Hansford and Secretary, Department of Family and Community Servic Es

[2003] AATA 198

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2003] AATA 198

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          Nos S2002/248 & 254

GENERAL ADMINISTRATIVE  DIVISION		)
Re		Stanley Joseph Hansford & Elizabeth Hansford

Applicants

And Secretary, Department of Family and Community Services

Respondent

DECISION

Tribunal Mr D.J. Trowse (Member)

Date28 February 2003

PlaceAdelaide

Decision The decision under review is affirmed.

Mr D.J Trowse

(signed)

Member

CATCHWORDS – SOCIAL SECURITY – controlled company – attribution of assets – inclusion of an asset being an amount owing by applicants to company – ability to offset monies borrowed by company for the purchase of shares against the value of those shares – decision affirmed

Social Security Act 1991; ss1118, 1121, 1208E, 1208G, 1208H, 1209E

Social Security (Attribution of Assets) Principles 2001

REASONS FOR DECISION

28 February 2003 Mr D.J. Trowse (Member)        

1.These are appeals by Mr Stanley Joseph Hansford and his wife Mrs Elizabeth Hansford (the applicants) against a decision of the Social Security Appeals Tribunal (SSAT) dated 1 May 2002 which affirmed a decision of a Centrelink officer dated 6 December 2001 and which had been affirmed by an authorised review officer on 15 January 2002. These references raise questions pertaining to the methodology to be applied under the new means test system where clients of the respondent are in control of private trusts and private companies. In those circumstances, the assets and incomes of the trust or company will be treated as if they are the assets and incomes of the person or persons exercising the control.

2.More specifically, there are two matters to be determined, both of which relate to the calculation of the asset positions of the applicants. First, whether it is permissible to offset monies borrowed by a controlled company for the purchase of shares in public companies and secured by way of a mortgage over the home owned and occupied by the applicants against the value of those shares which have been attributed to the applicants. Secondly, whether an amount owed by the applicants to the same company should be included as an asset in working out their asset positions for means testing purposes. This new system came into operation on 1 January 2002 and, thus, the need to consider the asset positions of the applicants as at that date.

3.The Tribunal received into evidence the documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975, together with three exhibits. Additionally, the Tribunal heard evidence from Mr S. Hansford. The applicants were represented by Mr S. Hansford and the respondent by Ms A. Pugsley, an advocate on its behalf.

4.The applicants have been in receipt of the aged pension since 1992. It appears that Mr Hansford had developed a plan to supplement, if not replace, that pension by dealing in shares and that, with this in mind, he had incorporated a company named Bethstan Pty Ltd (the Company). This was to be the vehicle for the purchase of shares in public listed companies. The applicants are the sole directors and shareholders of the Company. In the first instance, shares were acquired by the Company from funds made available by the applicants.  However, in December 1999, a decision was made to expand the Company’s share portfolio and, to that end, monies were borrowed by the Company from Perpetual Trustees.  The total amount borrowed was $200,000 of which $75,565 was allocated to the purchase of the further shares.  The remainder was advanced by the Company to the applicants who employed those funds in the purchase of their current dwelling.  The security taken for the loan of $200,000 to the Company was a first mortgage on the house property being acquired by the applicants in their joint names.

5.Prior to the above transaction, the Company was indebted to the applicants to the extent of $39,764.  After offsetting this credit balance against the balance loan monies paid over to the applicants, they remained indebted to the Company for an amount of $84,670.  It is the contention of the respondent that this personal liability, which remained outstanding as at 1 January 2002, must be brought to account as an asset in the assessment of the applicants’ means test.

6.The shares acquired by the Company are of a speculative nature.  Financial statements confirm that no dividends are received.  Despite recent market downturns, Mr Hansford remains confident that, providing the Company is not required to sell prematurely, his aim to become financially independent is achievable.  As at 1 January 2002, the investments made by the Company and forming its portfolio had a market value of $346,988.  The amount borrowed from Perpetual Trustees had not been reduced and, hence, the portion applicable to the purchase of shares, that is $75,565 remained owing at the relevant date.  As a result of the new system, the respondent submits that the value of the shares to be included in the means test assessment is $346,988 and that, notwithstanding the use made of the $75,565, no reduction of that contribution is permitted.

7.Because of the change in the legislation, the total amount of the aged pension being received by the applicants has been diminished to about $50 per week.  Not surprisingly, such an amount is not sufficient to meet normal household expenditure and, thus, the need to realise upon some of the shares held by the Company.  Adopting the approach suggested by the respondent, a transaction of this kind makes no change to the means tested asset position of the applicants.  Such an outcome is forthcoming because the reduction in share value is compensated by an increase in the applicants’ loan account with the Company.  Bearing in mind the expenditure of the funds so realised on living expenses, such a conclusion appears illogical.

8.Means testing for social security purposes is a method used to identify those in the community who are in need of financial assistance. In order to determine those requiring benefit, regard is had to the level of assets held and income derived. Citizens with assets exceeding nominated levels are deemed to be capable of financially caring for themselves and, depending on the quantum of those excesses, they are either excluded from the receipt of assistance or receive a lesser entitlement. In arriving at the value of a person’s assets, certain assets, one of which is the person’s principal home, are to be disregarded – see section 1118 of the Social Security Act 1991 (the Act).  If, as the respondent maintains, the total amount owing to Perpetual Trustees is counter balanced against the value of the applicants’ principal home, the indebtedness of $200,000 plays no role in the calculation of their asset positions.

9.The object of the new system was to overcome the growing trend of individuals using private trusts and private companies to hold and control assets outside the bounds of the testing previously applied.  The second reading speech to the introductory bill makes it clear that the new legislation was intended to restore equity and integrity to the Social Security and Veterans’ Affairs means tests and to ensure that people with similar levels of private resources should receive similar levels of payment.

10.The legislation giving effect to the new regime and which is pertinent to the current matter is as follows:

“Attribution of assets

1208E(1) For the purposes of this Act, if:

(a)      an individual is an attributable stakeholder of a company or trust at a

particular time on or after 1 January 2002; and

(b)      at that time, the company or trust owns a particular asset (whether alone or jointly or in common with another entity or entities); and

(c)      if, at that time, that asset had been owned by the individual instead of by the company or trust, the value of the asset would not be required to be disregarded by any express provision of this Act; and

(d)      at that time, the asset is not an excluded asset (see subsection (2));

there is to be included in the value of the individual's assets an amount equal to the individual's asset attribution percentage of the value of the asset referred to in paragraph (b).

Excluded assets

1208E(2) The Secretary may, by writing, determine that, for the purposes of the application of subsection (1) to a specified individual and a particular company or trust, a specified asset is an excluded asset.

1208E(3) A determination under subsection (2) has effect accordingly.

1208E(4) In making a determination under subsection (2), the Secretary must comply with any relevant decision-making principles.

Charge or encumbrance relating to a single asset

1208G(1)       For the purposes of the application of this Division (other than this section) to a particular individual and a particular company or trust, if:

(a)      there is a charge or encumbrance over a particular asset of the company or trust; and

(b)      the charge or encumbrance relates exclusively to that asset; the value of the asset is to be reduced by the value of the charge or encumbrance.

1208G(2)       Subsection (1) does not apply to a charge or encumbrance over an asset of a company or trust 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 an entity other than the company or trust; or

(c)      the value of the charge or encumbrance is excluded under subsection (6).

…

Exclusion

1208G(6)       The Secretary may, by writing, determine that, for the purposes of the application of this section to a specified individual and a specified company or trust, the whole or a specified part of a specified charge or encumbrance over one or more of the assets of the company or trust is excluded for the purposes of paragraphs (2)(c) and (4)(b).

1208G(7)        A determination under subsection (6) has effect accordingly.

1208G(8)       In making a determination under subsection (6), the Secretary must comply with any relevant decision-making principles.

Effect of unsecured loan on value of assets

1208H.(1) For the purposes of the application of this Division to a particular

individual and a particular company or trust, if:

(a)       the company or trust is the borrower under a loan; and

(b)       the loan is not secured by a charge or encumbrance over one or more of the assets of the company or trust;

the Secretary may, by writing, determine that the value of a specified asset of the company or tust is to be reduced by the whole, or a specified part, of the amount of the loan.

1208H.(2) A determination under subsection (1) has effect accordingly.

1208H.(3) In making a determination under subsection (1), the Secretary must comply with any relevant decision-making principles.”

11.There is no dispute – that the Company is a controlled private company – that

the applicants are attributable stakeholders of the Company – and that the asset attribution percentage is 100%.  The existence of that factual situation brings into play section 1208 E of the Act

12. The Tribunal is satisfied that the assets of the Company as at 1 January 2002

were comprised of shares in public companies and monies owing to it by the applicants. Unless excluded under sub section 1208E(2), the value of those assets is to be included in the value of the applicants’ individual assets. The Tribunal has referred to the Social Security (Attribution of Assets) Principles 2001 formulated under section 1209E of the Act, and, more particularly, to Part 2 which sets out the decision-making principles with which the Secretary must comply for the purposes of making a determination under subsection 1208E(2) of the Act. There is nothing in the Principles to support a determination that either of the assets in question should be excluded.

13.The remaining issue pertains to the value to be ascribed to these assets in the

individual assessments of the applicants.  In the case of the shares, the Tribunal turns to considers whether their value should be reduced by the monies borrowed and used in connection with their partial acquisition.  On this issue, the provisions of sections 1208G and 1208H are relevant.

14.Section 1208 G provides that, in the event of a charge or encumbrance over a

particular asset or trust, the value of the asset so burdened is to be reduced by the value of the charge or encumbrance.  In the current matter, the amount owing to Perpetual Trustee is secured by a mortgage on the home owned by the applicants and, thus, the provisions of section 1208G are of no avail.

15.The fact that the loan is not secured by a charge of encumbrance over one or

more assets of the Company gives rise to a consideration of the discretion bestowed upon the Secretary in terms of subsection 1208H(1) of the Act.  The legislation clearly indicates that there will be cases where the value of an unsecured loan may be applied against the value of a specified asset of a company or trust and that, in those circumstances, the Secretary in the exercise of his discretion is bound by the relevant decision-making principles.

16.Turning again to the Principles formulated under section 1209E of the Act, the

Tribunal notes the following principles that have application in situations of the kind now under examination:

“11.     Purpose of Part 4

This Part sets out decision-making principles with which the Secretary must comply in making a determination under subsection 1208H(1) of the Act.

12.      Effect of unsecured loan on value of assets

In relation to an unsecured loan, the Secretary must take into account:

(a)       whether a transaction that gave rise to the loan was an arm’s length transaction, having regard to the criteria described in section 13; and

(b)       the matters referred to in section 14.

…

14.      Other matters

For paragraph 12 (b), the Secretary must also take into account, in relation to the transaction that gave rise to the charge or encumbrance:

(a)       whether the individual is the sole attributable stakeholder, or a member of a couple both members of which are the only 2 attributable stakeholders of the company trust; and

(b)       whether the loan is secured by a charge or encumbrance over an asset other than an asset described in paragraph 1208H (1) (b) of the Act; and

(c)      the commercial, social and familial relationships (if any) between the parties to the transaction; and

(d)       the nature and circumstances of the transaction.”

17.The respondent, in reliance on the material contained in part section 14 (b) of

the Principle and the reality that the loan is secured elsewhere, submits that the Secretary is not empowered to make the determination being sought by the applicants.  Furthermore, the respondent maintains that this view is re-inforced by the provisions of s1121 of the Act which repeat the intention that the value of charges and encumbrances can only be used to reduce the value of the particular asset so charged or encumbered.

18.The Tribunal agrees with the respondent’s interpretation of the legislation and

the application of that construction to the relevant facts.  The debt of $200,000 is secured by a charge over the home owned by the applicants and, thus, in the Tribunal’s opinion, the discretion contained in section 1208H is not capable of being exercised.  On this basis, the Tribunal finds that the value of the shares held by the Company as at 1 January 2002  required to be brought to account in the assessment of the applicants’ means tests is $346,988.

19.As at 1 January 2002, the amount owing by the applicants to the Company

was $84,670.  From the Company’s prospective, this represented an asset with a value of $84,670.  As previously concluded, that outstanding is caught by section 1208E of the Act and, as such, must be included in the value of the individual’s assets.  In the Tribunal’s view, a result of this kind is extraordinary.  The fact that the applicants are both debtors and creditors to the same extent and that such an ‘asset’ adds nothing to their net worth or their ability to support themselves has not been recognised in the legislation.  Notwithstanding those oddities, the Tribunal is bound in terms of the legislation to find that the debt of $84,670 must be included in the applicants’ means tested assessments.

20.The Tribunal believes that some comment on the government pursuit of equity

and integrity is appropriate.  The inclusion of an amount owing by the applicants as an asset is lacking in logic.  The Tribunal fails to see how such an aggregation is relevant to a targeting of people in need of financial assistance.  Indeed, a process of this type is capable of seriously disadvantaging people in necessitous circumstances.  Additionally the Tribunal has reservations on a method whereby the deduction of loan monies is restricted to the asset charged or encumbered.  It is not too difficult to envisage a situation where two claimants with precisely the same level of resources and who have borrowed similar amounts to attain those resources are treated markedly different.  The one securing the loan by a charge or encumbrance over the investments acquired receives the benefit of offset.  The other who secures the loan on his dwelling is denied the deduction.  To this extent the current system appears to be in conflict with the stated doctrine that people with similar levels of private resources should receive similar levels of payment.  Given that emphasis, a system based on the use to which the borrowings are put may provide a more equitable result.

21.For the reasons enunciated above, the Tribunal affirms the decision under

review.

I certify that the 21 preceding paragraphs are a true copy of the reasons for the decision herein of Mr D.J. Trowse (Member)

Signed:         .......................................................................................
  Associate

Date/s of Hearing  28 October 2002 & 18 December 2002
Date of Decision  28 February 2003
Counsel for the Applicant         In person
Solicitor for the Applicant          -
Counsel for the Respondent     Ms A Pugsley
Solicitor for the Respondent     Centrelink