restructuring results in a lower level of taxable income, the Registrar may assess the level of child support with reference to the earlier income.

Parents may use complex business structures which have the effect of minimising their ATI. Where the issues raised by the application for change to an assessment are too complex, the Registrar can refuse to change the assessment (CSA Act section 98E).

Primary production

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 but income poor, they may have additional financial resources and a greater capacity to contribute to the financial support of the child.

Farm management deposits

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 over a period of 5 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 their 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, the Registrar 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 their 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 CSPs (1.1.C.150).

Conversely, if a parent who is a primary producer has 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 ATI by the full amount of the particular deposit is likely to be the most appropriate action.

Salary packaging, fringe benefits, Defence Force benefits & allowances

Salary packaging

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 ATI may not be an accurate reflection of their overall remuneration from their employment.

Fringe benefits

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:

  • provision of a car, house or equipment for private purposes
  • a novated lease for purchase of a motor vehicle
  • giving somebody ownership of something, for example, items of clothing
  • permitting somebody to enjoy a privilege or facility, for example, a discounted loan or discounted airfares, and
  • provision of a service, for example, use of skill or labour.

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 (Fringe Benefits Tax Assessment Act 1986 Part III).

Income derived by the provision of a fringe benefit within the meaning of the Fringe Benefits Tax Assessment Act is exempt income and is not taxable income (Income Tax Assessment Act 1936 section 23L).

Employers are required to report on an employee's payment summary all fringe benefits with a total taxable value of more than $2,000 a year (Fringe Benefits Tax Assessment Act section 135P). 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 payment summary. The grossed up taxable value is known as the 'reportable fringe benefits' amount.

For child support assessments commencing after 30 June 2000, the reportable fringe benefits total (1.1.R.70) included in an employee's payment summary (being the grossed up taxable value) is included in the parent's ATI 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 applying to change the child support assessment on the basis that their income, property and financial resources are not properly reflected in the child support assessment because such fringe benefits have been included. The fact that reportable fringe benefits have been included in the ATI 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, the Registrar can consider the individual circumstances of the case including whether the:

  • fringe benefit is unusual, or peculiar to the parent's employment
  • fringe benefit is one which cannot be 'repackaged' or converted into salary or wages, and
  • parent would ordinarily have incurred a similar level of expense for the same kind of 'benefit' provided by the reportable fringe benefit.

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. The Registrar may reduce the ATI by the difference of the reportable fringe benefit and the estimated expenditure.

The Registrar may also give consideration to Reason 7 (5.2.7) (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 their salary package or financial affairs. In deciding what is an appropriate period the Registrar 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 (Fringe Benefits Tax Assessment Act section 136(1)). Examples include:

  • payments of salary or wages
  • approved employee share acquisition schemes
  • employer contributions to complying superannuation funds, and
  • payments for termination of employment (for example, a 'company' car given or sold to an employee on termination).

The Registrar will not gross up the value of a benefit of this type. The Registrar 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:

  • housing assistance
  • reunion travel for members (but not reverse reunion travel)
  • reunion travel for children in critical years of schooling
  • education assistance for school aged children in critical years of schooling
  • special needs assistance provided to families
  • overseas living allowance that compensates for cost of living differences
  • funeral costs, and
  • the entitlement to removal expenses upon the breakdown of a marriage.

The benefits listed above are not reported to the ATO, and are therefore not included in the parent's ATI. 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.

The Registrar will take into consideration government policy regarding the exemptions from reportable fringe benefits. The Registrar 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, the Registrar 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.

Defence Force Reserves also receive tax free allowances for part time service in Australia. Reservists may also serve overseas and receive similar payments to full-time Defence Force personnel serving overseas.

Tax-free payments to Defence Force personnel are not included in a parent's ATI and are therefore not 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, the Registrar may increase the parent's ATI by the amount of their tax exempt salary, but will not gross-up the value of that salary. The Registrar will generally not include the value of any additional non-taxable allowances in the parent's ATI.

If the parent applying for a change to the assessment raises other grounds, or the other parent makes a cross-application the Registrar 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 ATI for the purposes of calculating their child support assessment. As with all income included in ATI, the Registrar 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 their 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:

  • being retrenched from their employment
  • drawing funds from a superannuation fund
  • receiving a distribution from a deceased estate
  • being compensated for some loss or damage, or
  • being successful in a lottery or some other gambling venture.

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.

Payments received under the National Disability Insurance Scheme as part of a parent's or their child's support package are not included as income for child support purposes. They will also not be taken into account as a financial resource of the parent when establishing special circumstances under this reason. Payments made under this scheme are required to be spent for a specific purpose and do not increase the financial resources available to the parent.

Payments received under the National Redress Scheme or the Territories Stolen Generations Redress Scheme are also not included as income for child support purposes. Although these payments are not required to be spent for a specific purpose, they are intended for the personal use of the recipient, and will not be taken into account as income or a financial resource of the parent when establishing special circumstances under this reason. However, consideration of a payment received by a parent under either scheme as part of their overall circumstances may be relevant to a decision about the parent's earning capacity (5.2.9).

Superannuation

Where a parent has drawn money as a lump sum from their superannuation fund, the Registrar 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 their 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 (David George Carey Husband and Tracey Louise Carey Wife (1994) FLC 92-489).

However, if the parent has a low current income and is making an inadequate contribution to child support the Registrar may still consider any superannuation received by the parent in deciding that parent's capacity to contribute to the financial support of the child. The Registrar will also take into account whether the superannuation has been drawn prior to retirement because of severe financial hardship.

Reportable superannuation contributions

Under the superannuation guarantee law, most employed parents have superannuation paid by their employers in addition to their wage or salary income. Self-employed parents generally fund their own superannuation contributions.

Parents who are mainly self-employed may be able to claim some superannuation contributions as tax deductions (Income Tax Assessment Act 1997 section 290.150). However, superannuation contributions that are claimed as tax deductions are regarded as reportable superannuation contributions (1.1.R.80) and will be included in the parent's ATI.

A self-employed parent funding their own superannuation contributions is, of itself, unlikely to lead to a child support assessment being unfair. However, when considering a parent's overall financial situation, it is reasonable to take into account the amount the parent would have been entitled to receive under the superannuation guarantee if they were an employee.

Example: Under the superannuation guarantee law, employers are required to contribute superannuation on behalf of their employees at the superannuation guarantee rate. A self-employed parent makes superannuation contributions for themselves or others at a higher rate. The Registrar may determine that the contributions over and above the superannuation guarantee rate should be added back to the parent's ATI amount.

Information about the superannuation guarantee rate may be found at the Super for employers - How much to pay page on the ATO website.

Compensation

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 the department 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.

Windfall

Amounts received as a windfall (for example, 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 ATI and are not taken into account in a formula assessment (1.1.F.20).

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.

Social security payments

Any government pension, allowance or benefit that would normally be included in a parent's ATI in an ordinary formula assessment will be taken into account when considering the parent's income and financial resources under this reason. This includes any pension or benefit that is classified as taxable income, as well as certain tax-free pensions and benefits.

FTB payments paid for any children in the payee (1.1.P.30) or payer's care (including a child for whom the payer is liable to pay child support) will not be taken into account when considering a parent's income and financial resources.

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