Dennis Darcy and and Secretary, Department of Families, Housing, Community Services and Indigenous Affairs
[2012] AATA 562
[2012] AATA 562
Division GENERAL ADMINISTRATIVE DIVISION
File Number(s)
2012/0817
Re
Dennis Darcy
APPLICANT
And
Secretary, Department of Families, Housing, Community Services and Indigenous Affairs
RESPONDENT
File Number(s)
2012/0829
Re
Carol Darcy
APPLICANT
And
Secretary, Department of Families, Housing, Community Services and Indigenous Affairs
RESPONDENT
DECISION
Tribunal Senior Member J F Toohey
Date 28 August 2012 Place Sydney The decision under review is set aside and in substitution the Tribunal decides that:
(i)the transaction by which the applicants gave $169,000 to their daughter in 2005 was a disposition of an asset within the meaning of the Social Security Act 1991 which, because it occurred more than five years before either of the applicants qualified for the age pension, is to be disregarded in calculating the value of their assets; and
(ii)the matters are remitted to the respondent to calculate the rate of payment of the applicants’ age pensions since 2 September 2011.
..............[sgd]..........................................................
Senior Member J F Toohey
CATCHWORDS
SOCIAL SECURITY – age pension – assets test – disposal of assets – whether transaction by which funds were transferred to applicants’ daughter was a loan or a disposition of property – applicants’ entitlement to age pension affected if the transaction was a loan but not if it was a disposition of property – evidence of loan agreement – whether transaction was in fact a gift – finding that transaction was a gift – as the disposition of property occurred more than five years before either applicant qualified for age pension, to be disregarded for the purpose of the assets test – decisions under review set aside
LEGISLATION
Social Security Act 1991 ss 9(1), 9(4), 11, 1064, 1077, 1122, 1123 and 1127
CASES
Drake v The Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60
Re Hanrick and Secretary, Department of Family and Community Services [2003] AATA 549
Re Lyons and Secretary, Department of Family and Community Services and Anor [2007] AATA 1095Tsourounakis and Repatriation Commission [2004] AATA 332
SECONDARY MATERIALS
Department of Families, Housing, Community Services and Indigenous Affairs, Guide to Social Security Law, 2012
REASONS FOR DECISION
Senior Member J F Toohey
28 August 2012
BACKGROUND
This matter concerns whether the rate of age pension payable to Dennis and Carol Darcy is affected by a transfer of money to their daughter.
Mr and Mrs Darcy live in a home which has increased in value many times over since they bought it. They regard themselves as having benefitted from a “windfall”. They have no plans to sell their house and intend to live in it for the rest of their lives. When their daughter and son could not afford to buy their own homes, Mr and Mrs Darcy decided to give each of them what they regarded as an advance on their inheritances. Their home was unencumbered and they used an existing overdraft facility to draw down two lots of funds totalling $430,000, in effect taking out an interest only loan, and giving the bank a mortgage over their home as security. Their plan was that their daughter and son would pay the interest owing but that, otherwise, the principal would not be repaid.
In 2005, Mr and Mrs Darcy gave their daughter $169,000 towards the purchase of a property in her name. She had not long entered a de facto relationship and they wanted to ensure the value of the money would be solely hers if the relationship came to an end. They sought advice from their solicitor and a financial adviser at their bank. Their solicitor advised them the best way to secure the money for their daughter’s benefit would be to enter into a loan agreement with her by which the money would be repayable on 30 days’ notice if the relationship ended, isolating it from any property settlement, after which they could return it to her for her own use. On 26 October 2005, they signed an agreement with their daughter and her partner.
Some time later, Mr and Mrs Darcy gave a further $260,000 to their daughter to buy a unit in Melbourne for their son who was an undischarged bankrupt and could not hold property in his own name. The unit was bought in her name and their son occupied it. They intended the same arrangement for him as for their daughter, that it be an advance on his inheritance and he would pay the interest they would otherwise pay their bank. As he was single, they saw no need for the kind of formal agreement they had with their daughter.
As they intended to retire in 2011, Mr and Mrs Darcy asked their solicitor and financial adviser whether the transactions would have any effect on their future pensions. They were advised that, given the nature of their bank facility, as long as their daughter and son only paid the interest owing, it would not be regarded as income and their pensions would not be affected.
In September 2011, Mr and Mrs Darcy applied for age pensions. Centrelink treated the funds transferred to their children as loans, meaning they were assets for the purposes of the Pension Assets Test, and reduced the rate of their pensions accordingly.
Mr and Mrs Darcy seek review of a decision of the Social Security Appeals Tribunal (SSAT), which affirmed Centrelink’s determination.
RELEVANT LEGISLATION
There is no dispute that Mr and Mrs Darcy meet the requirements in s 43 of the Social Security Act1991 (the Act) and qualify for the age pension. Their pensions are payable at rates calculated according to a calculator in s 1064 of the Act, based on their combined assets.
Asset in the Act means property or money: s 11. A loan that has not been repaid in full is a financial investment and so a financial asset: s 9(1). By s 1077, age pensioners and members of a couple are deemed to receive income from a financial asset.
Certain assets, including the principal home, are exempt when calculating the value of a person’s assets: s 1118. If an asset (other than an exempt asset) is subject to a charge or encumbrance then, for the purposes of the assets test, its value is reduced by the value of the charge or encumbrance: s 1121. When Mr and Mrs Darcy first applied for the age pension, they argued that the value of the loan to their daughter should be reduced by the amount they had borrowed to fund that loan. (Whether that amount was a loan or a gift is the issue in these proceedings). Centrelink and the SSAT determined, correctly in my view, that s 1121 did not permit that to occur.
A loan made after 27 October 1986 is considered an asset, and the value of a person’s assets includes so much of the loan as remains unpaid: s 1122.
The Act contains provisions aimed at preventing a person who is claiming a social security payment from diminishing the value, or disposing of, assets in order to bring themselves within the relevant assets test. Assets disposed of in this way are included in the calculation of a person’s assets.
A deprived asset is a financial asset: s 9(1). An asset is a deprived asset if a person has disposed of it and its value is included in the value of his or her assets by reason of specified provisions in the Act: s 9(4).
A person disposes of assets if they directly or indirectly dispose of, or diminish the value of, some or all of, their assets; and, either, they receive no, or no adequate, consideration in money or money’s worth for the disposal or diminution, or the Secretary is satisfied that their purpose, or dominant purpose in doing so was to obtain a social security advantage: s 1123.
A disposition of an asset more than five years before the person (or their partner if a member of a couple) became qualified for a social security payment is disregarded for the purposes of provisions in the Act concerning disposal of assets: s 1127.
The effect of these provisions is that a gift made within five years before qualifying for the age pension is treated as an asset. As the transfer of funds to Mr and Mrs Darcy’s daughter occurred more than five years before either of them qualified for age pensions, it is common ground that, if properly characterised as a gift, it will not affect their pensions. Mr and Mrs Darcy agree that, if it is properly characterised as a loan, then it will affect their pensions.
The term loan is not defined in the Act. The Guide to Social Security Law (the Guide) contains Centrelink policy about the interpretation and application of social security law. The Tribunal should apply the policy unless there are cogent reasons not to do so: Drake v The Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60. According to the Guide:
To be a loan there MUST be:
·an actual lending of money or an asset of a particular value, AND
·a clear intention to repay.
A loan is:
·an advance of money, or
·the payment of an amount for, on account of, on behalf or poor at the request of the person where there is an obligation, whether express or implied, to repay the amount.
THE ISSUE
I have to determine whether the transfer of funds to Mr and Mrs Darcy’s daughter in 2005 is properly characterised as a loan or a gift. For the reasons set out below, the funds transferred later to their son are no longer in issue.
I should note that Centrelink’s original decision, and the decision of the SSAT, were concerned largely with whether the value of the funds transferred to Mr and Mrs Darcy’s daughter could be reduced by the amount of the mortgage over their own home. Centrelink and the SSAT determined, correctly in my view, that the Act did not permit that to occur. The SSAT was satisfied that the money transferred by Mr and Mrs Darcy to their daughter constituted a loan, because it was an advance of money. Otherwise, the question of whether it was a loan or a gift was not itself determined.
THE EVIDENCE
Mr Darcy gave evidence before the Tribunal. Mrs Darcy has provided a statutory declaration which confirms his evidence. Their daughter has provided a statutory declaration and gave oral evidence.
The facts as set out above are not in dispute. No challenge is made to the credibility of the evidence given by Mr and Mrs Darcy and their daughter, and I accept it without reservation.
Mr Darcy gave evidence that he talked to a solicitor friend who advised that, if their daughter’s relatively new de facto relationship ended, her partner stood to acquire half of the money they planned to give her. He advised they should protect her interest by means of a loan agreement by which they could require the principal to be repaid on 30 days’ notice but, otherwise, she would pay only the interest payable by Mr and Mrs Darcy to their bank. The property is in her name only.
Mr Darcy and Mrs Darcy say they intended, if their daughter’s relationship ended, that her equity in the property by reasons of the funds given to her would be isolated from any property settlement, and they could act on the loan agreement to call in the money, then give it back to her to buy another property of her own. As it has turned out, seven years later, the relationship has continued and their daughter and her partner now have a child.
In her statutory declaration, Mrs Darcy stated:
…the children would pay the interest, but the principle [sic] would be part of their inheritance when we die …we set up the loan agreement… to protect this money should our daughters relationship breakdown, this would isolate it from the settlement but it would remain [her] money.
Mr and Mrs Darcy’s daughter confirmed in a statutory declaration and oral evidence that her parents offered her a gift of up to $200,000 by using the equity in their house and all she would be required to do was to maintain the interest only payments. She gave evidence that it was in effect an advance on her inheritance and “it was never imagined” she would repay the principal unless the relationship ended. It has not, and she and her partner continue to live in the property and now have a child. She pays the interest on the overdraft at the interest rate applicable from time to time. She pays her parents by cash or transfer. She keeps a note of repayments on her iPhone and Mrs Darcy notes the due dates on a calendar. No receipts are issued.
The agreement signed on 26 October 2005 by Mr and Mrs Darcy, their daughter and her partner, provides:
WHEREAS Karinann is the daughter of Dennis and Carol and has entered into a relationship with Gordon and now intends to purchase a property to be the residence of herself and Gordon and Dennis and Carol have agreed to provide financial assistance to Karinann and in relation to that purchase.
IT IS NOW AGREED as follows:
1. Dennis and Carol will advance to Karinann an amount up to two hundred thousand dollars ($200,000), (the principal sum) by way of loan to be applied by Karinann towards the purchase of a property which will be in the name of Karinann
2. The principal sum so advanced shall be repayable by Karinann on thirty (30) days notice being given by Dennis and Carol to Karinann requiring such repayment.
3. Karinann agrees to pay interest to Dennis and Carol on the principal sum at the rate of 7% per annum. This interest will be payable at the same time as the principal sum is due from Karinann to Dennis and Carol. Interest shall be calculated at three (3) monthly intervals with the unpaid interest being added to the principal sum lent and the interest each three (3) months shall be calculated on the total of the principal sum outstanding, together with all interest on unpaid thereon.
4. Gordon acknowledges that he is aware of the loan being provided by Dennis and Carol to Karinann and agrees that he will make no claim or take no objection which would avoid or frustrate the due repayment of the loan and all interest by Karinann to Dennis and Carol.
Mrs Darcy completed the application for age pension on behalf of herself and Mr Darcy. It included an Income and Assets form. It asked whether either of them had money on loan to another person and, if so, whom. She responded that they had lent $435,000 jointly to their daughter on 26 October 2005. A statement from their bank of their “Portfolio loan” for August 2011 shows a closing balance of that amount.
The arrangement with Mr and Mrs Darcy’s son
As set out above, Mr and Mrs Darcy intended helping their son in the same way as their daughter but his circumstances were different. There is no evidence before the Tribunal of the sale of purchase of the property for him but Mr Darcy gave evidence it was between two and three years ago. For reasons which are not clear but which do not matter here, he has decided to move from Melbourne to Sydney. In April 2012, the property, which was in their daughter’s name, was sold. The sale realised $229,000, slightly less than the purchase price. The money was returned to his parents who have applied it to reduce their overdraft until he can buy a suitable property in Sydney. Mr Darcy says there was no point in their son or daughter holding on to the money and paying interest on it in the meantime.
Mr and Mrs Darcy maintain that the money they gave their son was a gift and not a loan. However, they concede that, because it was given to him within five years of their qualifying for the pension, if it is properly characterised as a gift, it will be a disposed asset and so affect their pension; if it is found to be a loan, then it has been repaid, and affected their pension for a few months only. They no longer seek review of that part of Centrelink’s determination.
CONSIDERATION
The Secretary contends that to find that the money advanced by Mr and Mrs Darcy to their daughter was not a loan would be inconsistent with the loan agreement drawn up in 2005 and the information provided in their application for age pensions. Further, that it would be inconsistent with information they gave to a Centrelink officer in an interview in November 2011 and to the SSAT. It is not clear from the officer’s notes or the SSAT’s decision precisely what that information was. It appears to be Mr and Mrs Darcy’s repeated references to “the loan” and “the loan agreement” as recorded in those documents.
On its face, the contract signed by Mr and Mrs Darcy and their daughter and her partner is clearly a loan agreement. What I have to determine is whether it was, as they claim, merely a device to protect their daughter’s equity in her home in the event of a property dispute.
As reflected in the definition of a loan the Guide, a defining characteristic of a loan, as distinct from a gift, is an intention that it be repaid. The Guide defines a loan to include “an advance of money” but it is clear that there must be also a clear intention to repay.
The Secretary contends that the loan agreement evinces a clear intention that Mr and Mrs Darcy could demand the whole of their money back on 30 days’ notice. There can be no dispute that, by its terms, the agreement gives them an unqualified right to demand repayment of the principal on 30 days’ notice.
The Secretary says the fact that the money could be called on at all, meaning that Mr and Mrs Darcy's daughter was not entirely free to do with it as she wished and there was some prospect of its return, is sufficient to characterise it as a loan rather than a gift. There is considerable force to that argument. It is in the nature of the gift that there be no expectation of its return.
However, I am satisfied there was not at the time of the written agreement, and there has never been since, any intention by Mr and Mrs Darcy that their daughter repay the money, or any intention on her part to repay it. The only occasion when the money would be returned would be if her relationship ended, and then only temporarily until she bought another property. I am satisfied there was never any intention that it be returned to Mr and Mrs Darcy for their own use.
It is relevant to consider the nature and purpose of the loan agreement in light of the arrangement Mr and Mrs Darcy had with their son, who has had the benefit of the greater part of the funds. There was no written agreement with him, or with their daughter on his behalf. The arrangement with him was the same: that he would pay the interest owing to their bank. The only difference was that he was not in a relationship. I am satisfied that, had she not been in a relationship, there would have been no written agreement with her.
I have considered the repeated references by Mr and Mrs Darcy and their daughter to “the loan” and “the loan agreement”. I am satisfied they use that language rather loosely and in some cases they are referring to the arrangement Mr and Mrs Darcy have with their bank. I am satisfied their language does not change their intentions or the true nature of the arrangement with their daughter.
The Secretary relies on the Tribunal’s decision in Re Lyons and Secretary, Department of Family and Community Services and Anor [2007] AATA 1095 in which the Tribunal said (at 45) “the gift characterisation is an ex-post de facto (or retrospective) attempt to outflank the accounting treatment of the loans made beforehand”. The Secretary contends that Mr and Mrs Darcy cannot take advantage of the loan agreement to protect the advanced money in the event of a separation and then re-characterise it as a gift to take advantage of the provisions of the social security legislation in order to obtain a higher rate of age pension.
In my view, Re Lyons (above) can be distinguished from the present case. There was clear evidence, in the form of financial statements and directors’ reports warranting the correctness of the view that the transactions in question were loans which the applicant now sought to characterise differently. The present case turns on whether the original transaction was a loan at all.
The Secretary also relies on the Tribunal's decision in Re Hanrick and Secretary, Department of Family and Community Services [2003] AATA 549 which also involved a commercial arrangement. The Tribunal found that an unpaid loan was a financial asset and said (at 20):
If one is to make use of complicated structures in the course of managing one's affairs in order to take advantage of the legal consequences of those structures, one cannot ignore the structure and its consequences when it suits one to do so.
I do not think, in fairness, that it can be said that Mr and Mrs Darcy have attempted retrospectively to re-characterise the arrangement with their daughter so as to suit themselves. I am satisfied that their intentions in respect of the transaction have remained the same throughout. I accept they sought legal advice about how best to protect their daughter’s equity in her property, and acted on advice that the loan agreement was the best means of doing so. I accept that they enquired about the possible effect of the arrangement on their future pensions and were advised there would be none. Mr Darcy concedes they did not confirm that advice with Centrelink but says that, at the time, they were still several years from their planned retirement and they accepted the advice of their solicitor and financial adviser.
There are few other decisions directly on point. Most concern forms of commercial arrangements or family trusts. However, a similar situation arose in Tsourounakis and Repatriation Commission [2004] AATA 332, in which the Tribunal considered whether Mr and Mrs Tsourounakis’ assets included the value of a house they said they had given to their son. Their claim was made under the Veterans Entitlements Act 1986, which contains provisions virtually identical to those affecting Mr and Mrs Darcy.
Mr and Mrs Tsourounakis were the registered proprietors of a property which had been their family home. They let it to tenants when they moved to another home. In 1991, their son lost his home after guaranteeing a business loan which was not repaid. Mr and Mrs Tsourounakis asked the tenants to leave; they offered the house to their son and his family and said they always intended it would be his eventually. They did not transfer the property to him because they feared his creditors could take it. He did not pay rent but, from 1992, he paid all the outgoings and maintained the property. Mr and Mrs Tsourounakis’ legal ownership of the property did not affect their pensions for many years but, by 2002, its value had increased because of its location and the substantial improvements their son made to it, and their pensions were affected. The Tribunal found that, “irrespective of what the documentation may say”, Mr and Mrs Tsourounakis had divested themselves of the asset in 1992 since when it had not constituted part of their assets. “The documentation” is not specified in the Tribunal’s decision but I take it to mean the title deed to the property.
There are very strong – and obvious – policy reasons why a person should not be able to divest themselves of assets in order to obtain a social security payment. It follows that any transaction which has every appearance of a loan, but which is claimed to be a gift, should be examined closely to determine its true nature. There needs to be compelling evidence to treat it as anything other than what it appears to be. On balance, I am satisfied there is such evidence in this case.
I am satisfied that Mr and Mrs Darcy genuinely intended to given their daughter the sum of $169,000 in 2005. I am satisfied that they have no intention ever to act on the loan agreement, or to call on that money, except to ensure it is maintained for their daughter’s benefit.
I find that the transaction was a disposal of an asset within the meaning of s 1123 of the Act but that, as it occurred more than five years before either Mr or Mrs Darcy qualified for the age pension, it is to be disregarded in the calculation of their assets for the purposes of their social security payment.
I certify that the preceding 46 (forty -six) paragraphs are a true copy of the reasons for the decision herein of Senior Member J F Toohey. .........[sgd]...............................................................
Associate
Dated 28 August 2012
Date(s) of hearing 14 June, 12 July and 14 August 2012 Applicant In person Solicitors for the Respondent Ms S Mantaring, DHS Program, Litigation and Review Branch
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