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Divergent views on depreciation in the Federal Magistrates Court

Feature Articles

Cite as: (2005) 79(9) LIJ, p. 44

There is more than one way to calculate the business depreciation expenses incurred by self-employed payers of child support.

By Simon Bacon

Under the Child Support (Assessment) Act 1989 (Cth) (CSAA), a non-resident parent’s obligation to pay child support for their children is primarily based on that parent’s taxable income.

As a first step in determining what child support should be paid in any case, one of the administrative formulae for child support in Part 5 of the CSAA is applied to the taxable income of the non-resident parent. This produces an annualised amount of child support.

Under Part 6A or Part 7, Division 4 of the CSAA (see in particular s117(2)), either the payee or payer of child support can apply for the administratively determined amount of child support to be increased or decreased in certain special circumstances. This process is known as a “change of assessment” when it is done internally by the Child Support Agency under Part 6A, or a “departure order” when the change of assessment is undertaken by a court under s116 of the CSAA.

One of the special circumstances (under s117(2)(c)(i) of the CSAA) is that the administratively determined amount of child support results in an unjust and inequitable level of child support because of the income, earning capacity, property and financial resources of either parent.

A particularly common scenario is when the payer of child support derives their income from their own business (either as a sole trader, or through a company, partnership or trust). Typically in such cases, the payee targets the tax-deductible expenses which the payer has used in calculating the taxable income of the business involved. The payee will ordinarily argue that some of the expenses claimed by the business, although legitimate for income tax purposes, should be ignored for child support purposes under s117(2)(c)(i).

The philosophy behind this approach was put clearly by the Full Court of the Family Court in Bassingthwaighte and Leane:[1] “The Respondent is perfectly entitled to arrange his financial affairs as he wishes. What he cannot do is avoid his responsibilities as a parent”.

Business depreciation expenses are regularly challenged in this way under s117(2)(c)(i).

Differing approaches to expenses

There appears to be a diversity of opinion in the Federal Magistrates Court as to how these depreciation expenses are to be handled. As the Federal Magistrates Court is now the primary commonwealth court that hears child support matters,[2] this apparent difference of opinion is problematic.

The two schools of thought in the Federal Magistrates Court are illustrated by the following two quotations:

“The mother’s counsel attempted to persuade me that I should ignore the depreciation claimed ... I fail to see how I can do that, because depreciation is claimed for very good reason. Business assets wear out and need to be replaced. Consequently some provision must be made for their replacement”.[3]

and

“Depreciation is claimed of $2202 but the evidence does not suggest that this is an expense actually incurred”.[4]

The first of these cases is indicative of a view that depreciation expenses are “real” expenses and must not be discounted by the Court in hearing departure applications under s117(2)(c)(i). The second approach suggests depreciation expenses are “artificial” expenses and can be ignored when examining a parent’s capacity to pay child support.

Which of these differing approaches is preferable?

The Full Court of the Family Court spoke on the issue in Dunbar:[5]

“[C]ounsel for the husband submitted that in order to ascertain the true profitability of the partnership, all reference to depreciation of the fixed assets of the partnerships should be ignored. In our view that is an inappropriate approach. Whilst it is true that the rates of depreciation are chosen in the books of account by reference to a formula approved for income tax purposes, it may be an inappropriate gauge having regard to the actual change in the value of the fixed assets.

The wear and tear on the assets and other loss of value cannot be entirely ignored in a business such as this one. Appropriate allowance has to be made for wear and tear and replacement of the various items”.

In Dunbar, the Court went on to quote other academic writings referring to McCathie v Federal Commission of Taxation.[6] However, I suggest that McCathie says very little about the issue, and Minister of State for the Navy v Rae[7] is a far more helpful authority. That case involved the acquisition of a ship by the Commonwealth and a dispute over the proper compensation to be paid by the Commonwealth for that acquisition. In his usual clear way, Dixon J said:

“[T]o find the value to the owner it is, I think, in the present case, proper first to take the items of capital expenditure . . . and make some estimate of the extent they should be depreciated for physical deterioration . . . as against the depreciation on account of age and use, some allowance must be made for the increase that has taken place in values by the time the ship was acquired”.[8]

But how does one properly “make some estimate” for depreciation? Dixon J went on:

“What system of depreciation is to be employed in a given case is in a great measure a question of suitability depending on the facts. The law prescribes none of the systems commonly used in commercial or accountancy practice to the exclusion of others. It is a matter of what is appropriate to be judged as a matter of fact”.[9]

The applicable method of depreciation, then, is not one that the law clearly spells out. The chief methods used by the accountancy profession are the decreasing balance and straight line methods. Which of those (or other methods) should be applied will depend on the facts and circumstances of each case.

What is clear, though, is that the Court will not necessarily accept the rate of depreciation prescribed by the Australian Taxation Office in any one situation. In this regard it is useful to refer to Houlihan and Houlihan.[10]

Houlihan was a child support case involving, among other issues, the depreciation costs of a motor vehicle. Kay J said:

“I do not believe it is appropriate that I should visit those costs upon the costs of access beyond reasonable costs for some depreciation, and reasonable costs for wear and tear on the motor vehicle, and in the absence of any specific evidence, I can only make what I would then consider to be a reasonable allowance.[11] (emphasis added)

It was also clear from Dixon J’s judgment in Rae that in calculating the applicable quantum of depreciation allowable, some allowance must be made for the natural increase in value that assets tend to experience over time.[12] In Rae, after the applicable allowance had been made for the depreciation of the ship, that depreciated value was then increased by 10 per cent: “I have added, however, more than 10 per cent to represent the appreciation of values by reason of increased costs and other elements”.[13 ]This 10 per cent figure seemed very much to be an intuitive one arrived at by Dixon J.

Conclusion

It consequently seems that in reaching a value to cover both the decrease in value of an asset due to wear and tear and its increase in value due to inflationary factors, the courts may well fall back on vague notions of what is “fair and reasonable in all the circumstances”.

This method may well have been what Nicholson CJ meant when (in a child support context) he said: “[I]t is necessary to use a degree of rule of thumb”.[14]

In Dixon J’s own words: “I have arrived by way of estimate at a round figure”.[15]

In summary, it is submitted that the depreciation of an asset is something a court can never ignore under s117(2)(c)(i) of the CSAA. However, the value to be attributed to it in any given case will depend on the facts and circumstances of that particular case.


SIMON BACON is a family lawyer with the Legal Aid Commission of Tasmania. He has previously practised in child support in both Queensland and Victoria.


[1] (1993) 16 Fam LR 918 at 920.

[2] See Family Court Practice Direction 4 of 2004.

[3] B & P [2001] FMCAfam 159.

[4] C & G [2002] FMC Afam 361. See also EGH & SH [2005] FMCAfam 27 at para 54.

[5] (1987) 11 Fam LR 901 at 912.

[6] (1944) 69 CLR 1.

[7] (1945) 70 CLR 339.

[8] Rae, note 7 above, at 345.

[9] Rae, note 7 above, at 346.

[10] (1991) FLC 92-248.

[11] Houlihan, note 10 above, at 78,677.

[12] Such increases would be well known to observers of the Australian residential property market in the past four or so years.

[13] Rae, note 7 above, at 348.

[14] Cleary and Cleary (1992) FLC 92-278 at 79,058.

[15] Rae, note 7 above, at 348.

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