Dart and Secretary, Department of Family and Community Services - [2002] AATA 1289

DECISION AND REASONS FOR DECISION [2002] AATA 1289

ADMINISTRATIVE APPEALS TRIBUNAL )

) No Q2002/532

GENERAL ADMINISTRATIVE DIVISION          )
           Re      JOHN PEDEN DART
  Applicant
           And    SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES
  Respondent

DECISION

Tribunal Mr B J McCabe, Member

Date13 December 2002
PlaceBrisbane

Decision The Tribunal affirms the decision under review.

(Sgnd) B J McCabe
Member
CATCHWORDS
SOCIAL SECURITY – age pension – assets test – meaning of "home-owner" - whether applicant is a home-owner for the purposes of the Act – whether applicant has a right or interest in the property – whether that right or interest gave reasonable security of tenure
SOCIAL SECURITY – age pension – assets test – date on which assets disposed of – shares – whether gift takes effect on date of declaration of gift or date on which formal transfer executed – effect of s 1124A of the Social Security Act 1991
Social Security Act 1991
Property Law Act 1974
Corporations Act 2001
Corporations Law
Re Delos Reyes and Secretary, Department of Social Security (1993) 32 ALD 287
Re Johnston and Repatriation Commission (AAT No 9508, 31 May 1994)
Re Secretary, Department of Social Security and Staniland (1997) 48 ALD 333
Gartside v Inland Revenue Commission [1968] AC 553
Radaich v Smith (1959) 101 CLR 209
Re Secretary, Department of Social Security and Williams (1998) 52 ALD 418
Re Ropert and Secretary, Department of Social Security [1999] AATA 15
Unicomb v Secretary, Department of Social Security (1998) 50 ALD 405
Jones v Lipman [1962] 1 WLR 832
Corin v Patton (1990) 169 CLR 540
Re Isle of Thanet Electricity Supply Co Ltd [1950] Ch 161
Scottish Insurance Corp Ltd v Wilsons and Clyde Coal Co Ltd [1949] AC 462

REASONS FOR DECISION

13 December 2002 Mr B J McCabe, Member

Introduction

Mr John Dart, the applicant, has sought review of a decision of the Social Security Appeals Tribunal (the SSAT). The SSAT affirmed the respondent's decision to refuse Mr Dart's application for the aged pension. The respondent rejected the application because he said Mr Dart did not satisfy the assets test provided for in the Social Security Act 1991.
Mr Dart's affairs are complex. He lives in a house owned by a trust. He says he should not have been treated as a home-owner for the purposes of the asset test. (A person who does not own their own home is entitled to hold more assets before their eligibility for a pension is affected). There is also a dispute over whether a debt owed to a family trust should be offset against a loan made by the applicant to another trust. Mr Dart also disputed the date on which he transferred shares in a family company to his children, and the value attached to the shares he retained.
The Material Before the Tribunal
The respondent furnished the documents required under s 37 of the Administrative Appeals Tribunal Act 1975. There were three volumes of documents. The respondent also tendered a certificate of title relating to Mr Dart's home. The applicant tendered a document that was, in effect, a statement. He swore to its contents during the course of his testimony. He also tendered a diagram showing the organisation of his business affairs, a letter from his lawyers, Messrs Bowdens, dated 23 June 1997, and a copy of his will.
Mr Dart represented himself at the hearing. Mr Kanowski represented the respondent.
The Facts
The applicant is a successful Brisbane businessman. He has been involved in the business of selling edible nuts and dried fruit for many years.
Mr Dart has resided in a house in Corinda since May 2001. The house is owned by Fastcombe Pty Ltd, the trustee of the Dart Security Trust. Mr Dart is not a beneficiary under that trust, but he is one of three directors and the majority shareholder in Fastcombe Pty Ltd. The company purchased the house for Mr Dart because he needed somewhere to live following the breakdown of his marriage. During the period in question he paid rent of $646 per month. He does not have a formal lease and he said in evidence he did not know whether the rent was at the market rate. He said the company determined the amount of the rent by fixing a 5% rate of return on the purchase price of the house. He pointed out the return on other assets held by the trust was only 4%, so he (and the company, it seems) regarded the rental arrangement as a good deal.
The Dart Security Trust holds a number of property assets purchased over the years. The applicant said the Dart Security Trust held the family's property assets, while the trading operations (the fruit and nut business) were conducted by Trumps Pty Ltd as trustee for the Trumps Trust. Mr Dart is not a beneficiary of the Trumps Trust, but he is one of three directors and the major shareholder in Trumps Pty Ltd. Both trusts are discretionary trusts.
Mr Dart had not drawn a salary from Trumps for a period of time. The company owed him money as a result. The company was meeting some of his expenses, but he was still owed $44,171.19. The applicant was drawing money from the Dart Security Trust to fund his living expenses in the absence of money from Trumps. The drawings were debited against his name and he owed $48,438.83 at 30 June 1996. The applicant explained in his evidence that these were really accounting entries, and the books were subsequently balanced with the exchange of cheques between the two companies occurring on 26 March 2002.
Mr Dart has eight children from two marriages. He wanted to make arrangements for control of his business in the wake of his retirement. He proposed a transfer of the trading operations to one of his children, Declan, who showed a keen interest in the business. The transfer was effected by allocating to Declan a controlling shareholding in Saharra Pty Ltd, the company receiving profits from the Trump Trust. Declan also became a director (along with the applicant and Declan's mother, who was also a minority shareholder) of Trumps Pty Ltd. The business borrowed $1.4 million from the Dart Security Trust in connection with these transactions. The applicant proposed transferring shares in Sobrante Pty Ltd, the company receiving profits from the Dart Security Trust, to his children. In order to preserve his control in the interim, the 65 shares transferred to the children were declared to be non-voting. The applicant retained 20 shares that did not include a right to receive dividends but retained voting rights. Five other non-voting shares remained on issue.
Mr Dart said he wrote to his children on 5 May 1996 explaining the proposal. He asked each of the children to sign the letter they received and return it to confirm they accepted his plan. A copy of the letter apparently sent to one of the children was included in the T documents (T30, pp 488-489), although I note the letter is dated 29 April 1996. Mr Dart also recorded his wishes in his will executed on 4 May 1996. He says he instructed his accountants to attend to the share transfers and other documentation, but nothing was done at the time.
The applicant's solicitors subsequently prepared a deed of gift, share transfer forms and draft minutes of a meeting. They were forwarded to him under cover of a letter dated 23 June 1997. The deed was executed on 24 June 1997, over twelve months after the applicant's proposal was announced to family members.
Mr Dart is now 75 years old. He applied to Centrelink for an aged pension on 18 July 2001. He was rejected after a Complex Assessment Officer reviewed his business affairs and determined he did not satisfy the relevant assets test.
The Law
The assets test calculator is set out in s 1064. In the course of calculating an individual's entitlement (if any) to receive an aged pension, the decision-maker is required to have regard to the value of the individual's assets. Section 1064-G3 includes a table that says a person without a partner (such as Mr Dart) is permitted to own up to $141,000 in assets if he is a home-owner, or $242,000 in assets if he does not own his home.

(a) Is Mr Dart a home-owner for the purposes of the Act?

Section 1118 says that the family home may be disregarded for the purposes of the assets test. Section 1118(1)(a) provides:
"1118(1) In calculating the value of a person's assets for the purposes of this Act …disregard the following:
(a) if the person is not a member of a couple—the value of any right or interest of the person in the person's principal home that:
(i) is a right or interest that gives the person reasonable security of tenure in the home; …"

The expression "home-owner" is defined in almost identical terms in s 11(4), although that word is not actually used in s 1118. (It is used in s 1064.)
The clearest example of a right or interest that gives reasonable security in the home is ownership, in the sense that one is the registered proprietor of the property. Mr Dart does not own the home; the certificate of title shows the registered proprietor is Fastcombe Pty Ltd. But a person who does not have title may nonetheless be regarded as an owner for the purposes of the Act in some circumstances, provided he establishes (i) he or she has a right or interest recognised under the legislation, and (ii) that right or interest confers security of tenure.
(i) Existence of a Right or Interest

In Re Delos Reyes and Secretary, Department of Social Security (1993) 32 ALD 287, the Tribunal took a narrow view of the meaning of the expression "right or interest" in s 11(4). Deputy President Forrest said (at 290):
"The expression 'right or interest' is not defined in the Act. For the purposes of the provision I consider a right or interest in the principal home to be synonymous with a right or interest in real property. It if were otherwise I think it would give a meaning to homeowner not contemplated by the provision."

The Tribunal accepted it was unnecessary to establish one had an interest capable of protection through lodgment of a caveat before one could be said to have a "right or interest" within the meaning of the Act. But Deputy President Forrest said (at 291) that an interest in particular was "a right of a proprietary nature not a mere personal right".
The Tribunal revisited the question in Re Johnston and Repatriation Commission (AAT No 9508, 31 May 1994). In Johnston, the relevant legislation referred to a "property owner" and defined a property owner as a person who had a "right or interest" in a residence which afforded "a reasonable security of tenure in the home". The Tribunal examined a number of cases in which the expressions "right" and "interest" were used. Not surprisingly, the Tribunal was unable to discern a consensus as to the meaning of the terms. It was accepted the interpretation given to the terms depended on the circumstances in which they were used. After considering the decision in Delos Reyes, the Tribunal agreed a "right or interest…in a residence" amounted to a right or interest in real property. The Tribunal added (at par 24):
"We note that there are many 'arrangements' relating to real property which may give rise to interests or rights in relation to that real property. Some of those interests or rights may be legal and some equitable. Some relate to the freehold estate and some to the leasehold. Interests in real property include the freehold and leasehold estates as well as mortgages, rent charges and easements. Some 'arrangements' in relation to land do not confer a right or interest in the land but are matters of contract as, for example, a licence."

The decision in Johnston confirms a leasehold is a recognised right or interest for the purposes of the relevant legislation. But there have been other cases where a right or interest has been recognised without a formal lease or ownership. Mr Kanowski referred to the decision of Senior Member Beddoe in Re Secretary, Department of Social Security and Staniland (1997) 48 ALD 333. In Staniland, the applicant lived in a home owned by a discretionary trust. Mr Staniland controlled the trustee company; he and his wife were amongst those named as beneficiaries under the trust. He applied for a job search allowance and there was a dispute over whether he had a right or interest in the home for the purposes of the relevant assets test. Senior Member Beddoe concluded he did, although there was no evidence of a formal lease arrangement. The Tribunal said the applicant's status as a beneficiary and his control over the trust were enough to establish an interest in the circumstances.
Mr Kanowski doubted whether it was correct to say a beneficiary under a discretionary trust had a right or interest. He is right: a beneficiary under a discretionary trust does not necessarily have an equitable interest in the corpus of the trust (although the beneficiary may well have rights enforceable in a court of equity to ensure the trust is administered properly, for example): see Gartside v Inland Revenue Commission [1968] AC 553 at 616-618 per Lord Wilberforce. The Tribunal made the same point in Johnston at paragraph 30. In that case, the Tribunal said it was appropriate to ignore the fact of control of the trust that owned the property and the claim the occupants of the property might have in their capacity as beneficiaries. The Tribunal focused instead on the basis of the occupation. In the event, the Tribunal found the occupants of the property had a lease, albeit an unregistered one. The tenancy arrangement was enforceable in equity – which was enough to give rise to a right or interest within the meaning of the section: at par 34-35.
The (unregistered) lease found to exist in Johnston must be contrasted with a licence to occupy, which would not give rise to an enforceable equitable interest in the property. It is important in a case such as this to distinguish between occupation pursuant to a licence and occupation pursuant to a lease.
The distinction between leases and licences was considered by the High Court in Radaich v Smith (1959) 101 CLR 209. Windeyer J explained (at 222):
"What then is the fundamental right which a tenant has that distinguishes his position from that of a licensee? It is an interest in land as distinct from a personal permission to enter the land and use it for some stipulated purpose or purposes. And how is it to be ascertained whether such an interest in land has been given? By seeing whether the grantee was given a legal right of exclusive possession of the land for a term or from year to year or for a life or lives. If he was, he is a tenant. And he cannot be other than a tenant, because a legal right of exclusive possession is a tenancy and the creation of such a right is a demise."

The task in this case is complicated by the absence of any written record of the arrangement between the applicant and the landlord, which the applicant controlled. I suspect the applicant did not think it was necessary to sign a formal lease because he appeared to regard the trust as being under an obligation to provide him with a place to live. He did not share the premises with anyone and I formed the impression from his evidence that he would be surprised if he did not have the right to exclusive possession. He paid rent each month, and it was a residential property.
I think the Tribunal is entitled to infer the applicant had a lease in this case, as opposed to a mere licence. It follows that I am satisfied there was a right or interest within the meaning of the legislation. The only question is whether that right or interest gave reasonable security of tenure.
(ii) Security of Tenure

The most secure form of tenure is obviously ownership. A registered lease might also confer security, but the Tribunal may not accept that the existence of a registered lease will confer enough security to satisfy the wording of the legislation: see, for example, Johnston at paragraph 42. A long-term lease on favourable terms might confer sufficient security of tenure – provided the lease still has a long time to run. An unregistered lease provides even less security. Without more, the unregistered lease is unlikely to satisfy the requirements of the Act.
There is an additional factor in this case. The applicant controls the landlord. While he is under an obligation to act in the best interests of the landlord company and that company is itself under an obligation to act in the interests of the beneficiaries, it is unlikely the applicant's occupancy would ever be under threat. That is not to say the applicant's tenancy is definitely secure: circumstances might arise where the interests of the company or the beneficiaries oblige the landlord to terminate the applicant's occupation. But the Act does not refer to absolutes. It merely requires reasonable security. I think it is clear the applicant has, in the circumstances, reasonable security of tenure: see Re Secretary, Department of Social Security and Williams (1998) 52 ALD 418 at 425.

(b) How should loans owed to Mr Dart be treated for the purposes of the assets test?

It has already been noted that Trumps Pty Ltd owed Mr Dart $44,171.19 at 30 June 1996, while Mr Dart owed $48,438.83 in respect of advances made by the trustee of the Dart Security Trust. The respondent says the full amount of the debt owed to Mr Dart must be included as an asset for the purposes of the assets test, but the liability must be ignored. The applicant says the amount of the debt owed to the trustee of the Dart Security Trust should offset against the value of the loan to Trumps.
Section 1122 says the amount outstanding on any loan (apart from interest) made by the applicant to another shall be counted as an asset. But what of the debt? I note the Tribunal declined to offset a debt against a loan in Re Ropert and Secretary, Department of Social Security [1999] AATA 15. Senior Member Allen relied (at par 16) on the decision of Branson J in Unicomb v Secretary, Department of Social Security(1998) 50 ALD 405 (at 407) as authority for the proposition that the value of a loan may not be offset by an obligation to repay that amount or a similar amount if that obligation arose out of the same transaction.
I agree with Senior Member Allen's approach in Ropert. The legislation does not provide for offset.
Mr Dart suggested the whole transaction was artificial in the sense that he was being paid by one entity that he controlled instead of the other. He pointed out there was an exchange of cheques in due course that allowed balancing entries to be made in the books of both entities. He was arguing, in effect, for the Tribunal to pierce the corporate veil.
The separate entity doctrine lies at the heart of corporate law. In the absence of statutory authorisation, the courts will only consider piercing the corporate veil if the corporate form is being used to perpetrate a fraud: see Jones v Lipman [1962] 1 WLR 832. (Commentators sometimes wrongly suggest courts will pierce the veil of a corporation where it acts as the agent of another, as in Smith, Stone and Knight Ltd v Birmingham Corporation (1939) 161 LT 371. But that case is properly explained as an application of agency principles that has nothing to do with veil-piercing: see, generally, Welling, Corporate Law in Canada: The Governing Principles (Butterworths Canada, 2d ed, 1991).)
Mr Dart has used the separate legal personalities of the various companies he controls to his advantage in his business affairs. Those personalities cannot be set aside merely because it would benefit him to do so in this case. There is no fraud and no statutory basis for ignoring the legal structures and persons he has brought into being.

(c) What is the value of the shares in Sobrante Pty Ltd?

I have already found the applicant proposed a reorganisation of his affairs that would see shares in Saharra Pty Ltd allocated to his son, Declan, while 65 non-voting shares in Sobrante Pty Ltd were transferred to the applicant's children (including Declan). The applicant proposed retaining 20 shares that had votes attached, but which did not confer any rights to dividend. The applicant says the shares he retained were only worth a nominal amount because they did not create an economic interest.

The respondent disagrees. The complex review officer employed by the respondent calculated the company had net assets of $434,609.75 as at 30 June 2000. That amount divided by 90 (the total number of shares on issue) was $4,828.99. The officer concluded that if each share was worth $4,828.99, Mr Dart's 20 non-voting shares were worth a total of $96,579.94. That was the figure he used for the purposes of the assets test.
The respondent also claimed the value of the shares given away by the applicant to his children should be counted in the applicant's assets. The respondent noted s 1124A says the value of the assets disposed of in the five years preceding the application must be counted as part of the applicant's assets.
The first step is to ascertain the date on which the shares were gifted to the applicant's children. It is common ground that the share transfers and the deed of gift were not executed until 24 June 1997. That is less than five years before Mr Dart's application to Centrelink dated 17 July 2001. Mr Dart argues the gifts took effect at the time he announced his intention to make a gift in May 1996, and that the formal paperwork was not completed until June 1997 because of an error by his accountants. If the gift did take effect as Mr Dart claimed, it occurred more than five years prior to the application for benefits so that the value of the gift should not be taken into account for the purposes of the assets test as required under s 1124A.
The SSAT concluded the gift took effect on the date the transfers and deed of gift were signed. The SSAT relied on the High Court's decision in Corin v Patton (1990) 169 CLR 540. In that case, a joint tenant of land executed a voluntary transfer of her interest in the property to a trustee but died before the transfer was registered. It was clear the assignment was ineffective at law because the donor had not satisfied all the formal requirements. The High Court considered whether equity would intervene to perfect the imperfect gift. Mason CJ and McHugh J explained (at 558):
"The rationale for refusing to complete an incomplete gift is that a donor should not be compelled to make a gift, the decision to give being a personal one for the donor to make. However, that rationale cannot justify continued refusal to recognize any interest in the donee after the point when the donor has done all that is necessary to be done on his part to complete the gift, especially when the instrument of transfer has been delivered to the donee. Just as a manifestation of intention plus sufficient acts of delivery are enough to complete a gift of chattels at common law, so should the doing of all necessary acts by the donor be sufficient to complete a gift in equity. The need for compliance with subsequent procedures such as registration, procedures which the donee is able to satisfy, should not permit the donor to resile from the gift. Once the transaction is complete so far as the donor is concerned, he has no locus poenitentiae."

As the donor failed to take essential steps that only she could take in order to complete the gift, the High Court held the gift failed.
Section 200 of the Property Law Act 1974 incorporates into the statute the rule with respect to donors discussed in Corin. Section 200(1) says:
"A voluntary assignment of property shall in equity be effective and complete when, and as soon as, the assignor has done everything to be done by the assignor that is necessary in order to transfer the property to the assignee--
(a) even though anything remains to be done in order to transfer to the assignee complete and perfect title to the property; and
(b) provided that anything so remaining to be done is such as may afterwards be done without intervention of or assistance from the assignor."

Whether one applies the reasoning in Corin (the SSAT's approach) or s 200 of the Property Law Act, the result is the same in this case. Mr Dart did not execute the transfers until 24 June 1997. The execution of the documents was an essential task that no one else could complete in his behalf. It follows the gift did not take effect until 24 June 1997 when he did the remaining thing that only he could do.
The next question is to ask whether the non-voting shares should have the same value as the voting shares. That depends in part on the precise rights attached to the two different classes of shares. But it also depends on an assessment of the value of control that flows from the voting shares.
Shares are choses in action. They are bundles of rights exercisable against the company and the other members. The bundle typically includes the right to vote, a right to receive dividends when they are declared, and the right to participate in the surplus on winding up. Shares with those rights are known as "ordinary shares". But the contents of the bundle will not always be the same. Pursuant to s 254A of the Corporations Act 2001, the constitution of the company might say, for example, that some shares have no voting rights but receive a preference with respect to dividends. These shares are called "preference shares". Where the bundle of shares is adjusted by varying the rights, all the shares bearing that configuration of rights form part of a class.
A company might have several classes of shares apart from ordinary shares. The original constitution of Sobrante Pty Ltd (at least, those regulations that supplemented and varied the provisions of the old Table A of the Corporations Law) are set out in document T23 at p 438. The constitution acknowledges at clause 2 that the company could issue shares with special rights or restrictions. Pursuant to that clause, the general meeting resolved on 2 May 1996 to issue 20 Z class shares to the applicant that would have "an entitlement to full voting rights…but without any dividend rights". There was no mention of a right to participate in the surplus upon winding up.
All of the shares apart from the ordinary shares are regarded at law as preference shares. (The expression may have a different meaning for accountants). A preference shareholder has those rights allotted to him or her by the constitution, the resolution that creates the class pursuant to the constitution, and the law. Section 254A of the Corporations Act 2001 now says those rights must be spelled out in the constitution or in a special resolution of the company. The preference shareholder is not entitled to assume he or she has all the rights of the ordinary shareholder subject only to the modifications made by the terms of the resolution creating the class: see Re Isle of Thanet Electricity Supply Co Ltd [1950] Ch 161 at 175-176 per Lord Evershed MR; see also Scottish Insurance Corp Ltd v Wilsons and Clyde Coal Co Ltd [1949] AC 462 at 487-488 per Lord Simonds.
It is unclear from the constitution or the resolution whether the Z class shares included a right to participate in a surplus in the event of winding up. It follows there was no such right.
The constitution was replaced on 8 June 1999 pursuant to a special resolution of the company. The Tribunal was provided with a copy of part of the new constitution (T1 at p 16-17) that does refer specifically to the Z class shares. The constitution makes it clear the ordinary shares and voting shares carried votes, but the other classes of shares did not. At clause 5.3, the constitution attempts to clarify the position of the Z class shareholders in the event of winding up. It is not a very successful attempt. The clauses in question are obviously part of a precedent that has been adjusted uncritically. The result is a mess. The clause now reads:
"The rights, privileges, restrictions and conditions following shall be attached to the said 'Z' Class Shares:
(a)the said 'Z' Class Shares shall confer upon the holders the no right to payment of dividends;
(b)a reference in this Constitution to the order in which the capital value of the shares is to be repaid, insofar as the reference is to 'Z' Class Shares, shall be read as excluding any further right to participate in the surplus assets or profits.
(c)upon a reduction of capital or winding up of the Company the capital value of the shares in each class on issue at the time shall be repaid in the following order to the holders of:
(i)     Ordinary Shares;
(ii)     'A' Class Shares;
(iii)     'B' Class Shares;
(iv)    'C' Class Shares;
(v)     'D' Class Shares;
(vi)    'E' Class Shares;
(vii)   'F' Class Shares;
(viii)   'G' Class Shares;
(ix)    'Z' Class Shares."

The clause is apparently intended to confirm holders of Z class shares will have no right to participate in the surplus on winding up.
There are important differences between the shares given to Mr Dart's children and those held by Mr Dart. Those differences suggest the different classes of share will be valued differently. Mr Dart says the Z class shares only bear a nominal value, but that is not true. Those shares give Mr Dart control of the company, and control is valuable.
It is unnecessary for the purposes of this decision to consider the different methods of valuation in detail. That may be necessary if Centrelink is required to assess the value of Mr Dart's assets should he make a fresh application for assistance. But that is a question for another day. The case before the Tribunal on this occasion can be disposed of more easily. The SSAT accepted Centrelink's approach to the valuation of the company. While I acknowledge there may be other approaches to valuation, there was no evidence provided suggesting Centrelink's approach was inappropriate or wrong. Having settled on a value of the company, the SSAT determined that even if one accepted Mr Dart's argument that his shares were worth less than the value assigned by Centrelink, the shares he gifted to his children were inevitably worth more. While the SSAT was uncertain of the final value of the gifted shares if one approached them on that basis, it was clear their value exceeded the limit on assets. Since those shares were included in Mr Dart's assets by reason of s 1124A, that is the end of the matter. I agree with the SSAT's reasoning and conclusion.
Conclusion
Mr Dart is a man of substantial means. At least he was a man of substantial means before he formally disposed of his assets to his children and asked the taxpayers to support him through the social security system. But his application must fail because he does not satisfy the assets test in the legislation. The decision is affirmed.
I certify that the 51 preceding paragraphs are a true copy of the reasons for the decision herein of Mr B J McCabe, Member
Signed:         Sarah Oliver
  Associate
Date of Hearing  28 October 2002
Date of Decision  13 December 2002
The Applicant Appeared in Person
Solicitor for the Respondent    Mr P Kanowski, Departmental Advocate