Fong and Secretary, Department of Family and Community Services
[2002] AATA 172
•15 March 2002
DECISION AND REASONS FOR DECISION [2002] AATA 172
ADMINISTRATIVE APPEALS TRIBUNAL )
) Nos N2000/1671
N2000/1672
GENERAL ADMINISTRATIVE DIVISION )
Re ERNEST SUE FONG JOYCE RUBY SUE FONG
Applicants
And SECRETARY, DEPARTMENT OF FAMILY & COMMUNITY SERVICES
Respondent
DECISION
Tribunal Ms S M Bullock, Senior Member
Date15 March 2002
PlaceInverell
Decision The decision under review is affirmed.
..............................................
Ms S M Bullock Senior Member
CATCHWORDS
SOCIAL SECURITY - Age Pension - Assets Test - Valuation of Shares
LEGISLATION
Social Security Act 1991 - ss 11, 44, 1064, 1118, 1121, 1122, 1129
AUTHORITIES
Re Collingwood and Repatriation Commission (1992) 26 ALD 519
Re Duncan and Repatriation Commission (1996) 42 ALD 778
Re Secretary, Department of Family and Community Services and Dolesny [1999] AATA 738
Re Angliss and Secretary, Department of Social Security (1998) AAT 12637
Re Eimberts and Repatriation Commission (1988) 16 ALD 19
Repatriation Commission v Harrison (1997) 78 FCR 442
Re Mackintosh and Repatriation Commission (1997) AAT 12499
Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23
Re Woodhouse and Secretary, Department of Social Security (1987) 12 ALD 474
Re Brown and Department of Social Security (1993) 76 SSR 1098
REASONS FOR DECISION
15 March 2002 Ms S M Bullock, Senior Member
This is an application for review to the Administrative Appeals Tribunal ("the Tribunal") by Ernest and Joyce Ruby Sue Fong ("the Applicants") of a decision made by the Social Security Appeals Tribunal ("the SSAT") on 16 October 2000, that Mr and Mrs Sue Fong's Age Pension claims should be rejected because their assets were too high (T2). The SSAT's decision affirmed a decision of an Authorised Review Officer ("ARO") made on 2 February 2000 (T30), which in turn affirmed the original decision of a delegate of the Secretary, Department of Family and Community Services ("the Department") dated 10 January 2000 (T23).
A hearing was held before the Tribunal in Inverell on 20 November 2001. The Applicants were represented by Mr S Collins, Solicitor. Mr and Mrs Sue Fong provided oral evidence. The Respondent, the Department, was represented by Ms A Smith, Senior Departmental Advocate. The Tribunal took into evidence documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 ("T Documents", T1-T36) and the following exhibits:
Exhibit No Description Date
T1-T36 Documents prepared pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 ("T-documents")
A1 Letter to Messrs. Borthwick and Butler, Solicitors from Mr IG Dunn, Solicitor 12 February 2001
A2 Letter from Ms S Lavender, Senior Sales Consultant, ANZ Bank, Inverell to Borthwick and Butler, Solicitors 15 February 2001
A3 Letter to Mrs J Sue Fong from Mr H Fay Senior, Hong Yuen and Co. Pty. Ltd. 9 August 2001
A4 Letter to Mrs J Sue Fong from Mr H Fay Senior Undated
R1 Letter to Tamworth Centrelink from Messrs. Borthwick and Butler, Solicitors 22 January 2001
R2 Letter to Messrs. Borthwick and Butler, Solicitors, from Ms A Smith, Senior Departmental Advocate 24 January 2001
R3 Letter to Mr S Collins, Solicitor, Messrs. Borthwick and Butler, from Ms A Smith, Senior Departmental Advocate 31 January 2001
R4 Letter and attachments to Ms A Smith, Senior Departmental Advocate from Borthwick and Butler, Solicitors 22 March 2001
issues
The issues in this matter are:
a)Whether the value of Mr and Mrs Sue Fong's combined assessable assets exceeded the relevant limits applying at the time of the claim.
b)Whether or not Mr and Mrs Sue Fong's claims for Age Pension lodged in October 1999 were correctly rejected.
legislation
A determination in this matter requires consideration of the provisions of the Social Security Act 1991 ("the Act").
Specifically, section 11 of the Act defines, amongst other things, "asset" and as relevant states:
"11 Assets test definitions
11(1) In this Act, unless the contrary intention appears:
...
asset means property (including property outside Australia).
...
exempt assets means assets described in any of paragraphs 1118(1)(a) to (s).
…
principal home has the meaning given by subsections (5) to (7).
...
unrealisable asset has the meaning given by subsections (12),
(13) and(14).
value has the meaning given by subsections (2) and (3).
Note: see also sections 1118 (certain assets to be disregarded in calculating the value of a person's assets), 1121 (effect of charge or encumbrance on value of property) and 1145-1157 (retirement villages).
11(2) A reference in this Act to the value of a particular asset of a person is, if the asset is owned by the person jointly or in common with another person or persons, a reference to the value of the person's interest in the asset.
11(3) A reference in this Act to the value of a charge or encumbrance on an asset of a person is, if the asset is owned by the person jointly or in common with another person or persons, a reference to the value of that charge or encumbrance in so far as it relates to the person's interest in the asset.
11(3A) A reference in this Act to the value of a liability of a person is, if the liability is shared by the person with another person, a reference to the value of the person's share of the liability…"
Section 44 of the Act deals with the Age Pension not being payable in some circumstances and of specific relevance is subsection 44(2) which states that subject to subsection 44(3), an Age Pension is not payable to a person if the person's Age Pension rate would be nil. Subsection 44(3) is not relevant to the Applicants.
Module G of section 1064 of the Act deals with the rate of Age Pension calculated under the pension's asset test.
Section 1118 deals with the calculation of a person's assets and as relevant states:
"1118 Certain assets to be disregarded in calculating the value of a person's assets
1118(1) In calculating the value of a person's assets for the purposes of this Act (other than sections 198H, 198HA, 198HB, 198J, 198JA, 198JB, 198K and 198L, subparagraph 501E(1)(d)(iv) and sections 1125, 1126, 1133 and 1135A), disregard the following:
(a) if the person is not a member of a couple—the value of any right or interest of the person in the person's principal home that:
(i) is a right or interest that gives the person reasonable security of tenure in the home;
(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;"
…."
Subsection 1121(1) of the Act is relevant in relation to how to treat tax charges or encumbrances over a particular asset and states:
"1121 Effect of charge or encumbrance on value of assets
1121(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.
…."Section 1122 of the Act deals with how loans are to be treated for the purpose of calculating assets and as relevant states:
"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 of the Act deals with the financial hardship rules and as relevant states:
"1129 Access to financial hardship rules - pensions
1129(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 t he 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.Note 1: For social security pension see subsection 23(1).
Note 2: for unrealisable asset see subsections 11(12) and (13).…
1129(2) A decision under subsection (1) takes effect:
(a) on the day on which the request under paragraph (1)(d) was lodged with the Department; or
(b) if the Secretary so decides in the special circumstances of the case—on a day not more than 6 months before the day referred to in paragraph (a). "
background
The following information is provided by a way of background and the information contained within is not in dispute.
Mr and Mrs Sue Fong were born on 9 June 1916 and 6 March 1923 respectively (T7, p20).
On 14 October 1999, Mr and Mrs Sue Fong lodged claims for an Age Pension at Centrelink, Inverell (T7). Previous claims were lodged in 1992, 1996 and 1998 but had been rejected.
Mrs Sue Fong holds 15,350 shares in Hong Yuen and Co. Pty. Ltd. out of a total allocation of 175,000 shares in the business. Mr Harry Fay Senior is the Governing Director of Hong Yuen and Co. Pty. Ltd. and has control as to the disposition of shareholdings in the Company. Mr Fay has determined that no further transfer of shares will be allowed except to members of Mr Fay's immediate family at a price determined by him (Exhibit A1). Mr Fay has made an offer to buy back shares from Mrs Sue Fong at $3.50 per share (Exhibit A3, A4). Mr Fay has further control as to the payment of dividends to shareholders and pursuant to such power, he has not allowed for a distribution of dividends to shareholders in the Company.
Hong Yuen and Co. Pty. Ltd.. had Long Service Leave commitments to employees at the relevant time of approximately $623,000.00.
The 1999 Age Pension Claim was the subject of investigation by a Departmental Complex Assessment Officer. On 23 December 1999, the Complex Assessment Officer was provided with Departmental advice in relation to the calculation of shares owned by Mrs Sue Fong in the private company Hong Yuen and Co. Pty. Ltd. (T22). The advice was that it was appropriate to value Mrs Sue Fong's private company shares using the net asset backing method. Mrs Sue Fong owns both ordinary and "A" class shares in the Company. Both classes of shares have the right to fully participate in any surplus on a winding up of the Company.
On 11 January 2000, a Departmental Delegate rejected the Applicants' claims for Age Pension (T24) on the basis that the value of their combined assessable assets exceeded the relevant limit for an Age Pension.
Mr and Mrs Sue Fong requested a review of the primary decision and on 2 February 2000, an ARO affirmed the original decision (T30). The ARO noted that Mrs Sue Fong had at the time of the claim, 15,300 shares in Hong Yuen and Co. Pty. Ltd. The total value of these shares was assessed at $298,350.00. There were further combined personal assets of $126,946.00, with a total combined asset value of $425,296.00 (T30, p106). The ARO noted that a married couple who owns their own home cease to qualify for pension if the level of assets is greater than $387,500.00. The ARO explained that the share value is worked out by calculating the net asset value of the Company divided by the number of shares issued. This was done by calculating the current market value of the Company's assets and then deducting the Company's liabilities. To work out the value of the Company's properties/real estate holdings, the person's estimate of the current market value is used, not the amount shown on the Company balance sheet. The value of freehold land and buildings for Hong Yuen, Inverell, was assessed at $1,655,000.00 not the $708,490.00 showing on the Company's balance sheet for the 1998/1999 financial year. The ARO noted that Mr Harry Fay, Governing Director of Hong Yuen, agreed that the property value of $1,655,000.00 used in the assessment was a reasonable value. In calculating the Company's liabilities, the ARO noted that amounts held in provision accounts were not considered as an acceptable business expense and were therefore deducted from the amount of liabilities shown on the balance sheet. This was in accordance with procedures set out in Chapter 7 of the Complex Assessment Officer's Hand Book.
On 23 March 2000, Mr and Mrs Sue Fong made an application for review to the SSAT and on 16 October 2000, the SSAT affirmed the decision under review. The SSAT received information from Mr Harry Fay Senior who submitted that Centrelink should take into account a loan owed by Mr and Mrs Sue Fong to Hong Yuen and Co. Pty. Ltd.. in addition to Hong Yuen's liability for employee entitlements, which as at May 2000, were $623,000.00, upon selling the Company's assets for the purpose of distribution between the shareholders of Hong Yuen's net assets. The SSAT found that the total value of Hong Yuen's real estate is at least $1,660,000.00 and the total gross value of Hong Yuen's assets, which includes Hong Yuen and Co. Pty. Ltd.. and Hong Yuen and Co. (Texas) Pty. Ltd., as at 30 June 1999 was $4,646,411.00. This was the value of its assets before adding the amount for accrued employee entitlements.
The SSAT used the net asset backing method to value Mrs Sue Fong's shares in a private company. The SSAT noted that in the case of a private company where the shares are backed by the company's assets and the shareholder has the right to participate in the capital distribution of the company, the Department has established the policy of valuing the person's shares by: aggregating the value of the company's real and other property; subtracting the value of the company's debts; dividing the net amount by the total number of allocated shares; and, multiplying that figure by the number of shares a person holds.
The SSAT did not agree with the valuation preferred by Mr and Mrs Sue Fong as advised by the accounting firm, Stirling, Warton, Williams. The accountants used a method which examined the capitalisation rate and earning capacity of Hong Yuen and is based on the Company's trading performance. This method does not assess the value of property owned by the company in which shareholders have an interest. The SSAT found that excluding any regard for the right of the shareholder to participate in the company's capital distribution cannot be justified in view of the legislative assumption that any realisable interest in an asset must be assessed unless there is a legislative provision specifically giving it an exemption. The SSAT increased the value of Mr and Mrs Sue Fong's personal assets to $188,453.00. This included an amount of $5667.00 owed by the Company to Mrs Sue Fong. Furthermore, the SSAT noted that Mr Sue Fong owed an amount of $29,163.00.
In relation to the Company's liability for employee entitlements, the SSAT accepted Mr Fay's figure of $623,000.00 for accrued employee entitlements and included this in the Company's liabilities. The SSAT found that Hong Yuen's net asset value was $2,736,496.00. The SSAT also determined that the value of each of Mrs Sue Fong's shares is $15.64 and therefore her total shares were valued at $240,074.00. The SSAT concluded that the total value of the assets belonging to Mr and Mrs Sue Fong was $428,527.00. This was above the asset limit of $387,500.00 and therefore no Age Pension was payable.
On 30 October 2000, Mr Gary Sue Fong, Mr and Mrs Sue Fong's son, made an application for review to the Tribunal on behalf of his parents (T1).
evidence of mrs joyce sue fong
Mrs Sue Fong stated that she married in 1942 and has been living at 22 Oliver Street, Inverell, NSW, since about 1949. Mrs Sue Fong's maiden name was "Joyce Fay".
Mrs Sue Fong's brother, Mr Harry Fay Senior, with whom she enjoys a good relationship, runs the business Hong Yuen and Co. Pty. Ltd.. Her family plays no part in the running of the business and she consequently has no say in its management. Mrs Sue Fong believed that she last received dividends as a shareholder about 30 years ago.
In relation to Mr Fay's letter to Mrs Sue Fong, concerning repayment of a loan and the offer to buy her shares at $3.50 per share, Mrs Sue Fong stated that she had taken no notice of this letter (Exhibit A4). The share offer was too low, Mrs Sue Fong stated, although she would sell her shares if the price was "right". Mrs Sue Fong had not discussed the transfer of her shares with her husband.
Questioned further about the loan from the Company, Mrs Sue Fong stated that when she and her husband shop at Hong Yuen for groceries, the cost is charged to the Company. It could be that these costs are treated as a loan by the Company to Mr and Mrs Sue Fong. Mrs Sue Fong knew of no other loan being provided to her by Hong Yuen thus the amount of $5,667.00 could be accounted for by the groceries (T33, p132).
evidence of mr ernest sue fong
Mr Sue Fong stated that he came to Inverell in 1936 and later married Joyce Fay.
Mr Sue Fong told the Tribunal that he had lived for 50 years in his home in Oliver Street. As a young man, he worked in the Hardware Section of Hong Yuen and Co. Pty. Ltd. and continues to work in the store. Most recently, Mr Sue Fong works part-time as a "Shop Walker", which provides a public relations role, including talking to customers and assisting them whenever possible. Mr Sue Fong earns approximately $250.00 per week.
Mr Sue Fong explained to the Tribunal that when he and his wife shop at Hong Yuen, they pay for everything except for groceries, the cost of which averages $70.00 per week. He did not know that the cost of their groceries was placed on an account. In relation to the loan owed by Mrs Sue Fong to the Company, Mr Sue Fong did not know why this money was owed, apart from booking up the groceries. At the time of hearing, Mr Sue Fong stated that he had $105,000.00 in the bank.
In relation to Hong Yuen and Co. Pty. Ltd.., Mr Sue Fong stated that he had no involvement in the management of the business, in its direction and certainly exerted no influence.
submissions
Mr Collins submitted that the Applicants are witnesses of credit. They are not involved in any share scams or transactions in relation to their involvement with Hong Yuen and Co. Pty. Ltd. A decision in this matter should take into account the beneficial nature of the legislation, Mr Collins further submitted, and the legislation should be interpreted beneficially. Any doubts about the correct and preferable decision by the Tribunal should be resolved beneficially.
Mr Collins submitted that at the relevant time, the Applicants' joint assets were as follows:
"A Bank Accounts:
i ANZ Joint Savings Account $ 4,946.00
ii ANZ Funds Management Account $42,000.00
iii Esanda Debenture Stock Account $43,000.00
iv ANZ Term Deposit Account $10,000.00
v Cash at hand $1,000.00
B Other Assets:
vi Household contents $5,000.00
vii Motor vehicle Toyota Camry 1998 $22,000.00
$127,946.00"Noting the Respondent's concession, that 20 Oliver Street, Inverell, is part of the principal home, the Applicants own the principal residence and this is an exempt asset under the provisions of subsection 1118(1) of the Act.
Mr Collins submitted that Mr and Mrs Sue Fong have in reality no ability to realise their assets with Hong Yuen. There is no likelihood in their lifetime of the Company winding up as it has been in existence for some one hundred years and is still going strong. Mr and Mrs Sue Fong have no control of such events or indeed the management of the Company. The Company has a gross annual turnover of between nine and ten million dollars. It is an established and well-known entity in Inverell.
Mr Collins noted that the Department has assessed the value of Mrs Sue Fong's shares held in Hong Yuen and Co. Pty. Ltd.. at $314,675.00. The Applicants contend that the assessment of Mrs Sue Fong's 15,350 shares in Hong Yuen as assessed on the basis of an asset backing method at a value of $3.50 per share, represents $53,725.00. All Mr and Mrs Sue Fong can do in reality is to deal with that offer of $3.50 per share, even though Mrs Sue Fong is not happy with this offer. Mr Collins submitted that while the amount of $3.50 per share may be an arbitrary amount, it is all that has been offered.
Mr and Mrs Sue Fong concede that in examining the affairs of a private company, care should be taken to properly assess the bona fides of a claim that the assets are unrealisable. Mr Collins submitted however, that the Department's assessment of the value of Mrs Sue Fong's shares in Hong Yuen is inappropriate as such value is unrealisable by the Applicants until the winding up of Hong Yuen and Co. Pty. Ltd.. While Mr Collins acknowledged that there is no legislative basis for the valuation of shares in a private company, and further, that most decisions about such matters use the asset backing method, he nevertheless contended that the individual case should turn on its own facts.
Mr Collins submitted that the Tribunal should note that in the circumstances of this case, the Applicants' contention concerning the valuation of shares is supported by the fact that the Managing Director of the Company, Mr Harry Fay Senior, has the power to determine the transfer of shares within the organisation and has determined initially that the shares would be bought from existing shareholders at $3.50 per share by Mr Fay or his nominated transferees, his immediate family. This offer represents the only opportunity for Mrs Sue Fong to dispose of her share assets. The Company is a family company and is not a corporate set-up for Mr and Mrs Sue Fong in order to assist their claim for pension.
In reviewing the Shares Register of a Company, Mr Collins noted the existence of a number of deceased estate shareholders in Hong Yuen and Co. Pty. Ltd. who had not been permitted to transfer their shares unless in accordance with the controls established by Mr Harry Fay.
Mr Collins contended that the Applicants are totally controlled or prevented from realising the assets to any value apart from that determined by Mr Harry Fay. In these circumstances, Mr Collins submitted that to value the assets of the private company as a "going concern" is inappropriate. The Applicants are only entitled to the true value of the shares of the Company at a winding up. In further support of this contention, Mr Collins reiterated that no right to dividends are available to the shareholders except with the discretion of the Governing Director. If Mrs Sue Fong was to dispose of her shares in accordance with the offer of the Governing Director, Mr Collins submitted that such a transfer would not be of assistance in effectively divesting herself of the asset, as the Respondent would then deem that the transfer was for less than true value. The Applicants are therefore effectively precluded from having any real benefit from the shareholding and at the same time they are prevented from an assessment qualifying them for the Age Pension.
Mr Collins referred the Tribunal to Re Collingwood and Repatriation Commission (1992) 26 ALD 519 in which that Tribunal held that shares in a company are property within the meaning of the Act. In that case, the Tribunal refused to allow the "corporate veil" to be lifted in respect of family companies and held that the assets of a family company are not those of the individual shareholders. Re Collingwood and Repatriation Commission (supra), highlighted the need to study carefully the share distribution and the rights attached to shares in family trusts when determining the assets of a shareholder. In Re Duncan and Repatriation Commission (1996) 42 ALD 778, the Tribunal held that the most appropriate way to value a private company wholly owned by the Applicant and his wife was to determine the net asset backing of the company.
The Tribunal was also referred to Re Angliss and Secretary, Department of Social Security (1998) AAT 12637. In that case, the Applicant argued that due to the problem of non-transferability of shares, they should be valued on the basis of the conservative dividend paid. The Tribunal in that case rejected this approach and adopted the total asset backing approach. That Tribunal further noted that the last sale of shares about a year previously had been at about the share value calculated on the total asset backing approach. In Re Secretary, Department of Family and Community Services and Dolesny [1999] AATA 738, that Tribunal found it would look at the reality of the financial affairs of the Respondent. That Tribunal found that Mrs Dolesny's shares were of little value to her because of the circumstances in which they were held and she had little prospect of transferring the shares. That Tribunal was not so concerned about the market value of the shares because the evidence was that there was little scope for their sale outside the Respondent's immediate family. That Tribunal found "that to ascribe the value for the shares as proposed by the applicant and thus deprive the applicants (sic) [respondents] of their pension claim would be an inappropriate and unjust result in the circumstances".
Mr and Mrs Sue Fong refute the actual value of the business on the basis of the asset backing method in which the accrued Long Service Leave is disregarded in determining the value of the business. Mr Collins submitted that Long Service Leave is an accumulating liability of the Company on the basis of the rights of the employees of the business to such Long Services Leave at the conclusion of their employment.
It was further submitted that the exclusion of the Long Service liability is not an appropriate determination in Mr and Mrs Sue Fong's case, particularly having regard to the number of longstanding employees in the business who would be eligible for Long Service Leave should they resign. In the event of the Company being wound up, the full extent of the Long Service Leave liability would be determined and balanced against the provision for Long Service Leave set out in the Company records. Mr Collins submitted that the Respondent had not produced evidence to suggest that the amount currently set aside is an arbitrary or inflated figure and as such, Mr Collins submitted that the onus is on the Respondent to have made a real determination of Long Service Leave liabilities due to current employees.
At hearing, Mr Collins accepted that under the legislation loans of $29,163.00 and $5,667.00 must be considered as an asset. The sale of Mrs Sue Fong's shares at $3.50 per share would yield $53, 725.00.
In the Applicants' Statement of Facts and Contentions, Mr Collins contended that the combined assessable value of the Applicants' assets at the date of the claim is $127,946.00 plus $24,526.00 being the sale of the shares at $3.50 per share, less the amount outstanding by the Applicants to the Company in the Company Loan Account. At hearing, Mr Collins conceded that Mr and Mrs Sue Fong's loans should be considered as assets. Even so, the value of the shares at $53,725.00 would still allow Mr and Mrs Sue Fong to fall within the qualifying limit for Age Pension. The issue of the share valuation should turn on the facts of this case. Mr Collins concluded that the Company is a major part of Mr and Mrs Sue Fong's lives but they do not display a luxury lifestyle or the wealth of shareholders. In this regard, Mr Sue Fong is 85 years old and still working part-time as a Shop Walker.
Ms Smith, for the Respondent, submitted that there is no dispute as to the value of certain of Mr and Mrs Sue Fong's assets concluding, as did Mr Collins, that there is no dispute of assets totalling $127,946.00.
The Respondent conceded that on the basis of further information which had been provided, the property at 20 Oliver Street, Inverell, formed part of Mr and Mrs Sue Fong's principal residence and therefore is an exempt asset under section 1118 of the Act. Furthermore, Ms Smith conceded that Mr and Mrs Sue Fong do not have a controlling force in Hong Yuen and Co. Pty. Ltd..
Referring to section 11 of the Act, Ms Smith noted that the term "asset" is defined in subsection 11(1) as meaning "property (including property outside Australia)". There is no definition of "property" in the Act, however there is no dispute that the assets, referred to and agreed upon by the Respondent and the Applicant, constitute property for the purposes of social security law.
In her written submissions, Ms Smith noted that the major issue in this matter is the valuation of Mrs Sue Fong's shares. Although the Act also does not state how a person's assets are to be valued, the intention of the legislation is that a person's entitlement to income support payments must be established by reference to eligibility criteria and then, by reference to the extent of their financial resources including income and assets. The Respondent considers that the current market value is a good reflector of a claimant's financial resources and this is the basis on which assets are genuinely valued for social security purposes.
Considering shares in the private company, Ms Smith submitted that members of the Company are restricted in the manner in which they dispose of their shares. Ms Smith contended that the appropriate method of valuing private company shares is the net asset backing method, as this method represents what a person might expect to receive should the Company be wound up, its debts paid and any surplus distributed amongst the members. The net asset backing of a private company share is arrived by dividing the net Company asset figure by the number of shares issued which carry rights to distribution of the Company's assets on being wound up. This is the method the Respondent has used to value Mrs Sue Fong's shares in Hong Yuen and Co. Pty. Ltd.
Ms Smith referred the Tribunal to Re Eimberts and Repatriation Commission (1998) 16 ALD 19, in which the legal distinction still remained between the shareholders and the property of the Company itself. In that case, Ms Smith noted, the Tribunal refused to allow the corporate veil to be lifted in respect of family companies and held that the assets of the family company are not those of the shareholders, although the extent of the assets may affect the valuation of those shares. The separate legal existence and identity of corporate entities from that of their shareholders and corporators or directors is well-settled in corporations law and, subject to limited exemptions, that currently represents the law of Australia, Ms Smith submitted.
Ms Smith noted in her written submissions that the Respondent disagreed with the approach of the SSAT, which referred to Hong Yuen Co. Ptd. Ltd. and Hong Yuen (Texas) Pty. Ltd. as one entity. These companies are separate legal entities and a share value must be ascertained for each Company separately.
Ms Smith contended that the value of $3.50 per share as offered by Mr Fay Senior is not appropriate and Mrs Sue Fong also does not consider this an appropriate share value as it is too low. Ms Smith noted the Applicants' argument that they cannot use the shares yet their value impacts on the asset test for an Age Pension. Ms Smith said that this leads into the argument of hardship as contained within sections 1122 and 1129 of the Act and are more properly dealt with under those provisions.
Ms Smith noted that for the purpose of the Age Pension Asset Test, there are areas of difference in the way the Applicant and the Respondent assess the relevant balance sheet. In this regard, Ms Smith noted that all provisions for Long Service Leave had been excluded as liabilities, effectively adding these figures back into the assets of the companies. The Respondent contends that provisions for Long Service Leave are not liabilities but merely amounts set aside to meet future contingences. Ms Smith noted that while this approach is prudent accounting practice to create provisions, she contended that there is no certainty that the amounts will necessarily need to be fully expended. The funds represented by these provisions are still circulating within the Company and are represented by the various assets to that value.
The amount of $29,163.00 loaned by Hong Yuen and Co. Pty. Ltd. to Mr Ernest Sue Fong is not deductible from the Applicants' combined assessable assets, Ms Smith submitted. Ms Smith noted that in the Method Statement contained within section 1064-G1 of the Act, there is no reference to any reductions in the value of a person's assets other than in respect of encumbrances. Furthermore, the value of an encumbrance can only reduce the value of the asset to which it relates and not other assets, as provided by section 1121 of the Act. The debt owed by Mr Sue Fong to the Company is not an encumbrance over any particular asset of his. It represents a personal liability only.
In Repatriation Commission v Harrison (1997) 78 FCR 442, the Federal Court upheld an appeal against the Tribunal's decision and specifically rejected the Tribunal's right at law to lift the corporate veil. The Court also rejected the finding of law that the assets test was necessarily concerned with ascertaining the net value of a person's assets. In relation to the net asset issue, the Court noted the existence of certain provisions in the Veterans' Entitlements Act 1986 which permit set-offs in certain circumstances, and the absence of any provision of general application to this effect. Ms Smith submitted that the Veterans' Entitlements Act 1986 closely mirrors the provisions of the Social Security Act 1991. On the basis of the figures, Ms Smith contended that the assessable value of Mrs Sue Fong's 15,350 shares in Hong Yuen at $19.223925 per share is $295,087.00. This figure when added to the undisputed assets value would bring the total value of assessable assets to $423,033.00, this figure being in excess of the allowable limit at the time.
In the alternative, if the Tribunal accepted the scenario in which the provisions for Long Service Leave and Annual Leave provided in the 1999 accounts of Hong Yuen were deducted from the net asset value of the companies, then, as detailed in Attachment C to the Respondent 's Statement of Facts and Contentions, the value per share would be $18.3243 with a total value of $281,278.00. When this figure is added to the agreed assets, the total assets would be $409,224.00 and again, this figure is in excess of the allowable asset limit for qualification for the Age Pension.
Ms Smith noted that the Applicants assert that the net asset backing method does not reflect the true value of Mrs Sue Fong's shares, partly because the shares cannot readily be sold. Ms Smith contended that this is an issue of the shares being considered unrealisable as defined in subsection 11(12) of the Act. A consideration of whether an asset is unrealisable can only be made in the context of the consideration of the claim made under the assets hardship provisions contained within section 1129 of the Act.
In conclusion, Ms Smith submitted that combined assessable value of the Applicants' asset, as at the date of the claim on 14 October 1999 is either $423,000.33 or $409,224.00. As both these amounts are in excess of the asset value at which the combined rate of pension would be reduced to nil ($387,500.00), Age Pensions were not payable to the Mr and Mrs Sue Fong in accordance with subsection 44(2) of the Act. In such circumstances, Ms Smith submitted that the SSAT's decision should be affirmed.
findings
The Tribunal has reached a decision in this matter taking into account the oral and documentary evidence, the submissions, the legislation and case law.
The Tribunal found Mr and Mrs Sue Fong to be witnesses of the truth.
There are number of issues which must be determined in this matter in making the decision as to whether or not Mr and Mrs Sue Fong's assets put them over the limit for qualification for an Age Pension.
It is not in dispute and the Tribunal agrees that Mr and Mrs Sue Fong have the following assets:
Bank accounts and investments (T7/37)
ANZ joint account $4,946.00
ANZ Funds Management Account $42,000.00
Esanda Debenture Stock Account $43,000.00
ANZ Term Deposit Account $10,000.00
Cash in Hand $1,000.00Other Assets (T8/48)
Household contents $5,000.00
Motor Vehicle - Toyota Camry 1998 $22,000.00
$127,946.00
It is conceded by the Respondent on the basis of further information provided by the Applicant, that the property at 20 Oliver Street, Inverell, forms part of the Applicants' principal residence and as such is an exempt asset under section 1118(1) of the Act. The Tribunal agrees with this concession.
In addition, at the hearing, the Applicants' representative conceded that the loan accounts of $5,667.00, a loan to Mrs Sue Fong, and the amount of $29,163.00, a loan to Mr Sue Fong, must be considered to be assets. The Tribunal again considers that this concession is properly given.
Remaining at issue are how Long Service Leave and Annual Leave entitlements are to be characterised in addition to the value of Mrs Sue Fong's shares. The Tribunal notes that neither Mr nor Mrs Sue Fong hold shares in Hong Yuen (Texas) Pty. Ltd. (Exhibit R4,p8).
In relation to the Long Service Leave and Annual Leave entitlements for Hong Yuen and Co. Pty. Ltd., the SSAT argument, urged upon the Tribunal by the Applicants, is that the cost of paying the accrued leave entitlements to Hong Yuen's 55 employees would lead to a total liability for the Company of $1,909,915.00. This characterisation of Long Service Leave and Annual Leave entitlements is not in accordance with the Departmental policy as the value of the liability for Long Service Leave and Annual leave is added back into the value of the Company's assets. The Tribunal does not consider it is reasonable for this process to occur, particularly when the valuation method adopted is based on the capital distribution to shareholders when the Company is wound up. Accepting the alternate approach as detailed by the Respondent in Attachment C to the Respondent's Statement of Facts and Contentions, allowing for the provision for Long Service Leave and Annual Leave provided in the 1999 accounts of Hong Yuen and Co. Pty. Ltd. being deducted from the net asset value of the Company, the Company is valued at $3,206,756.00.
In relation to the value of Mrs Sue Fong's shares, the Tribunal notes that under the legislation there is no statutory provision in the Act specifying any method for valuation of assets. The test which seems to have been applied by the Tribunal in a majority of cases is a net market value approach based on comparable sales and the "best use" to which the asset could be put (Re Eimberts and Repatriation Commission (supra). In Re Woodhouse and Secretary, Department of Social Security (1987) 12 ALD 474, that Tribunal concluded that its task was to consider the value of the shares and not the financial effect which would result if the shares were realised by the Applicant. Where an application of this process results in hardship, then those are circumstances in which the application of the hardship provisions contained within section 1129 of the Act should be applied.
The Tribunal considers that the method most appropriate to valuing the shares is the net asset backing method. In this regard, the Tribunal follows the approach taken in Re Duncan and Repatriation Commission (supra), Re Eimberts and Repatriation Commission (supra), Re Angliss and Secretary, Department of Social Security (supra) and Re Mackintosh and Repatriation Commission (1997) AAT 12499.
The Tribunal distinguishes the Applicants' circumstances from that detailed in Re Secretary, Department of Family and Community Services and Dolesny (supra). Mr Fay has offered Mrs Sue Fong a price for shares at a value that she is not happy with because it is too low. She told the Tribunal that she is prepared to sell the shares but only at the right price. The Tribunal further notes that in Re Brown and Secretary, Department of Social Security (1993) 76 SSR 1098, that Tribunal referred to Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23 for authority for the proposition that "in assessing the values of the shares in a company, the concept of a willing but not anxious buyer and seller should be the basis adopted." Adopting this approach and noting the Company's value of $3,206,756.00, the Tribunal considers that Mrs Sue Fong's 15,356 shares should be valued at $18.32432 cents per share, totalling $281,278.00. With the addition of the agreed assets of $127,946.00, the combined assessable assets for Mr and Mrs Sue Fong is $409,224.00. This is in excess of the asset value limit of $387,500.00 for the Age Pension and the combined rate of pension would be reduced to nil in these circumstances. Accordingly, the Age Pension is not payable to Mr and Mrs Sue Fong in accordance with subsection 44(2) of the Act.
In all the circumstances and for the reasons outlined above, the Tribunal affirms the decision under review under the provision of section 43 of the Administrative Appeals Tribunal Act 1975.
I certify that the 61 preceding paragraphs are a true copy of the reasons for the decision herein of Ms S M Bullock, Senior Member
Signed: .....................................................................................
Ms J Purches, AssociateDate of Hearing 20 November 2001
Date of Decision 15 March 2002Representative for the Applicant Mr S Collins, Solicitor, Messrs. Borthwick and Butler
Representative for the Respondent Ms A Smith,
Senior Departmental Advocate
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