Draper and Secretary, Department of Family and Community Services
[2003] AATA 706
•25 July 2003
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2003] AATA 706
ADMINISTRATIVE APPEALS TRIBUNAL N2002/1286
GENERAL ADMINISTRATIVE DIVISION
Re: Geoffrey Draper
Applicant
And: Secretary, Department of Family and Community Services
Respondent
DECISION
Tribunal: RP Handley, Deputy President, PJ Lindsay, Senior Member
Date: 25 July 2003
Place: Sydney
Decision:The SSAT’s decision under review is set aside in part, the Tribunal remitting the matter to the respondent with the directions that:
i) the rate of newstart allowance payable to Mr Draper should be determined by treating the dividend he received from ACN 067 726 845 Pty Ltd on 17 May 2001 as an exempt lump sum.
ii) the secured margin loans used by Mr Draper to purchase shares and managed funds held at 5 September 2001 should be taken into account when valuing those assets to calculate deemed income pursuant to s 1076 of the Act.
In other respects the SSAT’s decision is affirmed.
. . . . . . . . .. . . . . . . . . . . . . . . .
Deputy President
© Commonwealth of Australia (2003)
CATCHWORDS
SOCIAL SECURITY – newstart allowance – whether dividend should be treated as income – whether financial assets are subject to charges or encumbrances - decision set aside in part
Social Security Act 1991 ss 8, 9, 1068, 1072, 1073, 1076, 1081, 1083, 1118, 1121
Social Security Administration Act 1999 s 110Re Varcoe and Secretary, Department of Family and Community Services [2000] AATA 1002
Re Smith & SFCaCS [1999a] AATA 26 (27 April 1999)
Re Fawthrop and Repatriation Commission (1994) 36 ALD 140REASONS FOR DECISION
RP Handley, Deputy President, PJ Lindsay, Senior Member
1. This is an application by Geoffrey Draper (the applicant) for review of those parts of a decision made by the Social Security Appeals Tribunal (SSAT) on 7 May 2002 to affirm:
i) the decision by an authorised review officer that, in determining the rate of newstart allowance payable to the applicant, a dividend he had received from a private company was to be treated as income;
ii) the authorised review officer’s decision that certain loans made to Mr Draper should not be offset against the value of assets that were subject to the deemed income rules.
The Tribunal notes that Mr Draper did not seek review of another part of the SSAT’s decision that set aside the decision by the authorised review officer to regard an investment by Mr Draper in the NAB All in One Service managed fund as a financial asset subject to the income test.
2. Mr Draper appeared at the hearing and represented himself. The Secretary, Department of Family and Community Services (the respondent) was represented by Ms C Collis of Centrelink. The Tribunal had before it the documents prepared in accordance with s 37 of the Administrative Appeals Tribunal Act 1975 (“the T Documents”) and the exhibits tendered at the hearing.
Background
3. In support of his claim for newstart allowance lodged on 29 May 2001, Mr Draper completed a number of Centrelink forms that gave details of his assets and income. He noted (T23) that he was involved in an “inactive” business that had not generated fee income since July 1999. He also stated that he held shares in other businesses via managed funds. In the private company form (T24) he stated that he was a shareholder and a director of a private company named ACN 067 726 845 Pty Ltd and that in the financial year ended 30 June 2001, he had received a dividend of $3,992.67 from the company.
4. Mr Draper advised Centrelink on 1 August 2001 that he had not received any income in the form of salary or wages from ACN 067 726 845 Pty Ltd since 1 July 2000. Mr Draper’s accountants, C E Finch & Co, wrote to Centrelink on 24 August 2001 confirming this to be true (T41):
From information provided by our client we confirm as follows: -
· ACN 067 726 845 Pty Ltd has paid no wages to Mr Draper during the Financial Year ended 30th June 2001 and that
· It is not expected that ACN 067 726 845 Pty Ltd will pay Mr Draper wages up to and including 31st October 2001.
5. Mr Draper advised Centrelink on 31 August 2001 that he had sold his investment in NAB All in One Service, a managed fund, but was not then aware of the amount he would receive from the sale (T44).
6. On 5 September 2001 Centrelink determined the rate of Mr Draper’s newstart allowance (T2). He sought a review of this decision. On 13 September 2001 Centrelink advised Mr Draper of the way in which his income had been assessed in determining the rate of his newstart allowance (T54). Centrelink noted that Mr Draper had $111,810 invested in financial assets as follows: 2655 units in BT Split Growth fund worth $8,718; 2451 units in BT Aust Share fund worth $7,262; 10,000 units in OM Series 6 worth $10,000; 3000 units in OM Series 4 worth $36,879; $9,491 in NAFM All In One and $40,000 in Venture Capital Technology. Centrelink assessed his deemed income on these financial assets at the rate of 3 per cent on the first $33,400 and 4.5 per cent on the balance of $78,140. The total of deemed income was $4,530.45 per year or $174.24 per fortnight. Taking the private company dividend into account, Centrelink assessed a dividend amount of $153.56 per fortnight, making a total of ongoing assessable income of $327.80 per fortnight.
7. On 24 September 2001 the applicant asked Centrelink to review its decision of 13 September 2001 (T51). Mr Draper identified three matters in dispute: the sale of his investment in the NAB All In One investment service, the inclusion of the dividend of $3,992.67 from ACN 067 726 845 Pty Ltd and the amount of income he was deemed to have received from his managed fund investments. Subsequently, on 4 October 2001 Mr Draper requested a review by the authorised review officer because he considered that his rate of payment was incorrect as a result of his assets not being assessed correctly (T55)..
8. The authorised review officer affirmed the decision under review (T57). In his opinion the decisions to assess the dividend from ACN 067 726 845 Pty Ltd and the total deemed income from the applicant’s portfolio of managed investments were correct.
9. On review of the authorised review officer’s decision, the SSAT affirmed the decision to treat the dividend paid to Mr Draper in May 2001 by ACN 067 726 845 Pty Ltd as income and not to offset certain of his loans against his managed investments. However, the SSAT also set aside that part of the decision that treated the amount of $9,491 that he had invested in the NAB All in One Service investment as a financial asset from 5 September 2001. This matter was remitted to Centrelink with a direction that Mr Draper’s newstart allowance be recalculated taking into account the fact that this investment had been sold on 5 September 2001 and requiring any increase in the rate of newstart allowance resulting from this recalculation to be backdated to 5 September 2001. As a result Centrelink recalculated the rate of newstart allowance and paid him arrears of $13.73.
Issues
10. The parties agree that there are two issues before the Tribunal:
i) Whether the dividend paid to Mr Draper in May 2001 by ACN 067 726 845 Pty Ltd should be treated as income, and
ii) Whether certain of Mr Draper’s loans are charges or encumbrances over his financial assets.
Evidence
11. Mr Draper was born on 3 July 1949 and of recent years has worked in the information technology industry. He said that ACN 067 726 845 Pty Ltd, which he set up in 1994, was the vehicle through which he worked as a consultant in that industry. The company’s issued capital was 100 shares of $1 each, the applicant holding 99 and his mother the remaining share. Mr Draper was a director of the company. His practice was for the annual revenue of ACN 067 726 845 Pty Ltd, after expenses, to be fully paid out to him in salary. In some years the company also paid a smaller salary to his spouse for the administrative duties she performed. The company had no other employees.
12. Mr Draper told the Tribunal that he travelled to the United Kingdom in around September 1997 to nurse his mother who was being treated for cancer. He returned to Australia in around June 1998 and then went back to the United Kingdom in around September 1998. He has remained in Australia since coming back here in around August 1999.
13. While in the United Kingdom he found work in his field. He arranged for a United Kingdom company, Lyttondale Limited, to be established and it was through that company that he offered his consulting services. Lyttondale Limited was a wholly owned subsidiary of ACN 067 726 845 Pty Ltd (T5 p44). Lyttondale Limited subcontracted its jobs to ACN 067 726 845 Pty Ltd, and Mr Draper as an employee of ACN 067 726 845 Pty Ltd performed the necessary work.
14. Lyttondale Limited’s financial accounts for the period 17 December 1998 to 31 August 1999 disclosed that it received fees of 36,734 pounds sterling and that it was charged 25,713 pounds sterling by ACN 067 726 845 Pty Ltd for consultancy services (T5). The profit and loss accounts for ACN 067 726 845 Pty Ltd for the years ended 30 June 1999 and 30 June 2000 disclosed gross fee revenue of $31,627 and $31,513.09 respectively (T10 p88). Mr Draper said these amounts of revenue were received from Lyttondale Limited. ACN 067 726 845 Pty Ltd incurred an operating loss of $5,784 in the year ended 30 June 1999 and at 30 June 1999 had accumulated losses of $6,863. In the 2000 financial year, however, the company made an operating profit of $8,243.
15. Mr Draper’s evidence was that, following his return to Australia in around August 1999, he looked for work as an IT consultant but was unsuccessful. He believed that the combination of his age and a weakening of the IT industry at that time explained his inability to get work. Mr Draper eventually decided that he would wind up ACN 067 726 845 Pty Ltd as it was not securing any contracts. Referring to a cheque he had written in payment of a fee for the Australian Securities and Investment Commission (ASIC) to deregister his company, Mr Draper said that winding up was under consideration in April 2000. He later cancelled the cheque and then missed various ASIC deadlines for liquidating the company. The cheque stub dated 6 April 2000 was accepted in evidence (Exhibit A3). In the following months he discussed the winding up with his accountants but progress was slow because the accountants were busy. By April or May 2001 he knew what had to be done to effect the winding up of the company and that involved its making a final distribution to shareholders. In the course of the winding up, the company paid out a dividend from the profits made in the year ended 30 June 2000. Mr Draper said that the company paid him a dividend of $3,992.67 on 17 May 2001. His mother was paid a smaller amount.
16. Apart from paying statutory expenses, Mr Draper said ACN 067 726 845 Pty Ltd ceased trading from the time it made the dividend payments. In a letter dated 3 June 2003, Mr Draper’s accountants C E Finch & Co, who were also the accountants and tax agent for the company, summarised events that occurred in the lead up to the deregistration of the company (Exhibit A1). They noted that the company’s gross revenue for the 2000 financial year was $32,087, but only $11 in the following year, and added, “ It was due to this inactivity that Mr Draper discussed with the writer the process of voluntarily deregistering the company. These discussions took place over a period of time during the 2001 year and preparations were made by Mr Draper for deregistration to occur by the end of the 2001 financial year.” The accountants stated that, during its existence, the company paid only one dividend, in May 2001.
17. The ASIC recorded that ACN 067 726 845 Pty Ltd was deregistered on 1 October 2002 (Exhibit R4). The company’s financial statements (Exhibit R3) disclose that the 2001 financial year’s revenue of $11 was interest paid by Mr Draper and that in the 2001 year the company expensed $105 for workcover premiums ($198 in the 1999 financial year, $32 in 2000, $0 in 2002); $423 for depreciation ($0 in 1999, $1,046 in 2000 and $175 in 2002); $535 for accountancy ($920 in 1999, $1,105 in 2000 and $1,000 in 2002); and $83 for printing, postage and stationery ($20 in 1999, $176 in 2000 and $113 in 2002).
18. Prior to leaving Australia in 1997 to tend to his mother, Mr Draper said he had been working for the Australian Broadcasting Corporation and was well paid. He had recently bought a house in suburban Sydney, at Hurlstone Park. He had also acquired some investments in shares and managed funds. Mr Draper told the Tribunal that while he was in the United Kingdom, his mother lent him some money so that he would not have to sell his investments. The loan was not documented at the time. As at 5 September 2001, the approximate balance of the loan was $15,000 (Exhibit R2). In preparation for the Tribunal’s hearing, however, his mother wrote a memorandum dated 3 June 2003 which Mr Draper said accorded with his understanding of their arrangement. Eleanor Draper’s memorandum stated (Exhibit A2):
TO WHOM IT MAY CONCERN
This is to confirm that when my son, Geoffrey Draper, was here in the UK in 1997-1998, I lent him some money to help him cover the outgoings associated with his investments.
The loan was made on the understanding and agreement that:
1. the loan is secured by his investments,
2. he would sell investments (if necessary) in the event that I should need the loan to be repaid in part of in full,
3. if the value of his investments were to fall to a level that causes significant doubt about his being able to repay the loan, he would repay the loan promptly by selling investments.
He advises me from time to time of the investments he holds.
The loan accrues interest, currently at a rate of 7% per annum, which is added to the balance of the loan each year. He sends me a copy of the updated loan details each year.
A subsequent loan of $5,647 (2,000 pounds sterling) received from his mother on 1 November 2001 (T61) does not appear to be relevant to the decision made in relation to Mr Draper’s claim for newstart allowance.
19. The purchase of the property at Hurlstone Park was financed by the National Australia Bank. Mr Draper was advanced $257,000 in around May 1997 under the NAB’s Flexi Plus Mortgage Facility Individuals Personal Investment Purposes (T3). The loan was secured by first registered mortgages Mr Draper gave over that property and three properties he owned in Queensland. He sold the Queensland properties in January 2000, June 2000 and March 2001. He said that after these sales he kept on foot a loan from the NAB. He said the loan, which was secured over the Hursltone Park property, was used for the purchase of investments in managed funds. At 5 September 2001, the balance of that loan was $27,796.57 (Exhibit R2). However, the most important sources of his finance for investment in shares and managed funds were margin loans. Mr Draper arranged a margin loan initially with the NAB and later with Westpac. The balances at 5 September 2001 were as follows: NAB margin loan facility - $16,179.43; Westpac margin loan: $18,122.28. Mr Draper’s evidence was that he would use his NAB Master card as an additional source of short term funds to acquire investments. The balance due on his Master card at 5 September 2001 was $659.25 (Exhibit R2).
20. The Tribunal accepted into evidence a Margin Lending Guide published by NAB (Exhibit A4) and the NAB’s National Margin Lending Facility – Customer Terms (Exhibit A5). The Margin Lending Guide described margin lending as involving “ … the use of borrowed money to increase the amount you can invest in shares and managed funs. The shares or managed funds you purchase are held as security for your margin lending facility. … The National will lend a different amount on each approved stock making up your portfolio of shares or managed funds. This is known as the ‘security ratio’ and is the percentage of the stock’s market value that the national will lend you under the terms of a National Margin Lending Facility.”
21. Mr Draper said his margin loan was subject to the terms of the National Margin Lending Facility. Advances made under the facility must be used to purchase approved stocks or for other business or investment approved by the bank. Clause 16 of the Facility provided for the investor “ … to mortgage to us as security for payment of the secured liabilities … all future stocks held in your name … “ and “To cover your liability under this agreement, we are entitled to resort to any secured property we hold from you.” (Exhibit A5).
Applicable Legislation
22. The following sections in the Social Security Act 1991 (“the Act”) are relevant to this application:
Section 8(1)
income, in relation to a person, means:
(a) an income amount earned, derived or received by the person for the person's own use or benefit; or
(b) a periodical payment by way of gift or allowance; or
(c) a periodical benefit by way of gift or allowance;
but does not include an amount that is excluded under subsection (4), (5) or (8).
Note 1: See also sections 1074 and 1075 (business income), sections 1076-1084 (deemed income from financial assets), sections 1095 to 1099D (income from income streams), section 1099F (exempt bond amount does not count as income) and section 1099K (refunded amount does not count as income). …
Note 3: income is equivalent to ordinary income plus maintenance income.
income amount means:
(a) valuable consideration; or
(b) personal earnings; or
(c) moneys; or
(d) profits;
(whether of a capital nature or not).
ordinary income means income that is not maintenance income or an exempt lump sum.
Note 1: for maintenance income see subsection 10(1).
Note 2: amounts received as a series of periodic compensation payments may result in reduction of the person's rate of social security pension or benefit under Part 3.14: if this happens the amounts are not counted as ordinary income (see section 1171).
Note 3: For provisions affecting the amount of a person's ordinary income see sections 1072 and 1073 (ordinary income concept), sections 1074 and 1075 (business income), sections 1076-1084 (deemed income from financial assets) and sections 1095-1099D (income from income streams).
Section 8(11)
An amount received by a person is an exempt lump sum if:
(a) the amount is not a periodic amount (within the meaning of subsection 10(1A)); and
(b) the amount is not a leave payment within the meaning of points 1067G-H20, 1067L-D16 and 1068-G7AR; and
(c) the amount is not income from remunerative work undertaken by the person; and
(d) the amount is an amount, or class of amounts, determined by the Secretary to be an exempt lump sum.
Note: Some examples of the kinds of lump sums that the Secretary may determine to be exempt lump sums include a lottery win or other windfall, a legacy or bequest, or a gift—if it is a one-off gift.
Section 1072: General meaning of ordinary income
A reference in this Act to a person's ordinary income for a period is a reference to the person's gross ordinary income from all sources for the period calculated without any reduction, other than a reduction under Division 2 or 3.
Note 1: For ordinary income see subsection 8(1).
Note 2: For other provisions affecting the amount of a person's ordinary income see sections 1074 and 1075 (business income), sections 1076 to 1084 (deemed income from financial assets) and sections 1095 to 1099D (income from income streams).
Section 1073 provides relevantly that:
if a person receives, whether before or after the commencement of this section, an amount that:
(a) is not income within the meaning of Division 1B or 1C of this Part; and
(b) is not:
(i) income in the form of periodic payments; or
(ii) ordinary income from remunerative work undertaken by the person;
or
(iii) an exempt lump sum.
the person is, for the purposes of this Act, taken to receive one fifty-second of that amount as ordinary income of the person during each week in the 12 months commencing on the day on which the person becomes entitled to receive that amount.
Section 1076 provides for the calculation of deemed income based on a single person’s financial assets, including attributing that deemed income as being received in equal weekly amounts over the following year. Subsections 1076(2) and (3) provide:
(2) A person who has financial assets is taken, for the purposes of this Act, to receive ordinary income on those assets in accordance with this section.
(3) If the total value of the person's financial assets is equal to or less than the person's deeming threshold, the ordinary income the person is taken to receive per year on the financial assets is the amount worked out by multiplying the value of those assets by the below threshold rate.
…
Section 1118 provides relevantly that in calculating the value of a person’s assets for the purposes of the Act, “the value of any right or interest of the person in the person’s principal home” is to be disregarded.
Section 1121: Effect of charge or encumbrance on value of assets
(1) If there is a charge or encumbrance over a particular asset of the person, the value of the asset, for the purposes of calculating the value of the person's assets for the purposes of this Act, is to be reduced by the value of that charge or encumbrance.
Note: this section does not apply to an asset to which section 1121A (primary production assets) applies.
(2) Subsection (1) does not apply to a charge or encumbrance over an asset of a person to the extent that:
(a) the charge or encumbrance is a collateral security; or
(b) the charge or encumbrance was given for the benefit of a person other than the person or the person's partner.
(3) Subsection (1) does not apply to a charge or encumbrance over assets that are to be disregarded under section 1118.
(3A) Subsection (1) does not apply to an asset that is an asset-tested income stream (long-term). …
Findings and Consideration
23. Mr Draper contended that the dividend of $3,992.67 received from ACN 067 726 845 Pty Ltd on 17 May 2001 should not be taken into account in determining whether he satisfied the income test. In support of his argument for excluding the dividend from assessment, he referred to the following extract from the Guide to Social Security Law (the Guide) prepared by the Department of Family and Community Services (the Department):
4.7.2.10 Assessable income from private companies
Dividends on shares (including franking credits). Treatment: Hold them as their income for 12 months from the date of distribution. …
Dividends NOT treated as income
Dividends from private companies should NOT be assessed as income if the private company:
· is wound up within the 12 months before the date of claim by the customer,
· has suffered a permanent decline in its source of income in the 12 months before the customer claims payment or after the date of claim, either from a:
- reversal of business fortunes, or
- disaster (see example)
· makes a genuine once-off payment, that will not be repeated, within the 12 months before the date of claim by the customer (see explanation).
Examples: Flood or fire.
Explanation: This occurs when the company does not have a history of dividends.
The Guide explained that assessment of private company dividend income should cease where “the company in which a client has an interest is placed in liquidation … In this case the shareholders effectively no longer have access to the income”.
24. In Mr Draper’s submission, even if each condition in 4.7.2.10 of the Guide set out above had to be satisfied, which he disputed, ACN 067 726 845 Pty Ltd satisfied the three conditions. In Ms Collis’ submission each of the conditions stipulated in 4.7.2.10 of the Guide had to be met. Ms Collis submitted that the Guide was a working document for use by Centrelink staff. However, Ms Collis was unable to refer the Tribunal to any provision in the Act that would mandate the Guide’s conclusion that, in certain circumstances, a dividend received from a private company should not be treated as income.
25. The Tribunal finds that ACN 067 726 845 Pty Ltd was a private company at all relevant times and that Mr Draper received a dividend of $3,992.67 from the company on 27 May 2001. It is accepted on the basis of the applicant’s evidence and Exhibit A1 that this was the only dividend he ever received from the company. The Tribunal is satisfied that the dividend is “moneys” and thus an “income amount” as defined in s 8(1). Further, the Tribunal is satisfied that the dividend is an amount that was received by Mr Draper for his own use or benefit and so “income” within the definition in s 8(1).
26. Certain amounts of income are not subject to s 1073 of the Act, and accordingly not treated as being received evenly over the 52 weeks following receipt of the amount, if they are exempt lump sums. Under s 8(11) an amount will be an exempt lump sum if various conditions are met. The respondent did not submit that the amount of $3,922.67 was income from remunerative work undertaken by Mr Draper and the Tribunal finds accordingly. Part (d) of the definition states “(d) the amount is an amount, or class of amounts, determined by the Secretary to be an exempt lump sum.” The Tribunal considers that 4.7.2.10 of the Guide is intended to assist the Secretary in determining whether an amount is an exempt lump sum.
27. In Re Varcoe and Secretary, Department of Family and Community Services [2000] AATA 1002 the Tribunal made a determination under s 8(11)(d) of the Act that a sum received on maturity of certain life insurance policies was an exempt lump sum. Senior Member Dwyer observed at [38] that “In the absence of a general determination, specific determinations are a way to achieve a more equitable result in individual matters.” We agree. Here, within 12 months prior to making his claim for newstart allowance, Mr Draper received a one-off payment from a company that did not have a history of paying dividends. The Tribunal finds that by the beginning of the 2000-01 financial year, if not earlier, ACN 067 726 845 Pty Ltd was no longer trading, that is earning revenue from its IT consultancy business, and in this regard the Tribunal notes that preliminary steps to wind up the company were under consideration in April 2000 (Exhibit A3). The dividend satisfies the third condition referred to in 4.7.2.10 of the Guide.. The Tribunal considers that the scenario contemplated by the second condition could not arise if the company paying the dividend had to have been placed in liquidation within the 12 months prior to a claim, and therefore rejects the respondent’s submission that the three conditions are cumulative. Consequently, and being satisfied that it would be unfair to Mr Draper to continue to assess the dividend income given the state of the company’s business and its pending liquidation at the time of making his claim, the Tribunal determines under s 8(11)(d) that the amount of $3,922.67 is an exempt lump sum.
28. The second issue is whether the loans used by Mr Draper for the purpose of purchasing or maintaining investment assets can be offset against the value of those assets when calculating his deemed income and applying the income test in determining the newstart allowance payable. Two categories of loans are in issue – secured and unsecured. First, with regard to secured loans, Mr Draper contends that certain loans used to purchase investments were secured over those investments. At the relevant time (the Centrelink decision of 5 September 2001), the Tribunal finds that Mr Draper’s principal home was his property at Hurlstone Park in respect of which there was an outstanding loan to the National Australia Bank secured by a mortgage over the property. Pursuant to s 1118, the value of a person’s principal home is to be disregarded for the purpose of calculating his or her assets. For the purposes of the Act, charges or encumbrances are taken into account in valuing the encumbered assets, except where the charge or encumbrance is over the person’s principal home: ss 1121(1) and 1121(3). Thus, the additional charge on the Hurlstone Park property which enabled Mr Draper to retain the National Australia Bank loan used for the purchase of his Queensland properties after they had been sold, and which he said he used to purchase managed funds, cannot be taken into account.
29. The Tribunal finds that Mr Draper used margin loans for the purchase of investments in shares and managed funds. At the relevant time, Mr Draper had a National Australia Bank margin loan facility of $16,179.43 and a Westpac margin loan of $18,122.28. Under the Terms of the National Australia Bank Margin Lending Facility (Exhibit A5), the customer agrees that the shares and managed funds purchased with the borrowed funds are held by the National Australia Bank as security for the margin lending facility. Clause 17.1 of the Terms provides that “If a default event occurs”, the National Australia Bank may exercise various powers under the agreement including selling “all or any of the secured property”.
30. Mr Draper contends that, pursuant to s 1121(1), the value of his shares/managed funds at the relevant time should be reduced by the value of the charge or encumbrance held over those assets. As was stated in the Tribunal’s decision in Re Smith and Department of Family and Community Service [1999] AATA 267 at paragraph 30, following cases such as Re Fawthrop and Repatriation Commission [1993] 19 AAR 290, the words “charge” and “encumbrance” refer to a form of security which specifically attaches to an asset.
31. The Tribunal notes the Department’s Guide to Social Security Law states relevantly at 4.4.1.30 “Scope of Deeming” that deeming “applies to financial assets” including shares and managed investments:
Treatment of encumbrances on assets
For ASSETS TEST purposes, the value of a customer’s asset is reduced by the value of a charge or encumbrance over that asset. This means that the assets test value is the customer’s EQUITY in the asset.
Example: A common example of an encumbrance is a mortgage secured against an investment property.
For INCOME TEST purposes, the GROSS market value of a financial investment is used to calculate deemed income
Act reference: SSAct section 1072 General meaning of ordinary income
Policy reference: The Guide 4.6.6.30 Encumbrances & Loans Against Assets.
32. Section 1072, quoted above, states that “a person’s ordinary income for a period is a reference to the person’s ordinary income from all sources for the period calculated without any reduction, other than a reduction under Division 2 or 3”.. Division 2 is concerned with conversion of foreign currency amounts and Division 3 is concerned with disposal of ordinary income, for example by disposal of income producing assets. Neither Division appears to be relevant to Mr Draper’s situation, and s 1121 is not included in either Division.
33. The Tribunal does not consider that s 1072 supports the statement at 4.4.1.30 of the Department’s Guide that for income test purposes, “the GROSS market value of a financial investment is used to calculate deemed income”. In the Tribunal’s view, the ordinary meaning of s 1072 is that for example, expenses incurred in earning income or the tax payable are not to be taken into account in determining a person’s ordinary income for a period. The reference in s 1072 is to gross ordinary income. It is not to the gross value of assets.
34. With regard to s 1076, which provides for the calculation of deemed income from financial assets, it is “the total value of the person’s financial assets” to which reference is made. In the Tribunal’s view, in determining the total value, s 1121(1) is plainly applicable and will reduce the value of a financial asset by the value of a charge or encumbrance over the particular asset.
35. Consequently, the Tribunal concludes that the statement in the Department’s Guide at 4.4.1.30 that “the GROSS market value of a financial investment is used to calculate deemed income” has no statutory basis and is, therefore, wrong. Thus, pursuant to s 1121(1), the value of charges or encumbrances in respect of loans by National Australia Bank or Westpac, must be taken into account in determining the value of the shares or managed funds over which the loans are secured.
36. Mr Draper also contends that a loan of $15,000 from his mother (Exhibit R2) made in 1997-1998, should be taken into account. He said this money was loaned to him while he was caring for his mother following her treatment for cancer, so that he would not have to sell investments in shares and managed funds purchased prior to his leaving Australia in 1997 when he was working for the ABC and receiving a good income. Mr Draper provided the Tribunal with a statement from his mother dated 3 June 2003 (Exhibit A2) detailed at paragraph 18 above.
37. Although there was an understanding between Mr Draper and his mother with regard to the loan, the Tribunal is not satisfied that any charge or encumbrance specifically attached to particular assets for the purpose of s 1121(1). Thus, the loan should be treated as unsecured and the value of the loan at 5 September 2001 can be taken into account in determining the value of Mr Draper’s assets for the purposes of calculating his deemed income under s 1076 only if unsecured loans can also be taken into account.
38. The Tribunal notes the Department’s Guide states relevantly at 4.6.6.30:
Unsecured Loans
If a customer has an unsecured loan AND provides evidence that the loan was specifically obtained to purchase the asset, the outstanding amount of the loan IS deducted from the value of the asset.
Exception: The value of an asset tested income stream CANNOT be reduced by the amount of an unsecured loan.
39. No statutory basis for this statement is cited but the Tribunal assumes that it would be the same as that in respect of the statement about the income test in 4.4.1.30 referred to above, that is s 1072. In this instance, there is no special provision in respect of unsecured loans as is the case for secured loans under s 1121. Section 1072 does allow for reductions in ordinary income under Division 1A. This is in respect of ordinary income derived from a business carried on by the person in respect of which certain losses, outgoings, depreciation and other allowable deductions will be taken into account. However, s 1075(2) states that if a person is deemed to receive ordinary income on a financial investment, “that ordinary income is not to be reduced by the amount of any expenses incurred by the person because of that investment”.
40. Reference should also be made to s 1083. This provides relevantly that “any return on a financial asset that a person actually receives is taken for the purposes of this Act, not to be ordinary income of the person”. The definition of “financial asset” in s 9(1) includes a “financial investment” which in turn is defined to include managed investments and shares.
41. In the Tribunal’s view, for the purpose of the income test, s 1072 and s 1083 exclude the possibility of reductions in respect of an unsecured loan and expenses in calculating the deemed income from a financial investment. Thus, the Tribunal concludes that Mr Draper’s loan from his mother cannot be taken into account and, for the same reason, expenses he incurred in the use of his credit cards for short term unsecured borrowings for the purpose of purchasing shares or managed funds also cannot be taken into account.
decision
42. The Tribunal affirms that part of the SSAT’s decision that set aside the authorised review officer’s decision in respect of the investment in the NAB All in One Service but sets aside the other two parts of the SSAT’s decision and remits the matter to the respondent with the directions that:
i) the rate of newstart allowance payable to Mr Draper should be determined by not treating as ordinary income the dividend of $3,992.67 he received from ACN 067 726 845 Pty Ltd on 17 May 2001 which the Tribunal determines is an exempt lump sum;
ii)the secured margin loans used by Mr Draper to purchase shares and managed funds held at 5 September 2001 should be taken into account when valuing those assets in order to calculate deemed income pursuant to s 1076 of the Act.
I certify that the 42 preceding paragraphs are a true copy of the reasons for the decision herein of RP Handley, Deputy President and PJ Lindsay, Senior Member:
Signed: .......................................................................................
AssociateDate of Hearing 4 June 2003
Date of Decision 25 July 2003
Applicant Self-representedRespondent’s representative Centrelink
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