F v S HC Christchurch CIV-2010-409-020979 [2011] NZHC 1532 (29 September 2011)

Last Updated: 17 November 2011

NOTE: ANY REPORT OF THIS PROCEEDING MUST COMPLY WITH SS

11B TO 11D OF THE FAMILY COURTS ACT 1980. FOR FURTHER INFORMATION PLEASE SEE WWW.JUSTICE.GOVT.NZ/FAMILY/LEGISLATION/RESTRICTIONS.

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

_{CIV-2010-409-020979}

BETWEEN F Appellant

AND S Respondent

Hearing: 1 September 2011

Appearances: S H Marsden for Appellant

G Tyrrell for Respondent

Judgment: 29 September 2011

_{JUDGMENT OF FOGARTY J}

Introduction

[1] This is an appeal against two decisions of the Family Court (Judge Somerville) on the subject of child support. The first is a judgment delivered on 25 November 2010 and the second is a judgment by way of clarification in addressing costs.

[2] The appellant before this Court is the separated wife. Her husband is a doctor with a private medical practice. She was largely successful in the Family Court, appealing decisions by the Commissioner adjusting child support downwards by reason of the father meeting private school fees of the three children. The Judge, however, refused her application for an upward departure, recording in the principal

_{judgment that her counsel had acknowledged that if the appeal against the father‘s}

F V S HC CHCH CIV-2010-409-020979 29 September 2011

downward departure was successful she would not pursue this appeal in respect to the 2011 child support year.

[3] In respect of the mother‘s application for an upward departure for the 2009 child support year the Judge found that there were no special circumstances which would justify an increase above that figure. In his clarification judgment he expanded on his reasons. Before setting out his short reasons in the principal judgment and the clarification judgment I briefly introduce the context.

Context

[4] The parties were married in 1993, separated in 2006, and in 2007 resolved relationship property matters by agreement. From that time on the three children of the marriage are being shared by the appellant mother and the respondent father on a week about basis. The father is a general practitioner with a medical practice structured as a limited liability company, he owning all the shares but one and deriving his income by way of salary from the company. The annual profits from the medical practice are split between his salary, calculated at the same rate as he pays his locums, and the balance of the profits is distributed by way of dividend to a trust of which he is the trustee with his accountant and as a beneficiary with his three children.

[5] At the time of separation the father was adamant that the three children should attend private schools. The separation agreement provided for the children to attend private school at the father‘s cost. Thereafter it provided that payment for child support by either party will be assessed under the Child Support Act 1991. The private school is a significant cost, running in excess of $50,000 at the time of the Family Court judgment at the end of 2010.

[6] The father paid these fees and claimed under the Child Support Act for a downward departure in assessment, arguing that by virtue of the special circumstances of having to provide for private school education his capacity to provide financial support for the child was significantly reduced. He relied on s

105(2)(b)(iii) which provides:

105 Matters as to which Court must be satisfied before making order

(2) For the purposes of subsection (1)(a) of this section, the grounds for departure are as follows:

...

(b) That, in the special circumstances of the case, the costs of maintaining the child are significantly affected because—

...

(iii) The child is being cared for, educated, or trained in the manner that was expected by either of his or her parents; or

...

[7] Judge Somerville then allowed the wife‘s appeal against the downward orders. In his principal judgment he found that:

[34] At the time the father set up this trust he transferred assets to it at market value and, since then, it has owed him a significant sum for the unpaid purchase price, which is payable on demand. Each year since separation, it has repaid part of that debt, which the father has then used to pay the school fees.

[35] The father‘s accountant, [...], admitted that the trust has sufficient surplus income each year to pay the children‘s school fees, but finds itself unable to do so because, each year, the father seeks a partial repayment of the debt owed to him by the trust.

[36] She also acknowledged that every year this has resulted in an increase in the trust‘s assets to the value of the school fees (by repaying the loan to the father) and a reduction in the value of the father‘s assets to the same extent.

[37] I, therefore, find that the father is choosing to pay school fees out of his capital, when those fees are perfectly capable of being paid for out of income by the children‘s trust of which he is a trustee. No business case could be made for this course of action. The only conclusion is that he has structured his affairs in this way in order to qualify under s 105(2)(b)(iii) for a reduction in his child support.

[38] Bearing in mind those circumstances and the detrimental impact on the mother of the reduction in child support caused by the departure, I find that it is neither just, nor equitable nor proper that a departure be granted in favour of the father.

[39] The appeal against the downward departure order is therefore allowed in respect of the 2010 and 2011 child support years.

(FC CHCH FAM 2009-009-1865, 25 November 2010)

[8] In the appeal to this Court the appellant mother now seeks to rely on the same kind of reasoning to justify an upward departure taking advantage of s 105(2)(c):

(c) That, by virtue of special circumstances, application in relation to the child of the provisions of this Act relating to formula assessment of child support would result in an unjust and inequitable determination of the level of financial support to be provided by the liable parent for the child because of—

(i) The income, earning capacity, property, and financial resources of either parent or the child; or

(ii) Any payments, and any transfer or settlement of property, previously made (whether under this Act, the Property (Relationships) Act 1976 or otherwise) by the liable parent to the child, to the qualifying custodian, or to any other person for the benefit of the child; or

(iii) An entitlement of the custodian to the continued occupancy of a property in which the liable parent has a financial interest.

[9] She argues that when the profitability of the medical practice is taken as a whole, before the profits are split as to salary and dividends to the trust, the father‘s medical practice can afford to generate an income to him set at the maximum under the Child Support Act (for most years around $120,000). This would be an uplift over the lower salary. For example for the year ended 31 March 2009 the father drew wages and salaries of $98,461 as against the previous year of $120,000 for shareholders‘ salaries. Her counsel argues this is a relatively modest uplift but would translate into another $100 per week after the wife‘s obligations of child support (she has reasonable income). Ms Marsden argued that the overall scale of relief being sought over a period of four years to which this appeal relates would be in the order

$20,000 for calculation of interest.

[10] She argues that applying s 105(2)(c) the Court can look at the father‘s ability to access the financial resources of the trust, as he has been doing every year in the past and recognising these as ―special circumstances‖ justifying an adjustment of the

―child support income amount‖ (usually the annual assessable income for tax), as provided by s 106(1)(a):

106 Orders that may be made

(1) In determining an application made under section 104 of this Act, a

Court may make either one, or both, of the following orders:

(a) An order varying the child support percentage, child support income amount, or living allowance of the liable parent; ...

[11] In Andrews v Andrews[1] Gault J said:

The second question was said to be whether the Court can go behind the accounting income of a self employed person to establish ‗true income‘. Both Judges in the lower courts held that in certain circumstances it will be appropriate to go behind business accounts but held that it should not be done in this case. The issue of law therefore was decided in the applicant's favour and it was in applying that to the facts that she was unsuccessful. In his judgment Hammond J said:

But, if it is apparent that unfair or inappropriate devices have been adopted to diminish liability — often to evade a liability under this Act — I regard that as ―special circumstances‖ entitling the Court to have regard to the ―real‖ income of the assessed person.

If that was intended as an exhaustive statement of the circumstances in which it would be appropriate to go behind financial accounts to find true income for the purpose of the formula assessment we think it is too narrowly stated. That that was not the intention of the Judge is indicated by his further reference to devices ‗and other circumstances‘ that would give rise to special circumstances. Plainly each case will need to be considered on its own facts as the Family Court Judge recognised. In this case both Judges agreed that the deductions were entirely appropriate and that was endorsed by the accountants' Statement of Accounting Policies in the accounts of the business for each of the relevant years. That was open on any view of the correct approach. The matter was determined on the facts and there is no question of law justifying leave on this point.

[12] Judge Somerville rejected this argument in the principal judgment briefly and with clarification in the second judgment. I set out the relevant passages from both judgments:

Principal judgment

[49] The only aspect of her application that has any merit, is her claim under s 104(2)(c)(ii) that the assessment for the father is unjust and inequitable having regard to the earning capacity of the children. As is obvious from paragraphs [31] to [37] above, there was sufficient income being received by a trust for the children to meet the cost of their private education. Had those funds been used for that purpose, the father‘s income would have been available to meet a formula assessment.

[50] But the mother‘s application seeks an upward variation of the father‘s formula assessment. That would have resulted in an assessment at the statutory maximum and there are no special circumstances in this case that would justify an increase above that figure.

Clarification judgment

[7] In determining that the respondent‘s child support should be based

purely upon a formula assessment, I took into account the following factors:

(a) His salary is not arbitrarily calculated, but is based on his actual workload and calculated at the rate a locum would be paid to undertake that work.

(b) The practice income is derived, not just from the respondent‘s efforts, but also from the efforts of employed staff, including locums.

(c) The service company income that the respondent is paid to the family trust for the benefit of the children.

(d) I was not confident of the respondent‘s ability to maintain the service company‘s income at historical levels, having regard to the difficulty he was experiencing in maintaining partnership relationships and retaining qualified employees.

(e) The respondent‘s salary, even at its lowest point, is still

likely to generate significant child support for the applicant.

[8] The formula assessment, therefore, will take into account all of the uncertainties of the future while at the same time providing sufficient child support for the applicant.

[9] There is no need, therefore, for me to correct my judgment.

[13] Mr Tyrrell defended the Judge‘s reasoning, particularly as expanded in the clarification. He argued that the Judge was impressed by the fact that the salary the father was taking from the practice was based on his actual workload and calculated at the same rate that a locum would be paid to do such work. Inferentially, that it was a reasonable sum.

[14] Mr Tyrrell distinguished the merit or otherwise of this practice from more egregious allocations of income. He submitted that provided these business structures are reasonable the Court should respect the assessable income and not treat the circumstances as special as a basis for adjusting ultimately the child support.

[15] The scheme of the Child Support Act supports Mr Tyrrell‘s argument in many respects. Child support is calculated around the annual assessable income. The Act has its genesis in a desire of Parliament to have a reasonably mechanical assessment of child support to say that the assessments can be calculated by computer on a mass scale across the country with a minimum need for individual assessment and the time consuming costs that that entails.

[16] One of the problems, however, as Ms Marsden pointed out, is that the maximum income for the purposes of calculating child support of $120,000 simply does not reflect the scale of income typically enjoyed by the professional classes in New Zealand. Distinguishing between the scheme or mechanism of the Act from the purposes of the Act, she pointed out that there is nothing in the purposes of the Act which suggests that there was any determination by Parliament that the level of compulsory child support was to be confined to a band of support affordable to middle and low income parents even though the parent in question could afford a great deal more and that the children of such parents have much higher expectations as to quality of life.

[17] As Judges we can do nothing about and must respect the upper level. But in my view it is an appropriate response to the purposes of the Act to view with askance income splitting structures by professionals which take their assessable below the maximum ceiling for the purposes of the Child Support Act. Currently the ceiling is in the round likely to be only 50% or less of the assessable income that medical practitioners would have been enjoying across New Zealand over the same period. To structure one‘s income to go below the statutory ceiling, when the statutory ceiling is already only a fraction of the assessable income before structuring, can and should be properly characterised as conduct designed to thwart the purposes of the Act.

[18] As Ms Marsden points out, and it was the crux of her argument, this is exactly what Judge Somerville found in para [37] of his judgment. Her criticism of his treatment of the application for an upward order is that he has not followed through on this finding.

[19] I agree he has not, though for two understandable reasons. Firstly, he thought the appeal on that ground had been abandoned. Secondly, I think he was concerned when writing the clarification judgment as to the future implications. In this regard I draw to attention to his para [7](b). Overhanging the case from the day of the first hearing before Judge Somerville and then continuing to the second hearing and even now is the fact that the father has been diagnosed with cancer. This is currently affecting his professional life and income and is likely to do so in the short term at the very least.

[20] This appeal, however, is retrospective in effect. Should the father‘s medical condition reduce his income from the practice significantly so that it can no longer be said that he is structuring his affairs in order to qualify for a reduction in his child support then, of course, in those changed circumstances there may well be a basis under s 105 for reduction.

[21] The appeal is allowed. The Family Court decisions are reversed. There is a Departure Order increasing the amount of child support payable by the respondent to the appellant to the statutory maximum for the 2011 tax year, and retrospectively to and including the 2009 tax year.

[22] The cross appeal against the failure of the Family Court Judge to award the respondent costs is dismissed.

[23] The successful appellant is entitled to costs in this Court and in the Family Court. Leave is reserved to hear argument on quantum, in this Court, and as to the Family Court – the quantum of costs is remitted back.

Solicitors:

Wynn Williams & Co, Christchurch, for Appellant

Weston Ward & Lascelles, Christchurch, for Respondent

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[1] Andrews v Andrews CA19/94 24 May 1995