Kisielewicz and Secretary, Department of Social Services (Social services second review)
[2021] AATA 2277
•14 July 2021
Kisielewicz and Secretary, Department of Social Services (Social services second review) [2021] AATA 2277 (14 July 2021)
Division:GENERAL DIVISION
File Number(s): 2019/1521
Re:Roman Kisielewicz
APPLICANT
AndSecretary, Department of Social Services
RESPONDENT
DECISION
Tribunal:Emeritus Professor P A Fairall, Senior Member
Date:14 July 2021
Place:Sydney
The reviewable decision is set aside and remitted to the respondent for reconsideration in accordance with a finding that the gifted amount is $230,501.38.
..................................[sgd].........................................
Emeritus Professor P A Fairall, Senior Member
CATCHWORDS
SOCIAL SECURITY – aged pension – asset test – gifting provisions – valuation of share in unit trust – reviewable decision set aside and remitted
LEGISLATION
Social Security Act 1991 (Cth) ss 1064, 1126AC
CASES
Kirkovski v Secretary, Department of Family and Community Services [2004] FCA 790
Spencer v The Commonwealth of Australia [1907] HCA 82; (1907) 5 CLR 418
SECONDARY MATERIALS
Social Security Guide (Cth) (Version 1.283 – Released 1 July 2021)
REASONS FOR DECISION
Emeritus Professor P A Fairall, Senior Member
14 July 2021
INTRODUCTION
The age pension (‘AP’) under the Social Security Act 1991 (Cth) (‘Social Security Act’) is subject to an asset test and an income test. In applying the asset test, Centrelink is required to take account of any assets disposed of by a claimant within the previous period of five years, whether individually or as a member of a couple.[1]
[1] Section 1126AC relates to disposal of assets in income year (members of couples).
The applicant was in receipt of AP since 20 February 2015.[2] He and his wife have been married for many years, and are treated as pooling their resources (income and assets) and sharing them on a 50/50 basis.[3]
[2] T12/241.
[3] Section 1064-A2.
They owned approximately half the shares[4] in a private trust (‘the Trust’), the remaining shares being owned by their long-term business partners, Mr and Mrs Harkness. In April 2016, they sold their interest in the Trust to Mr and Mrs Harkness for $200,000, providing a loan facility to fund the acquisition.[5]
[4] The shares were held by Perfab Property Pty Ltd as trustee for the Perfab Unit Trust.
[5] T4/93, 100, 105.
Services Australia (‘Centrelink’) assessed the value of this disposal at $525,954.00, with a commensurate gifting amount of $325,954.00 ($525,954 - $200,000). This assessment was based on information provided by the applicant and by his accountant, Mr Sexton.
On 12 February 2019, the Social Services and Child Support Division of the Administrative Appeal Tribunal (‘AAT1’) confirmed this assessment (‘reviewable decision’).
An application for review of the AAT1 decision was heard by the Tribunal on 25 March 2021. Mr Justice of counsel appeared for the applicant. Dr Thompson represented Centrelink.
The disposition of the present application requires the Tribunal to determine the value of the applicant and his wife’s interest in the Trust at the time of sale.
BACKGROUND
The applicant and Mr Harkness operated Perfab Pty Ltd (‘Perfab’), a prefabrication business in Tomago, of which they and their respective wives were directors. The business operated from two industrial units (No. 18 and No. 20 Martin Drive) leased from the Trust. The business fell into difficulty and Perfab was wound up in 2015, with substantial debts owing to the Commonwealth Bank (the Bank).
The Bank held a variety of securities including a first registered mortgage over the industrial properties, a mortgage over the Harkness’ residential property, a first registered equitable mortgage over the Trust, and personal guarantees from each of the directors. However, the Bank did not hold a registered mortgage over the applicant’s residential property.
On 21 January 2016, the Bank issued a claim against Perfab (in liquidation) for $1,211,843.32.[6] It was against the background that the applicant and his wife sold their share in the Trust for $200,000 to Mr and Mrs Harkness.
[6] T10/192.
Mr Sexton, an accountant to each of the directors, gave evidence at the first tier review (AAT1) that the total amount owing to the Bank was in fact a larger sum - $1,613.000.00. He could not locate any letter of claim from the Bank itemising the larger amount, but the AAT1 accepted this figure.[7]
[7] AAT1, [16]: T2/7.
Mr Sexton gave evidence to this Tribunal that he wrote to Centrelink in May 2018, stating that at the time of the transaction, the applicant and his wife’s interest in the Trust was “worth nil value”.[8] He told the Tribunal that the amount of $200,000 was a “fair value”[9] and that the advice he gave in April 2016 to the four interested parties was sound. Under cross examination, he said:
What advice did you give about the $200,000?---That it was a fair value.
What basis did you have for saying that $200,000 was a fair value for the units that were transferred?---Well, if you look at the balance sheet prior to the exchange of the units, which your client doesn’t take into account the written down values. In accounting world, you carry the figures at cost, or their current market value if it’s below cost. I believe the balance sheet had a negative value.[10]
[8] T7/123, 124.
[9] Transcript, 62.
[10] Transcript, 48.
He described $200,000 as a “generous figure”, because there were “no other buyers for units in a privately held unit trust”.[11]
[11] Transcript, 58.
The notion that the risk of foreclosure by the Bank was real and could only be met by finding a buyer of the intangible shares in the private Trust, rather than by selling the real estate owned by the Trust, permeated Mr Sexton’s thinking. It was a false analysis for two reasons. Fundamentally, it was the net market value of the industrial units that determined the value of the Trust, and the task was to find buyers for those industrial units, which were far from worthless. Secondly, and to the extent that it was relevant, it was simply not true that there were no “other buyers” for the shares in the Trust. The applicant’s business partner and his business partner’s wife were willing buyers, and did in fact purchase the shares. In doing so, they received not only the nominal shares in the Trust, but the assets of the Trust, including the valuable industrial units. The assets of the Trust were far in excess of the Trust’s liabilities. And to facilitate the purchase, they were assisted by a loan facility provided by the applicant, which amounted in effect to a deferred payment plan.[12] I note in passing that the applicant told the Tribunal that he had no recollection of entering into this loan facility agreement.[13] There is however a copy of the signed agreement in the materials before the Tribunal, and a reference to a $200,000 loan with $130,000 outstanding in the Income and Assets Declaration of 29 March 2017 made by the applicant.[14]
[12] T4/106-107.
[13] Transcript, 19, 23.
[14] T4/93, 100, 105.
The applicant said in evidence that he was worried about the personal guarantee he and his wife had given to the Bank. He believed that his house would be safe if he sold his share in the Trust to Mr and Mrs Harkness. He wanted to walk down the street knowing that he had paid all his debts. He was examined about the $200,000 amount, and said:
Have you any idea how the $200,000 was arrived at?‑‑‑Yes, we went through all the money that we were owed – we owed people. Right. And at the finish of it, it was less than 200,000.
Who is “we”? Is the company or you and Mrs Kisielewicz or someone else?‑‑‑No. Me, Mr Harkness and Mark, Mr Sexton.
When you say we went through all the money we owed to people?‑‑‑We owed to – all the money that was owed to, yes, different people, different companies, whatever, and what was left was less than 200,000. And Ray said, “No, no, no, that’s no good.” He said, “Would you be happy with 200,000?” And I thought, well, hang on, this is a lot better than what really is left in there, so I accepted it.[15]
[15] Transcript, 96.
And later he said:
Mr Sexton was there?‑‑‑Yes.
He was advising all the parties around the table, wasn’t he?‑‑‑Yes.
Whose idea was it that you would land on $200,000 for the value of your units in the company trust?‑‑‑Like I said, we got an amount of money that, well we owed people. So that was less than what the 200,000 was, right, which was left and Ray said to me, mate, he said that’s no good to you. He said what if he make it 200,000, would you happy be with that? I said yes mate, yes. I would.
Mr Sexton give advice to either of Mr Harkness or yourself at this stage?‑‑‑No, Mr Sexton stayed out of it. He said that’s up to me and Ray.[16]
[16] Transcript, 98.
He was asked whether he agreed with the assessment by Mr Sexton that the Trust was worthless:
All right. I’ll just quickly finish off with Mr Sexton’s letter… he’s saying, in 27 April 2016 at the time of accepting the offer of $200,000 your interest in the trust was worth nil value. Do you agree with that from your perspective as the seller of the units?‑‑‑The way that things were going and the way that our finances were, there was nothing worth anything.
Why did you sell for $200,000 if you thought it was nil?‑‑‑Well because that’s what I was offered and I wasn’t forced to take it. If I’m happy with that would I take it and I said of course I am. Ray – look, Ray and I have been partners for a long time and we were – not childhood friends but teenage friends and we did a lot of things together. We went fishing, shooting, skiing. Everything we did, we did together and I thought it was good for him to offer me that otherwise I’d end up with nothing.
What were you going to get out of this offer? That is by selling your units in the unit trust for $200,000. Do you think it would have got you off the hook with the Commonwealth Bank?‑‑‑Yes.
Why?‑‑‑Well he went and reorganised everything after I said yes. He reorganised the loans, he reorganised everything.
Sorry, this is Mr Sexton you’re talking about?‑‑‑Mr Harkness.
Mr Harkness, okay. I beg your pardon?‑‑‑Mr Sexton worked with him.
Yes. What did he reorganise?‑‑‑All the loans whatever else. So he was looking after the properties.
Were you released from your person guarantees to the Commonwealth Bank?‑‑‑Look, I don’t know. You’ve asked me that once already.[17]
[17] Transcript, 103-104.
ASSESSING THE TRUST’S VALUE
According to Financial Statements prepared by Mr Sexton and provided to the Tribunal, the Trust was in a strong position in 2014 with a net asset value of $1.4 million, was in a slightly weaker position in 2015, but was worthless in 2016. Assets had declined in value by 20% and total liabilities had increased by almost $1 million.
In 2015, the Trust embarked on an asset sale venture, and attempted to sell the industrial units. This resulted in a number of inquiries, five inspections and a formal offer for both units at $2,550,000 excluding GST. This sale did not proceed.[18]
[18] T17/365.
In calculating the value of the Trust at the time of sale, the AAT1 recreated the Trust’s balance sheet as follows:
18 and 20 Martin Drive Tomago $2,550,000
Accrued Depreciation ($0)
Plant and Equipment at-cost $491,223.00
Accrued Depreciation ($307,844.00)
Office equipment at-cost $32,216.27
Accrued Depreciation ($24,687.72)
Cheque Account $32,992.93
Gross assets $2,773,900.48GST Provision $8,166.06
Secured Loans $1,613,000.00
Harkness Loan $100,824.12
Gross Liabilities $1,721,990.18Net assets $1,051,910.30
I note that there is little detail before the Tribunal as to how the Gross Liability figure of $1,721,990.18 was arrived at. There were for example, no details about the Harkness loan for $100,824.12, or the increase of approximately $400,000 owed to the Bank over the amount showed in the previous Balance Sheets for 2015 and 2014 (see Appendix A).
The Trust’s Balance Sheet dated 27 April 2016 also records an additional liability in the form of a loan to Mr and Mrs Harkness for $100,824.12, and an amount for GST provision, making total liabilities of $1,721,990.18.[19]
[19] AAT1, [12]: T2/6.
In the present proceedings, the respondent accepted that the Trust’s gross liabilities as at 27 April 2016 were $1,721,990.18.[20] The AAT1 also accepted this figure as correctly representing the total liability of the Trust at the time of the transfer. I accept that this is the best estimate of the total liabilities of the Trust at the time of the transfer.
[20] Respondent’s Statement of Facts, Issues and Contentions, 7.7.
I therefore find that in April 2016 the total liabilities of the Trust amounted to $1,721,990.18.
VALUATION OF ASSETS OWNED BY THE TRUST
It is axiomatic that the value of a private trust at a particular time is determined by the net value of the assets beneficially owned by the trust, making appropriate allowance for liabilities. In this case the Trust owned two industrial units, each subject to a first registered mortgage to the Bank. A crucial question relates to the value of the industrial properties owned by the Trust as at April 2016.
The Social Security Act is silent as to the method to be used in the valuation of assets, but there is clear authority for the proposition that it is the net market value at a particular point in time that is relevant.[21] The net market value is the value that a willing (but not desperate) buyer would need to pay, assuming the owner is desirous of selling, but does not need to do so.
[21] See also Kirkovski v Secretary, Department of Family and Community Services [2004] FCA 790 at [17] in relation to the Social Security Act 1991 (Cth).
The hypothetical buyer is assumed to be aware of any imperfections affecting the value of the property, and is taken to be:
perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property.[22]
[22] Spencer v The Commonwealth of Australia [1907] HCA 82; (1907) 5 CLR 418, per Isaacs J at 441.
I agree with the respondent that the proper way of valuing the industrial units was to determine their net market value at the time of sale.
Mr Sexton said that the 2016 Balance Sheets recorded what he understood to be the value of the industrial units at cost allowing for depreciation. On that basis the units were valued at $2,129,474.68 allowing depreciation of $632,940.04. In his professional opinion, the written down value of the industrial units gave a net value of $1,496,534.64. He maintained in evidence to the Tribunal that this was a fair valuation. He conceded that the April Balance Sheet was created well after the fact to provide a foundation for the $200,000 sale figure.
Mr Sexton admitted that he was not a valuer and said that he did not base his figures on a professional valuation, because it would have been a “$20,000 exercise” to get a valuation of the properties from a registered valuer.[23]
[23] Transcript, 62.
The figure of $2,550,000 adopted by the AAT1 was informed by the actual sale of one of the units in October 2016. No.18 Martin Drive sold in October 2016 for $1,350,000. The following year, a desk-top valuation for the other unit valued it at $1,200.000.
There is a million-dollar chasm separating Mr Sexton’s estimated value from these figures. A realistic assessment of the market value of the industrial units in April 2016 was well above the figure of $1.5 million, upon which the contested transaction was based.[24] In terms of arriving at a realistic net market value, the ‘cost depreciation’ method gave a result that was wildly inaccurate.
[24] T5/108.
Dr Thompson put to Mr Sexton that the sale for $200,000 had short-changed the applicant and his wife.
Mr Sexton: Why would Mr and Mrs Kisielewicz take a $200,000 offer to then be short‑sheeted at Centrelink by three hundred and whatever thousand dollars? Why would that make economic sense if they had any other choice?
Dr Thompson: Because, on your own evidence, and on the evidence, the undisputed evidence in the documents that we’ve been through, those units were worth considerably more than $200,000. Do you agree with that?‑‑‑In your opinion.
Mr Sexton’s analysis of the value of the Trust in April 2016 as essentially “worthless” was based on accounting principles that did not reflect the net market value of the underlying assets. He displayed a considerable rigidity in his thinking about the arrangement. He remained adamant that $200,000 represented a fair deal, and that it was “generous” of the Harkness’ to make an “offer” to purchase at that price. The deal, done on a handshake between old mates, was anything but generous.
MOTIVATION FOR SALE
I note that the Social Security Guide (‘Guide’) in paragraph 4.1.1 refers to circumstances where special or unusual circumstances necessitate a quick sale. Under such circumstances, deprivation has not occurred. However, I do not think that this reference in the Guide can be relied on in the present circumstances.
The applicant said that he was motivated to sell in order to avoid the loss of his house, and that he was encouraged to do so because of the general advice given by Mr Sexton as to his potential exposure. Mr Sexton said in evidence that this fear was well founded because the Bank would adopt a scattergun approach in pursuing all available securities.
I respectfully agree with the AAT1’s reasoning and findings in this regard:[25]
15. … There is no evidence that there are any unusual barriers to selling the Trust property. It consists of two standard industrial units in an industrial area. In 2015 there was at least one formal offer in writing (folio 191) and the sale of one of the units was completed in 2016. The Tribunal does not accept the suggestion that because there was no offer current at 27 April 2016 the property had no market value. It seems clear that the property owned by the Trust was always saleable and there is no reason to believe that the valuations used by the Department are unrealistic.
16. The Tribunal accepts that the Commonwealth Bank was threatening to foreclose on the Perfab Unit Trust property. The formal letter of demand from the Bank dated 28 January 2016 (folio 103) is for an amount of $1,211,845.82, however at the hearing Mr Sexton said that all of the debts owed to the Commonwealth Bank, including bank guarantees that he described as contingent liabilities, were aggregated and that an amount of $1,613,000.00 was owed. That is the figure that is shown in the balance sheet of 27 April 2016 and, despite there being no supporting documentation, the Tribunal accepts that figure. The Tribunal also accepts the loan made to the Trust by Mr and Mrs Harkness although that loan also is undocumented. Even accepting these liabilities the Trust still had an adjusted net asset value of $1,051,910.30. The Tribunal accepts that Mr and Mrs Kisielwicz had extended a personal guarantee as security for the Commonwealth Bank loans. However the Bank had also received other security for the loans, including not only a personal guarantee from Mr and Mrs Harkness but also first registered mortgages over the Trust property, a first registered mortgage over another property, apparently owned by Mr and Mrs Harkness through their private company and a charge over and a guarantee by the Harkness Family Trust. While further documentation may show that Mr and Mrs Kisielwicz’ family home was at risk through their personal guarantee, in view of the other security available, it seems unlikely that the Bank would have found it necessary to take action to seize the Kisielwicz’ home in order to recover their funds.
17. … The Tribunal also finds that the risk faced by Mr and Mrs Kisielwicz as a result of the demand made by the Commonwealth Bank does not produce circumstances that truly necessitated the quick sale of the assets. The Tribunal can understand that Mr and Mrs Kisielwicz may have wished to relieve themselves of the anxiety surrounding the winding up of their business and the liquidation of the associated assets …
(emphasis added)
[25] AAT1, [15]-[17]: T2/7-8.
I also note that it was not established that the Bank was party to any agreement to release the applicant from his personal guarantee. There was no evidence before the Tribunal of any release. The applicant said he did not know whether he had been released from his guarantee.[26] Mr Sexton said that the Bank probably retained the guarantee.[27] Under those circumstances, I am not satisfied that the applicant was motivated by a desire to be released from his personal guarantee.
[26] Transcript, 104.
[27] Transcript, 66.
I agree with the AAT1 that there was no serious threat to the applicant’s residential property given the extensive securities held by the Bank, including the first registered mortgages over the industrial units, which were worth well in excess of the amount owed.
PLANT AND EQUIPMENT (INCLUDING OFFICE EQUIPMENT)
The effect of including an amount for the depreciated value of Plant and Equipment in the April 2016 Balance Sheet was to increase the Trust’s asset value by $187,479.55. The figures are as follows:
Plant and Equipment at cost $491,223.00
Accrued Depreciation ($310,528.00)
Office equipment at cost $32,216.27
Accrued Depreciation ($25,431.72)
$187,479.55Mr Sexton told the Tribunal that in April 2016 the Plant and Equipment associated with the business enterprise had no value. He said that the equipment that was fixed with the building should be included in the price of the building, and the other machinery had no value and was sold at auction for scrap. He invited the Tribunal to adjust the 2016 Balance Sheets to reflect this reality.
Mr Sexton was pressed on this matter. He pointed out that the cranes and gantries and other items of heavy machinery were fixtures or too heavy to move and any value they had was included in the value of the buildings.[28] The heavy equipment sold with the properties. He said that the liquidator subsequently confirmed that the Trust got no part of the proceeds from the auction of the assets of the enterprise.[29] He was adamant that no funds came back to the Trust from the sale at auction of the plant and equipment including office equipment.[30] He said that the figure in the Balance Sheet that he prepared should be adjusted downwards, because there was no value in the Plant and Equipment.
What I was saying at page 175 is that the value of the assets on the balance sheet, the plant and equipment and office equipment, was irrelevant. It could have been a million dollars, because we didn’t get anything for it. That was the point I was making. It should be disregarded. And yes, to take it out. Take out the net asset value, net of depreciation, which is a figure of $190,908. I’m pointing out that the balance sheet should be adjusted downward, because that was no longer an asset of the Perfab Unit Trust. [31]
To your knowledge?‑‑‑Yes, because it ‑ well, as I’ve just explained, at 27 April, I did not know at that date that the plant and equipment and office equipment would realise a nil value for the Perfab Unit Trust. That only subsequently it became knowledge when the liquidator sold all the assets and Perfab Unit Trust didn’t get anything. [32]
[28] Transcript, 78.
[29] Transcript, 78.
[30] Transcript, 62.
[31] Transcript, 80.
[32] Transcript, 81.
The applicant gave evidence in similar terms:
On page 175, Mr Sexton has said in paragraph one there that the value of the plant and equipment, integral part of the buildings had no value. Now he told us that the plant and equipment meant the cranes and gantries?‑‑‑They were supposed – they were part of the building.
Yes, part of the fabric of the building. So they were fixtures?‑‑‑They were fixtures, yes.
Do you agree with him that they had no value?‑‑‑Well they were in with the price of the building. They were valued with the building.
So why do you say they had no value?‑‑‑It costs you more to pull them down to sell them than what, to leave them in the building and let somebody utilise them. [33]
[33] Transcript, 105.
I accept Mr Sexton’s evidence that, as at April 2016, the plant and equipment were worthless assets. Although AAT1 considered that no adjustment for plant and equipment was warranted, with respect, I consider that some allowance should be made, despite the somewhat puzzling inclusion of Plant and Equipment in the 2016 Balance Sheet as items of value.
Finally, I note the matter of superannuation raised by Mr Sexton. This was said to relate to a small component (approximately two percent) of the shares of the Trust. Mr Sexton suggested that the applicant and his wife did not have an equal half share in the Trust in April 2016, because a small parcel of shares was vested in the ‘Perfab Superannuation Fund’. He stated that in April 2016, the applicant and his wife owned only 47.976% of the shares of the Trust. Having listened carefully to his evidence, and examined what documentary evidence there is bearing on the matter, I am not persuaded that any further adjustment should be made for present purposes. For the avoidance of doubt, I find that at the time of sale the directors owned equal shares in the Trust.[34] I therefore consider that the Net Assets of the Trust should be calculated as follows:
[34] Transcript, 49-50.
18 and 20 Martin Drive Tomago $2,550,000
Cheque account $32,992.93
Gross assets $2,582,992.93
Gross liabilities $1,721,990.18Net assets $861,002.75
50% share = $430,501.38
Less $200,000
Gifted amount = $230,501.38
I find that the value of the share of the Trust owned by the applicant and his wife at the time of sale was $430,501.38, and the gifted amount therefore equates to $230,501.38.
DECISION
The reviewable decision is set aside and remitted to the respondent for reconsideration in accordance with a finding that the gifted amount is $230,501.38.
I certify that the preceding 47 (forty-seven) paragraphs are a true copy of the reasons for the decision herein of Emeritus Professor P A Fairall, Senior Member
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Associate
Dated: 14 July 2021
Date of hearing: 25 March 2021 Counsel for the Applicant: Mr A Justice Solicitors for the Applicant: Ms R McKenzie, McKenzie Law Office Solicitors for the Respondent: Dr S Thompson, Services Australia APPENDIX A - FINANCIAL STATEMENTS
As at 30 June 2014, the Balance Sheet showed Total Assets of $2,044,890.76; Total Liabilities of $638,285.28 and Net Assets of $1,406,625.48.[35]
[35] T16/357.
As at 27 April 2016, the Balance Sheet showed Total Assets of $1,720,435.12; and Total Liabilities of $1,721,990.18, and Net Assets of minus $1,555.06.[36] In evidence, Mr Sexton agreed that this Balance Sheet up to 27 April 2016 was provided to Centrelink in 2018 “for the purpose of giving a foundation, or a factual basis, for the $200,000”.[37]
[36] T6/122.
[37] Transcript, 70.
As at 30 June 2016, the Balance Sheet showed Total Assets of $1,677,905.19; and Total Liabilities of $1,688,977.25 and a related party loan of $69,891.69. The Net Assets were stated as negative $11,092.06.[38]
[38] T6/116.
Total Assets
Total Liabilities
Net Assets
2014
2,044,890.76
638,285.28
1,406,625.48
2015
1,979,180.58
633,816.86
1,345,363.72
April 2016
1,720,435.12
1,721,990.18
(1,555.06)
2016
1,677,905.19
1,688,977.25
(11,092.06)
0
2
0