Jakab and Repatriation Commission

[2004] AATA 428

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2004] AATA 428

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No Q2003/9

VETERANS' APPEALS DIVISION		)
Re		STEFAN JAKAB

Applicant

And REPATRIATION COMMISSION

Respondent

DECISION

Tribunal Senior Member KL Beddoe

Date30 April 2004  

PlaceBrisbane

Decision The Tribunal decides to affirm the decision under review insofar as it has jurisdiction to do so.

..................(Sgd).......................

KL Beddoe
  Senior Member

CATCHWORDS

VETERANS’ AFFAIRS – benefits and entitlements - rate of service pension – partnership business trading in listed securities – income from business properly treated as ordinary income and not deemed income – shares traded by the business not “financial assets” - decision to reduce rate of pension properly made

VETERANS’ AFFAIRS – practice and procedure – overpayment of pension - jurisdiction of Tribunal on review – no power to review whether there has been an overpayment

Veterans’ Entitlements Act 1986 ss 5H, 5(J)(1), 37N, 46B, 46E, 57, 175(2)

Re Knight and Repatriation Commission (1993) 18 AAR 370
FC of T v Everett (1980) 143 CLR 440
Norman v FC of T (1963) 109 CLR 9

REASONS FOR DECISION

30 April 2004 Senior Member KL Beddoe           

1.      The applicant seeks review of a decision by the respondent that there has been an overpayment of service pension to the applicant.  In essence the dispute arises from data-matching with records of the Australian Taxation Office and because the applicant did not report income on the basis that he was carrying on business in partnership with his wife to the respondent.  The business is said to be one of trading in listed securities.  The applicant says the deeming provisions should apply as the listed securities are financial assets.  He also says that the shares are jointly owned with his wife and were properly reported to the Department of Veterans’ Affairs.  He does not deny substantial profits from share trading in the year to 30 June 2000, the financial year in which it is said that the overpayment of service pension occurred.

2. Sub-division B of Division 4 of Part III of the Veterans’ Entitlements Act 1986 (“the Act”) provides for making a claim for invalidity service pension.  It is not disputed that the applicant made such a claim and that the claim was accepted.

3. Section 37N of the Act provides for working out the rate of payment of an invalidity service pension in accordance with the Rate Calculator in Part 2 of Schedule 6 of the Act.

4.      Module A of the Rate Calculator provides for the overall rate calculation process but depends upon calculations made in relevant following modules.

5.      In particular, Module E provides for the “ordinary/adjusted income test”.  In this case the relevant concept is “ordinary income” which is defined in sub-section 5H(1) of the Act as meaning income that is not maintenance income or an exempt lump sum. No issue arises in relation to maintenance income, or an exempt lump sum.

6. Section 5H(1) defines “income”  in relation to a person to mean:

(a)an income amount earned, derived or received by the person for the person’s own use or benefit; or

(b)a periodical payment by way of gift or allowance; or

(c)a periodical benefit by way of gift or allowance;

but does not include an amount that is excluded under sub-sections 5H(4), 5H(5) or 5H(6).  None of those sub-sections are applicable on the facts of this case.

7.      “Income amount” is defined in sub-section 5H(1) to mean:

(a)      valuable consideration; or
(b)      personal earnings; or
(c)       moneys; or

(d)      profits, whether of a capital nature or not.

8. A reference in the Act to a person’s ordinary income for a period is a reference to a person’s gross ordinary income from all sources for that period calculated without any allowance for deduction except deductions allowed by Division 2 of Part IIIB of the Act (section 46).

9.      Division 2 provides for additions and reductions of ordinary income amounts where the person carries on a business.

10. A different concept applies in relation to financial assets. Section 46E of the Act provides for calculation of deemed income for such assets. Two rates (below threshold and above threshold) apply but it is not necessary to consider the operation of the provisions here.

11.     “Financial asset” is relevantly defined to mean a financial investment which in turn is relevantly defined to mean, inter alia, a listed security, which in turn is defined to mean a share in a company or another security listed on a stock exchange.

12. The Tribunal’s jurisdiction is found in and confined to the provisions of section 175 of the Act. Sub-section 175(2) relevantly provides that where the respondent affirms, on review, a decision under section 57 of the Act, then this Tribunal has jurisdiction to review that decision. The relevant circumstance covered by section 57, in this case, is the decision to reduce the rate of service pension (section 57(2)(c)). So far as I am aware there is no provision in the Act for this Tribunal to review a decision by the respondent to claim an overpayment of service pension. I agree with the Tribunal’s decision in Re Knight and Repatriation Commission (1993) 18 AAR 370.

13. At the hearing the applicant conducted his own case and Mr Derrington appeared for the respondent. The documents lodged in the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were before the Tribunal as the “T” Documents and further documents were tendered and marked as exhibits.

14.     Oral evidence was given by the applicant.

15.     I make the following findings of fact.

16.     During the year ended 30 June 2000 the applicant and his wife purchased and sold listed securities on the Australian Stock Exchange.

17.     The transactions are detailed in the “T” Documents sufficiently to satisfy me that the applicant and his wife were trading in the securities to such an extent that they were intent on making profits on purchase and resale rather than income from investment.  In coming to that finding I have taken into account the essential character of the securities purchased following sale of their home in South Australia in April 1999 (T4, folios 23, 27, 28, 29).

18.     That information is scant but when considered with T4/31, which sets out the listed securities held at 20 February 2001, it is apparent that the applicant and his wife were engaged in trading listed securities.

19.     In a letter dated 2 August 2002 addressed to the Department of Veterans’ Affairs, the applicant said:

“In December 1998, my wife and I commenced trading shares on the Australian stock exchange.  I notified DVA (Adelaide), of the change of circumstances and were deemed appropriately on the portfolio and bank account balances as advised by me.  In early 1999 my wife and I formed a partnership to utilise tax benefits for share trading, which otherwise would not have been available to us without a partnership.

On the 16/4/99 we sold our primary residence in Adelaide and all of those proceeds ($108,931.00) were utilised to increase the portfolio.  Again, as is required, I notified DVA of this change of circumstance and again was deemed appropriately according to my records.  DVA noted on their files that the $108,931.00 was from house proceeds and classed it as Deductible Assets – Non Deemed.  I have records of all letters from DVA, so if you require a copy for confirmation I am able to supply same.

It is my understanding from advice I have received from the Department of Veterans’ Affairs, that any monies I receive over and above the amounts deemed as income is to my advantage.  This was certainly the case in the 1999/2000 financial year when the Tech boom occurred, and we made a reasonable profit.  This money was used to purchase our primary residence here in Queensland in May, 2000.

In addition, please note, that in the financial year prior to 1999/2000 and the subsequent years following 1999/2000, there have been losses and not profits in the portfolio.”

20.     The applicant has not resiled from that letter which is consistent with his oral evidence.  In that evidence the applicant said that the partnership was created in March 1999 and that the registered name of the partnership was “Schillmarc Investments” although it is not apparent to me that the listed securities were purchased in this name.  Whether the business name was so used appears to me to be irrelevant.  I note that in the income tax returns the name of the partnership is shown as “Stefan G and Mary M Jakab”.

21.     The applicant and his wife lodged a partnership income tax return for the year ended 30 June 2000.  That return described the main business activity as “Shares, Stocks Trading (own Account)” (T4/69).

22.     The detailed Trading Profit and Loss Account (T4/73-4) for the year ended 30 June 2000 included the following:

SALES  

Sales – Shares  392,441.80

392,441.80

LESS COST OF GOODS SOLD

Opening Stock   58,865.58

Purchases – Shares  278,431.89

337,297.47

Closing Stock    25,770.00

311,527.47

GROSS PROFIT FROM TRADING    80,914.33

LESS EXPENDITURE

Accountancy Fees   1,255.00

Bank Charges   1,555.24

Conference & Seminar Expense   1,126.00

Computer Consumables & Software   1,407.89

Depreciation   3,582.00

Less:  Private use   (1,035.15)

Electricity & Gas  194.66

Hire of Plant & Equipment  140.00

Insurance  328.00

Interest Paid  21.74

Magazines, Journals & Periodicals   1,271.80

Motor Vehicle Expenses   3,261.80

Less Private Use   (2,741.93)

Plant & Equip (under $300)  389.50

Postage  83.20

Printing & Stationery  642.35

Rent   1,495.00

Subscriptions   1,557.10

Telephone   3,559.09

Tool Replacement  466.04

Travelling Expenses        175.00   

18,734.33

62,180.00

OTHER INCOME

Dividends Received  655.00

Interest Received   3,321.95

Other Revenue        200.00

4,176.95

NET PROFIT  66,356.95

DISTRIBUTION TO PARTNERS

Stefan G JAKAB    19,907.09

Mary M JAKAB    46,449.86

$66,356.95

23.     I am satisfied that the Trading Profit and Loss Statement is consistent with trading operations and not consistent with mere investment of listed securities.  The level of activity evidenced by the statement satisfies me that the essential character of the purchase and sale of listed securities was one of trade and not merely investment.  The level of expenditure and the character of the expenses, is, in my view, sufficient to find that the applicant and his wife were conducting a business with its primary purpose being the buying (and selling) of shares which became the trading stock of the business.

24.     While I accept that a set of accounts is not, per se, determinative of the essential character of operations reflected in those accounts, in this case the evidence is consistent with a conclusion that the operations were businesslike and constituted a business of share trading, and I so find.

Consideration

25. The applicant asserts that while it was to his advantage to constitute a business for income tax purposes, so that he could take advantage of allowable deductions not available to mere investors, the operations conducted by him and his wife were not a business for the purposes of the Act. In particular the profit from buying and selling shares was not income and he should only be assessed on the basis of “deemed income” of the listed securities (“financial assets”) held.

26.     The respondent asserts that the Department of Veterans’ Affairs calculated the applicant’s pension correctly, on re-assessment, by treating the profit in share trading as ordinary income and by not determining a deemed income for the relevant listed securities.

27.     It also asserts that the relevant listed securities were owned by the partnership and the applicant had an interest by way of an interest as a partner in the partnership.  The respondent says that this interest is “an equitable interest in the nature of a chose in action” and not an interest in the shares themselves. It follows, says the respondent, that there is no conflict between sections 46B and 46E of the Act because section 46E only applies where a person has a complete beneficial interest.

28.     While I am uncertain as to whether the ownership of the listed securities had, in fact, been committed to the business of the partnership, as distinct from mere joint ownership by the applicant and his wife, I am satisfied that the applicant (and his wife) derived profits from the listed securities and those profits were committed to the partnership business.

29.     If it is necessary for me to decide the nature of the ownership of the listed securities, I follow dicta of the High Court in FC of T v Everett (1980) 143 CLR 440 at 446-7 (per Barwick CJ, Stephen, Mason and Wilson JJ) as follows:

“Although a partner has no title to specific property owned by the partnership, he has a beneficial interest in the partnership assets … it is a right or interest enforceable in equity but not at law…”

30.     The majority went on to describe a partner’s interest in the partnership as a chose in action.

31.     By contrast, a share in a company is a chose in action at law and while it consists of a bundle of rights those rights are not severable by assignment (Norman v FC of T (1963) 109 CLR 9).

32. It follows, in my view, that section 46E of the Act cannot operate in this case because the relevant asset is not a financial asset as defined because it is not a financial investment as defined (section 5J(1)).

33. I am satisfied that the respondent was correct in not applying section 46E of the Act to the circumstances of this case.

34. The profits on share trading derived by the partnership were income amounts as defined for the purposes of the Act and therefore income as defined (section 5H(1)).

35.     Whether there is an overpayment of pension is not a question I can answer.

36.     The respondent’s submission that the application be dismissed is rejected, there being a live issue before the Tribunal.

37.     The decision under review is affirmed to the extent that this Tribunal has jurisdiction to do so.

I certify that the 37 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member KL Beddoe

Signed:         Sarah Oliver
  Associate

Date of Hearing  10 July 2003 (at Maroochydore)
Date of Decision  30 April 2004 (at Brisbane)

The Applicant appeared in person
Counsel for the Respondent     Mr R Derrington
Solicitor for the Respondent     Australian Government Solicitor