Katholos and Secretary, Department of Social Services (Social services second review)
[2017] AATA 1293
•17 August 2017
Katholos and Secretary, Department of Social Services (Social services second review) [2017] AATA 1293 (17 August 2017)
Division:GENERAL DIVISION
File Number(s): 2016/4262
Re:Jim Katholos
APPLICANT
AndSecretary, Department of Social Services
RESPONDENT
File Number(s): 2016/4266
Re:Eleftheria Katholos
APPLICANT
AndSecretary, Department of Social Services
RESPONDENT
DECISION
Tribunal:Deputy President J W Constance
Date:17 August 2017
Place:Sydney
1.The decision of the Social Services and Child Support Division of the Tribunal made 27 July 2016 in these matters is set aside.
2.The two decision of the Authorised Review Officer made 20 March 2016 in these matters are set aside.
3.The matters are remitted to the Secretary, Department of Social Services for reconsideration in accordance with these Reasons for Decision.
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Deputy President J W Constance
CATCHWORDS
SOCIAL SECURITY – overpayment debt – social services payments – age pension – carer’s allowance – transfer of residential properties to sons – consideration of natural love and affection – whether loans – whether assets – decisions set aside and remitted for reconsideration
LEGISLATION
Social Security Act 1991 (Cth) ss 1122, 1223(1)
CASES
Trade Practices Commission v Email Ltd and Another (1980) 43 FLR 383; (1980) 31 ALR 53
REASONS FOR DECISION
Deputy President J W Constance
17 August 2017
INTRODUCTION
In 1998 Mr and Mrs Katholos transferred a residential property in suburban Sydney to each of their two sons. The consideration for the transfer in each case was expressed to be “natural love and affection”.
In 2003 Mr and Mrs Katholos and each son executed separate Deeds of Family Arrangement which acknowledged the receipt by each son in 1998 of a principal sum equal to the value of the property transferred to him.
In 2015, when the relationship between Mr and Mrs Katholos and their sons had unfortunately deteriorated Court proceedings were instituted by all parties concerning the nature of the legal obligations which had arisen under the deeds. In a negotiated settlement of these disputes the sons paid an agreed sum to their parents who in return withdrew caveats they had registered over the properties.
When Mrs Katholos informed Centrelink that she and her husband had received the payment the Secretary determined that in fact Mr and Mrs Katholos had made loans to their sons in 2003. He then decided that the loans were assets which should have been taken into account in determining the level of social services payments which had been paid to them previously. At the relevant time Mr Katholos was in receipt of the age pension and Mrs Katholos received a carer’s allowance. The Secretary raised overpayment debts totalling over $180,000.00 against Mr and Mrs Katholos.
The Social Services and Child Support Division of the Tribunal affirmed the Secretary’s decisions. Mr and Mrs Katholos have applied to the General Division to review the Tribunal’s earlier decision.
For the reasons which follow the decisions under review will be set aside and the matters will be remitted to the Secretary to be reconsidered in accordance with these Reasons for Decisions.
BACKGROUND
Unless otherwise stated the findings of fact in these reasons are based on the evidence of the Applicant, Mrs Katholos. I am satisfied that she was an honest witness who gave her evidence to the best of her knowledge and recollection. The Applicant, Mr Katholos, did not give evidence by reason of his ill-health.
Mr Katholos is 73 years old, Mrs Katholos is 67. They have two children, Richard, who was born in 1971, and Frank born in 1974. For clarity I will refer to the sons by their first names.
Mr and Mrs Katholos migrated to Australia in 1967 and 1957 respectively. They married after they came to Australia. They both worked hard and acquired a family home in which they continue to live. In 1982 they purchased a residential property in Bexley, a suburb of Sydney. They purchased a second residential property in another suburb, Earlwood, in 1985.
At the time the properties were purchased Mr and Mrs Katholos planned that the properties would eventually be given to Richard and Frank.
In February 1998 the Bexley property was transferred to Frank and the Earlwood property was transferred to Richard. Mrs Katholos prepared and lodged the transfer documents. She and Mr Katholos paid the stamp duty on each transfer. The properties were tenanted and managed by Mrs Katholos. The rent received was paid into an account which was used to maintain the properties and to which the sons had access for their own purposes.
Frank married in 1999. He separated from his wife 13 months later. He and his wife divorced. His former wife claimed an interest in the Bexley property.[1]
[1] Exhibit R1 p.114. Unless otherwise stated, the Exhibit R1 page number references refer to the section 37 documents in the 2016/4242 application or the supplementary section 37 documents relating to both applications.
In 2000 Mr and Mrs Katholos gave Frank $55,000 to purchase a villa which he rented out. Nothing was said at the time to suggest that this amount was repayable.
In 2001 Mr and Mrs Katholos paid for renovations to the Bexley property owned by Frank. He moved into the property in 2001 and lived there until 2006.
In about 2003 Mr and Mrs Katholos started to worry that the properties they had transferred to their sons may become the subject of claims by spouses in the event of further unsuccessful marriages. They were concerned to protect the properties and their sons from such claims. With this in mind they sought legal advice, which was to enter “family deeds” with their sons. They discussed this with Richard and Frank and told them that “if we have an interest in them [the properties] it would be harder for spouses to claim a share.”[2]
[2] Mrs Katholos’ evidence 10 May 2017.
On 30 September 2003 Mr and Mrs Katholos entered a “Deed of Family Arrangement” with each son.[3] The deeds were prepared by the Solicitor for Mr and Mrs Katholos. The Solicitor witnessed the signatures of all parties to the deeds. There is no evidence that either Richard or Frank sought separate legal advice before signing his deed.
[3] Exhibit R1 pp. 76 and 87.
The provisions of the deeds are not in dispute and are accurately summarised in the following two paragraphs taken from the Respondent’s Statement of Facts and Contentions dated 18 January 2017 and lodged in the Tribunal.
On 30 September 2003, Mr and Mrs Katholos entered into a “Deed of Family Arrangement” contract with [Richard] whereby (among other things):
(a)[Richard] acknowledged receipt of the principal sum of $439,390.00 on 20 February 1998;
(b)the purpose of the principal sum advanced at that time was for [Richard] to purchase the property at [Earlwood];
(c)[Richard] would pay interest on the principal sum at the rate of 10% per annum from 20 February 1998;
(d)[Richard] would make repayments to Mr and Mrs Katholos “as agreed between the parties” during the period of the loan (which ended on 20 February 2018);
(e)in any event, [Richard] would repay the principal sum and any accrued interest by 20 February 2018;
(f)Mr and Mrs Katholos were entitled to lodge a caveat at the Land Titles office “at any time” with respect to their interests under the deed;
(g)The loans were to be secured by an unregistered mortgage between Mr and Mrs Katholos as mortgagees and [Richard] as mortgagor over [Richard’s] property at [Earlwood]; and
(h)The parties acknowledged and agreed that Mr and Mrs Katholos had provided the purchase price for the property at [Earlwood] together with incidental costs;
On 30 September 2003, Mr and Mrs Katholos also entered into a separate “Deed of Family Arrangement” contract with [Frank] whereby (among other things):
(a)[Frank] acknowledged receipt of the principal sum of $313,990.00 on 20 February 1998;
(b)the purpose of the principal sum advanced at that time was for [Frank] to purchase the property at [Bexley];
(c)[Frank] would pay interest on the principal sum at the rate of 10% per annum from 20 February 1998;
(d)[Frank] would make repayments to Mr and Mrs Katholos “as agreed between the parties” during the period of the loan (which ended on 20 February 2018);
(e)in any event, [Frank] would repay the principal sum and any accrued interest by 20 February 2018;
(f)Mr and Mrs Katholos were entitled to lodge a caveat at the Land Titles office “at any time” with respect to their interests under the deed;
(g)The loans were to be secured by an unregistered mortgage between Mr and Mrs Katholos as mortgagees and [Frank] as mortgagor over [Frank’s] property at [Bexley]; and
(h)The parties acknowledged and agreed that Mr and Mrs Katholos had provided the purchase price for the property at [Bexley] together with incidental costs;[4]
[4] Respondent’s Statement of Facts and Contentions paras.3.4 and 3.8.
On the day the deeds were executed Mr and Mrs Katholos and Richard executed a mortgage whereby Richard mortgaged his interest in the Earlwood property to his parents.[5] Frank executed a mortgage of his interest in the Bexley property to his parents on the same day.[6] All signatures were witnessed by the Solicitor for Mr and Mrs Katholos. There is no evidence to suggest that either Richard or Frank sought separate legal advice before signing the mortgage documents.
[5] Exhibit R1 p.73.
[6] Exhibit R1 p.93.
Mr and Mrs Katholos then lodged a caveat over each property. At the time they told their sons that they would never require payment of the amounts referred to in the deeds and did not intend for interest to be paid. Between 2003 and 2015 neither son made any payments in respect of the relevant deed or mortgage.
Richard married in 2004. Mr and Mrs Katholos paid for renovations of the property before Richard and his wife moved in in 2005. They have lived in the home ever since.
The villa purchased by Frank in 2000 was sold by him in 2006 when he remarried.
In 2006 or 2007 Richard asked his parents to remove the caveat on the Earlwood property as he wished to use it as security for a loan. Mrs Katholos refused, telling him that the caveat was in place for his own protection.
By letter dated 27 June 2014 Richard’s Solicitors demanded the removal of the caveat and advised that if this was not done he would make an application to lapse the caveat.[7]
[7] Exhibit R1 p.324.
On 23 July 2014 the Solicitors for Mr and Mrs Katholos advised Richard’s Solicitor that Mr and Mrs Katholos refused to withdraw the caveat.[8]
[8] Exhibit R1 p.326.
On 28 November 2014 Mr and Mrs Katholos commenced proceedings in the Supreme Court of New South Wales against Richard seeking an order extending the operation of the caveat on the title of the Earlwood property. This was followed by a number of actions and cross-claims in the Court, including claims by Richard and Frank for declarations that the Deeds of Family Arrangement and the mortgages signed by them were void. I will refer to these proceedings in more detail later in these Reasons.
On 3 September 2015 Mr and Mrs Katholos and their sons attended a mediation of all the Supreme Court proceedings. As a result of that mediation Richard and Frank agreed to pay their parents $410,000. Mr and Mrs Katholos agreed to lift the caveats on both properties.
Mrs Katholos informed Centrelink of this settlement on 9 September 2014. At the time she stated that she had won “against children to repay funds due …… from previous assistance.” [9]
[9] Exhibit R1 p.294 (section 37 documents in the 2016/4266 application).
A letter to Mr and Mrs Katholos from their Solicitors following the settlement included the following paragraph:
We confirm that there were a total of three loans evidenced by mortgages and Deeds of Family Arrangement dated 30 September 2003, such mortgages having been protected by registered caveats on your sons’ properties…..[10]
[10] Exhibit R1 p.86.
On 3 November 2015 the Department decided that the amounts referred to in the two Deeds of Family Arrangement (totalling $753,380) were loans made by Mr and Mrs Katholos on 3 September 2003, being the date of the deeds. It was then determined that the loans were assets which should have been taken into account in calculating Mr Katholos’ pension and Mrs Katholos’ carer’s payment.
The overpayments were calculated to be $91,127.60 to Mr Katholos and $90,367.55 to Mrs Katholos. If the Secretary is found to be correct in determining that the amounts referred to were loans, Mr and Mrs Katholos do not dispute the calculation of the debts claimed.
These decisions were affirmed by the Social Services and Child Support Division of this Tribunal. Mr and Mrs Katholos have applied to the General Division of the Tribunal to review its earlier decision.
LEGISLATION
Section 1122 of the Social Security Act 1991 (Cth) provides:
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.
Subsection 1223(1) provides:
Subject to this section, if:
(a)a social security payment is made; and
(b)a person who obtains the benefit of the payment was not entitled for any reason to obtain that benefit;
the amount of the payment is a debt due to the Commonwealth by the person and the debt is taken to arise when the person obtains the benefit of the payment.
ISSUES
The only issue between the parties is whether the amounts of $439,390.00 and $313,990.00, referred to in the deeds between Mr and Mrs Katholos and Richard and Frank respectively, were loaned by Mr and Mrs Katholos in accordance with section 1122 of the Social Security Act 1991.
FURTHER EVIDENCE AND FINDINGS OF FACT
I am satisfied of the facts stated in the following paragraphs 35 to 45 inclusive on the balance of probabilities. Unless otherwise stated the findings are based on the evidence of Mrs Katholos.
The transfers of the properties in 1998 were by way of gift to Richard and Frank. From the time the properties were purchased it was the intention of both Mr and Mrs Katholos that ultimately they would be for the benefit of their two sons. At the time the transfers were made Mr and Mrs Katholos were concerned about their future land tax liability in respect of the properties and the income tax liability arising from the receipt of the rental income. I am satisfied that this accounted for the timing of the transfers.
Mrs Katholos prepared and lodged the transfers, each of which was expressed to be in consideration of “natural love and affection”. All signatures to the transfers were witnessed by a member of the Katholos family.[11]
[11] Exhibit R1 p.115 and 116.
The stamp duty on each transfer (paid by Mr and Mrs Katholos) was calculated on valuations of the properties obtained at the time.
When the Deeds of Family Arrangement were entered into in 2003 Mr and Mrs Katholos believed that the existence of the deeds would make it more difficult for a spouse of either son to claim a share of his property because “they [the spouse] would have to sue us”.[12]
[12] Evidence of Mrs Katholos 10 May 2017.
Mr and Mrs Katholos and both sons together sought advice from the same solicitor prior to executing the deeds. He told them he would get advice from a barrister.
Although Mr and Mrs Katholos were aware of the provisions in the deeds for the payment of the principal sums and interest,[13] it was never their intention to seek payment of these amounts. At no time did either son offer to make any such payment.
[13] Exhibit R1 pp.77 and 88.
The repayment date of 20 February 2018 was inserted as the parties were told by their Solicitor that it was necessary to insert such a date in the deeds.
The litigation between the parties in the Supreme Court of New South Wales comprised the following claims:
·on 28 November 2014 Mr and Mrs Katholos filed a Summons against Richard seeking an order “extending the operation” of the caveat over the Earlwood property;[14]
·on 5 March 2015 a Further Amended Summons was filed on behalf of Mr and Mrs Katholos seeking a declaration that the Earlwood property was subject to the mortgage executed by Richard or, alternatively, that the property was held in trust for Mr and Mrs Katholos;[15]
·on 12 March 2015 Frank filed a Summons against Mr and Mrs Katholos seeking declarations that the Deed of Family Arrangement and the mortgage signed by him were void and an order for the withdrawal of the caveat over the Bexley property;[16]
·on 14 March 2015 Richard filed a First Cross-Claim and Cross-Summons seeking declarations that the Deed of Family Arrangement and the Mortgage signed by him were void and an order for the withdrawal of the caveat over the Earlwood property.[17]
[14] Exhibit R1 p.336.
[15] Exhibit R1 p.344.
[16] Exhibit R1 p.330.
[17] Exhibit R1 p.348.
Mr and Mrs Katholos made the claims in the Court documents on legal advice. They commenced action in the Supreme Court in response to the advice that an application to have the caveat lapse was about to be made.
By the time of the mediation in December 2015 Mr and Mrs Katholos had decided that they wanted some payment from their sons “to get some money in the Bank after all the costs” they had incurred. Their legal costs were in excess of $100,000. In addition Mrs Katholos was very upset by other family issues involving Frank’s treatment of Mr Katholos’ brother who had died recently and who had been living with them for many years.[18]
[18] Mrs Katholos’ evidence 10 May 2017.
CONSIDERATION
The Secretary contends as follows:
The Secretary contends that:
(a)the written loan instruments dated 30 September 2003 with [Richard] and [Frank] were legally enforceable loan contracts at common law during the relevant period;
(b)in particular:
(i) the loan instruments were deeds at common law during the relevant period and therefore did not need consideration to support the legal efficacy of the loan instruments as contracts;
(ii) the parties to the loan instruments intended their respective loan obligations to be honoured and enforceable during the relevant period; and
(iii) the loan instruments were not a sham at law (if that is what Mr and Mrs Katholos are contending);
(c)the principal sums in the loan instruments ($439,390.00 for [Richard] and $313,990.00 for [Frank]) should be characterised as “loans” for the purposes of section 1122 of the SocialSecurityAct;
(d)those principal sums should be counted for the purpose of calculating the rate of Mr and Mrs Katholos’ DSP, age pension and carer payment respectively under section 1064(1) of the SocialSecurityAct;
(e)the DSP and age pension, and carer payment overpayments of $91,127.60 and $90,367.55 respectively over the relevant period were correctly calculated as debts to the Commonwealth; and
(f)neither the whole nor part of the debts should be written off or waived.
The principal sums in the loan instruments were not gifts at law, and the loan instruments were not a sham.[19]
[19] Respondent’s Statement of Facts and Contentions paras. 5.1 and 5.2.
In the Respondent’s Statement of Facts and Contentions the Solicitor for the Secretary set out in considerable detail the legal principles applicable in this application and has cited the relevant authorities in support of those principles. I appreciate the attention which has been given to the presentation of this material.
I agree with the Secretary’s statement of the applicable law. However I cannot agree with his application of the law to the facts of the applications before me.
For the purposes of these applications I agree with the following propositions put forward on behalf of the Secretary:
·A loan, for the purpose of deciding the value of Mr and Mrs Katholos’ assets under the Social Security Act, is a contractual agreement governed by the common law of contract and any express agreement between the parties.[20]
[20] Respondent’s Statement of Facts and Contentions para.8.1.
·the fact of the existence of the two Deeds of Family Arrangement “is …… persuasive but not conclusive in relation to whether the transactions documented by the Deeds of Family Arrangement constituted loans for the purposes of the Social Security Act.” [21]
·The legal requirements for the formation of a contract apply to contracts of all types, including a loan contract. The four principal requirements are:
(a)agreement (express or implied);
(b)consideration;
(c)an intention to create legal relations (the most important element); and
(d)certainty of terms.[22]
·…a contract should not lightly be implied. Moreover, no contract can be inferred from conduct in a case where the third essential element of intention is not satisfied.[23]
·Transactions between family members are often not characterised by the courts as loans because of the informal nature of the arrangement and the propensity of family members to forgive the liabilities of other family members to whom money is given. This is indicative of an absence of intention to create legal relations between close family members, at the time.[24]
[21] Respondent’s Statement of Facts and Contentions para.8.2.
[22] Respondent’s Statement of Facts and Contentions para.8.3.
[23] Respondent’s Statement of Facts and Contentions para.8.9.
[24] Respondent’s Statement of Facts and Contentions para.8.10.
It is clear that none of the parties intended to create a legal relationship of lender and borrower when the properties were transferred in 1998. The transfers disclosed the consideration as “natural love and affection”.[25] There was no monetary consideration shown which could have formed the basis of a loan agreement. The transactions were the result of family relationships and gave effect to the long-held intentions of both Mr and Mrs Katholos that their sons would be the ultimate beneficiaries of the properties.
[25] Exhibit R1 pp.115 and 116.
I am satisfied that the documents entered into by the parties on 30 September 2003 do not evidence a change in the intention of any of the parties. In fact, the evidence clearly points to no party intending to enter into a loan agreement at that time.
The Deeds of Family Arrangement acknowledge receipt of the principal sum and the obligation to pay interest from 20 February 1998, being the date of the transfers. This is inconsistent with the Secretary’s argument that loans were created at the time the deeds were executed. On the other hand it is consistent with the intention of the parties to create legal obligations between them which they believed would make it more difficult for a spouse of either son to claim an interest in the relevant property in the event of a failed marriage.
The conduct of the parties, both after the property transfers and after the execution of the deeds, supports the conclusion that there was no intention to enter contracts of loan. Neither son paid, or offered to pay, interest and neither paid the legal costs for which he was responsible under the relevant deed. Mr and Mrs Katholos did not seek payment of interest and all costs were paid by them without demand on their sons.
The payment of $55,000 to Frank in 2000 was expressed to be a gift. He did not repay this sum, or any part of it, when he sold the villa in 2006.
Although Richard requested the removal of the caveat from his property in about 2007 he did not take action to try to force this to be done until 2014, some seven years later. In that time he did not offer to make any payment to his parents nor was payment requested. This is consistent with the caveat being in place to protect Richard from a claim rather than being to ensure repayment of a principal sum and interest.
The Secretary argues that the commencement of proceedings in the Supreme Court by Mr and Mrs Katholos in 2014 is evidence of their intention in 2003 to enter loan agreements with their sons. I do not agree.
Mr and Mrs Katholos commenced the proceedings in response to a threat by Richard to institute action to have the caveat over the Earlwood property lapsed. The law required them to obtain a Supreme Court order to prevent this.
I have taken into account that in the Further Amended Summons Mr and Mrs Katholos sought declarations upholding the validity of the deed and mortgage entered into with Richard or alternatively a declaration of trust in their favour. I have found that they were still seeking to have the property protected from adverse claims rather than to have the terms of payment of principal and/or interest enforced.
I have taken into account also that Mr and Mrs Katholos each swore an affidavit verifying the grounds of defence to the cross-claim filed by Richard.[26] The defence alleged that the deed and the associated mortgage were valid.[27] However this does not show an intention to enter a loan agreement. Rather it is consistent with Mrs Katholos’ evidence that she and Mr Katholos regarded the documents as “valid to protect the children”. I accept her evidence that “there was never any intention to act on the paper work …… we acted because they tried to take the caveats off”.[28]
[26] Exhibit R1 pp.353 and 354.
[27] Exhibit R1 p.352.
[28] Mrs Katholos’ evidence 10 May 2017.
Mr and Mrs Katholos only sought payment from their sons when the proceedings went to mediation in December 2015. I am satisfied that at that time they were seeking payment to recover costs which they had incurred by reason of the actions of their sons and for other reasons not associated with the transactions which occurred in 2003. I make this finding on the basis of the evidence of Mrs Katholos to which I have already referred.
Correspondence from Mr and Mrs Katholos’ Solicitors does refer to loans when reporting the results of the mediation to their clients. However this does not outweigh the other evidence as to the intentions of the parties.
The Secretary argued that Richard and Frank appeared to have repudiated the loan contracts which precipitated the litigation. I do not accept this argument. Rather than any suggestion of repudiation both sons claimed that the documents signed by them were void, in effect that the documents had never had any legal effect. One of the claimed reasons for this was that there had been no money lent under the documents.[29]
[29] Exhibit R1 pp. 331 and 349.
Although dealing with different legislation, the following statement of the law by Lockhart J in Trade Practices Commission v Email Ltd and Another[30] is apt:
For there to be an arrangement or understanding there must be a meeting of the minds of those said to be parties to the arrangement or understanding. In some cases this may be inferred from circumstantial evidence. There must be a consensus as to what is to be done and not just a mere hope as to what might be done or happen. Independently held beliefs are not enough.
[30] (1980) 43 FLR 383; (1980) 31 ALR 53 at 56.
Even if the conduct of Mr and Mrs Katholos in 2014 and 2015 was evidence of an intention to enter into loan agreements (which I have found it was not), there is no evidence that either son ever regarded his transaction as an agreement for loan. In fact the evidence strongly supports the conclusion that they were of the view that neither of them ever entered an agreement for loan with their parents.
CONCLUSION
The decision of the Social Services and Child Support Division of the Tribunal made 27 July 2016 in these matters will be set aside.
The two decision of the Authorised Review Officer made 20 March 2016 in these matters will be set aside.
The matters will be remitted to the Secretary, Department of Social Services for reconsideration in accordance with these Reasons for Decision.
I certify that the preceding 67 (sixty -seven) paragraphs are a true copy of the reasons for the decision herein of Deputy President J W Constance
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Associate
Dated: 17 August 2017
Date(s) of hearing: 10 May 2017 Applicant (Eleftheria Katholos): In person Advocate for the Applicant
(Jim Katholos):E Katholos
Solicitors for the Respondent:
S Thompson, Department of Human Services
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