Chapman; Secretary, Department of Employment and Workplace Relations
[2005] AATA 1161
•23 November 2005
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2005] AATA 1161
ADMINISTRATIVE APPEALS TRIBUNAL )
) No N2005/760
GENERAL ADMINISTRATIVE DIVISION ) Re Secretary, Department of Employment and Workplace Relations Applicant
And
Alan Chapman
Respondent
DECISION
Tribunal Mr M.A. Griffin, Member Date23 November 2005
PlaceSydney
Decision The Tribunal sets aside the decision under review and substitutes therefor the following decision. In calculating the rate of Newstart Allowance payable to Mr Chapman, no amount of the net profit of Gregalan Contracting Pty Ltd for the year ending 30 June 2004 is excluded income for the purposes of Part 3.18 of the Social Security Act 1991.
[Sgd] Mr M. A. Griffin, Member
CATCHWORDS
SOCIAL SECURITY - Newstart Allowance - loan to wholly owned private company - company profit - no distribution of profit - attribution of income - income deeming provisions - whether double counting - no discretion - decision under review is set aside.
Social Security Act 1991 Part 3.18, sections 9, 1075, 1076, 1081, 1082, 1083, 1084,1122, 1207N, 1207X, 1207Y
Re Backer and Secretary, Department of Family and Community Services [2002] AATA 1335
REASONS FOR DECISION
23 November 2005 Mr M.A. Griffin, Member 1. The Secretary, Department of Employment and Workplace Relations (“the Applicant”) seeks review of a decision of the Social Security Appeals Tribunal (“the SSAT”). The SSAT set aside a decision made by Centrelink about the calculation of Newstart Allowance payable to Mr Chapman (“the Respondent”).
2. Centrelink had decided firstly, that the net profit of Mr Chapman’s private company for the year ending 30 June 2004, should be attributed to Mr Chapman as part of his ordinary income and secondly, that a loan Mr Chapman had given to his private company was a financial asset from which Mr Chapman derived ordinary income in the form of deemed income. The effect of the Centrelink decision was to reduce the amount of Newstart Allowance payable to Mr Chapman.
3. The SSAT concluded that “so much of the net income of the company as is equivalent to the deemed income derived from Mr Chapman’s loan account to the company, namely $7.241.67, must be treated as excluded income…” and sent the matter back to Centrelink to be recalculated accordingly.
Issue
4. The issue for the Tribunal to decide is whether the sum of $10,183.98 being the attributed income from Gregalan Pty Ltd can be reduced by the amount of $7,241.67, being the deemed income from Mr Chapman’s loan to Gregalan Pty Ltd, in assessing Mr Chapman’s ordinary income for the purposes of calculating his rate of Newstart Allowance.
Background
5. At the hearing, Ms Mantaring appeared for the Applicant and Mr Chapman represented himself. The Tribunal received into evidence the documents prepared in accordance with section 37 of the Administrative Appeals Tribunal Act 1975 (“the T documents”) and documents produced by the Applicant and exhibited as A1.
6. The following factual history, taken from Exhibit A1 and not disputed by Mr Chapman, sets out the background to this matter.
7. Mr Chapman has been in receipt of Newstart Allowance since 30 April 2004. Between April and October 2004 his regular rate of payment was around $300 per fortnight.
8. Mr Chapman is the owner of all issued shares of Gregalan Contracting Pty Ltd. He is the company's sole director. On 17 June 2004 a Complex Assessment Officer determined that Mr Chapman was to be attributed with 100% of Gregalan's income and assets (T4, p.7).
9. In the year ended 30 June 2004 Gregalan disclosed in its income tax return a net profit before income tax of $10,184 (T7, p.35). The balance sheet also disclosed an unsecured loan from Mr Chapman in the sum of $144,833.43. (T7, p.43)
10. In October 2004 Mr Chapman's financial information relating to Gregalan was updated from the 2003/04 financial statements provided by him. Centrelink decided on 25 October 2004 to reduce the rate of Newstart Allowance payable to him. The income assessed at that time was:
· Attributed income from Gregalan of $10,183 p.a. or $391.65 per fortnight.
· Deemed income from Loan of $144,833 and shares valued at $52,734 being $351.93 per fortnight.
Total income assessed per fortnight: $743.58 (p.51, T11)
As a result of the assessment, Mr Chapman's rate of NSA was reduced from $298.63 per fortnight to $30.29 per fortnight thereafter.
The decision to review the rate was affirmed by an Authorised Review Officer (“ARO”) on 17 February 2005. On 5 May 2005 the SSAT set aside the decision. The SSAT decided that of the $10,183.98 income earned by Gregalan in 2003/04, only $2,942.31 should be attributed to Mr Chapman with the remainder being assessed as "excluded income" for the purpose of Part 3.18 of the Act.
Evidence
In addition to the facts stated above, Mr Chapman said the 2003/2004 profit was a one-off and that Gregalan had in fact incurred minor losses for the previous three years. He said that the calculation of attributed and deemed income amounted to double dipping and was unfair. He said that he had experienced considerable difficulty in obtaining timely and accurate advice from Centrelink staff about these matters.
Ms Mantaring acknowledged that there had been what she termed “service difficulties”. She had personally intervened to assist Mr Chapman in his dealings with the relevant Centrelink staff. Mr Chapman expressed some degree of satisfaction with these developments. The parties agreed that these service matters were secondary to the issue before the Tribunal concerning the correct application of the legislative provisions relating to “excluded income”.
Consideration
Mr Chapman made a loan to Gregalan Contracting Pty Ltd, a private company of which he is the sole director, which, at 30 June 2004, had an outstanding balance of $144,833.43.
Pursuant to section 1122 of the Social Security Act 1991 (“the Act”), the balance of so much of the loan as remains unpaid is an asset of the lender. In addition, under section 9(1), the loan is also a “financial investment” and a “financial asset” for the purpose of the Act.
In addition to the loan, Mr Chapman has also held various other market investments, including shares in publicly traded companies and managed investments, which are also considered financial assets. Income from a NSA recipient’s total amount of financial assets is not assessed on the basis of income actually received (section 1083), but rather is calculated on the basis of the “deeming rules” contained in Part 3.10, Division 1B of the Act.
According to the deeming rules, the ordinary income from financial investments is calculated on the basis of “deemed” rates of interest and a formula which take into account a lower rate of interest for investments below a particular threshold and a higher rate of interest for investments above the threshold (sections 1076, 1081 & 1082).
On 25 October 2004 the threshold for the total financial investment value was $36,400, with an interest rate of 3% p.a. assigned to investment amounts below the threshold and 5% p.a. above the threshold. The Minister may declare certain specific financial investments to be disregarded under section 1084, but no such power is available to the Tribunal.
Insofar as Mr Chapman disputes the actual level of financial assets, other than the loan to Gregalan, assessed on 25 October 2004 the Applicant has accepted that the original decision was not correct. Specifically, certain shares included in financial assets in October 2004 had already been sold and therefore the level of those assets was less than reflected in the original decision. More recently, Centrelink officers have updated the shares Mr Chapman held in October 2004 to reflect the true position and this has resulted in a small payment of arrears going back to 25 October 2004 (see Exhibit A1 attachments B & C).
I find that Mr Chapman’s loan to Gregalan was a financial investment attracting deemed income in accordance with the Act, as was also found by the SSAT.
Since 1 January 2002 the assessment of income derived from most private companies and trusts is to be determined in accordance with Part 3.18 of the Act. Part 3.18 provides for attribution of the assets of controlled designated companies to attributable stakeholders of the company in proportion to an attribution percentage that is worked out under the provisions.
Gregalan is a designated private company pursuant to section 1207N(1)(a). It is also a controlled private company in relation to Mr Chapman, as set out in section 1207Q, as he is the company’s sole owner and director. As set out in section 1207X, once a company is a controlled private company in relation to an individual, that individual is an attributable stakeholder.
The general rule is that an attributable stakeholder has an asset and income attribution percentage of 100% unless the Secretary determines a lower percentage is applicable. By virtue of his shareholding and directorship, Mr Chapman is the only controller, consequently an attribution percentage of 100% is to be applied.
Section 1207Y outlines the method by which ordinary income derived by a company is attributed to an attributable stakeholder. Ordinary income derived in a derivation period, in this case the 2003/04 financial year, is attributed to the stakeholder in the attribution period at the annual rate equal to a person’s income attribution percentage.
As Mr Chapman is a 100% controller of the company, it follows that all of the ordinary income of Gregalan Pty Ltd should be taken to be part of his ordinary income for the attribution period, that is in the period from 25 October 2004 until the information about the next financial year’s income is made available.
In calculating the income of Gregalan, the definition of “ordinary income” contained in section 8 of the Act applies, as do the rules in Part 3.10 of the Act (General Provisions Relating to the Income Test). Specifically, in accepting that the “ordinary income” of Gregalan is equivalent to the income taken from tax returns, section 1075 has been applied to reduce the gross income of the company by permissible deductions.
Sub-section 1207Y(I)(3) provides that specified amounts of income may be excluded from attribution. In relation to “excluded income”, the Act provides the following:
“Excluded income
1207Y(2) The Secretary may, by writing, determine that, for the purposes of the application of subsection (1) to a specified individual and a specified company or trust, a specified amount is excluded income.
1207Y(3) A determination under subsection (2) has effect accordingly.
1207Y(4) In making a determination under subsection (2), the Secretary must comply with any relevant decision-making principles.”
Decision making principles for exercising the power in section 1207Y(2) are contained in the Social Security (Attribution of Income) Principles 2002 (“the Principles”) (TI5, p.74-84).
The Principles expressly state:
“These Principles set out decision-making principles with which the Secretary must comply in making the following determinations:
(a)a determination under subsection 1207Y (2) of the Act that, for the purposes of the application of subsection 1207Y (1) of the Act to a specified individual and a specified company or trust, a specified amount is excluded income;”
It is plain on the face of the legislation that compliance with these Principles is mandatory.
The circumstances where it is envisaged that income should be excluded under the Principles are limited to those where, by virtue of distributions being made, there may be double-counting if the income distributed is also attributed under Part 3.18.
On the evidence there was no distribution of the Gregalan profits. The factual situation here does not come within any of the circumstances outlined in Part 2 of the Principles. It follows that no part of the income derived by Gregalan in the 2003/04 financial year can be regarded as excluded income.
If Mr Chapman had in fact received any actual income, in the form of interest payments on the loan, this actual income would already be excluded by operation of section 1083 of the deeming rules. The financial statements of Gregalan show that no such interest was paid.
In the case of Re Backer and Secretary, Department of Family and Community Services [2002] AATA 1335 the Tribunal examined a similar fact situation where the applicants made loans to a trust. The Tribunal stated:
“32. The ordinary income of Mr and Mrs Backer includes both the deemed income and the attributed income. I have noted their concern that the legislation has operated unfairly by introducing the concept of attributed income and by assessing it along with the deemed income level. However, the Act is clear that this must be done. Paragraph 1207Y(1)(e) of the Act requires that the attributed income be considered in addition to any other ordinary income of the individual.”
I respectfully agree with the interpretation of the relevant sections of the Act given by the Tribunal in the decision of Re Backer (supra). I understand Mr Chapman’s concerns about ‘double counting’, however I am satisfied there is no discretion available to the Tribunal in the application of this legislation. I find that the ordinary income of Mr Chapman includes both the attributed income and the deemed income. I find that none of the income can be considered as excluded income for the purposes of the Act.
The Tribunal sets aside the decision under review and substitutes therefor the following decision. In calculating the rate of Newstart Allowance payable to Mr Chapman, no amount of the net profit of Gregalan Contracting Pty Ltd for the year ending 30 June 2004 is excluded income for the purposes of Part 3.18 of the Social Security Act1991.
I certify that the 38 preceding paragraphs are a true copy of the reasons for the decision herein of M.A. Griffin
Signed: Associate
Date of Hearing 5 August 2005
Date of Decision 23 November 2005
Representative for the Applicant Ms Mantaring
Advocate for the Respondent Mr Chapman
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