Downes; Secretary, Department of Family and Community Services - [2002] AATA 737

DECISION AND REASONS FOR DECISION [2002] AATA 737

ADMINISTRATIVE APPEALS TRIBUNAL )

) No Q2002/326

GENERAL ADMINISTRATIVE   DIVISION     )
           Re      SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES
  Applicant
           And    FREDERICK and WILMA DOWNES
  Respondents

DECISION

Tribunal Mr RG Kenny, Member

Date30 August 2002
PlaceBrisbane

Decision The Tribunal sets aside the decision under review and substitutes its decision that the rate of age pension of Frederick and Wilma Downes in the three fortnightly periods from 21 November 2001 until 7 January 2002 is to be calculated on the basis that their assets included a loan of $337,100.

...............…(Sgd)........................
Mr RG Kenny
Member
CATCHWORDS
SOCIAL SECURITY – aged pension – assets test – whether loans to private companies should be treated as assets – valuation of loans – relevance of hardship provisions

Social Security Act 1991 ss 11, 43, 55, 1064, 1064G, 1120, 1129

Drake v Minister for Immigration and Ethnic Affairs (1979) 47 FLR 409
Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634
Re Dainty and Minister for Immigration and Ethnic Affairs (1987) 6 AAR 259
Minister for Immigration, Local Government and Ethnic Affairs v Roberts (1993) 41 FCR 82
Re Ling and Secretary, Department of Family and Community Services [1999] AATA 797
Re Mendes and Secretary, Department of Family and Community Services [2000] AATA 22
Re Hughes and Secretary, Department of Social Security (1992) 25 ALD 754
Re Trewin and Secretary, Department of Family and Community Services [2002] AATA 437

REASONS FOR DECISION

30 August 2002 Mr R G Kenny, Member

Prior to November 2001, Frederick and Wilma Downes (the respondents) were in receipt of age pension. On 21 November 2001, a delegate of Centrelink for the Secretary, Department of Family and Community Services (the applicant), determined that the age pension payments to the respondents were to be reduced in the period from 21 November 2001 until 7 January 2002 because of the combined value of their assets. That decision was affirmed by an authorised review officer on 23 January 2002. On 4 March 2002, the Social Security Appeals Tribunal set aside that decision and substituted its decision that the loan which constituted the asset referred to in the earlier decisions was not a recoverable loan. The applicant sought review of that decision by the Administrative Appeals Tribunal.
Appearances
The applicant was represented at the hearing by Mr P Kanowski, advocate with the applicant's Advocacy and Administration Law Team. The respondents were not represented but Mr Downes appeared on behalf of himself and his wife.
At the hearing, the following material was taken into evidence.

Exhibit T1 Documents prepared in accordance with Section 37 of the Administrative Appeals Tribunal Act 1975 (the "T" Documents – T1 to T37);
Exhibit A1 A bundle of documents tendered by the applicant and attached to a letter by Mr Kanowski dated 11 June 2002; and
Exhibit R1 A promotional brochure for a real estate development called Newforest Rise tendered by the respondent.

Background

The undisputed facts in this case are as follows.
Mr Downes and his wife were born in 1925 and 1927, respectively. At all material times, they have been the sole directors and shareholders of the private company, Greensdale Pty Ltd (the company). The company was incorporated in 1993 and was involved in investment activities. One of these activities was a real estate development at Mapleton in Queensland. A history, which was adopted by Mr Downes as being, for material purposes, correct, of the company's involvement in that development was set out in the decision of the Social Security Appeals Tribunal in the following way:
"1. … They used the vehicle of Greensdale Pty Ltd. $200,000.00, originally sourced by Mr and Mrs Downs [sic], was invested by Greensdale Pty Ltd in the joint venture. In addition, Mr and Mrs Downs [sic] provided $50,000.00 to their son for an investment through his corporate vehicle in the same venture. Greensdale Pty Ltd had a quarter share.

There was a Stage 1 and Stage 2 planned. The joint venturers had anticipated that the 11 blocks near the Mapleton township would sell quickly. These were the Stage 1 blocks. They then intended to use the money for Stages 2 and 3. The blocks didn't sell and by 1998/1999 the joint venturers had borrowed $1.7M. This had been progressively borrowed. Bank action was threatening and the parties sold Lot 93 undeveloped. This was the Stage 3 block but it was sold as a single unit as the joint venturers recognised that they were never going to be in a financial position to develop it.
By the end of the 1998/1999 financial year, Mr and Mrs Downs [sic] were in trouble financially. He had sold his life insurance policy and owed the bank $35,000.00. By the end of 1999 Mr and Mrs Downs [sic] had sold their own property and had no pension, no interest, no income. They sold their farm and bought a house at Buderim. They paid off their loans and invested their surplus money and had their assets down to a minimum.
During 1999/2000 the joint venturers disposed of one of the blocks and by the end of 2000 there was one block left to sell. It was valued in the pension process for $130,000.00 and sold for $90,000.00. The joint venturers owed the bank $68,000.00 and they also had to give surplus land to the Council to reafforest. There were $50,000.00-$60,000.00 in bank bond to facilitate the reforestation of the block.
The last block sold and was settled on 14 August 2001. At that date, the joint venturers only had their bank bond liability and the reforestation task. They then decided to give the Mapleton City Council the bond money to finish off the reforestation.
The parties had always intended to wind up their corporate investment vehicle after the sale of the last block."

Loans totalling $337,100 were made by the respondents to the company and it was this amount which constituted the asset relied upon by the Centrelink delegate in the decision under review.
Respondent's Case
Mr Downes submitted that, whilst he and his wife had provided loans totalling $337,100 to the company, the assets of the company had been dissipated by poor sales performance and by the accumulation of interest on monies borrowed. This meant that, at all times, the company was in no position to make the repayment of those amounts. He said that the company was still a legal entity but that an application had been made for it to be deregistered.
Mr Downes submitted that he and his wife have been dealt with unfairly in that, prior to 21 November 2001, the respondent had been aware of the loans that had been made to the company but had been willing to accept a valuation which reflected the inability of the company to repay those loans.
Mr Downes said that the only amount that he and his wife were able to recover from the original investment of $337,100 was $11,002.
Mr Downes conceded that he did not consider that he or his wife would meet the requirements of being in financial hardship and also that no application in that regard had been made by them.
Applicant's Case
Mr Kanowski conceded that, prior to November 2001, the value of the loan of $337,100 had not been taken into account as an asset. He referred to a change in policy in Centrelink in the way that private companies and family trusts were viewed for the purposes of asset valuation and to the change in emphasis to ensure that such loans would be taken into account where the legislation so required. He submitted that this was the case under section 1122 of the Social Security Act 1991 (the Act). He also referred to a further change in policy in January 2002 which, again, enabled the value of the loans not to be taken into account for asset valuation purposes. He described the decision under review concerning the respondents' age pension as relating only to three fortnightly periods between November 2001 and January 2002. During those periods, age pension was paid but at a significantly reduced rate.
Mr Kanowski submitted that, while the company was in no position to repay the loans to the respondents, that was no reason for the value of the loans not to be taken into account as assets in accordance with section 1122 of the Act. He noted that, subsequent to the period of reduced age pension payments, the respondents had forgiven the company's obligation to repay the loan to them. However, he submitted that, as this had not been done as part of a process of winding-up the company, the loan was still to be taken into account as an asset in the period of reduced pension payments.
Mr Kanowski also submitted that the notion of a non-recoverable loan as being an unrealisable asset had relevance but only in respect of rules pertaining to financial hardship and that there was no evidence that the respondents had experienced financial hardship or that any formal claim for consideration under the relevant provisions pertaining to financial hardship had been made.
Issues and Legislation
Section 43 of the Act sets out the qualifying criteria for the age pension. It is conceded by the applicant in this case, and I am reasonably satisfied, that the respondents meet those requirements. Once it has been determined that a person is qualified to receive age pension, the relevant rate of that pension has to be determined. That is dependant on the value of the parties' assets.
Relevant to the determination of the value of assets in this case are the following provisions of the Act:
"Section 11Assets test definitions
asset
(1)In this Act, unless the contrary intention appears:
asset means property or money (including property or money outside Australia).
homeowner
(4) For the purposes of this Act:
…
(b) a person who is a member of a couple is a homeowner if:
(i) the person, or the person's partner, has a right or interest in one residence that is:
(A) the person's principal home; or
(B) the partner's principal home; or
(C) the principal home of both of them; and
(ii) the person's right or interest, or the partner's right or interest, in the home gives the person, or the person's partner, reasonable security of tenure in the home;
unrealisable asset
(12)An asset of a person is an unrealisable asset if:
(a) the person cannot sell or realise the asset; and
(b) the person cannot use the asset as a security for borrowing.
…
Section 55 How to work out a person's age pension rate
A person's age pension rate is worked out:
(a)if the person is not permanently blind—using Pension Rate Calculator A at the end of section 1064 (see Part 3.2); …
…
Section 1064 Rate of age pension
(1) The rate of:
      (a)    age pension; …
is to be calculated in accordance with the Rate Calculator at the end of this section.
…
Section 1118 Certain assets to be disregarded in calculating the value of a person's assets
(1)   In calculating the value of a person's assets for the purposes of this Act…, disregard the following: …
(b)if the person is a member of a couple—the value of any right or interest of the person in one residence that is the principal home of the person, of the person's partner or of both of them that:
(i)is a right or interest that gives the person or the person's partner reasonable security of tenure in the home; …
…
Section 1122 Loans
If a person lends an amount after 27 October 1986, the value of the assets of the person for the purposes of this Act includes so much of that amount as remains unpaid but does not include any amount payable by way of interest under the loan.
…
Section 1129   Access to financial hardship rules—pensions
(1)   If:
(a)    either:
(i)a social security pension is not payable to a person because of the application of an assets test; or
(ii) a person's social security pension rate is determined by the application of an assets test; and
(b)    either:
(i) sections 1108 and 1109 (disposal of income) and 1124A, 1125, 1125A and 1126 (disposal of assets) do not apply to the person; or
(ii) the Secretary determines that the application of those sections to the person should, for the purposes of this section, be disregarded; and
(c)    the person, or the person's partner, has an unrealisable asset; and
(d)    the person lodges with the Department, in a form approved by the Secretary, a request that this section apply to the person; and
(e)    the Secretary is satisfied that the person would suffer severe financial hardship if this section did not apply to the person;
the Secretary must determine that this section applies to the person."
It is not disputed by the applicant, and I am reasonably satisfied that, the respondents are "members of a couple" and "home owners" under the Act. The issue for the Tribunal is whether the loan of $337,100 by the respondents to the company is an asset which must be taken into account in determining the rate of payment of age pension.
Consideration
The company was incorporated in 1993 and the loans were made to it, therefore, after the 1986 date referred to in section 1122 of the Act. In the period from November 2001 until January 2002, the loans had not been repaid and, in that sense, they meet the requirements of section 1122 of the Act. The value of the respondents' assets includes the amount of the unpaid loans.
There is provision in the Act to disregard unrealisable assets. The term is defined in subsection 11(12) of the Act. It was conceded by Mr Kanowski, and I am reasonably satisfied that, in the relevant period from 21 November 2001, the respondents' loan to the company meets that description. However, that finding has no relevance to the application of the assets test when assessing the value of assets. In the circumstances of this case, the only occasion when the notion of an unrealisable asset would be relevant is if the financial hardship provisions in section 1129 of the Act were invoked. In a case such as this, that provision has application where the age pension is not payable to the respondents because of the application of the assets test and where the respondents have lodged a request in the approved form for the financial hardship provisions to be extended to them. This means that the notion of an unrealisable asset is only relevant after the value of the respondents' assets have been determined. Of course, a specific request must also be lodged and that has not been done by the respondents.
In a letter dated 8 January 2002, from Geitz and Associates, Certified Practising Accountants (see Exhibit A1), reference is made to the loan in question in this matter. There, the loan is referred to as having been, in respect of the amount of $242,077, forgiven by the respondents.
Also in evidence were extracts from the Guide to the Social Security Law (the Guide) published by the applicant. It provides guidance to those who administer the Act. The Tribunal, whilst not bound to apply policy guidelines of the kind referred to above in the Guide (see Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409) may do so and, indeed, will usually apply the guidelines unless there are cogent reasons in a particular case for not doing so: see Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634 at 639-645; Re Dainty and Minister for Immigration and Ethnic Affairs (1987) 6 AAR 259 at 267; and Minister for Immigration, Local Government and Ethnic Affairs v Roberts (1993) 41 FCR 82 at 86. In this case, there is no material before the Tribunal to indicate that they should not be applied.
Paragraph 4.6.5.110 of the Guide details procedures to be adopted when assessing failed financial investments in the form of loans (see T21). It provides circumstances in which a loan will be treated as no longer existing and these include the situation where the lender forgives a loan. However, this is qualified, in the case of a loan to a company, by the explanation that the forgiving of a loan must occur when "the company that borrowed the money is wound up" or "is in in the process of winding up".
The evidence in this case is that, although there had been a winding down of its operations, the company has not been wound up as at the date of the hearing and was not in the process of winding up as at the date when the loan was treated as an asset by the applicant. In that situation, it is not the case that the loan was forgiven in accordance with the Guide such that it, or any part of it, is not to be taken into account in applying the assets test under the Act.
The loans in this case must be given their face value rather than any reduced rate which would recognise a component of their unrealisability: see Re Ling and Secretary, Department of Family and Community Services [1999] AATA 797; Re Mendes and Secretary, Department of Family and Community Services [2000] AATA 22; and Re Hughes and Secretary, Department of Social Security (1992) 25 ALD 754. The terms of section 1122 are clear and their application in this case means that the value of the assets of the respondents must include the loans to the company in the amount of $337,100. When that is taken into account, the levels of the age pension payable to the respondents in the three fortnightly periods from 21 November 2001 to 7 January 2002 are reduced, accordingly. It was on that basis that the original decision and the decision of the Authorised Review Officer were made. Accordingly, the Tribunal sets aside the decision of the Social Security Appeals Tribunal.
Decision
The Tribunal sets aside the decision under review and substitutes its decision that the rate of age pension of the respondents in the three fortnightly periods from 21 November 2001 until 7 January 2002 is to be calculated on the basis that their assets included the loan of $337,100.

I certify that the 24 preceding paragraphs are a true copy of the reasons for the decision herein of Mr RG Kenny, Member
Signed:         Sarah Oliver
  Associate
Date of Hearing  13 August 2002
Date of Decision  30 August 2002
Solicitor for the Applicant         Mr P Kanowski, Departmental Advocate
Mr Downes represented his wife and himself