Graham Smith v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs

[2011] AATA 244

Administrative Appeals Tribunal

DIRECTION AND REASONS FOR DECISION [2011] AATA 244

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2010/1362

GENERAL ADMINISTRATIVE DIVISION		)
Re		GRAHAM SMITH

Applicant

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

Respondent

DIRECTION

Tribunal Senior Member S E Frost

Date13 April 2011  

PlaceSydney (heard in Orange)

The Tribunal directs that the proceedings be listed for further directions by telephone at a date convenient to the parties.

.....................[SGD].........................

S E Frost
  Senior Member

CATCHWORDS

SOCIAL SECURITY – value of assets – s 1122 – whether money represented a loan – whether person in personal capacity can lend money to himself as trustee – direction made

Farm Help Re-establishment Grant Scheme 1997

Social Security Act 1991

Re Thorp and Secretary, Department of Education Employment and Workplace Relations [2010] AATA 442

Wright v Morgan [1926] AC 788

REASONS FOR DECISION

13 April 2011 Senior Member S E Frost  

Introduction

1.      In late 2006 or early 2007 Graham Smith ceased carrying on the farming activities that had sustained him and his family for many years.  Once he sold his farm enterprise Mr Smith became eligible for financial assistance under a scheme called the Farm Help Re-establishment Grant Scheme 1997 (the Scheme).  He made a claim for financial assistance and in considering his claim Centrelink was required to assess Mr Smith’s assets.  Centrelink included in Mr Smith’s assets an amount which it considered represented the value of a loan that Mr Smith had made and which had not been repaid.  The inclusion of that amount in Mr Smith’s assets had the effect of reducing the level of assistance Mr Smith received under the Scheme.  Mr Smith has sought review of Centrelink’s decision.

The issue

2.      The parties have asked the Tribunal to determine, as a preliminary issue, whether the amount included in Centrelink’s assessment of Mr Smith’s assets should have been included.

The relevant law

3. The issue falls for consideration under s 1122 of the Social Security Act 1991 (the Act) which provides as follows:

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.

(Original emphasis).

The circumstances giving rise to the issue

4.      Mr Smith’s former farming activities were conducted by a trust, of which Mr Smith is the trustee.  Mr Smith is said to have made a “loan” to the trust, and it is this “loan” that is the subject of this preliminary decision.

Why might the amount not be taken into account?

5.      Two arguments have been advanced as to why the amount should not be taken into account in the calculation of Mr Smith’s assets.  Both arguments are based on the proposition – which cannot be disputed – that dealings with a trust are not with the trust as such (since a “trust” is not a legal entity, but a fiduciary relationship and a set of responsibilities) but with the trustee.  In this case, that is Mr Smith himself.

6.      First, it is said that the “loan” is not a loan at all, but simply a movement of funds from Mr Smith to himself.  A loan requires there to be a lender and a borrower.  Where the “lender” is the same person as the “borrower”, there cannot be a loan.

7.      The second proposition is that, even if Mr Smith has indeed made a loan to himself as trustee (so that the value of the loan is treated as an asset of his), there is a corresponding liability on him as trustee to repay the loan, which has the effect of negating the value of the asset. 

8.      For the time being, I will address only the first of these arguments, as agreed with the parties.  Before undertaking an analysis of the second argument it is appropriate for me to allow the parties time to consider my conclusion on the first question and the reasons for it.

Can a person, in his personal capacity, lend money to himself as trustee of a trust?

9.      The short answer to this question must be “yes”.

10.     While the argument that the “lender” and the “borrower” are one and the same has some appeal, the reality is that the person is operating in different capacities on either side of the transaction: the expression often used is that he is “wearing two hats”.  On one side of the transaction he is acting in his personal capacity and on his own behalf.  On the other side of the transaction he is acting as the trustee of the trust, and in that capacity he has a range of different responsibilities with which equity will require him to comply. 

11.     This “two hats” notion is recognised indirectly by the “self-dealing rule” that a trustee may not purchase trust property (Wright v Morgan [1926] AC 788) – a rule justified on the basis of the potential of a conflict of interest and breach of trust by the trustee if he were to sell the trust property to himself, rather than on the much more straightforward basis that it is impossible to sell something to oneself in the first place.

12. The financial statements of the trust record that the trust (actually Mr Smith as trustee) owes money to Mr Smith. Mr Smith accepts that he lent money to the trust (or more accurately, to himself as trustee of the trust). If there had been a corporate trustee of the trust, there is no doubt that the loan would have been treated as an asset of Mr Smith under s 1122 of the Act. The fact that he himself is the trustee does not lead to any different conclusion.

13. It follows that the amount of the loan that was outstanding at the date of the assessment must be included, in accordance with s 1122 of the Act, in the value of Mr Smith’s assets.

14.     I note that the Tribunal was faced with a similar set of circumstances in Re Thorp and Secretary, Department of Education Employment and Workplace Relations [2010] AATA 442, and found that Mr Thorp had made a loan to a trust of which he himself was the trustee.

Conclusion

15.     The proceedings will be listed for further directions by telephone at a date convenient to the parties.

I certify that the 15 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member S E Frost

Signed:         ..............................[SGD]................................................
  Associate

Dates of Hearing  24 February, 25 March 2011
Date of Decision  13 April 2011
Appearance for the Applicant         Mr D Brough, WHK              
Appearance for the Respondent     Ms J Maclean, Centrelink Legal Services