IN THE COURT OF APPEAL OF NEW ZEALAND CA41/2012 [2013] NZCA 100. ELIZABETH JOY DE VERE Appellant. ANDREW JOHN CAPLEN BEAVIS First Respondent

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1 NOTE: PURSUANT TO S 124 OF THE CHILD SUPPORT ACT 1991, ANY REPORT OF THIS PROCEEDING MUST COMPLY WITH SS 11B TO 11D OF THE FAMILY COURTS ACT FOR FURTHER INFORMATION PLEASE SEE COURT/LEGISLATION/RESTRICTIONS-ON-PUBLICATIONS IN THE COURT OF APPEAL OF NEW ZEALAND CA41/2012 [2013] NZCA 100 BETWEEN AND AND ELIZABETH JOY DE VERE Appellant ANDREW JOHN CAPLEN BEAVIS First Respondent COMMISSIONER OF INLAND REVENUE Second Respondent Hearing: 16 October 2012 Court: Counsel: Judgment: Harrison, Wild and Ronald Young JJ A M Manuel for Appellant L J Kearns for First Respondent M Deligiannis for Second Respondent 12 April 2013 at 11 am JUDGMENT OF THE COURT A The appeal is allowed and the judgment of the High Court set aside. B A retrospective departure order in the terms set out in [81] [82] and [97] of this judgment is substituted. C Interest on the amounts contained in that order is allowed at the rates prescribed under s 62B of the District Courts Act 1947, and calculated on the basis set out in [100] of this judgment. DE VERE V BEAVIS COA CA41/2012 [12 April 2013]

2 D Leave is reserved to the appellant in the terms set out in [106] of this judgment. E The first respondent is to pay the appellant s costs as for a standard appeal on a band B basis with usual disbursements. REASONS OF THE COURT (Given by Wild J) Table of Contents Introduction [1] Factual background [6] The separation and the separation agreement [6] Assessments for child support [7] Steps taken by the father which resulted in the reduction of his [12] taxable income Development project [18] Child support review applications [20] Application to the Family Court for a departure order [21] Appeal to the High Court [23] Retrospectivity [25] The judgment in the Family Court [28] The judgment under appeal [38] Issue 1: Does the Family Court have the power to make [39] retrospective orders? Issue 2: Should the findings as to level of income remain? [40] Issue 3: Was the trust a sham? [47] Issue 4: What is the just, equitable and proper result? [49] Submissions and our decision [52] Statutory provisions [52] Principles [54] Period from 1997 to 2003 [59] Period from 2004 to 2010 [83] Interest [98] Enforcement [101] Result [107]

3 Introduction [1] This is an appeal against a judgment of Fogarty J delivered on 16 March The Judge reduced, to $29,538 ($15,442 plus $14,096 interest), the Family Court s award to the appellant mother of $297, ($146,676 plus $150, interest) in retrospective child support. The mother had applied to the Family Court for a departure from the formula assessment of the respondent father under the Child Support Act 1991 (the CSA). [2] The father set up a family trust (the L Trust) in 1996, soon after his separation from the mother. He transferred his business (WR), of which he was an employee, into the L Trust, along with the majority of his other assets, including his house. He began paying himself a reduced salary, while the profits of WR were paid to the L Trust as dividends. He had access to the funds in the L Trust as the Trust was indebted to him. In 2003 the father embarked on a development project through WR which further reduced his income. This further reduced the amount of child support the father was required to pay under the formula assessment. [3] In the Family Court, the father was self-represented. Judge McHardy agreed with the conclusion of the mother s accountant that the primary purpose for establishing the company and trust structures was to avoid a higher child support liability, saying: [t]he evidence is conclusive that the [father] has deliberately undertaken a course of action designed to reduce his liability for child support. The effects of this course of action have had the desired effect. 2 In relation to the development project, the Judge found that this was an extension of the father s greater plan to avoid paying child support. He ordered retrospectively that the father pay the maximum amount payable under the formula assessment for each year from 1999 to the time of the hearing (which was in August and November 2009). He also varied the separation agreement between the father and the mother. 1 2 B v X [2011] 2 NZLR 405 (HC); [2011] NZFLR 481 [the High Court judgment]. EJD v AJCB FC Auckland FAM , 14 April 2010 at [91] [the Family Court judgment].

4 [4] In the High Court, the father was represented. Although Fogarty J accepted that child support had been underpaid in the years 1997 to 2003, he substantially reduced the amount awarded in favour of the mother. He looked through the Trust to a lesser extent than had the Family Court, and decided not to include the father s personal use of some Trust resources in his calculations. Fogarty J also disagreed with the Family Court s finding that the development project was an extension of the father s avoidance plans. He found that the decision to embark on the project was a reasonable business decision, and therefore declined to order any increase in child support payments for the period 2004 to [5] The appellant seeks restoration of the Family Court s award. Thus, the issue for this Court is which approach is correct in all the circumstances of this case: that taken by the Family Court; that taken by the High Court; or some different approach? Factual background The separation and the separation agreement [6] After a marriage lasting 12 years, the parties separated in March The three children, all girls, were then aged nine, seven and four. A comprehensive separation agreement dated 9 May 1996 included provision that: (a) the parties were to have joint custody and care of the girls. Although they were to be in the day-to-day care of their mother, the father had generous stipulated times for custody; (b) the father was to pay, monthly, to the wife maintenance in respect of the children based upon the appropriate formula-assessed calculation laid down in the [CSA]. The father was also to pay additional stipulated costs, for example for schooling and medical care; (c) the father was also to pay agreed monthly financial support to the mother, for up to two years from the date of separation. One of the

5 circumstances in which this financial support obligation was to cease was the mother entering into a new relationship where there is a clear inference that she is receiving financial support from her partner ; and (d) ownership of the parties company (we will refer to it as WR) passed to the father (WR was the company through which the father ran his software design and development business). Assessments for child support [7] Six months later, on 19 November 1996 the father wrote to the mother advising that he was cutting spousal support without prejudice. He gave as the reason the mother s relationship with another man, which he maintained made the continuation of the agreed spousal support a travesty of justice. The father made his last spousal support payment in November [8] This led the mother to apply, also in December 1996, for a domestic purposes benefit. The automatic consequence was that the father was assessed by the second respondent, the Commissioner of Inland Revenue (the CIR), to pay child support under the CSA from 23 December [9] The mother continued to receive a domestic purposes benefit until January She had been out of the workforce since around the time the parties first child was born in From January 1999 on she supported herself, first from a landscape design business and then, after she had retrained, by working as a real estate agent. [10] The parties three girls remained in their mother s primary care throughout, save for about 10 months in 2004, when the eldest girl lived with her father. The father s liability for child support for the three girls ended as follows: (a) in 2005 for the eldest girl, when she began studying at university;

6 (b) in February 2007 for the middle child, when she began work; and (c) in February 2011 for the youngest child, on her 19 th birthday. (in the case of the two youngest girls, the father s liability ended pursuant to s 5 of the CSA). [11] The mother s uncontradicted evidence was that the child support assessed against, and paid by, the father over the years he was liable was as follows: 3 Financial year ended 31 March Assessed Paid 1997 $2, NA (mother on DPB) 1998 $8, NA (mother on DPB) 1999 $7, $2, $8, $8, $7, $7, $6, $6, $6, $6, $5, $5, $5, (offset to $4,606.30) $3, $2, $1, $ (minimum payable) $ $ (minimum payable) $1, $ (minimum payable) $ Totals $61, $43, Steps taken by the father which resulted in the reduction of his taxable income [12] Pursuant to s 29 of the CSA, child support is assessed on a formula based on the liable parent s taxable income for the most recent tax year. The explanation for the diminishing assessments set out in the table in [11] is the steps referred to briefly in [2] above, taken by the father which resulted in the reduction of his taxable 3 Case on Appeal at 693.

7 income. There were essentially five steps. First, on 1 December 1996, the father established the L Trust. He was the settlor, the sole trustee and the first of the stipulated classes of discretionary beneficiaries. The trust deed also named the father as the appointor whose powers included the appointment of new trustees and the removal of any existing trustee. [13] Secondly, successively over the years 1997 to 2005, the father transferred his assets to the L Trust. These assets included his shares in WR and two other software companies, his intellectual property rights, his home and its contents, and substantial inheritances he received from his mother s estate (for example, $230,000 in the 2002 financial year and a further $18,000 in 2003). By 31 March 2004 the L Trust s funds were $590,768.80, and by 31 March 2008 $699,439. [14] Thirdly, the father reduced his salary from WR. The evidence was that his annual salary up to 1996 averaged around $120,000. From 1997 until 2004, the father paid himself a salary of no more than $40,000 per annum. [15] Fourthly, having reduced his salary, the father paid out the profit of WR in the form of dividends to the L Trust as its shareholder. [16] Fifthly, the L Trust used its dividend income to repay its indebtedness to the father in respect of the sale price of the assets he had transferred to the trust. By 31 March 2006 this indebtedness had been reduced to $66, [17] Overall, these arrangements were tax neutral (indeed, probably slightly tax negative). But they increasingly protected the father from his creditors. They also achieved the reduction in the father s assessed child support payments, as shown in the table in [11]. Development project [18] In 2001, but with financial impact from 2003, WR lost one of its agencies. In January 2003 the father embarked on a software development project. The father claimed this was a business response to the loss of the agency and the general downturn of business in 2001 and Although assisted by a grant from the Foundation

8 of Science and Research, this required WR to invest over $300,000, mainly to pay sub-contractors. WR borrowed much of this sum from its bank. From 2003 onward WR either made much reduced profits or turned a loss. The father further reduced his own salary, thus: Year ended $ , , , ,413 [19] The evidence is that this development project is beginning to bear fruit. WR s financial statements for the year ended 31 March 2008 (the last in evidence) showed sales of $90,133, with indebtedness to the bank (for both current and noncurrent borrowings) at $212,529. In his evidence in the Family Court, the father estimated the then current value of the project at up to $1 million. The father gave three estimates: $1 million; $500,000 and $250, Child support review applications [20] Between August 1998 and February 2004 the mother made three applications to the CIR to increase the child support allowance. One was successful. In turn, over the period September 1999 to March 2010, the father made five applications to the CIR to decrease his child support assessment. Two of those were successful. The father withdrew his last two applications. In his evidence the father conceded that he had not been required to produce financial statements for the L Trust, or for WR, or for his other companies at any of the review hearings. Application to the Family Court for a departure order [21] On 27 June 2004 the mother, dissatisfied with the outcome of the child support review officers decisions, applied to the Family Court for a departure from 4 The Family Court judgment, above n 2, at [60].

9 the formula assessment under the CSA. She filed an amended application on 18 December The father cross-applied on 8 September [22] After prolonged interlocutories, including an appeal to the High Court on the issue of joinder of the L Trust as a party, the applications came on for hearing in the Family Court in August and November Judge McHardy delivered his substantive decision on 14 April On 19 July 2010 he delivered a second decision dealing with costs and interest. 6 Appeal to the High Court [23] In the meantime, on 10 May 2010, the father had appealed to the High Court against Judge McHardy s substantive decision. An application by the father to adduce further evidence was dealt with by Courtney J in a judgment delivered on 17 September In that judgment Courtney J recorded agreement that the parties accountants would confer on the issue: 8 What happened to the $257,000 that [the father] put back into [WR] between 1997 and 2003? [24] Courtney J also gave leave for a joint statement by the accountants to be placed before the High Court on the hearing of the father s appeal, and gave directions for the filing of affidavits by the two accountants and cross-examination on those affidavits. Retrospectivity [25] Fogarty J s finding that there is jurisdiction to award retrospective child support is not challenged on this appeal. It is therefore both unnecessary and inappropriate for this Court to express a view The Family Court judgment, above n 2. EJD v AJCB FC Auckland FAM , 19 July 2010 [the Family Court costs judgment]. B v D HC Auckland CIV , 17 September 2010 [the High Court leave judgment]. At [30].

10 [26] It is nevertheless appropriate that we acknowledge Ms Deligiannis comprehensive and careful submissions on the retrospectivity issue. For the CIR, she supported Fogarty J s finding that jurisdiction existed to make a departure order with retrospective effect. She summarised the CIR s submissions in these terms: 1. Using a purposive approach, the correct interpretation of the CSA is that a departure order may be made retrospectively: in particular ss 96O, 96ZE, 104, 105, 106 and The objects of the CSA are set out in s 4 and the purpose of the ability to depart from the formula assessment is to reflect what is just and equitable and otherwise proper in the particular case. 3. Certainty for the parties of the formula assessment for the future does not trump injustice or inequity. 4. Section 118(1)(e) of the CSA is particularly relevant and applies to departure orders made under s 105. It provides that an order may be expressed to be retrospective. 5. An intricate grammatical analysis of s 105 of the CSA 9 is not the correct approach to interpreting the section. 6. Not allowing retrospective departure orders will lead to absurd results that are not outweighed by ensuring certainty of the formula assessment looking forward. [27] We have set out this summary because, as Ms Deligiannis noted, there is an equally balanced difference of opinion in the High Court on the retrospectivity issue. 10 This Court may therefore be called upon in some future case to resolve that difference and decide the issue. The judgment in the Family Court [28] Judge McHardy noted that the statutory framework for the child support regime allows a party to apply to the Family Court for a departure order either upwards or downwards from the formula assessment in order more accurately to 9 10 Such as was urged on O Regan J by counsel for the appellant in Johnson v Commissioner of Inland Revenue [2002] 2 NZLR 816 (HC) at [53]. The two decisions which have held that the courts do not have the power to make retrospective orders departing from a formula assessment of child support are: Commissioner of Inland Revenue v Aspinall [1999] 3 NZLR 87 (HC) and Johnson, above n 9. The two judgments in addition to that of Fogarty J holding that there is jurisdiction to make retrospective departure orders are: Hastings v Morel HC Wellington AP351/93, 19 July 1995 and IPD v KME [2008] 2 NZLR 523 (HC).

11 reflect the current financial circumstances of the liable parent. The jurisdiction for such applications is in ss of the CSA. 11 [29] The Judge observed that the mother s primary reliance was on s 105(2)(c)(i) which provides that the grounds for departure (from the formula assessment of child support) are: 12 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 party or the child; or [30] The Judge had also recorded the father s acceptance that the Court had jurisdiction to make retrospective orders. 13 [31] After summarising the parties opposing positions, the Judge dealt with the accounting evidence. As we have mentioned, he had evidence only from the mother s accountant, Mr Leonard. The Judge substantially accepted Mr Leonard s evidence. The Judge also observed that the father, through the various departure applications, had demonstrated a good understanding of the Child Support legislation. He viewed the father s applications as an extension of his determination to deprive the [mother] of financial support, particularly for the girls. He added there was an element of smugness about the way in which the [father] endeavoured to defend his position at the hearing. 14 [32] Judge McHardy s critical finding was: 15 The evidence is conclusive that the [father] has deliberately undertaken a course of action designed to reduce his liability for child support. The effects of this course of action have had the desired effect. The [father] has successfully reduced his income by use of an artifice which has enabled him to conceal his real income. He has taken steps to reduce his earning capacity and he has so dealt with substantial assets to avoid them earning income The Family Court judgment, above n 2, at [17] [18]. At [52]. At [27]. All three passages quoted are at [87]. At [91].

12 [33] The Judge took the view that the father s child support between 1999 and 2003 should be set at the maximum figure allowed by the CSA. 16 He made orders to that end. In particular, he made an order varying the formula assessment in relation to the father s income amount, fixing it at the maximum applicable for each year in terms of the calculations provided to the Court by the mother in evidence. He ordered that the sum of $146,676 was owing and was to be paid to the mother in a lump sum forthwith. 17 [34] The Judge also made an order, pursuant to s 182 of the Family Proceedings Act 1980, varying the parties separation agreement by requiring the father to pay: 18 an adjustment sum to [the mother] being the equivalent of the amount of her claim, interests and costs and the further sum of $90,000 to be applied towards the ongoing costs for the girls. [35] The Judge dismissed the father s cross-application for departure, categorising it as a meritless retaliatory response unsupported by evidence. 19 [36] In his second judgment the Judge awarded the mother interest under s 62B of the District Courts Act 1947 at the successive prescribed rates applicable over the relevant years, 20 and costs of $65,463 (a 40 per cent uplift on the District Court 3B scale) plus her accountant s fee of $22, [37] As sealed, the judgment of the Family Court was for a total of $297, (with interest accruing at $33.76 per day). The judgment under appeal [38] Fogarty J addressed four issues At [17]. At [127](b). At [124]. At [126]. The Family Court costs judgment, above n 6, at [10]. At [25].

13 Issue 1: Does the Family Court have the power to make retrospective orders? [39] The Judge answered this issue Yes. For the reasons we explained at [25]-[27] above, we need say nothing further on this issue. Issue 2: Should the findings as to level of income remain? [40] Fogarty J dealt first with the period 1 April 1997 to 31 March He noted that Mr Leonard, accountant for the mother, considered that the father s income over this period additional to his taxable income was $127,838. He also noted that the comparable figure of Mr Melzer, accountant for the father, was $89,750. The Judge adopted Mr Melzer s figure, explaining his reasons in this way: 22 the true difference [between the two accountants figures] is $33,297. (I am ignoring a $4,000 odd dispute between the experts as being of no consequence over six years, taking the figures less than the $4,000 figure.) This sum is the closing balance of the director s loan account on 31 March But as the director s loan account was in debit of $105,152 as at 1 April 1997 I agree with Mr Melzer that to take into account the figure of $33,297 is to extend the period of assessment of income beyond 1 April March For these reasons I think Mr Melzer s view is the correct one. In short, the net advances obtained by [the father] in this period, in addition to his taxable income was $89,750. These were sums received in his hand and to be equivalent to taxable income needed to be converted by the addition of tax. They then can be allocated across the seven years, However, it should be noted the claim is only for the years In the earlier years the mother was on the DPB. The last year that the father took drawings from the company, in addition to his salary, was [41] Fogarty J then stated that the reasoning we have just set out resolved the contest between the two accountants as to income benefits in fact derived by the father, setting to one side the issue as to whether or not the structure was a sham and/or whether the net receipts he was receiving from the trust can be brought into account in a s 105 analysis and a s 106 adjustment. He said he would return to those structural issues later in the judgment The High Court judgment, above n 1, at [50] [51]. These paragraph numbers are correct for the judgment as reported in the NZLR and NZFLR. They are not correct for the judgment as contained in the Case on Appeal. For some reason not explained to us paragraph [6] is missing from that judgment. It also contains a different interest figure in [5]. At [52].

14 [42] Turning to 2003 onwards, Fogarty J summarised the financial effects of the father embarking on the software development project, and the Family Court Judge s view. He did not share the Judge s conclusion that the development project was simply an extension of a greater plan by the father to avoid paying child support. He rejected the mother s submission that the Court should base child support on a notional capitalised development salary based on the father s evidence that he would have had to pay an employee $100,000 per annum to carry out his role in the development project. [43] Fogarty J pointed out that the CSA is substantially anchored around deriving the amount of child support to be paid from the taxable income of the liable parent. 24 He considered that the core sections, ss 104, 105 and 106, were rooted in making adjustments to the figures otherwise derived from taxable income, and observed: 25 There is no section in the Act which in any way suggests that there is an obligation on the liable parent to make employment decisions which at all times ensure that his income remains at the higher level. Of course, if a liable parent deliberately lowers his income for the sole purpose of avoiding the obligation of child support that might be a different matter. This is not the case here. [44] The Judge concluded his analysis in this way: 26 Standing back there can be no suggestion that there is anything unusual about a software service provider losing an agency and embarking on a programme to develop a new product. It is in the nature of business. This Court would embark into treacherous waters if it interpreted the Child Support Act as preventing self-employed persons from making normal business decisions designed to maintain their income and wealth in the long run. [45] Next, Fogarty J referred to spreadsheets both counsel had provided to him supporting their respective submissions on the correct level of child support. The Judge did not accept either of these spreadsheets, but annexed to his judgment a spreadsheet of his own: At [60]. At [60]. At [61]. We note that this table is arithmetically and factually incorrect. For example, the figures given for the living allowance in 2001, 2002 and 2003 are incorrect. Some of the calculations are

15 Year ended Salary Averaged New Drawings 1 FORMULA FACTORS s 29(1)(B) (a) National Gross Income (b) Living Allowance (c) CS% (a-b) x c CS Liability on this basis Paid Difference Interest ,000 19,232 59,232 10,783 27% NA NA NA NA ,000 19,232 59,232 11,082 27% NA NA NA NA ,000 19,232 57,232 11,372 27% 12,382 8,472 3,810 4, ,188 19,232 54,420 11,401 27% 11,615 8,089 3,526 3, ,000 19,232 53,232 15,501 27% 10,187 7,498 2,689 2, ,000 19,232 54,232 15,584 27% 10,434 6,943 3,491 2, ,000 19,232 53,232 16,233 27% 9,989 6,063 3,926 2, ,442 14,096 15,442 14,096 $29,538 Rounded: $30,000 Net drawings of $12,714 grossed up to notional pre-tax drawings, to $19,232, per Ms Manuel s calculations of 21/2/11. 2 At 11% (1999 July 2002) At 7.4% (Aug June 2008) At 8.4% (July 2008 March 2011) [46] The Judge explained this spreadsheet in this way: 28 It identifies additional income of about $15,000. Interest on that, at the statutory rates, to date, doubles that figure, approximately, to say $30,000. The interest calculations are approximate. The indicative result is, of course, vastly different: in the order of one-tenth, of the total judgment of the District Court. 28 incorrect: for example the Difference column has been added incorrectly: the total should read $17,442 based on the figures given in that column. At [67] [68].

16 It is explicable principally by the recognition that the dividends of $250,000 odd were sustainable only provided they were used mainly to repay drawings, and by my rejection of the notional capitalised development salary advocated for by Ms Manuel for the years 2004 to On her schedule that accounts for a total income over those years to an additional non-declared income of $537,196. It is partially explained also by reason that in the years 1999 to 2003 I am not taking account of private use of the car or interest charged on drawings and I am working from the after tax figure of $89,000 rather than $127,000 for the seven years, 1996 through to Issue 3: Was the trust a sham? [47] First, Fogarty J accepted that the Family Court had jurisdiction to decide whether or not the L Trust was a sham. Not satisfied that the father intended the trust deed to be deceitful, the Judge concluded that it was not a sham document. The Judge categorised the L Trust in this way: 29 Rather, if it has to be put into a box, the deed should be approached as an expression of a general power of appointment, which he always had, but is now formally expressed. General powers of appointment have never been recognised in equity as constituting a fiduciary obligation. [48] The Judge then expressed his agreement with Judge McHardy that, because the father had used the net cash flow of the business for his personal end, it could be treated as his income in a general sense of that word. 30 He said: [100] The question becomes whether or not it is the sort of income, that should be taken into account when applying the criteria in s 105 and making orders pursuant to s 106 of the Child Support Act. Issue 4: What is the just, equitable and proper result? [49] After referring to the relevant parts of s 105, the Judge confirmed his: 31 working presumption that the net benefit, received by the cycle of drawings and repayments, identifies income which should be taken into account in examining whether or not there ought to be a departure from the formula assessment At [96]. At [99]. At [101].

17 [50] He reiterated his rejection of the notion that he should either ignore or otherwise compensate for the loss of income in the wider sense caused by the development of the new software post 2003, repeating the treacherous waters observation we have quoted in [44] above. 32 [51] Satisfied that it would be just and equitable, he then varied retrospectively the child support income amounts for the years 1997 to 2003 in terms of the schedule annexed to his judgment. He set aside the judgment of the District Court and entered judgment in favour of the mother for $29,538 ($15,442 plus interest of $14,096, as set out in the table in [45] above). He reserved costs to be fixed failing agreement. Submissions and our decision Statutory provisions [52] The mother made her application for departure from the formula assessment under s 104 of the CSA. Relevant to the mother s application, s 105 provides: 105 Matters as to which court must be satisfied before making order (1) Where an application is made to a Family Court under section 104 for an order in relation to a child and the court is satisfied that (a) (b) 1 or more of the grounds for departure mentioned in subsection (2) of this section exists or exist; and it would be (i) (ii) just and equitable as regards the child, the qualifying custodian, and the liable parent; and otherwise proper, the Court may make the order. to make a particular order of the type specified in section 106, (2) For the purposes of subsection (1)(a), the grounds for departure are as follows: 32 At [104].

18 (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 (4) In determining whether it would be just and equitable as regards the child, the qualifying custodian, and the liable parent to make a particular order of the type specified in section 106, the court shall have regard to (a) (b) the objects of this Act, and, in particular, the nature of the duty of a parent to maintain a child and the fact that it is the parents of a child themselves who have the primary duty to maintain the child; and the proper needs of the child, having regard to (i) (ii) the manner in which the child is being, and in which the parents expect the child to be, cared for, educated, or trained; and any special needs of the child; and (d) the income, earning capacity, property, and financial resources of each parent who is a party to the proceeding; and (f) (g) the direct and indirect costs incurred by the qualifying custodian in providing care for the child, including the income and earning capacity foregone by the qualifying custodian in providing that care; and any hardship that would be caused to (i) (ii) the child or the qualifying custodian by the making of, or the refusal to make, the order; or the liable parent, or any other child or another person that the liable parent has a duty to support, by the making of, or the refusal to make, the order.

19 (5) In having regard to the income, earning capacity, property, and financial resources of the child or a parent of the child, the court must (a) (b) have regard to the capacity of the child or parent to earn or derive income, including having regard to any assets of, under the control of, or held for the benefit of, the child or parent that do not produce, but are capable of producing, income; and disregard the income, earning capacity, property, and financial resources of any person who does not have a duty to maintain the child, or who has such a duty but is not a party to the proceeding, unless, in the special circumstances of the case, the court considers that it is appropriate to have regard to them. (6) The court may have regard to other matters beyond those specified in subsections (4) and (5). [53] The objects of the CSA to which s 105(4) requires the court to have regard are set out in s 4. The following have particular relevance here: 4 Objects The objects of this Act are (a) (b) to affirm the right of children to be maintained by their parents: to affirm the obligation of parents to maintain their children: (d) to provide that the level of financial support to be provided by parents for their children is to be determined according to their capacity to provide financial support: (h) to ensure that equity exists between custodial and noncustodial parents, in respect of the costs of supporting children: (j) to ensure that the costs to the State of providing an adequate level of financial support for children and their custodians is offset by the collection of a fair contribution from noncustodial parents:

20 Principles [54] Authorities dealing with ss of the CSA are now legion. They include the decisions of this Court in Lyon v Wilcox and Andrews v Andrews. 33 The following points emerge from those two cases: (a) The three matters in s 105(1) about which the court must be satisfied are cumulative, with the onus being on the applicant. 34 (b) The thrust of the legislation is plain from its objects and provisions: parents are primarily responsible for their childrens support, not the general taxpayer or third parties; the formula assessment is the norm; and departure from it will be allowed only if stringent tests are satisfied. As has been said in a number of cases, those seeking departure must pass through a narrow gate. 35 (c) Special circumstances in s 105(2)(c) means facts peculiar to the particular case which set it apart from other cases. 36 (d) Special circumstances include, but are not confined to, those where it is apparent that unfair, or inappropriate devices have been adopted to diminish liability often to evade a liability under the Act.... Such circumstances entitle the Court to have regard to the real income of the assessed person. 37 [55] Section 105(4)(d) and (5)(a) empower the Court to ascertain the true financial ability and resources of the parent of a child, in terms of ability to pay child support. That includes the ability to go behind or, as Ms Manuel put it, to look through company, trust and other structures. That was made abundantly clear by this Court in Andrews v Andrews in the passages cited in [54](d) above. We consider Morris J Lyon v Wilcox [1994] 3 NZLR 422; [1994] NZFLR 634 (CA); and Andrews v Andrews [1995] NZFLR 769 (CA). Lyon v Wilcox at 428. At 430. At 431, approving the judgment of the Full Court of the High Court in Re M [1993] NZFLR 74. Andrew v Andrews, at 771.

21 had earlier put the position accurately, and with his characteristic robustness, in Clasper v Clasper: 38 Can it be the legislature intended a person could avoid the obligation to provide proper maintenance based on real income simply because that person is able to regulate his/her affairs in such a way as to reduce his/her liability for income tax under the Revenue statutes? I think not. It is vital to the integrity of a fair system of child support a person s real income be ascertained and liability assessed as far as possible on a person s true ability to pay based on his/her real income. In common parlance, every liable parent should be assessed under the Act on the money the parent gets in his/her pocket. Sections 104 & 105 were enacted to enable this to be done in appropriate cases. An appropriate case will be where special circumstances or conditions are found to exist and where it would be inequitable to allow an assessment based on return of income to stand: Andrews v Andrews [1994] NZFLR 39. [56] In granting leave for this appeal in a judgment on 21 September 2011, this Court listed the questions the appeal appeared to raise. The first of these was: 39 Should the Trust income be treated as [the father s] income for the purposes of the Act? In stating that question, this Court invited the parties to consider the relevance (if any) of the Supreme Court s decision in Penny & Hooper v Commissioner of Inland Revenue. 40 [57] Ms Manuel responded to that invitation by submitting that the structures set up by the appellant surgeons in Penny are virtually identical to the structure set up by the father in this case, except that the [surgeons ] payment obligation was to the CIR rather than [as here, to] the mother as custodial parent. Ms Manuel submitted there is a similarity in the underlying policies of the CSA and the Income Tax Act She referred particularly to the statement by Blanchard J, delivering the Supreme Court s judgment, that: 41 The policy underlying the general anti-avoidance provision is to negate any structuring of a taxpayer s affairs, whether or not done as a matter of ordinary business or family dealings unless any tax advantage is just an incidental feature Clasper v Clasper (1995) 13 FRNZ 604 (HC) at 607. D v B [2011] NZCA 474, [2011] NZFLR 1065 at [8]. Penny & Hooper v Commissioner of Inland Revenue [2011] NZSC 95, [2012] 1 NZLR 433. At [47].

22 [58] Any analogy which can be drawn between this case and Penny & Hooper can only go so far. There is an analogy in that Messrs Penny and Hooper set up trust structures in order to split their income and thus avoid income tax and the father in this case also set up a trust structure which had the effect of reducing his taxable income and therefore his liability for child support. But the difference is that tax avoidance was not an incidental purpose in Penny & Hooper, whereas reducing liability for child support may have been incidental in the father s case. We are prepared to accept that there may have been sound commercial reasons for the father s trust structure, namely to protect himself from creditors of his business. Period from 1997 to 2003 [59] Broadly, Ms Manuel argued that the Judge had erred in rejecting Mr Leonard s analysis, briefly referred to in [40] above. [60] Ms Kearns defended as accurate the Judge s acceptance of Mr Meltzer s figure, also referred to in [40] above. [61] In the Family Court only the appellant s accountant had given evidence. Pursuant to the leave granted by Courtney J in September 2010, 42 Fogarty J heard further evidence in the High Court. It came particularly from the parties accountants. In accordance with the direction of Courtney J, the two accountants had filed a joint statement, dated 9 September 2010, addressing the question: what happened to the $257,000 that [the father] put back into WR between 1997 and 2003? Ms Manuel suggested this question might more accurately have been framed: why was profit recycled through the Trust, and a reduced salary paid at all? Whichever way it is framed, we view the question as an attempt to help the High Court ascertain what, if any, additional financial resources were available to the father to pay child support as a result of the steps outlined in [12] [16] above. [62] The accountants joint statement contains this paragraph: 42 The High Court leave judgment, above n 7, referred to in [23] [24] above.

23 Dividend Funds recycled to [WR] 4. Mr Meltzer has calculated that the sum of $256, was paid by [the L Trust] to [the father] in reduction of his Loan Account and that from this sum [the father] then repaid $252,300 to [WR] in reduction of the Directors Loan Account. These figures are based on information and data provided by [the father]. Mr Leonard has assumed that $257,091 was repaid by [the father] to [WR]. The difference between these two figures is $4,971. This issue is addressed below. [63] Mr Meltzer termed his figure of $256, repayments by the L Trust to the father, presumably because they reduced the Trust s debt to him for the assets he had transferred into the Trust. Mr Leonard was quite adamant that his figure of $257,091 represented advances. He based this on the state of the father s account with the L Trust. The categorisation seems to us to matter not, because the two accountants are agreed that the L Trust paid the father in excess of $256,000 over the 1997 to 2003 period. [64] There are three other matters of agreement between the two accountants: (a) The father s loan account with WR was overdrawn $105,152 as at 1 April 1997, and $33,297 as at 31 March (b) Vehicle expenses of $27,584 were properly treated as drawings from WR by the father (these relate to an Audi motorcar purchased by the L Trust for $34,000 in 2000, leased by it to WR, but used exclusively by the father). (c) Interest of $29,814 charged to WR at fringe benefit tax rates on the father s overdrawn loan account with WR was also properly treated as drawings by the father. [65] The different approaches taken by the two accountants are then set out in these two tables contained in their joint statement to the High Court:

24 Mr Leonard s analysis for the mother Directors Loan Account Balance as at 01 April 1997 $ 105,152 Debit Net Funds available to be repaid 257,091 Drawings by the father Vehicle Expenses (Estimate) Interest Charged (Estimate) 27,584 29,814 Unspecified drawings 127,838 Subtotal Balance at 31 March ,236 Debit 33,297 Debit [66] Mr Leonard calculated his total drawings of $185,236 in the following way: Total dividends $257,091 Less the difference between the opening and closing debit balances of the father s loan account $71,855 Balance $185,236 [67] The components of that $185,236 were the agreed vehicle expenses ($27,584) and interest charged ($29,814), and the unspecified drawings of $127,838. [68] Mr Meltzer s analysis was this: Mr Meltzer s analysis Repayments by the father 252,300 Less: Director s Loan Account Opening Balance $ (105,152) Less: Motor Vehicle Private Use (27,584) Less: Interest (29,814) Further advances 89,750

25 [69] Mr Meltzer s view was that the repayments by the father were to be applied first to repay the oldest outstanding balance, which was the debit opening balance of the father s director s loan account as at 1 April They were next to be applied to reimburse WR for the motor vehicle expenses and interest it had paid. [70] As he acknowledged in the joint statement, Mr Meltzer s calculations focused on answering the question posed by Courtney J: what happened to the $257,000 that the father put back into WR between 1997 and 2003? [71] In their joint statement the two accountants agreed that the father s loan account with WR was analogous to a revolving credit type facility. Advances were made by WR to the father and were repaid to WR by the father. Further advances were made and repaid. Effectively, the father used WR as his bank. The two accountants were agreed that those advances because they were required to be repaid were not treated as income taxable in the hands of the father. And, provided interest was charged on the account balance at the prescribed rate, no fringe benefit tax was payable by WR. [72] We consider Mr Leonard was correct to include in the monies advanced to the father the difference between the opening and closing debit balances of the father s loan account. That difference represented a reduction in the amount the father owed WR, and thus an improvement in his asset position. It was accordingly relevant to the Court s task. [73] We disagree with Fogarty J in two significant respects. First, we do not agree with Fogarty J s preference for Mr Meltzer s analysis in terms of the application of the repayments. The aim of the accountants task was to assist the High Court to identify what financial resources, additional to the salary the father received from WR, which he had available to pay child support. While we do not disagree with Mr Meltzer s view that the father s payments were first to be applied to repay his overdrawn director s loan account with WR, it is not an accounting analysis that is required here but one that identifies what additional resources the father had available to pay child support.

26 [74] Secondly, we disagree with Fogarty J s reasoning and conclusion in relation to the car and the interest charged. He held: 43 these benefits are not incorporated into the formula under the Act. This is the case even though such benefits are common place. Accordingly, it would be contrary to the scheme of the Act to justify a departure from the formula by an application under s 104 merely because of the presence of these benefits. Were the benefits obtained in order to frustrate the purpose of the Act, that might be ground for departure. [75] Accepting the Judge was correct to hold that those benefits were not incorporated into the formula, we do not agree that it is logical to exclude them when considering an application for a departure from the formula. This proceeding is, by definition, about departure from the formula assessment, and it is illogical to conclude that what cannot be included in the formula assessment can by extension not be included in considering a departure from the formula assessment. The reason for allowing a departure is that the formula assessment is unable to take into account certain things, such as the use of a car and of interest-free loans, which affect the financial position and resources of the liable parent and which it is just and equitable and otherwise proper to take into account. [76] It is common ground that the vehicle expenses and interest charged, totalling $57,398, should be treated as drawings by the father. Those benefits were of obvious value to the father. But for those benefits, the father would have had to use his own income to provide himself with a car and to pay the cost of credit. They are thus correctly included for s 105 purposes. [77] That leaves Mr Leonard s unspecified drawings of $127,838, contrasted with Mr Meltzer s further advances of $89,750. The $38,088 difference between those two figures comprises the closing debit balance at 31 March 2003 of the father s loan account plus a difference of $4,791 in dividends repaid by the father to WR. [78] We adopt Mr Meltzer s figure of $89,750 further advances in preference to Mr Leonard s figure of $127,838 unspecified drawings. We do that because the latter figure includes the $33,297 debit closing balance at 31 March 2003 of the father s director s loan account. We consider it is the difference between the debit 43 The High Court judgment, above n 1, at [48].

27 opening and closing balances of that account that is appropriately included, for the reasons explained in [72] above. [79] We agree with Fogarty J that the other component of the difference between the accountants two figures is appropriately ignored as de minimus when spread across the seven year period. 44 [80] Thus, the following sums are to be added to the father s income over the period, for the purpose of assessing his liability for child support: The difference between the debit opening and closing balances of his director s loan account with WR that difference representing an increase in his asset base, or, correspondingly, a decrease in the amount he owed WR $71,855 The agreed vehicle expenses ($27,584) and interest charged ($29,814), both being treated as drawings by the father valuable benefits he enjoyed during the period $57,398 Further advances to/drawings by the father as calculated by Mr Meltzer $89,750 Total $219,003 [81] This sum should be spread equally across the seven years 1997 to 2003, increasing the father s income available for the assessment of child support by $31,286 for each of those years. [82] On our calculations, the result is that the father will be liable to the maximum child support amount for five of the seven years. We calculate that, for 2001 and 2003, his adjusted income will fall short of the maximum income for assessment of 44 This is the $4,791 difference as to dividends repaid by the father to WR. In [50] of his judgment Fogarty J said I am ignoring a $4,000 odd dispute between the experts as being of no consequence over six years, taking the figures less than the $4,000 figure.

28 child support. 45 But it is best that we leave the necessary calculations to counsel, so that it is agreed they are accurately made. Period 2004 to 2010 [83] We turn now to the period 2004 to We consider this period separately from the 1997 to 2003 period because the substantial drop in the father s income in this second period came about as a result of his embarking on a large software development project. The issue in this second period is therefore different from the issue in the first period, where the drop in income resulted from the restructuring of the father s financial affairs. For consideration is whether and to what extent the father was entitled to take the decision to embark on an expensive development project to the detriment of his ability to make child support payments. [84] Ms Manuel argued that the father should be assessed for child support during this period on a notional salary of at least $100,000. She based this on the father s evidence that that is what he would have had to pay another person to undertake the software development project. This was the relevant exchange in evidence: 46 Q A Q What would I have to have paid you to do all those jobs you re working more than full time that you described? Are you saying to me I couldn t afford you? I couldn t have afforded, um, to employ another person. Because you would ve had to pay them, how much? A $100,000. Q A At least? It would ve been. At least. [85] The father also accepted in evidence that undertaking the software development project would certainly have been far more difficult if he had had the parties three girls living in his full-time care through the development period Our calculations are: for 2001 the father will be assessed on an income of $67,286, against a maximum of $68,463. For 2003 the comparable figures are $67,286 and $86,684. Supplementary case on appeal at At