Foschi and Secretary, Department of Families, Community Services and Indigenous Affairs

[2006] AATA 459

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2006] AATA 459

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No Q2005/561

GENERAL ADMINISTRATIVE DIVISION		)
Re		ITALO FOSCHI

Applicant

And SECRETARY, DEPARTMENT OF FAMILIES, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS

Respondent

DECISION

Tribunal Ms M J Carstairs, Member

Date26 May 2006

PlaceMount Isa

Decision

The Tribunal sets aside the decision under review and remits the matter to the respondent to re-calculate the value of Mr Foschi’s loans to Foschi Enterprises, in accordance with these reasons. 

The Tribunal directs that:

           (i)    the respondent revalue the loans advanced before 27 October 1986 according to net worth of the assets of Foschi Enterprises

          (ii)    in recalculating the pre-27 October 1986 component of the loans the respondent is to take into account the material in the document titled Submissions on Behalf of the Applicant to the Administrative Appeals Tribunal  (Exhibit A4) referring to the company’s financial statements for the tax years up to and including the year ended 30 June 1987

.........[Sgd].........

M J Carstairs
  Member

CATCHWORDS

SOCIAL SECURITY – recovery of debt – assets in excess of statutory limits – loans to company as asset –valuation of loans prior to October 1986 - matter remitted for re-calculation of the debt.

Social Security Act 1991 ss 11, 1122

Hawkins and Secretary, Department of Family and Community Services [2005] AATA 1219
Secretary, Department of Social Security and Vonhoff (1998) 54 ALD 227
Re Hughes and Secretary, Department of Social Security (1992) 25 ALD 754
Boyd and Secretary, Department of Social Security (1994) 36 ALD 331;
Re O’Brien and Secretary, Department of Family and Community Services (2002) 70 ALD 552
Re King and Repatriation Commission (1990) 12 AAR 375.
Re Wright and Secretary, Department of Social Security (1994) 82 SSR 1196
Re Unicomb and Secretary, Department of Social Security (1996) AATA 10915

REASONS FOR DECISION

26 May 2006  Ms M J Carstairs, Member        

1.      Clara Foschi and Italo Foschi are pensioners against whom substantial  debts of have been raised on the basis that, for about five years between 1996 and 2001, their combined assets had not been correctly assessed by Centrelink.  As a result their age pensions were overpaid. 

2.      Mr Foschi commenced receiving age pension when he turned sixty five in 1993 and Mrs Foschi received age pension when she turned sixty in 1994. 

3.      The main asset that has been focussed upon in relation to the debts relates to loans made from time to time by Mr Foschi to his mining company, Foschi Enterprises.  Centrelink had not assessed those loans during the period of the debt.  Mr and Mrs Foschi had other assets that also were overlooked by Centrelink when assessing their pensions, including two properties in Italy.  Thus, it was not the solely the loan to Foschi Enterprises that led to their pension first being cancelled and then later, debts being raised.  Nevertheless the loans, which totalled $294,970 in 2001, were a major part of their combined assets. 

4.      The Social Security Appeals Tribunal waived a part of each debt relating to a period in 2001 on the basis of Centrelink administrative errors at that time.  However the Social Security Appeals Tribunal otherwise decided that the debts should be recovered.  The respective debt amounts are now:

§$35,856.03 : Mr Foschi; and

§$34,257.24: Mrs Foschi.

ISSUES

5.      There were two issues that I needed to consider with regard to Mr Foschi’s application:

§  Was there a recoverable debt of age pension based upon understated assets?  This question in part relates to :

(a)the valuation of the loans to Foschi Enterprises

§  If there is a debt, should any part of it be waived on the basis of special circumstances? (no other ground of waiver being suggested on the facts in this case).

BACKGROUND

6.      At the end of 2001, after his and Mrs Foschi’s pensions were cancelled, Mr Foschi forgave all debts owed by Foschi Enterprises (T109).  After the loans were forgiven, Mr and Mrs Foschi’s age pensions were restored and they currently receive those pensions, though at a reduced amount, with some moneys being withheld to recover the debts.

7.      It is part of Mr Foschi’s argument that the loans should not have been assessed for his age pension because Foschi Enterprises was never in a position to repay him.  Mr Foschi represented himself at the hearing.  He said that his accountants should have advised him earlier to forgive the debts, and he would not now have this problem with Centrelink.  He wants to have the debt issue cleared up, so that he can return to live in Italy.

8.      Mr Foschi’s solicitors, G R Moffatt and Associates, who appeared on Mr Foschi’s behalf at the Social Security Appeals Tribunal, have presented a more complex argument than this, in the course of several submissions, traversing such matters as Centrelink‘s procedures for valuing loans, and issues such as the recoverability of the loans at law (T187, T208).  According to a letter from Mr Foschi to the Tribunal, filed after the hearing in Mt Isa on 10 January 2006, and dated 25 January 2006, Mr D Moffatt (who, according to Mr Foschi’s letter has retired from practice), had arranged for counsel to prepare a written submission, which Mr Foschi had forgotten to tender at the hearing.  (I now have marked counsel’s submission as exhibit A4).  The respondent was given further time to reply to those submissions and did so (their response now marked exhibit R1). 

9.      The submissions at T187 and T208 and the most recent submission (exhibit A4), touched, in part, on matters which I dealt with in Hawkins and Secretary, Department of Family and Community Services [2005] AATA 1219. However none of the submissions addressed the Hawkins decision.  The submissions do not persuade me to depart from the conclusions that I reached in Hawkins on the treatment of loans under the Act, even those that might be statute barred. In Hawkins I concluded that even after the expiry of limitations periods, loans may still be assessed, and loans made after October 1987 must be assessed at their face value.

DOCUMENTARY MATERIALS ON MR AND MRS FOSCHI’S FILES

10.     Mr and Mrs Foschi’s original age pension claim forms are lost.  This makes it impossible to know what personal or business information either Mr or Mrs Foschi might have provided in their respective applications to the then Department of Social Security.  No pension review forms seem to have been required after the initial claims.  There was some reference to Mr Foschi completing Centrelink pre-departure information forms before he made return visits to Italy, however these documents were not amongst the documents filed with the Tribunal (the T-documents).  Nevertheless Mr Foschi acknowledged to the Social Security Appeals Tribunal (through his solicitor) that he did not tell Centrelink about the loan because he did not see it as an asset, and did not see the company as separate from himself (T4, folio 10).

11.     The respondent acknowledged that some information about Foschi Enterprises was provided at the time of the claims or soon thereafter.  For instance, in debt submission document at T171 a delegate noted that Centrelink [sic] was aware of the company as at 1995.  The authorised review officer also noted that the information given to Centrelink concerning Foschi Enterprises was not fully coded and the loans appearing on the company balance sheets were not recognised as being made by the customer to the company.

12.     I understood from the review officer’s comment that he was referring to officers of Centrelink (or its predecessor, the Department of Social Security) not having coded assets where information was provided by or on behalf of Mr Foschi.  This general proposition, that the respondent was aware of Mr Foschi’s private company structure, was supported by one of the few retained early records, a letter dated 22 October 1993 (T24) issuing from the Mt Isa Regional Manager of Social Security to Mr Foschi’s then accountants, Coopers and Lybrand, requesting the mining business financial records for the 1992/1993 tax year.  This letter predated Mr Foschi’s grant of age pension, and it can be reasonably inferred from Mr Foschi having been granted age pension the following month, that Coopers and Lybrand provided the requested information.

13.     Early notices from the Mt Isa Social Security office to Mr and Mrs Foschi referred to the value of Foschi Enterprises’ mining leases (T30), also tended to confirm that they had provided information about the company.  However later notices did not include this information, which may be explained by the Foschi’s being income-tested pension recipients, rather than assets tested. 

14.     The reason that the loans to Foschi Enterprises came to Centrelink’s attention in 2001, resulting ultimately in the decisions to raise Mr and Mrs Foschi’s debts, was because of forthcoming changes to assessment procedures for assets and income deriving from private trusts and companies.  These changes, due to be implemented the following year, meant that the assets and income of private trusts and companies would be attributed to individuals for social security purposes.  Before this, assets and income from private trusts and companies could only attributed to an individual if the legal ownership or a fixed right of income was established. 

15.     Centrelink undertook a preliminary phase during 2001, identifying those recipients who might be affected and seeking additional information from them where their records revealed - as was the case with Mr Foschi - involvement with a private company or trust structure. 

16.     On 1 February 2001 Centrelink sent out a data collection package to Mr Foschi.  His then accountants, McGuiness Cramb & Brown, returned the completed paperwork on 28 February 2001, answering the question : Does the company owe money to any associates? as follows:

..Yes    √         Amount owed $294,970.   Note assets of the company are insufficient to repay this debt.

FOSCHI ENTERPRISES AND MR FOSCHI’S LOANS TO IT

17.     Mr Foschi’s solicitors summarised Mr Foschi’s history of business activities since coming to Australia in 1953 (T187).  Briefly, after migrating to Australia in 1952, Mr Foschi became involved in mining in Mt Isa and was buying and selling mining leases in the area between 1955 and 1970.  During that time Mount Isa Mines purchased ore produced on small holdings such as Mr Foschi’s, but later, from about 1992, MIM ceased purchasing copper ore this way.  Mr Foschi had set up his own companies, the last of them being Foschi Enterprises.  The company’s fortunes were adversely affected by MIM’s decision not to continue to buy from small lease-holders, and were further declined with the introduction of the requirement for mining tenement holders to make good the land after mining operations, to comply with the Environmental Protection Act (Qld) 1994.

18.      What followed during the 1990’s, according to the solicitors’ outline of the history, was that the leases dropped in value.  Mr Foschi made efforts to sell the leases and in 1995 he successfully negotiated an agreement with one company to purchase five of them, however the option was not exercised.  

19.     Mr Foschi provided to Centrelink a copy of an article featuring him in the newspaper The North West Star dated 23 February 2001 (T122).  I note that the newspaper article predated any Centrelink action to raise debts, so it was not written with a motive to influence an outcome for his debt situation with Centrelink.  The newspaper article reflected the general tenor of T187 noting the declining fortunes of Foschi Enterprises over the years. 

20.     The newspaper article included the following: 

Italo Foschi came to Australia …as a young man in 1952 working as a cane cutter in Ingham before coming to Mount Isa and getting work in the King Solomon Mine…For years he worked hard, hand drilling shifting ore with pick and shovel, finally getting his own lease and starting his own mine Gunpowder Mammoth in 1959….he owned and worked leases…but the crunch came in 1993 when MIM announced it would no longer buy material from small operators..

21.     The article went on to describe how Mr Foschi faced higher lease payments during the 1990’s, on leases which had ceased to generate income, but which he was unable to sell.  He owed the Cloncurry Shire Council rates on these leases and was threatened with having the leases cancelled.  It is a fair summary of the financial records for the relevant tax years (T7 – T23 and those attached ‘A’ to the Respondents Statement of Facts and Contentions) to say that during the 1990’s Foschi Enterprises was struggling.  Bearing in mind that Mr Foschi reached retirement age in 1993 this may well have affected the company’s future operations.  There was no evidence that anyone other than Mr Foschi was involved in its operations apart from casual wages being paid from time to time.  These were minimal.  As his solicitors’ submission at T137 pointed out the total expenditure on wages over a seven year period was $3,354.

22.     There was little evidence about when Mr Foschi first lent money to the company.  Mr Foschi’s solicitors did not address this directly in their first written submission (T187), nor in a subsequent submission filed with the Social Security Appeals Tribunal on 22 July 2005 (T208)

23.     The first of those submissions (T187) dealt with the valuation of loans and said this should reflect the company’s capacity to repay.  This, it was submitted, was nil after 1992, when MIM ceased taking ore on arrangement.  The second submission (T208) confirmed unsuccessful searches for financial statements pre-dating 1988.  This second submission noted that the financial records at 30 June 1988 revealed the loan from Mr Foschi then totalled $170,598 and continued to increase thereafter.  This submission does not accord fully with the financial records: between the financial years ended June 1990 and June 1991 the loan amount was reduced by over $63,000.

24.     The balance sheets for Foschi Enterprises for the tax years ended June 1984 and 1985 were provided as attachment ‘A’ to the Respondent’s Statement of Facts and Contentions.  These financial statements showed that at June 1984 the loan balance was $184,322 and at 1985 it was $198,572.  The company was trading erratically even then, if the records of sales in each of these years are an indication.  Sales of ore in 1984 were $8,967 but in 1985 they rose to $139,090.  The Social Security Appeals Tribunal decision refers to the 1987 financial statements.  These were not in the papers in the T-documents, but presumably are still held by Centrelink.  The submission at exhibit A4 also refers to the balance sheet for 1987 revealing the loan balance at 30 June 1986 as being $193,820 (paragraph 4(a) of exhibit A4)

ASSETS- TESTING OF LOANS IN THE ACT

25.     It is uncontentious that under the legislation a debt is an asset.  Asset is defined in s11(1) of the Social Security Act as meaning money or property.  Loans and debts are a species of property: Secretary, Department of Social Security and Vonhoff (1998) 54 ALD 227. The value of an asset is referred to in s11(2) of the Act, but it is s1122 that specifically deals with the asset valuation of loans, in the following terms:

1122.  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.

26.     As I pointed out in Hawkins case, the origins of s1122 providing for valuing a loan by that amount as remains unpaid, go back to the Social Security Act 1947 having been introduced into that Act in 1986.  The Explanatory Memorandum to the Bill suggests that the provision was intended to simplify valuation procedures and overcome the need for actuarial valuations of debts.  There is a clear line of authority making plain that this was the effect of the section with respect to post-1986 debts: Boyd and Secretary, Department of Social Security (1994) 36 ALD 331; Re O’Brien and Secretary, Department of Family and Community Services (2002) 70 ALD 552.

27.     I note that in Mr Foschi’s case the authorities that were cited to me by the respondent, when urging the proposition that all loans (regardless of when made) should be assessed at their face value (Re Boyd; Re O’Brien) were not cases which involved pre-1986 loans.  Nevertheless Re O’Brien clearly makes the point that loans made prior to 27 October 1986 have historically been assessed on the basis of their ‘real’ rather than their ‘face’ value.

28.     Indeed, the question of assessing pre-1986 loans and mixed pre and post-1986 debts has been addressed in a number of Tribunal cases. In looking at this interpreting s1122 generally, it seems plain enough that the named date of 27 October 1986 remains in the section for a reason.  If that were not so, it would be a simple matter for the section to have been drafted to refer to loans generally, without any date being nominated.  This issue did not arise in Hawkins case, where the loans post-dated 1986, so the question is not  addressed in that case. 

29.     In Re Hughes and Secretary, Department of Social Security (1992) 25 ALD 754 the Tribunal dealt with pre and post 1986 loans to a family trust and held that in assessing the value of property after 27 October 1986, the legislation required assessing the face value of loans, but the assessment of loans made before that date should be done by reference to the net worth of the assets. In so deciding, Hughes followed Re King and Repatriation Commission (1990) 12 AAR 375. Re Wright and Secretary, Department of Social Security (1994) 82 SSR 1196 provides an example of how the exercise of valuing pre and post 1986 loans is carried out and along with the Tribunal decision in Re Unicomb and Secretary, Department of Social Security (1996) AATA 10915, provides some guidance on the nature of the valuation exercise entailed. As Senior Member McCabe pointed out in Re O’Brien the task of working out the real value, rather than the face value, can be a difficult one.  Nevertheless this is what the Act requires.

30.     Ms Oliver acknowledged that the Tribunal authorities stating that loans made before 27 October 1986 should be ascribed their real rather than face value.  However she submitted that the Centrelink policy guidelines state that both pre and post 27 October 1986 loans should be assessed by face value.  She submitted that Departmental policy should be applied unless there are cogent reasons not to do so.

31.     It seems to me that the cases decided by the Tribunal to the contrary on exactly the same point provide that sufficiently cogent reason. 

32.     What is clear in Mr Foschi’s case is that Centrelink has not separated the pre-October 1986 component of the loans from the post-1986 component in order to determine the overall value of the loans by Mr Foschi to Foschi Enterprises at the start of the debt period.  The failure to do this means that Mr Foschi’s debt has been calculated incorrectly.  That being the case, I cannot be satisfied that the debt amount as it stands is correct.

33.     For these reasons I have decided that it is appropriate to remit the aspect of the valuation of the pre-October 1986 loans to the respondent, with the direction that the loans be valued in accordance with the principles set down in Re Hughes, Re Unicomb and Re Wright.  Furthermore the exercise of recalculating the loans should take into account the submissions made in exhibit A4, presenting an argument about interpreting whatever financial records in existence predating 30 June 1987.  Of course Centrelink can accept or reject the views expressed in exhibit A4, but Mr Foschi should have the benefit of having them considered in the re-assessment.

34.     It seems to me that because some financial records for Foschi Enterprises are available for the tax years ended June 1984, June 1985 and June 1987 it is possible, however difficult, to ascribe a real value of Mr Foschi’s pre-27 October 1986 loans.  That value then impacts on the assessment of the loans made thereafter. 

WAIVER

35.     In view of this debt being set aside and remitted for re-calculation, it would be premature to consider the question of any possible waiver of the debt on the grounds of special circumstances.  I am mindful that, in a separate decision today on Mrs Foschi’s matter, I have exercised the discretion to waive Mrs Foschi’s debt on the grounds of special circumstances, but in so doing I took into account her particular circumstances which I see quite differently from those of Mr Foschi.  I have set out fully my reasons for so doing in the decision Clara Foschi and Secretary, Department of Families, Community Services and Indigenous Affairs AATA 458.

36.     In Mr Foschi’s matter, this remittal for recalculation may result in a different amount of debt being raised.  This itself can be relevant to special circumstances. , Deciding whether or not to exercise the discretion may encompass a consideration of a person’s ability to repay.  Where the sum sought to be recovered is not known, it is appropriate to delay consideration of  waiver until after the debt amount is ascertained. 

37.     The debt on re-calculation may be for a lesser amount, but more likely than not, Mr Foschi will still have a debt.  In the circumstances, it would not make sense for Centrelink to return the moneys already recovered from Mr Foschi’s age pension, and face having to recover the money a second time..  However Mr Foschi may wish to negotiate with Centrelink for further recoveries to cease pending the recalculation of the debt.

DECISION

38.     The Tribunal sets aside the decision under review and remits the matter to the respondent to re-calculate the value of Mr Foschi’s loans to Foschi Enterprises, in accordance with these reasons. 

The Tribunal directs that:

(i)the respondent revalue the loans advanced before 27 October 1986 according to net worth of the assets of Foschi Enterprises

(ii)in recalculating the pre-27 October 1986 component of the loans the respondent is to take into account the material in the document titled Submissions on Behalf of the Applicant to the Administrative Appeals Tribunal  (Exhibit A4) referring to the company’s financial statements for the tax years up to and including the year ended 30 June 1987

I certify that the 38 preceding paragraphs are a true copy of the reasons for the decision herein of Ms M J Carstairs, Member

Signed:   Jeff Mills

Legal Research Officer

Date/s of Hearing                     10 January 2006
Date of Decision  26 May 2006
Date of Applicant’s Written Submission       27 January 2006
Date of Respondent’s Written Submission   24 February 2006
The Applicant appeared in person                
For the Respondent                                      Ms Oliver, Departmental Advocate