Doering; Secretary, Department of Agriculture, Water and the Environment and (Social services second review)

[2020] AATA 1504

Doering; Secretary, Department of Agriculture, Water and the Environment and (Social services second review) [2020] AATA 1504 (28 May 2020)

Division:GENERAL DIVISION

File Number(s):      2019/8604

2019/8605

2019/8606

2019/8608

Re:Secretary, Department of Agriculture, Water and the Environment

APPLICANT

AndPaul Doering

Debra Doering

Michael Doering

Carolyn Doering

RESPONDENTS

DECISION

Tribunal:Deputy President Britten-Jones

Date:28 May 2020

Place:Adelaide

The Tribunal sets aside the decisions of the Social Services & Child Support Division dated 19 November 2019 and substitutes a decision to affirm the decisions made by the authorised review officer dated 17 September 2019

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Deputy President Britten-Jones

CATCHWORDS

SOCIAL SECURITY – farm household allowance – where the respondents are beneficiaries of a trust – where the financial statements of the trust record loans to the respondents – whether there is a loan to the respondents as beneficiaries – whether the assets of the respondents include the beneficiary loans – whether the value of non-farm assets exceeds the value limit under s 33 of the Farm Household Support Act 2014 - farm household allowance is not payable – decision in the Social Services and Child Support Division is set aside

LEGISLATION

Farm Household Support Act 2014

Social Security Act 1991

REASONS FOR DECISION

Deputy President Britten-Jones

28 May 2020

1. The respondents applied for the farm household allowance under the Farm Household Support Act 2014 (the Act). Their entitlement depends upon whether the value of their assets exceeds a certain limit. The applicant decided to reject their claim on the basis that  their assets included an amount outstanding on a loan. That decision was overturned on review by the Administrative Appeals Tribunal (Social Services and Child Support Division) (the AAT1).  If the amount of the loan is included in the assets of the respondents then they will not be entitled to the farm household allowance. That is the only issue for determination in this matter.

   Decisions under review

2. The applicant seeks a review of decisions made on 19 November 2019 by the AAT1 to set aside decisions made by a delegate of the applicant on 24 January 2019, which were affirmed by an authorised review officer on 17 September 2019, to refuse the respondents’ applications for farm household allowance lodged on 10 November 2018, by reason of the value of the respondents’ non-farm assets being above the assets test limit.

   Background facts

3. There is no dispute about the background facts which were the subject of the evidence given by Mr Paul Doering. The respondents are two couples who have together been farming land owned by them in the area of Truro, South Australia.  The land is owned by Doering Investments Pty Ltd (the company) which is the trustee of their family trust called The Doering Family Funds Trust (the Trust).  The respondents are directors and shareholders of the company and beneficiaries of the Trust.  The respondents are in a partnership that operates the farm.  The partnership owes money to the ANZ bank.

4. On 5 February 2018, the company, as trustee, contracted to sell two blocks of the farm to Saxon Australia Pty Ltd (Saxon). The sale contract provided for a purchase price of $2.5 million plus GST and a vendor finance arrangement by which the company, as the vendor, lent to Saxon, as purchaser, the whole of the purchase price to be repaid as follows:

   (a)$1 million to be paid in 12 equal calendar monthly instalments of $83,330.33 with the first instalment to be paid on the last day of the month of settlement; and

   (b)the balance of $1.5 million to be paid in 20 quarterly instalments of $75,000 each with the first quarterly instalment to be paid on 1 March 2019 and thereafter on 1 June, 1 September and 1 December for five years.

5. The land sale settled on 5 February 2018, and Saxon has been paying the instalments of the purchase price in accordance with the contract.

6. The sale of the land created a significant capital gains tax burden on the four respondents, but they were able to offset that liability in their 2018 tax returns because of accrued tax losses. Mr Jonathan Gerhardy of Barossa Accounting and Tax Services carried out accounting work for the respondents and, in particular, dealt with the capital gains tax implications from the sale and prepared the financial statements for the Trust for the year ending 30 June 2018.

7. The financial statements for the year ended 30 June 2018 for the Trust recorded:

   (a)profit on the sale of $2,213,349.19

   (b)net profit from ordinary activities for income tax of $2,271,793.45

   (c)a share of profit for each of the four beneficiaries in the sum of $567,948.36

   (d)a profit distribution for each beneficiary of $585,148.06

   (e)trade debtors of $2,083,333.34

   (f)a loan to Doering bros of $357,006.63

   (g)current liabilities including a beneficiary loan to each of the four respondents in the amount of $585,148.06.

8. It is this last entry of the loan for $585,148.06 which is the subject of this dispute.

   Evidence from the accountant

9. Mr Gerhardy provided a letter explaining the financial statements of the Trust for 2018:

   The 2018 financial accounts show profit on the sale of land of $2,213,349. This land had previously been used in your rural enterprise. All money related to this sale will be used to pay back debt with the ANZ Bank. This debt has been incurred to fund primary production trading losses and historical farm land purchases. At the end of the 2018 year $2,083,333 was owed to the trust from this sale.

   The “loans” to Paul, Michael, Debra and Carolyn represent the profit distribution for 2018. As these individuals are all members of the Doering Brothers partnership it is effectively the same as distributing this profit to the partnership. From an accounting perspective this could have been done and Doering Brothers would have had $2,340,592 as a beneficiary loan at 30 June 2018.

   However from a tax perspective partnerships do not make capital gains, the partners do and hence why distribution has been made to the individuals. This then allowed the financial statements to be indicative of the activity in the tax return.

10. Mr Gerhardy gave oral evidence that the individual beneficiaries were not owed any money by the Trust because the on paper profit entitlement would be paid to the partnership which then pays it back to the ANZ.  He said that all of the profit from the sale goes to the ANZ bank as and when the instalments are received from Saxon. However, he confirmed that the share of profits in the 2018 financial statements was payable to the beneficiaries. He also confirmed that the amount shown as trade debtors in the sum of $2,083,333.34 represented the amount owing from Saxon as at 30 June 2018. He explained that monthly payments had been received from Saxon in the period from settlement up to 30 June 2018 and thereafter. He explained that for so long as Saxon owes money to the Trust, the respondents will be owed money by the Trust. He explained that the liability to the respondents arises from the profit distribution and that the loan reflects the profit entitlement of the respondents as a result of the sale and the capital gain. He said that the Trust is required to pay the respondents the amount each of $585,148 which will come from the instalments paid by Saxon. He said that the Trust had no ability to pay the $585,148 in the event that Saxon went into liquidation.

    The legislative scheme

11. The Act provides for farm household allowance at Part 2 Division 1, which says that the farm household allowance is payable to certain farmers and their partners if they qualify. Section 33 says that a farm household allowance is not payable to a person if the value of the person’s non-farm assets exceeds – if the person is a member of a couple – the person’s asset value limit worked out under subsection 611(2) of the Social Security Act. It is not in dispute that the value limit is $387,500.

12. Section 1122 of the Social Security Act provides that a person’s assets include a loan made by them to another person to the extent that the loan is unpaid.

13. Section 35 of the Act provides that a farm asset is any asset that is used or held solely or mainly for the purposes of a farm enterprise. A non-farm asset is an asset other than a farm asset. When calculating the value of assets of a person in a couple, the person’s partner’s assets are included.[1]

    [1] Farm Household Support Act 2014 (Cth) s 36.

    The nature of the loan

14. If there is a loan in the nature recorded in the 2018 financial statements, then that would constitute a non-farm asset because it does not come within the definition of a farm asset.

15. The respondents contend there was no loan because they advanced no money to the Trust and because they will receive no money when the alleged loan is repaid.  Further, they say that there is no written loan contract and the only evidence of the loan is “on paper” in the financial statements of the Trust for 2018.  I reject those contentions for the reasons that follow.

16. The loan recorded in the 2018 financial statements arises from the sale of the land by the company as trustee of the Trust.  The sale of the land generated a profit for the Trust of $2,213,349 because in round terms the land was purchased for (or had a book value of) $278,048 and sold for $2.5 million.  The profit is recorded in the 2018 accounts of the Trust.  The sale proceeds were the subject of a vendor finance agreement and were to be paid to the Trust over a period of 6 years.  There was a real profit arising from a very significant capital gain to which the respondents are entitled in accordance with the instalment arrangement set out in the sale contract. The beneficiaries of the Trust were entitled to share in the profit.  The loan arose at the time that the beneficiaries became entitled to the share of the profit.   The 2018 accounts show a distribution of that profit to them together with a corresponding beneficiary loan reflecting that payment of the profit monies would be deferred until Saxon paid the instalments of the purchase price.    As Mr Gerhardy explained in his oral evidence, for so long as Saxon owed money to the Trust, the respondents would be owed money by the Trust. 

17. The 2018 accounts record a genuine loan because the beneficiaries are owed money from the Trust and will be repaid that money as and when it is received from Saxon.  Indeed, the loan has been part performed by way of the instalments received monthly and then quarterly from the date of settlement.  If Saxon defaulted on its obligations, the liability of the Trust to the beneficiaries would remain to the extent of the amount unpaid.

18. I reject the contention of the respondents that they are not owed money by the Trust or that they will not receive any payment under the alleged loan because all the sale proceeds from Saxon go to the ANZ bank.  It is not unusual for sale proceeds due to a vendor to be paid to a bank in satisfaction of the vendor’s liability to the bank.  In this case, the instalment amounts are due to the company in its capacity as trustee of the Trust.  The 2018 financial statements of the Trust record trade debtors in the amount of the instalments due as the balance of the purchase price. The Trust receives the instalment amounts and then repays its loans to the respondent beneficiaries who pay the money to the ANZ to reduce the partnership’s debt to the ANZ.  Consequently, the respondents do receive money from the Trust in repayment of their beneficiary loans but that money is required to be paid to the ANZ. 

    The non-farm assets exceed the value limit

19. The applicant calculated the amounts owing under the loans at the relevant date by taking into account the instalment amounts received from Saxon and paid to the ANZ bank.  The relevant date is 10 November 2018 when the four respondents’ applications for farm household allowance were made, by which time Saxon had repaid $749,972.97 of the vendor finance loan (nine monthly loan repayments of $83,330.33 commencing end of February 2018). The repayments made by November 2018 would have reduced the individual beneficial loans of each respondent approximately from $585,148 to $397,654. 

20. The value of each respondent’s non-farm assets is approximately $795,308 because under s 36 of the Act, for a person who is a member of a couple, the value of the person’s assets includes the value of the partner’s assets.

21. The farm household allowance is not payable under s 33 of the Act because the value of each respondent’s non-farm assets exceeds the value limit of $387,500.

    Decision of the Tribunal

22. The Tribunal sets aside the decisions of the Social Services & Child Support Division dated 19 November 2019 and substitutes a decision to affirm the decisions made by the authorised review officer dated 17 September 2019.

23.     I certify that the preceding twenty-two [22] paragraphs are a true copy of the reasons for the decisions herein of Deputy President Britten-Jones.  

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Administrative Assistant Legal

Dated 28 May 2020   

Dates of hearing:  21 May 2020

Applicant’s Representative:  Mr D Brown, Australian Government Solicitor

Respondents’ Representative:  Mr P Doering, representing himself and the other applicants