Keen and Defence Force Retirement and Death Benefits

[2004] AATA 391

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2004] AATA 391

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No N2001/1829

GENERAL ADMINISTRATIVE  DIVISON		)
Re		ROBERT KEEN

Applicant

And DEFENCE FORCE RETIREMENT & DEATH BENEFITS

Respondent

DECISION

Tribunal Dr J D Campbell, Member

Date19 April 2004

PlaceSydney

Decision

The decision under review is set aside and in substitution thereof the Tribunal determines that:

1)    an overpayment of $87,832.71 was paid to the Applicant; and

2)    such overpayment was the result of sole administrative error by the Respondent; and

3)     the Applicant received such overpayments in good faith;

4)    the amount of $87,832.71 is a debt owed by the Applicant to the Commonwealth;

5)    an amount of $42,599 be waived being taxation instalments either paid or should have been paid and for which the Applicant would not receive any financial recognition and/or benefit, in the event repayment occurred over many years;

6)    the amount to be repaid by the Applicant is $64,183, comprising $45,234 (net amount of overpayment) plus an amount of $18,949, being an amount calculated to offset the financial benefit received by the Applicant in the amended tax return of December 2003;

7)     that the amount of $64,183 be repaid in accordance with the following schedule:

(a)  a lump sum of $5,314 within 14 days of the date of this decision;

(b)   the remaining amount of $58,869, less any amount that has already been paid by way of periodic payments of $250 per fortnight, being deducted from invalidity benefits paid to the Applicant.

8)  that in the event that the Australian Taxation Office (ATO) issues a     further amended assessment in relation to financial year ending 30 June 1999, and that such assessment results in the Applicant having to pay money to the Australian Taxation Office, an amount equal to the amount repaid to the ATO is to be deducted from the gross amount nominated in this decision, with any deduction not to exceed $18,949, this amount equating to the financial benefit received.

[Sgd] Dr J D Campbell
  Member

CATCHWORDS

DEFENCE FORCE RETIREMENT AND DEATH BENEFITS - change in retirement medical classification - lump sum payment in arrears - overpayment lump sum payment in arrears - recovery overpayment decision set aside

Defence Force Retirement Benefits Act 1948

Defence Force Retirement and Death Benefits Act 1973, section 126

General Principles and Procedural Guidelines for the Recovery of Overpayments issued by ComSuper January 1998

REASONS FOR DECISION

19 April 2004 Dr J D Campbell, Member

1.Mr Robert Keen seeks a review of the decision of the Defence Force Retirement and Death Benefits Authority (“the Respondent”) dated 2 November 2001.  This decision determined that Mr Keen had been overpaid an amount of $87,832.71 in the financial year ending 30 June 1999 and that this amount was to be recovered by deduction from invalidity pension payable to Mr Keen of $350 per fortnight.

2.A hearing was held before the Tribunal in Orange on 17 September 2002.  This hearing was adjourned in order that further advice be obtained from the Respondent as to the nature and cause of the overpayment and that advice be obtained from the Australian Taxation Office on tax aspects of the lump sum in arrears and the tax treatment of the overpayment.  Such advice was forwarded to Mr Keen’s accountant by the Australian Taxation Office on 16 December 2003.  The advice was made available to the Tribunal by the Respondent’s solicitor on 13 January 2004.  Further advice was received from the Respondent’s solicitor on 20 January 2004 containing further clarification from the Australian Taxation Office.  The Respondent’s final submissions dated 27 February 2004 in this matter were received by the Tribunal in early March 2004, with a final directions hearing held by the Tribunal on 4 March 2004.

3.During the protracted period while awaiting advice from the Australian Taxation Office, agreement was reached between the two parties on 24 March 2003 to reduce the rate of repayment by Mr Keen to $250 per fortnight. A decision to this effect was issued by the Tribunal pursuant to section 42C of the Administrative Appeals Tribunal Act 1975 on 5 March 2003.  The Respondent states that this decision was received by them on 16 May 2003 and effected at the first available payday after that date, namely 29 May 2003.

background

4.Mr Keen was born on 3 February 1941 and became a contributor under the Defence Force Retirement Benefits Act 1948 (“the 1948 Act) on 6 February 1963.  On 5 February 1969 Mr Keen was discharged from the Army at the rank of private, upon termination of his engagement.

5.On 7 February 1997 the Respondent determined under subsection 51(6) of the 1948 Act that at the time of retirement, grounds existed on which Mr Keen could have been retired on the ground of invalidity or of physical or mental incapacity to perform his duties, and that for the purposes of the 1948 Act, he should be treated as if he had retired on that ground.

6.On 22 April 1997 a delegate of the Respondent determined under section 51 of the 1948 Act that the Applicant’s initial classification for incapacity was 5 per cent Class C with effect from 6 February 1969.

7.Mr Keen requested reconsideration of this decision on 18 June 1997.  On 11 September 1998 the Respondent, in a reconsideration decision determined that Mr Keen, pursuant to sections 51 and 53 of the 1948 Act, be classified 30 per cent Class B from 6 February 1969 and 60 per cent Class A from 1 April 1994.  Mr Keen was determined to have been suffering from post-traumatic stress disorder, this being the incapacity by reason of which Mr Keen had been treated, as if he had been retired on the ground of invalidity.

8.Following the decision of 11 September 1998 the Respondent made various payments to Mr Keen prior to 30 June 1999.  In summary, payments made to Mr Keen totalled $229,330.70, made up of $157,146.02 paid to his Calare Credit Union Account on 22 October 1998, $9,932.80 for 16 fortnightly invalidity payments between 23 October 1998 and 3 June 1999 and $63,329.69 paid to the Australian Taxation Office on account of Mr Keen’s gross payments and other payments.

9.On 9 July 1999 the Respondent informed Mr Keen that his entitlements under the decision only amounted to $103,823.78 and that he had been overpaid by a gross amount of $87,263.10 with the cause for the overpayment being a computer error.  Following formal advice of such a determination on 23 August 1999, Mr Keen’s solicitor sought reconsideration of this decision on 7 September 1999.

10.On 25 January 2000, the Respondent determined pursuant to subsection 126 (4) of the Defence Force Retirement and Death Benefits Act 1973 (“the 1973 Act”) that the full amount of $87,263.10 was recoverable by the authority from the Applicant.

11.On 19 April 2001 the Respondent advised the Applicant of a further overpayment of $569.61 arising from erroneous application of rate increases in the calculation of benefits, and a rounding provision in the 1948 Act.

12.The Tribunal notes that Mr Keen did advise the Respondent that he had spent all the money received in the purchase of a house together with expenditure on a car, holiday, furniture and carpets as well as paying off outstanding debts.  Further, the Tribunal notes that Mr Keen’s financial circumstances were made known to the Respondent at various times after the overpayment had been established.

13.On 2 November 2001 the Respondent varied the decision of 25 January 2000 to the extent that the amount recoverable was $87,832.71 and directed the amount to be recovered by fortnightly deductions of $350 from invalidity benefits payable to Mr Keen until the debt was recovered.

ISSUES

14.The relevant issues in this matter are:

(a)  whether there was an overpayment by the Respondent to the Applicant in respect of the Applicant’s entitlements under the Defence Force Retirements Benefit Act 1948;

(b) whether the decision of the Respondent to seek to recover the overpayment pursuant to subsection 126 (4) of the Defence Force Retirement and Death Benefits Act 1973 was correct in the light of all the circumstances of this matter.

15.For the reasons nominated later in this decision, the Tribunal concludes that Mr Keen was overpaid an amount of $87,832.71, which includes an amount of $32,175.90 paid to the Australian Taxation Office.  The Tribunal finds that such an overpayment arose solely from an administrative error by the Respondent and that Mr Keen received such monies in good faith.  Further, the Tribunal concludes that Mr Keen has effectively spent all monies prior to being made aware of the overpayment of $87,832.71.

16.As regards the issue of recovery, the Tribunal, having observed the process and outcome of Mr Keen’s Respondent’s sponsored approach to the Australian Taxation Office, concludes that recovery of the overpayment should be limited to an amount, namely $58,869 plus an amount of $5,314, this being a part offset amount by which Mr Keen has received a benefit as a consequence of the tax portion of the overpayment being applied in tax assessment notice of 4 December 2003.  The amount of $5,314 is to be paid by Mr Keen as a lump sum payment to the Respondent within 14 days of the date of this decision. The remaining amount is to be repaid at the fortnightly rate of $250, by way of deductions from invalidity benefits payable to Mr Keen until the debt is recovered.  Finally the Tribunal considers that an adjustment of $400 to recompense Mr Keen for the delay in implementation of the agreed deduction in fortnightly payments is not warranted in the circumstances.  It is evident to the Tribunal that Mr Keen was not disadvantaged by the delay in that payment of the $400 and if paid would have further prolonged the debt recovery process.  Further, as a consequence of the taxation review process sponsored by the Respondent, Mr Keen has been significantly advantaged by the lump sum rebate payment from the Australian Tax Office.

consideration and findings

17.The Tribunal, in preliminary observations, notes that this has been a long running dispute between the parties and that much has been said, with resulting inferences drawn by each party as to the conduct of the other party.  This unfortunately does not help in resolving the underlying issues.

18.It is evident to the Tribunal that there is little dispute between the parties as to the factual issues in this matter.

19.Following an examination of all the material, the Tribunal finds that the Respondent overpaid Mr Keen a gross sum of $87,832.71, which included an amount of $32,175.90 paid to the Australian Taxation Office.  Such an overpayment was made between 23 October 1998 and 3 June 1999, with almost all the overpayment occurring in October 1998.

20.Further, the Tribunal concludes that such overpayment was the direct consequence of sole administrative error by the Respondent.  The Tribunal notes that the Respondent admits to such an error.

21.In addressing issues of good faith, the Tribunal notes that Mr Keen purchased a car on 26 October 1998 ($32,000), a house in March 1999 ($146,000, mortgage $80,000), purchased furniture and carpets ($15-20,000) and repaid debts ($5000).  Such expenditures were made from lump sum monies received in October 1998 ($157,000), an amount which Mr Keen considered congruent with his expectations of receiving $160,000, although he readily admits that he did not consider issues of tax being withheld on the $160,000.  In all the circumstances the Tribunal concludes that Mr Keen received the $157,000 in good faith and further had expended near to all this amount by the time the Respondent realised that administrative error had occurred and notified Mr Keen of the overpayment on 9 July 1999.

22.In addressing the issue of receiving the overpayment the Tribunal notes the following:

a)the gross amount of overpayment is $87,832.71 of which $32,175.90 was paid to the Australian Taxation Office;

b)that as the overpayment occurred in a previous financial year and a group certificate had been issued in respect of that overpayment, the beneficiary is liable for the gross amount of overpayment (c21 – General Principles and Procedural Guidelines for the Recovery of overpayments – January 1998 (Guidelines));

c)that when a dispute as to whether or not a benefit was obtained from the taxation paid, the beneficiary or legal representative should be instructed to raise the matter direct with the Australian Taxation Office (c22 Guidelines);

d)that the Respondent sponsored Mr Keen’s accountant to make the necessary approaches to the Australian Taxation Office in May 2003, which resulted in the notice of amended assessment dated 4 December 2003, which was forwarded to Mr Keen’s accountant on 16 December 2003 by the Australian Taxation Office;

e)that the amended assessment of 4 December 2003 was concerned with financial year ending 30 June 1999 and clearly defined that:

(i) the Defence Force Retirement Fund and Death Benefit Scheme is not a “taxed superannuation fund” and is not eligible for a rebate – tax return amended from $21,387 to zero;

(ii) a lump sum in arrears rebate – tax return amended to include a rebate of $41,043.00;

(iii) that the amended assessment included amended taxable income of $143,433, which does not reflect an inclusion of any portion of the overpaid amount of $87,832.71;

(iv) that the tax on the taxable income of $143,433 was $58,015.51;

(v) that the total credits for group certificates was $63,329.69;

(vi) that the total credits for group certificates included tax withheld and paid to the Australian Taxation Office for the overpayment, namely $32,175.90, this being an amount deducted to meet the tax on the overpayment amount of $87,832.71;

(vii) that no rebate arising from the lump sum in arrears related to the $87,832.71 was considered as the amended taxable income of $143,433 clearly did not include any portion of that amount; and

(viii) that Mr Keen received a refund of $23,124.14.

23.It is evident to the Tribunal that there are a number of errors in the amended tax return of 4 December 2003.  Simply stated, the taxable income did not include an amount either in part or in whole of the overpayment of $87,832.71.  On the other hand it included an amount of $32,175.90 in total tax paid of $63,329.69. The Tribunal, recognising that the Australian Taxation Office and the Applicant are the only parties that are able to institute action to further amend an assessment, concludes that information provided was either incomplete and/or alternatively misunderstood.  It is the Tribunal’s view that either the total overpayment should have been included in the taxable income, making the total taxable income $231,266.00; alternatively, in terms of an analysis to understand the financial benefit received by Mr Keen as a consequence of the error in the amended returns, an amount of $32,175.90 should be deducted from the total tax paid of $63,329.69, leaving an amount of $31,153.79.

24.The Tribunal, in noting the two methods of analysis suggested, would wish to indicate that the following financial analysis is an analysis to assess the financial benefit Mr Keen has received as a consequence of the issues already referred to by the Tribunal.

25.In addressing the situation in which the $32,175.90 is excluded from the amended tax return, it is evident that the following would be the outcome:

Amended taxable income  $143,433.00

Tax on taxable income  $58,015.51DR

Understatement penalty and interest  $     135.85DR

Total credit for group certificates  $31,153.79CR

Tax offsets and other credits  $41,268.00CR

Balance of this assessment   $14,270.43CR

Balance of previous 1999 assessment  $29,790.33CR

Difference between this and previous assessment      $12,519.90DR

Interest on underpaid tax  $ 2,208.51DR

Amount owing   $14,728.41

26.The Tribunal further notes that as a consequence of the amended return of 4 December 2003, Mr Keen received a refund of $23,124.41.  It is evident to the Tribunal that this analysis reveals that Mr Keen has received a financial benefit of $37,852.82 as a consequence of the manner in which the amended tax return approached the problem.  The Tribunal, however, does not accept the above analysis as a true reflection of the actual events surrounding the overpayment.  It is the Tribunal’s view that a financial/taxation analysis must be undertaken that includes what actually happened, and this includes the overpayment of $87,832.71.

27.While it is clear to the Tribunal that the tax paid in relation to the overpayment has not been refunded to Mr Keen, it is evident that in the amended return of 4 December 2003, that it has been applied to remedy and resolve an underpayment of tax as regards the primary lump sum and the tax treatment thereof.  In so doing, as already stated in the earlier analysis a financial benefit has been derived by Mr Keen, with this being reflected in the tax refund of $23,124.14CR received by Mr Keen in the amended return of 4 December 2003.

28.In such circumstances, the Tribunal considers it appropriate, in assessing the amount of financial benefit gained by Mr Keen, as a consequence of the anomalies in the amended tax return, to carry the benefit analysis to include the overpayment amount of $87,833 in a further tax analysis, which includes additional tax of $42,599 to arrive at a total tax of $100,615 ($58,016 plus $42,599); to acknowledge that the tax credit from group certificates is $63,330; include a further amount of $26,492, being rebate for lump sum paid in arrears (86,068) and acknowledge the difference between the earlier assessment (1999) and the amended assessment of 4 December 2003 ($19,656).

29.In summary it would appear to the Tribunal that such analysis would result in the following:

Amended taxable income              $231,266.00

Tax on amended taxable income  $100,615.00DR

Understatement of income/penalty  $       135.85DR

Total credit for group certificates  $ 63,330.00CR

Tax offsets and other credits  $ 67,760.00CR

Balance of Assessment  $ 30,339.00CR

Balance of 1999 Assessment  $ 26,790.00CR

Differences between this and 1999 assessment           $   3549.00CR

Credit for overpaid tax  $     626.00CR

Notional refund  $   4175.00CR

30.The Tribunal, in noting that Mr Keen received a refund of $23,124.00 as a consequence of the amended tax return, considers that in the light of this analysis that that refund should have been only $4175.00, and as such Mr Keen has received a financial benefit of $18,949 as a consequence of the tax derived from the overpayment being applied to the assessment of the primary lump sum.

31.In progressing the analysis further, the Tribunal observes that the consequential benefit to Mr Keen has been arrived at after including tax of $42,599.00 in the analysis, with a net overpayment after tax of $45,234.00.

32.The Tribunal, in noting the many difficulties arising from both the overpayment and the failure to correctly tax either the initial lump sum payment or the lump sum overpayment, considers that the recovery of the overpayment to Mr Keen should encompass the nominal net overpayment after tax of $45,234.00 plus an amount of $18,949.00, this being the financial benefit that has occurred to Mr Keen as a consequence of the overpayment, while at the same time reflecting the tax monies derived from the overpayment being used to offset tax payments necessary for the primary lump sum. In total the financial benefit to Mr Keen amounts to $64,183.

33.In arriving at the decision to limit recovery to the net amount after tax of $45,234 plus the amount of $18,949.00, the Tribunal has given consideration to the following:

a)the repayment process, namely $250 per fortnight will result in a recovery process lasting many years, and if the recovery process involved a gross amount, Mr Keen would never be in a position to claim taxation recognition for such repayments. Further, such a process would result in a financial detriment to Mr Keen, as repayment would outweigh any financial benefit received by Mr Keen as a consequence of the tax treatment of the overpayment;

b)the totality of error in this matter resides with the Respondent, and thus has been further complicated by significant taxation issues involving incorrect payments of tax relating to the primary lump sum and the overpayment lump sum and amended assessment.  Further, all those events have involved an individual who is suffering from a particular medical condition and created particular stresses, which have made it more difficult for that individual to cope in his defined environment;

c)in defining the financial benefit of the overpayment to Mr Keen, and including that amount in the recovery process, any extended recovery process which involved the gross amount which would lead to Mr Keen suffering a financial detriment in the circumstances that any annual repayment including tax amounts would not create a realisable  tax offset for Mr Keen.  In summary a recovery process involving a gross amount paid over an extended period, would result in an individual repaying an amount for which no financial benefit has ever been received, and for which he would receive no recognition by way of a refund from the Australian Taxation Office.

34.In considering whether interest should be paid on the outstanding amount, namely $64,183.00, the Tribunal, reflecting upon paragraph C49 of the Overpayment Guidelines, concludes that no interest should be paid on this debt, the debt having arisen as a consequence of sole administrative error by the Respondent.

35.In addressing the issue of a repayment schedule relating to the outstanding debt of $64,183.00, the Tribunal observes that Mr Keen received a financial benefit, as a consequence of the amended taxation assessment in December 2003.  The Tribunal also has observed that this has been derived as a result of a particular application of overpayment monies (tax amounts), and that an amount of $5,314 of tax paid from the lump sum overpayment remained.  In the Tribunal’s view it is appropriate that this amount of $5,314 be paid by Mr Keen as a lump sum amount within two weeks of the date of this decision to partially offset the financial benefit accrued to Mr Keen as a result of the application of the overpayment tax to the primary tax requirement. This would then leave an outstanding amount of $58,869 to be recovered by way of fortnightly payments at $250 per fortnight, less any amount that has been received by way of the fortnightly repayment schedule which has been in progress since November 2001 and which has been varied as to the amount pursuant to the Tribunal’s decision in May 2003.

36.In arriving at the decision and the schedule of repayments, the Tribunal has endeavoured to encompass the somewhat anomalous construction inherent in the amended return of December 2003.  In this return it is evident that monies from the overpayment were included in the gross tax paid, but neither that money nor the remainder of the overpayment were included in the taxable income.  Such an anomaly clearly provided Mr Keen with a financial benefit, which has been quantified in a further analysis undertaken by the Tribunal.

37.The Tribunal, in noting paragraph C23 of the Recovery Guidelines and the attached schedule of determinations obtained within those Guidelines, concludes that it is appropriate to waive the recovery of the taxation instalments associated with the overpayment of $87,883.71 pursuant to section 126 (4) of the 1973 Act.  This then leaves the debt to be recovered of $45,234.00, plus the financial benefit of $18,949 received by Mr Keen as a consequence of the anomalous treatment of the overpayment by the Australian Taxation Office in December 2003.  The reasons for exercising the discretion to waive the taxation instalments associated with the overpayment have been detailed earlier in paragraph 31 of this decision.

38.The Tribunal, is mindful that the amended assessment issued on 4 December 2003 could be the subject of a further amended assessment, which by redressing the particular anomalies could create a situation where any financial benefit received by way of the amended assessment of 4 December 2003 is nullified. The Tribunal considers it appropriate to address the possibility to minimise any further stress for the Applicant. In such circumstances, and in accord with the Tribunal’s financial benefit evaluation, any monies owed by the Applicant as a result of a further amended assessment would be paid by the Applicant to the ATO, with an equal amount being deducted from the gross amount owing to the Respondent. Such deductions from the gross amount would cease, once the amount equals $18,949, this being the level of financial benefit received as a consequence of the amended tax return of 4 December 2003.

determination

39.The decision under review is set aside and in substitution thereof the Tribunal determines that:

1)an overpayment of $87,832.71 was paid to the Applicant; and

2)such overpayment was the result of sole administrative error by the Respondent; and

3)the Applicant received such overpayments in good faith;

4)the amount of $87,832.71 is a debt owed by the Applicant to the Commonwealth;

5)that an amount of $42,599 be waived being taxation instalments either paid or should have been paid and for which the Applicant would not receive any financial recognition and/or benefit, in the event repayment occurred over many years;

6)the amount to be repaid by the Applicant is $64,183, comprising $45,234 (net amount of overpayment) plus an amount of $18,949, being an amount calculated to offset the financial benefit received by the Applicant, in the amended tax return of December 2003;

7)that the amount of $64,183 be repaid in accordance with the following schedule:

(a) a lump sum of $5,314 within 14 days of the date of this decision; and

(b) the remaining amount of $58,869, less any amount that has already                 been paid by way of periodic payments of $250 per fortnight, being   deducted from invalidity benefits paid to the Applicant.

8)    that in the event that the Australian Taxation Office (ATO) issues a further amended assessment in relation to financial year ending 30    June 1999 and that such assessment results in the Applicant having to         pay money to the ATO, an amount equal to the amount repaid is to be    deducted from the gross amount nominated in the decision, with any            deduction not to exceed $18,949, this amount equating to the financial        benefit received.

I certify that the 39 preceding paragraphs are a true copy of the reasons for the decision herein of Dr J D Campbell, Member

Signed:         Neil Glaser

Associate

Date/s of Hearing  9 and 17 September 2002
Date of Decision  19 April 2004
Applicant  Self- represented
Solicitor for the Respondent     Ms K Arnold