Kapust and Secretary, Department of Family and Community Services

[2006] AATA 110

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2006] AATA 110

ADMINISTRATIVE APPEALS TRIBUNAL        Nº V2005/840

GENERAL ADMINISTRATIVE  DIVISION

Re:         ERICH KAPUST

Applicant

And:       SECRETARY,
  DEPARTMENT OF FAMILY AND

COMMUNITY SERVICES

Respondent

DECISION

Tribunal:       Regina Perton, Member

Date:             9 February 2006

Place:            Melbourne

Decision:The Tribunal varies the decision under review to the extent that the value of the property as at October 2004 is $226,250.  The decision is remitted to the respondent for recalculation of Mr Kopust’s age pension entitlement.

(sgd) Regina Perton

Member

SOCIAL SECURITY – age pension – assets test – reduced rate of payment ‑ property valuation disputed – encumbrance – unregistered agreement – decision varied

Social Security Act 1991 ss 11, 55, 1118, 1064

Re Woodhouse and Secretary, Department of Social Security (1987) 12 ALD 474

REASONS FOR DECISION

9 February 2006  Regina Perton, Member

1.      Mr Erich Kapust, an 83 year old widower, receives a reduced rate of age pension because of the value attributed to his assets.  His major asset, apart from his own home which is not part of the “assets test”, is a rental flat in Murrumbeena (the property).  Centrelink, which administers age pension on behalf of the Department of Family and Community Services, undertook a review of Mr Kapust’s pension in early 2004.  Centrelink determined that the property’s value was considerably higher than Mr Kapust’s estimate.  As a result, Mr Kapust’s age pension was reduced.  Since then, Mr Kapust has been in dispute with Centrelink over the property’s value.  Also in issue is whether a mortgage over the property, under which his two children advanced him moneys to purchase a car and meet other personal expenses, should further reduce the property’s asset value for age pension calculations.

2.      In March 2004 the property was valued at $250,000 by the Australian Valuation Office (AVO).  On the basis of that evaluation, Centrelink reduced Mr Kopust’s age pension.  In October 2004 the AVO valued the property at $235,000 and Centrelink accordingly increased Mr Kopust’s age pension.  On 7 February 2005, an authorised review officer (ARO) from Centrelink maintained that the value of the property was $235,000.  On 8 March 2005 the ARO also determined that the unregistered mortgage would not be taken into account in assessing the value of Mr Kapust’s assets.  The Social Security Appeals Tribunal (SSAT) affirmed the ARO’s decision on 17 June 2005.

3.      Mr Kapust applied to this Tribunal for review of the SSAT’s decision on 26 July 2005.

BACKGROUND

4.      In early 2004, Centrelink undertook a review of Mr Kapust’s entitlements to age pension.  Centrelink periodically undertakes such reviews of individual’s circumstances to check that the person is receiving the correct entitlement.  Mr Kapust completed the questionnaires Centrelink sent to him and ascribed a value of $100,000 to the property.

5.      On 13 April 2004, Centrelink wrote to Mr Kapust advising him that his age pension had been reduced because the value of his assets had increased.  Centrelink calculated a total asset value of $274,500, of which $250,000 was the value of the property.  Mr Kapust challenged the valuation and on 8 July 2004, he applied for reconsideration of the amount of age pension he was receiving. 

6.      On 15 July 2004, Centrelink sent Mr Kapust a fresh questionnaire to complete concerning his assets.  Mr Kapust was interstate, convalescing from illness and advised Centrelink that he would complete the form when he was able to return to Melbourne, as he had the necessary information there.  On 30 September 2004, he provided Centrelink with the fresh details.  Mr Kapust estimated the property’s value to be $170,000 as at April 2004.  He also indicated that there was a deed of mortgage on the property on which he owed $47,000.  The moneys had been used to purchase a car and for other personal needs.  He also provided Centrelink with an authority for a valuer to inspect the property. 

7.      On 8 October 2004, Centrelink wrote to Mr Kapust to inform him that the valuation of the Murrumbeena property had been reduced from $250,000 to $235,000 and that his age pension rate would therefore be increased.  Mr Kapust was concerned that the original decision maker (ODM) had not considered all relevant aspects of his pension entitlement.  On 15 November 2004, Centrelink received a letter from Mr Kapust in which he asked that the ODM undertake the balance of the review.   

8.      There was considerable communication between Centrelink and Mr Kapust over the next few months culminating in the ARO’s decision of 7 February 2005 and the subsequent SSAT decision of 17 June 2005.

9.      Since lodging his application with the Tribunal on 26 July 2005, Mr Kapust has obtained a sworn valuation from Mr Geoff Brien, a Certified Practising Valuer whose practice is based in the area.  Mr Brien, in a report prepared in November 2005, estimated the market value of the property, as at 30 September 2004, to be $217,500.  In a report prepared on 6 January 2006, Mr Mel Trevithick, Senior Valuer of the AVO, estimated the market value of the property, as at 7 October 2004, to be $235,000.  He indicated that the market had softened since then and that an appropriate estimate as at 20 October 2005 was $225,000.  

10.     The issues before the Tribunal are:

·the value of the property as at October 2004; and

·whether the unregistered mortgage agreement between Mr Kapust and his two children can be taken into account in reducing the value of Mr Kapust’s assets and hence, increasing his age pension payments.

EVIDENCE

11.     Two reports of the value of the property prepared by accredited valuers have been presented to the Tribunal.  Centrelink has provided a valuation prepared on 6 January 2006 by Mr Trevithick, Senior Valuer of the AVO.  The AVO report valued the property at $235,000 as at 7 October 2004, and $225,000 as at 20 October 2005.  Mr Kapust provided a report prepared in November 2005 by Mr Brien, a Certified Practising Valuer.  Mr Brien valued the property at $217,500 as at 30 September 2004.  Mr Kapust gave evidence that he has not had any prior or subsequent relationship with Mr Brien, picking his name from the telephone book as a valuer based in the vicinity of the property.

12.     In his oral and written evidence, Mr Kapust stated that he and his two children entered into an agreement that they would advance him much needed money for a new car and other necessary expenses.  Mr Kapust plans to leave the property to his children when he dies.  Mr Kapust and his two children prepared and signed a document on 16 March 1999, as follows:

Deed of Mortgage of personal estate‑
For Murrumbeena, Vic.
Vol…  Folio…

I, Erich Kapust of …Vic. hereby certify, that I give in Mortgage my above estate to the lenders and Joint Tenants in Equal Shares, Gisela Rankin of….& Walter Kapust of…, as collateral (security) for a loan of $100,000 (One Hundred Thousand Dollars).  The loan is a Mortgage Deed of Periodic Payments during my lifetime, and by mutual agreement.  Conditions of my Will and Testament dated 26 of August 1993 apply.

The Lenders, Gisela Rankin & Walter Kapust, will be the Custodians of the above estate Title until settlement of the Mortgage Deed.

…

13.     The second page of the document signed by all three indicated $47,000 had been advanced to Mr Kapust under the agreement.  There was an advance of $27,400 on 16 March 1999, $10,000 on 14 March 2003 and $10,000 on 2 April 2004.  Mr Kapust stated that another $5,000 has now been advanced.  Mr Kapust said that his children hold the Certificate of Title and hence the moneys advanced constitute a loan held against the property.  He does not know where they are keeping the Title.  Title searches indicate that there is no registered mortgage or caveat on the property.

14.     Mr Kapust said that the loan arrangement constituted an encumbrance or charge over the property.  He said he did not seek legal advice or individual financial advice on whether the documentation and lack of registration of the mortgage met Centrelink criteria.  He had the idea after reading an article in the Queensland press by a financial counsellor.  He was not concerned about the validity of the document at that time, as he was being assessed on his income rather than his assets.  This was because the property’s value was under the asset test limit for a single age pensioner.  It was only when the property was revalued in 2004 that the classification of the loan and documentation became an issue as the method of assessing his entitlements was changed from the income test to the asset test.

CONSIDERATION OF THE ISSUES

15. Sections 55 and 1064 of the Social Security Act 1991 (the Act) set out the way in which the rate of age pension is calculated. Module G of s 1064 specifically relates to the impact of a person’s assets on their rate of age pension. Persons whose assets are over a certain threshold may still receive age pension, but the rate is progressively reduced as the value of the assets increases, until a cut-off point, which Mr Kapust has not reached.

16.     Subsection 11(1) of the Act defines asset as follows:

"asset" means property or money (including property or money outside Australia)…

17.     Subsections 11(4) – 11(10) of the Act provide that a property owned by an age pension recipient does not constitute part of the assets test if the recipient lives in that property or is living away from the property in certain prescribed circumstances.  The property was purchased by Mr Kapust for investment purposes and therefore forms part of his assets test. 

18.     There is no statutory provision in the Act setting out the method to be used for valuing property.  In past cases, the Tribunal has adopted the net market value approach based on comparable sales and the “best use” to which the assets could be put (Re Woodhouse and Secretary, Department of Social Security (1987) 12 ALD 474). Mr Kapust did not dispute that methodology. The Tribunal is satisfied that it is appropriate to adopt the net market value approach which, to the Tribunal’s knowledge, is the standard mode of valuation adopted by valuers in assessing the value of property for statutory purposes.

19.     The AVO valuation and that by Mr Kapust’s valuer are not vastly different.   They both used the sales figures of four nearby, similar, properties although only one was common to both reports.  In November 2005, Mr Brien valued the property as at 30 September 2004 to be worth $217,500.  Mr Trevithick set a value of $235,000.  Both valuations are by accredited independent valuers using the same methodology.   Valuation is not an exact science, as a property is only worth what someone is prepared to pay for it at a particular time.  In the circumstances, the Tribunal is of the view that a midpoint between the two valuations appears to be an appropriate way for it to set the value in this particular case.  Taking into account Mr Brien’s assessment of $217,500 and Mr Trevithick’s of $235,000, the Tribunal finds that the value of the property as at October 2004 to be $226,250.  

20.     Mr Kapust felt that the $225,000 value set by the AVO for the property, as at October 2005, did not take account of the original state of the flat and the work needed on it.  However, he stated that the cost of an alternative valuation and his energy and health levels militated against challenging the later valuation.  Mr Kapust therefore indicated at the hearing that he was prepared to abide by that valuation.

21.     Mr Kapust submitted that the net value of the asset to him should be the figure upon which Centrelink should calculate the property’s value.  He urged that the mortgage document signed by him and his two children, under which they advanced him $47,000, should be taken into account.  Section 1121 of the Act sets out the effect of a charge or encumbrance on the value or assets:

1121. (1) If there is a charge or encumbrance over a particular asset of the person, the value of the asset, for the purposes of calculating the value of the person's assets for the purposes of this Act (other than Division 1B of Part 3.10), is to be reduced by the value of that charge or encumbrance.

…

1121. (2) Subsection (1) does not apply to a charge or encumbrance over an asset of a person 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 a person other than the person or the person's partner.

22.     The words charge and encumbrance are not defined in the Act.  In Centrelink’s Guide to Social Security Law, the following guidelines are provided:

1.1.E.105 Encumbrance

Usage

These definitions apply to all payments subject to assets testing provisions.

Usual types

The usual types of encumbrances are:

·a registered mortgage,

·a bank overdraft secured by lodgement of title deeds,

·accumulated interest,

·arrears of rates,

·other outstanding local government charges,

·amounts outstanding to water, sewerage or electricity authorities if the charges are recoverable by statute against the property,

·a solicitor's lien for costs and fees,

·a banker's lien for money advanced, and

·legally enforceable liens against stock and other farm assets

…

4.6.6.30 Encumbrances & Loans Against Assets

…

Unsecured loans

If a customer has an unsecured loan AND provides evidence that the loan was specifically obtained to purchase the asset, the outstanding amount of the loan IS deducted from the value of the asset.

…

23.     A family agreement between Mr Kapust and his children does not constitute an encumbrance for the purposes of the assets test.  The document prepared by Mr Kapust and his children is not a registered mortgage.  The moneys advanced by Mr Kapust’s children were not provided to enable purchase of the property.  The Tribunal is satisfied that the Departmental policy appropriately amplifies the provisions of s 1121 of the Act.  The Tribunal finds that the value of the property is not to be reduced by the amount advanced to Mr Kapust by his children, for the purposes of the assets test. 

DECISION

24.     The Tribunal varies the decision under review to the extent that the value of the property as at October 2004 is $226,250.  The decision is remitted to the respondent for recalculation of Mr Kopust’s age pension entitlement.  

I certify that the twenty-four [24] preceding paragraphs are a true copy of the reasons for the decision of:

Regina Perton, Member

(sgd)       Olympia Sarrinikolaou

Clerk

Date of hearing:  27 January 2006

Date of decision:  9 February 2006
Advocate for applicant:               Self-represented
Advocate for respondent:            Ms K. Paul, Centrelink