Horyna-Stasi and Secretary to the Department of Family and Community Services - [2002] AATA 1284

DECISION AND REASONS FOR DECISION [2002] AATA 1284

ADMINISTRATIVE APPEALS TRIBUNAL Nº V2002/320
N° V2002/322
GENERAL ADMINISTRATIVE DIVISION

Re:PACILIA HORYNA-STASI AND HANS HORYNA (DECEASED)
Applicant

And:SECRETARY TO THE DEPARTMENT OF FAMILY AND COMMUNITY SERVICES
Respondent

DECISION

Tribunal:       M.J. Carstairs, Member
Date:             3 December 2002
Place:            Melbourne

Decision:For the reasons given orally, the Tribunal sets aside the decision under review and remits the matter for assessment of the claims for carer pension and disability support pension, from the date of the claims until the death of Hans Horyna on 5 June 2002, taking into account that the asset value of the 20 per cent share in Acan Plastics Pty Ltd was $163,656.

(sgd) M.J. Carstairs
Member
SOCIAL SECURITY - disability support pension and carer payment - asset test - valuation of shares in private company
Administrative Appeals Tribunal Act 1975
Social SecurityAct s9
Re Brown and Department of Social Security (AAT 8886, 4 August 1993)
Gregory v Commissioner of Taxation (1971) 123 CLR 547
James Angliss and Secretary, Department of Family and Community Services [1998] AATA 12637
Mike Gaffikin Marine Pty Ltd v Princes Street Marina Pty Ltd (1995) 122 FLR 294
MT Associates Pty Ltd v Aqua-Max Pty Ltd [2000] VSC 78
Matter W94/377 and Repatriation Commission (AAT 010466, 13 October 1995)
Secretary Department of Family and Community Services and Beverly May Dolesny and Stefan Dolesny [1999] AATA 738
Lonergan, W (1998), The Valuation of Businesses, Shares and Other Equity, Business and Professional Publishing, New South Wales

REASONS FOR DECISION

3 December 2002 M.J. Carstairs, Member

These are applications by Pacilia Horyna-Stasi (the applicant) and her husband Hans, since deceased, for review of decisions of the Social Security Appeals Tribunal (SSAT) made on 4 March 2002, in respect of claims for carer payment and disability support pension respectively. The SSAT affirmed a decision of a Centrelink delegate of the Secretary to the Department of Family and Community Services (the respondent) that the carer allowance and disability support pension could not be paid as the couple's assets were valued at an amount in excess of the level at which these payments could be made.
At the hearing, conducted by telephone, the applicant was represented by Ms E. Phillips, a social worker. Ms E. King, a Centrelink advocate, represented the respondent, and was assisted by Mr S Meehan, a complex assessment officer with Centrelink.
The tribunal had before it documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act (1975). The Tribunal also had before it the statement of facts and contentions lodged by the respondent and a share valuation report for the company Acan Plastics Pty. Ltd. (Acan Plastics), prepared by Mr C. Dawson, chartered accountant engaged by the applicant, dated 30 September 2002 (exhibit A1).
BACKGROUND
The applicant is aged 55. She was married to Hans Horyna (born 14 June 1937) who died on 5 June 2002 at the age of 65 years, shortly before this matter was listed for its first day of hearing.
The applicant and her husband were shareholders in, and sole directors of, SIP Holdings Pty. Ltd. (SIP Holdings), a private company incorporated on 29 May 1985. SIP Holdings has a 20 per cent share in another company, Acan Plastics. The applicant's husband had purchased the shares for $450,000 in February 2000. The applicant's husband worked at Acan Plastics. The other shareholder, holding an 80 per cent share, is Kurt Stern.
On 14 August 2001 the applicant and her husband claimed carer payment and disability support pension respectively. Hans Horyna had been diagnosed with cancer. On 17 December 2001 the respondent decided that SIP Holdings had assessable assets of $630,435 (without taking into account other assets held personally by the applicant and her husband). This level of assets was above the limit for the pensions claimed.
The applicant and her husband sought review of the decisions. An authorised review officer made two decisions on 13 November 2001, affirming the original decisions. The authorised review officer explained in his decision (T19):
Prior to 1st January 2002 it was the policy of the Department of Family and Community Services that Centrelink use the net asset backing method to value the shares of private companies. This method evaluation was used because it provides the least complex method of assessment, while still providing a consistent basis for the assessment of the value of all private companies.
When using the net asset backing method the net assets of the company are assessed according to the proportion of shares held, and in accordance with the shareholders rights to capital of the company upon winding up. Centrelink will assign a current market value to the net assets of the company, then the net asset value of the company will be divided by the number of issued shares that give access to the capital of the company upon wind up, which assigns an asset amount for each share in the company.
The recorded value of intangible (non material) assets such as goodwill which appear on a balance sheet will be assessed at their balance sheet value for the purposes of the share valuation. A private company is valued on a 'going concern' basis. This means that it is expected that the company continues to operate. The assets are therefore valued on the basis that they will not be realised at a 'fire sale' and the liabilities will need to be paid only in the normal course of business.
As the balance sheet for Acan Plastics stated that the net value of company assets, at September 2001, was $2,335,283, and as SIP Holdings held 20 of 100 issued shares in Acan Plastics, the value the review officer assigned to that holding was $467,056.60. Overall, the net asset value of SIP Holdings was $650,894.
When the applicant and her husband sought further review, the SSAT affirmed the decision about the level of assets. On 28 March 2002 an application for review of the decision made by the SSAT was lodged with this Tribunal.
EVIDENCE
The applicant said that her husband was working for Acan Plastics at the time that the shares were purchased. She stated that when her husband purchased the shares, he had the view that he would be able to monitor business operations. She said that she had approached Mr Stern, the holder of the 80 per cent interest in Acan Plastics, however he had refused to buy the 20 per cent share held by SIP Holdings. She said that Mr Stern was trying to sell his shares to the manager of the business, without success. She said it was part of the memorandum of agreement that neither Mr Stern nor her husband was to transfer shares without the consent of the other.
Other documentary material before the tribunal, including documents T23 and T25 showed that SIP Holdings held other shares to the value of $71,168 at the time of the claim in August 2001. The balance sheet for SIP Holdings at 30 June 2000 showed shares in Acan Plastics worth $450,789, and shares in listed companies valued at $45,114 (T25). The applicant gave evidence that the value of other shares held by SIP Holdings in listed companies at the time of the hearing was about $40,000. The amount held in cash trusts now was between $3000 and $4000. It was a higher figure at the time of the claims. She said that her husband's car had been sold since his death. The balance sheet for Acan Plastics, at June 2001 (T26) showed total assets of $2,580, 097.46 and goodwill of $1,446,000.
On 14 December 2001, Mr A. Tims, a chartered accountant engaged by the applicant, valued the 20 per cent share in Acan Plastics at $150,000 to $170,000. In his report he stated that numerous methods could be used to value a business. In a document dated 12 November 2001 (T27) Mr G. B. Johnson, a chartered accountant engaged by the applicant, assessed the value of the 20 per cent shareholding as not exceeding $70,000 on the basis that the minority shareholding reduced any opportunity to sell, and on the basis of low expected dividends.
Mr Johnson gave oral evidence that a 20 per cent shareholding gives no right of decision-making in a company, nor control over dividends. It is therefore worth less than its proportional amount in real terms. He said that assigning share value should be based on maintainable earnings, and he arrived at the figure of $70,000 on this basis. Capitalisation of maintainable earnings is a valuation method which calculates future maintainable profits of the company and takes into account variability or risk by using a multiplier which reflects the nature of the company being valued. He said that the multiplier that he adopted was appropriate for a high-risk venture, in a small company, where there was limited opportunity to get out of the business.
Mr Johnson said that in the balance sheet to 30 June 2000 the assets of Acan Plastics were $2.3 million of which goodwill was $1.5 million. However, as the company was not earning income that would warrant such a figure for goodwill, Mr Johnson said that if net assets were being used as the basis of valuation, the $1.5 million ascribed to goodwill and acquisition costs should be deducted, as the income being generated by the company did not support such a figure. He said the only value of goodwill is its capacity to earn income. He said also, that the dividend payment history did not support a higher figure. In regard to the disparity between his valuation and the purchase price paid by Mr Horyna, Mr Johnson said that he could not fully explain that. However, he said that had he been involved with the purchase, he would have strongly recommended against buying the shares in the company at that price.
In a written report dated 30 September 2002 (exhibit A1) Mr C. Dawson, a chartered accountant engaged by the applicant, stated that Acan Plastics was incorporated on 20 October 1999 to acquire a plastics manufacturing and printing business formerly trading as Acan Packaging. At purchase, the total price of the business was $1,800,000, of which $1,410,000 was for goodwill and $390,000 for plant and equipment. In his report he said:
The methods adopted for the valuation is to capitalise future maintainable earnings of the company on a going concern basis and comparing this valuation of the current net tangible asset position of the company….. The reported profits of the company since acquisition of the business have been volatile and the attached schedule indicates the decline in profitability over the period. As detailed in a report to the directors …dated 21 August 2002 it was indicated that the actual results for the year ended 30 June 2002 were some $300,000 below expected budget for the year.
In oral evidence, Mr Dawson said the method of capitalising future maintainable earnings was the preferred method for valuing shares in a company on an ongoing basis. He said that the method is based on earnings to determine the income stream. Using that method the value arrived at was $375,000. He then compared that figure with the figure produced by valuing on the basis of net tangible assets, which was $818,281. As a result of this comparison exercise, he adopted the net tangible assets figure as the basis of valuation. He acknowledged that in the net tangible assets method, goodwill was not valued, as it is an intangible asset.
He said that the differences in valuation amounts ascribed to Acan Plastics in this case are attributable to the fact that the valuation of shares is not an exact science. Mr Dawson said in oral evidence that he could not see the basis on which the valuation by Mr Johnson, at $70,000, was derived. Mr Dawson also said that the shareholders in Acan Plastics are not achieving a satisfactory return. He said that in examining this business it was necessary to recalculate the goodwill factor, taking into account the underperformance against budget in 2002. He said it was his view that SIP Holdings paid too much for the business, and had he been advising the applicant and her husband at the time of purchase he would have advised against this purchase at that price. He said that the profit since that time could not justify the price paid.
CONSIDERATION OF THE ISSUES
The assets tests are based on the net market value of assets. The market value of an asset will not necessarily be reflected by the purchase price. The market value of assets is the price upon which the willing purchaser and the willing but not anxious seller would reach an agreement.
Payment of rates of pension under the legislation depend upon the application of both the assets and income tests. Taking into account information from both tests, Centrelink applies the test that results in the lower rate of payment in each case. The thresholds at which assets affect social security payments differ, depending upon whether the payment is a pension or an allowance. Both carer payment and disability support pension are defined by the Act as pensions. In 2001, the assets test limit for a homeowner couple was $200,500. Above that amount, social security payments were reduced by $2 per fortnight for every $1000 above the limit. No carer payment or disability support pension could be paid when assets reached $426,500 for a couple. (The upper limit changed to $431,000 on 20 September 2001 and to $437,500 on 20 March 2002).
In terms of the claims before the Tribunal, these are limited to the period from August 2001 until the death of the applicant's husband on 5 June 2002, as the only claims concerned Hans Horyna's disability support pension and the need for the applicant to be his carer.
Provision is made in the Pension Rate Calculator Module A in the Social Security Act 1991, at point 1064-A1, for working out the rate of pension, applying the income and assets tests. Point 1064-G1 in Module G sets out the assets test, in combination with point 1064-G2, which provides that the value of the assets of a member of a couple is to be 50 per cent of the value of the person's assets and the person's partner's assets. The first step in point 1064-G1 requires that the value of assets must be worked out.
The essential issue is the value of SIP Holdings, taking into account the 20 per cent interest in Acan Plastics, and whether that value was too high for pension to be paid.
The respondent submitted that the value of assets in the company was $650,894. Using the net asset backing method of valuation, it was submitted that the value of the 20 per cent holding in Acan Plastics from the balance sheet of SIP Holdings at June 2000 was $467,056. Ms King submitted that this method provided the most consistent approach to valuing the shares in a private company. Ms King also submitted that in the majority of decided cases the Tribunal has accepted that the net asset backing method should be applied.
The Tribunal has reached a decision taking into account the written and oral evidence and the submissions at the hearing and notes the cases to which the Tribunal was referred to in submissions. The Tribunal also referred to the third edition of W. Lonergan's The Valuation of Businesses, Shares and other Equity. That text, as well as the case law, makes plain that value is a term that has no general statutory meaning, and different valuation methods will result in different valuation figures.
In Mike Gaffikin Marine Pty Ltd v Princes Street Marina Pty Ltd (1995) 122 FLR 294 the Federal Court said that the valuation of shares is always a most difficult matter. The court in that case said that while at one time the view was taken that restrictions on transfer of shares in private companies was not a factor that should affect value, since Gregory v Commissioner of Taxation (1971) 123 CLR 547 it has been taken that from a practical point of view these could not be ignored in the making of a valuation.
In MT Associates Pty Ltd v Aqua-Max Pty Ltd [2000] VSC 78 the Supreme Court of Victoria said that the object of the valuation exercise is to determine what a reasonable but not over-willing purchaser would be prepared to pay and the reasonable willing vendor would be prepared to accept. The court applied the capitalization of future maintainable earnings method. The Court said one must take into account the risks involved in the business…valuation of shares in a private company which conducts a small manufacturing and distribution business is a difficult exercise and invariably provokes much argument as to each step of the valuation procedure.
In Secretary Department of Family and Community Services and Dolesny [1999] AATA 738 the Tribunal was concerned with the value of a 25 per cent shareholding where the applicant was a director and her brother held 75 per cent interest. The Tribunal accepted the evidence of the applicant's accountant about price of shares when the brother was acquiring his 75 per cent interest and declined to apply the net assets backing method. In Re Brown and Secretary, Department of Social Security (AAT 8886, 4 August 1993) the Tribunal preferred to apply the capitalization of earnings method, in view of the high value of net asset backing for the shares. In that case the respondent led the evidence of valuation, based on earning and dividend paying capacity with a discount of 15 per cent for the non-negotiability of the shares.
In Re Matter W94/377 and Repatriation Commission (AAT 010466, 13 October 1995) the Tribunal applied the capitalization method. In James Angliss and Secretary, Department of Family and Community Services [1998] AATA 12637 the Tribunal accepted that the method to be adopted in valuing the shares of private companies may vary from case to case. In that case the net asset backing method accorded with the recent sales of the shares in the company, and there had been no major changes in assets of the company within a year of the claim for pension.
A range of methods of valuation of shares is open to this Tribunal, and this is reflected in the decisions of this Tribunal referred to above. The Tribunal accepts the valuation report of Mr Dawson based on net tangible assets. His report is based on a comparative analysis of the company's performance over the relevant time. Mr Dawson was able to justify his method in his oral evidence. The Tribunal accepts his evidence, that goodwill at the time of purchase of the company was overstated. Both Mr Johnson and Mr Dawson gave evidence that the purchase price paid was too high.
The only valuation reports before the Tribunal are those of the applicant. The respondent relied on submissions about the method to be used but did not have any expert valuation evidence. The respondent submitted that a consistent method of valuing shares was required, and this was the basis of the policy of Centrelink in requiring that the net asset backing method be applied. However, it was clear from the policy material provided by the respondent that consideration can be given to different methods of valuing shares. Ms King supplied the references to a policy headed Assessable Assets from Private and Unlisted Companies: para 47224.7.2.20 which sets out that in some cases it will be inappropriate to use the net asset backing method. Mr Dawson's report is in agreement with the use of the net asset backing method, but limits it to the tangible assets because of the performance of the company in recent years. A policy must be flexible to adapt to the circumstances of particular cases, otherwise a claimant could never assert that assets were unrealistically stated in company balance sheets and lead expert evidence to show that was so.
The Tribunal adopts the valuation completed by Mr Dawson. He has considered company performance over recent years and on that basis stated that goodwill is overvalued in the balance sheets, and was likely overvalued at the time of purchase. The Tribunal accepts the evidence of both Mr Johnson and Mr Dawson, neither of who was involved at the time of purchase of the share in Acan Plastics, that the purchase price was too high. The Tribunal accepts the evidence of Mr Dawson that goodwill should be valued at nil, given the state of trading and how the company has performed since June 2000.

For these reasons the Tribunal concludes that the matter should be remitted to Centrelink for re-assessment.
DECISION
For the reasons given orally, the Tribunal sets aside the decision under review and remits the matter for assessment of the claims for carer pension and disability support pension, from the date of the claims until the death of Hans Horyna on 5 June 2002, taking into account that the asset value of the 20 per cent share in Acan Plastics was $163,656.
I certify that the thirty-three [33] preceding paragraphs are a true copy of the reasons for the decision herein of
M.J. Carstairs, Member
(sgd)       Olympia Sarrinikolaou
              Clerk
Date of Hearing:  18 June 2002, 29 November 2002
Date of Decision:  3 December 2002
Advocate for the applicant:         Ms E. Phillips, Eastern Palliative Care
Advocate for the respondent:       Ms E. King, Advocate with Centrelink