McDonald and Secretary, Department of Social Services (Social services second review)

McDonald and Secretary, Department of Social Services (Social services second review) [2022] AATA 4207 (8 December 2022)
Division:GENERAL DIVISION
File Number: 2021/3183
Re:Gregory George McDonald
APPLICANT

AndSecretary, Department of Social Services
RESPONDENT

Decision
Tribunal:Mrs J C Kelly, Senior Member
Date:8 December 2022
Place:Sydney

The reviewable decision made on 23 April 2021 is affirmed.
..................................[sgd].....................................
Mrs J C Kelly, Senior Member
Catchwords
SOCIAL SECURITY – age pension – deprivation of assets – whether the applicant was an attributable stakeholder – whether the applicant deprived himself of the attributable assets of the company – calculation of rate of age pension – reviewable decision affirmed
Legislation
Social Security Act 1991 (Cth)
Cases
Bornecrantz v Secretary, Department of Social Services [2017] FCA 1010
Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60
Secondary Materials
Social Security (Attributable Stakeholder and Attribution Percentages) Principles 2017
Department of Social Services, ‘Social Security Guide’ Guides to Social Policy Law
REASONS FOR DECISION
Mrs J C Kelly, Senior Member
8 December 2022
Introduction

The Applicant, Mr McDonald, has applied for the review of a decision that set his rate of age pension by determining that he had deprived himself of 100 percent of the assets and income of N.S. Electrics Pty Ltd (the Company) on 12 December 2019. The effect of that decision is that those assets are taken into account in the calculation of his age pension for five years from that date. I have to decide whether that was the correct or preferable decision.
The Applicant represented himself with the assistance of his accountant, Ms Wilson.
His position is that he disposed of control of the Company on 1 August 2016 when he disposed of his 100 ordinary shares to his son, who was appointed director on the same date.
The position of the Secretary, Department of Social Services, the Respondent, is that the Applicant was an ’attributable stakeholder’ of the Company until 12 December 2019. At that date, the net assets of the company were $160,666, and the Applicant deprived himself of those assets on that date.
The decision-making history
On 28 July 2020, a Complex Assessment Officer reconsidered the decision to pay the Applicant age pension at a rate calculated according to the findings of the previous Complex Assessment Officer on 15 May 2020 and instead, decided that the Applicant’s rate of age pension ought to be calculated on the basis that:
(a)he was an attributable stakeholder of the Company until 12 December 2019;
(b)the net assets of the Company as at 12 December 2019 were $160,666; and
(c)the Applicant deprived himself of those assets on that date.
On 28 July 2020, the Applicant requested internal review of that decision.
On 28 October 2020, the Authorised Review Officer (ARO) affirmed the decision made on 28 July 2020, finding:
(a)the Applicant was an attributable stakeholder for social security purposes of the Company until 12 December 2019; and
(b)he deprived himself of the attributable assets of the Company on 12 December 2019.
On 23 April 2021, the Social Services and Child Support Division of this Tribunal affirmed the ARO’s decision (the reviewable decision).
The issues to be determined
The issues to be determined are:
a)Was the Applicant an attributable stakeholder of the company until 12 December 2019, or some other date?
b)Did the Applicant deprive himself of the attributable assets of the company?
Relevant legislation and policy
The relevant legislation and policy include the Social Security Act 1991 (the Act), the Social Security (Attributable Stakeholder and Attribution Percentages) Principles 2017 (the Attribution Principles), and the Social Security Guide (the Guide). The Tribunal is not bound to apply policy instructions, but ought to do so unless there are cogent reasons not to do so.[1]
[1] Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60; Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634, 639-645; Dainty and Minister for Immigration and Ethnic Affairs (1987) 12 ALD 416, 417; and Minister for Immigration, Local Government and Ethnic Affairs v Roberts (1993) 41 FCR 82, 86.
Facts that are not in dispute
The following facts are not in dispute:
·The Company was registered on 26 April 1978. The Applicant was appointed a director on 30 June 1978 and secretary on 1 May 1992.
·On 1 August 2016 the Applicant transferred his 100 ordinary shares in the Company to his son, who was appointed as a director and secretary of the Company on the same day.
·On 29 June 2017, the Applicant resigned as a director and secretary of the Company and was issued one E class share out of a total of 101 shares (100 ordinary shares and one E class share). An E class share-holder has no voting rights in a company but can receive dividends.
·Relevantly, the Applicant was paid the following fully franked dividends on account of his Class E share:
(i)$59,530 on 1 July 2016 for the 2016/17 financial year (T16/386-387);
(ii)$63,700 on 1 July 2017 for the 2017/18 financial year (T16/388-389); and
(iii)$114,336 on 1 July 2018 for the 2018/19 financial year (annexures to the Applicant’s Statement of Position dated 28 September 2021).
·On 21 November 2019, the Applicant transferred his one E class share to his son’s wife.
·On 26 November 2019, the Applicant made a claim for age pension and lodged an Income and Assets form (T4/170-190).
·On 3 December 2019, the Applicant lodged the following further documents:
(i)a 'Mod PC - Private Company' form signed by the Applicant and dated 26 November 2019, detailing his involvement with the Company (T5/191-207);
(ii)an ASIC Company Details extract for the Company dated 3 August 2016 (T5/208-209);
(iii)an ASIC 'Change to company details' form dated 3 August 2016 (T5/210-212);
(iv)his notice of resignation as company director and secretary dated 29 June 2017 (T5/213);
(v)a further ASIC Company Details extract for the Company dated 26 November 2019 (T5/214-215);
(vi)the Company’s tax return for the 2016/17 financial year (T5/217-226);
(vii)his amended individual tax return for the 2018/19 financial year (T5/227-239);
(viii)the financial report for the Company for the 2016/17 financial year (T5/240-254); and
(ix)the financial report for the Company for the 2018/19 financial year (T5/255-268).
·On 4 December 2019, a Complex Assessment Officer of the Agency wrote to the Applicant (T6/269-272) requesting that he provide:
(i)details of the consideration he received for relinquishing his shares in the Company;
(ii)various personal tax returns; and
(iii)a written declaration that he will not exert any control over, or benefit directly or indirectly in any way, from the Company.
·On 12 December 2019, the Applicant responded to that letter, advising regarding his disposal of his 100 ordinary shares on 3 August 2016 and his single Class E share on 21 November 2019, that he 'received no consideration for both transactions' (T7/276). He also declared that he will not exert any control over, or benefit directly or indirectly in any way from, the Company.
·On 27 April 2020, the Applicant supplied further information to the Agency including a balance sheet for the Company as at 30 June 2019, showing net assets of $160,666 (T9/336).
·On 15 May 2020, a Complex Assessment Officer decided (T17/391-392) that the Applicant had gifted $200,569 by relinquishing his control of the Company and not receiving any remuneration for it.
·On 19 May 2020, the Agency decided to grant the Applicant's claim for age pension with effect from 26 November 2019 (T10/345-347). The notice of grant indicated that the Applicant's regular payment was at a rate of $222.05/fortnight, having regard to his total assets of $504,207.
·On 28 July 2020, a different Complex Assessment Officer reconsidered the decision to pay the Applicant age pension and made the decision set out at [5].
The Applicant’s contentions
The Applicant’s position was summarised by Ms Wilson in a submission dated 28 September 2021 and clarified during the hearing.
The Applicant suffered considerable financial hardship following his divorce and was forced to use all his life savings to purchase a house. When he could no longer physically work, he transferred the Company to his son.
In 2013, the Applicant borrowed $247,532 from the Company. Interest was payable on the loan and calculated on 30 June each year.
The balance of the loan on 30 June 2016 was $227,833.
On 1 August 2016 when the Applicant transferred the Company to his son, the parties agreed that the Applicant would continue to receive an income stream sufficient to repay the debt of $227,833 by way of a dividend paid on one E class share. That would ensure that the Applicant did not have to sell his sole residence to clear the debt.
Further, when the Applicant transferred the ordinary shares to his son, he relinquished his beneficial interest in the Company and had no control of the Company. His son had 99% interest in the Company.
No point was taken by the Respondent that the records showed that the payment of the dividend of $59,530 for the E class share was made on 1 July 2016, before the agreement made on 1 August 2016 and before the issue of the one Class E share on 29 June 2017. I infer that was in accordance with usual accounting practice.
Ms Wilson explained that the income the Applicant received in the form of dividends were journal entries. The dividend payments were offset against the balance of the loan. The result was that the Applicant repaid the loan during the period ending 1 July 2018 when he was paid the dividend of $114,336. The Applicant declared the fully franked dividends as income in his personal income tax return.
The Applicant contended that the unpaid loan was a liability, not an asset as the Respondent had determined. The loan ceased to be an asset on 1 August 2016 and in any event, was fully extinguished by 1 July 2018. The loan was not owing to the company on 26 November 2019 as the Respondent had found.
Notwithstanding those arguments, the Applicant referred to the decision in Bornecrantz v Secretary, Department of Social Services [2017] FCA 1010 which ’would imply’ that if the loan was determined to be an asset, it would simultaneously be a liability, offsetting each other and preventing the Respondent from ’double dipping’.
In response to the Respondent’s position that the Applicant did not receive fair value for the transfer of the Company on 1 August 2016, the Applicant argued that he did, in the form of ongoing payments of fully franked dividends amounting to $237,566. Therefore, the deprivation rules are irrelevant.
Further, the Applicant contended that the Company is a sole trader operation and not saleable on the open market. It was fair and reasonable for the Applicant to transfer the Company to his son.
The Respondent’s contentions
In summary, the Respondent’s principal contentions are the issues in dispute set out at [9].
In addition, during the course of the hearing, the Respondent made the following observations/clarifications.
It did not accept that the Applicant had received fair value for the transfer of the control of the Company.
The Division 7A debit loan has never been assessed as an asset for social security purposes and is irrelevant. It accepted that the loan had been repaid as at 30 June 2019.
The Applicant received 100 per cent of the Company’s dividends during the financial years ending 30 June 2017, 2018 and 2019. The Applicant has benefited from his contribution to the Company. He had the benefit of the loan for about six years. The dividend was discretionary.
The Applicant’s attribution percentage is not 0% until 12 December 2019.
The Respondent has assessed the Applicant’s assets for the purpose of the assets tests since 12 December 2019 to include the deprived attributable assets of the Company which are valued at $150,666 (that is the Company’s net asset worth, less $10,000).
Consideration
Calculation of rate of Age pension
Section 55 of the Act provides that the rate of Age Pension is worked out according to the Pension Rate Calculator A (the Calculator) at the end of section 1064 of the Act. The Calculator provides that a person’s rate must take into account the assets test in Module G.
An ‘asset’ is defined in subsection 11(1) of the Act as property or money.
The effect of division 2 of part 3.12 of the Act is that where a person disposes of assets for no or inadequate consideration in money or money's worth, the value of those assets (minus an allowable amount of $10,000 in the Applicant’s case, pursuant to section 1126AA of the Act) remains assessable for the purposes of the assets test for 5 years from the date of the disposal.
Subsection 9(4) of the Act defines assets so treated as 'deprived assets'.
Module G details the effect a person’s assets have on their rate of age pension and sets an assets value limit. Relevantly, on 26 November 2019, the date of effect of the decision to grant the Applicant age pension, the assets value limit for a single homeowner in order to receive the full rate of age pension was $263,250. For every $1,000 in assets above this amount, a person's fortnightly rate of age pension is reduced by $3 until reaching the upper assets limit of $574,500, beyond which no age pension is payable to a single homeowner. The assets value limit is indexed from time to time and increased to $268,000 from 1 July 2020 and $270,500 from 1 July 2021.
The cumulative effect of the above provisions is that the value of the Applicant’s assets, including any deprived assets, must be applied to the assets test in Module G to calculate his rate of age pension. The Respondent has calculated the value of the deprived attributable assets of the Company as $150,666, which is the value of the Company’s net assets on 12 December 2019, less $10,000.
Was the Applicant an attributable stakeholder of the Company for social security purposes until 12 December 2019?
A person is an ‘attributable stakeholder’ of a company if that company is a controlled private company in relation to that person, unless otherwise determined by the Secretary.[2]
[2] Social Security Act 1991 (Cth) ss 1207X(1).
Section 1207Q of the Act sets out when a company is a 'controlled private company'. It includes when the ‘control test’ in subsection 1207Q(2) of the Act is satisfied. The Applicant satisfies that test because the direct voting interests in the company held by his associate, that is his son, is 50% or more. The Applicant’s son is a ‘relative’ pursuant to subsection 1207C(1)(e) and section 1207B of the Act.
If a person is an attributable stakeholder in a company, their ‘asset attribution percentage’ in relation to the company’s assets is 100%, unless otherwise determined by the Secretary. The Act explains how that discretion is to be exercised.[3] The Secretary is required to formulate decision-making principles for that purpose in a legislative instrument.[4] That legislative instrument is known as the Attribution Principles.
[3] Social Security Act 1991 (Cth) ss 1207X(3)-(5).
[4] Social Security Act 1991 (Cth) s 1209E.
Therefore, the Applicant is an attributable stakeholder in the Company and his asset attribution percentage in relation to the assets of the company is 100%, unless I can apply the Attribution Principles to his benefit.
Can I apply the Attribution Principles to find the Applicant had no control from 1 July 2018?
Part 2 of the Attribution Principles, paragraphs 5 to 13, set out the principles to apply in order to decide whether an individual is not an attributable stakeholder of the company under paragraph 1207X of the Act.
Part 3 of the Attribution Principles, paragraphs 14 to 22, set out the principles to apply to determine that the stakeholder’s asset attribution percentage in relation to a company is a specified percentage lower than 100%.
In substance, the principles are the same in both parts. Relevantly, paragraphs 7 and 16 require consideration of the circumstances affecting the relationship with the company. The Applicant was the director of the Company from 30 June 1978 and secretary from 1 May 1992 until he resigned from both positions on 29 June 2017. The only other office holder was his son who became a director and secretary on 1 August 2016. The Applicant ceased to have a controlling interest in the Company when he transferred his 100 ordinary shares to his son and associate, on 1 August 2016. Control of the Company remained with the Applicant’s associate who paid discretionary dividends of $237,566 to the Applicant over the subsequent three financial years.
Paragraphs 8 and 17 require consideration of the individual’s contribution to the company. The only direct evidence of contributions is the $1 the Applicant paid for his Class E share on 29 June 2017 and the $100 shown in a Change of company information form that he was paid for the 100 ordinary shares on 1 August 2016. However, as the Applicant was the only office holder and shareholder in the Company from 1978 until 30 June 2016, and that the net assets of the Company on that day were $300,995, I infer that he made a substantial contribution to the Company through his personal effort. There is no suggestion in the evidence that anyone else made a contribution.
Paragraphs 9 and 18 are about the past benefit the individual has received from distributions by the company. The Applicant received discretionary dividends of $237,566 from 1 August 2016 until he sold his Class E share on 21 November 2019.
Paragraphs 10 and 19 are about future benefits and are not relevant. The Respondent conceded that there is no evidence that the Applicant has received other benefits and therefore paragraphs 11 and 20 do not apply. Paragraph 12 considers whether there is an existing attribution to an individual. There was no suggestion that it applied.
There are no other circumstances in this case pursuant to paragraphs 13 and 22.
Instruction [4.12.9.10] of the Guide provides relevantly that the Secretary will accept a person’s resignation from the control of a private company as being genuine when the cumulative requirements are met. The person must:
·relinquish ALL formal roles and control in respect of the entity, AND
·if applicable, relinquish their shares and directorships, AND
·relinquish all beneficial interest i.e. they cannot be income or asset beneficiaries of the entity. This could be evidenced by an alteration to the trust deed stipulating that they could not be an income or asset beneficiary or by creating a separate deed to renounce the beneficial interest of the person and their partner in the trust, AND
·make a written declaration that they will not exert any control over, or benefit in any way from, the entity.
Having considered the Attribution Principles and that instruction, I am not persuaded that the Applicant was not an attributable stakeholder in the Company before 12 December 2019 or that the attribution percentage should be reduced to a percentage lower than 100%. The Applicant signed the declaration on 12 December 2019, having resigned as director and secretary on 29 June 2017 and sold his last Class E share on 21 November 2019.
It follows that 100% of the Company’s assets were attributable to the Applicant until 12 December pursuant to section 1208(E)(1) of the Act and he ceased to be an attributable stakeholder in the Company on 12 December 2019.
Did the Applicant deprive himself of the attributable assets of the Company on 12 December 2019?

When the Applicant ceased to be an attributable stakeholder in the Company on 12 December 2019, he is taken to have disposed of the Company’s assets as if they were his personal assets for the purposes of the deprivation rules in Division 2 of Part 3.12 of the Act.[5]
[5] Social Security Act 1991 (Cth) s 1208M.
Did he receive any consideration for the disposal?
In the ‘Mod PC – Private Company’ form dated 26 November 2019, the Applicant advised that the shareholders in the Company were his son, who held 100 ordinary shares, and his son’s wife who held one share, and each had acquired the share for ‘nil’ purchase price.
In his advice on 12 December 2019, the Applicant referred to his disposal of the 100 ordinary shares on 3 August 2016 and the one Class E share on 21 November 2019, and stated that he had ‘received no consideration for both transactions’.
In addition, Ms Wilson, the Company’s accountant, characterised the Applicant’s transfer of the 100 ordinary shares to his son on 1 August 2016 as ‘gifting’.
Neither the Applicant nor Respondent suggested that the nominal $100 payment for the 100 shares shown on the Change to company details form dated 1 August 2016 was of any significance.[6]
[6] T5, 212.
I accept that the Applicant did not receive any consideration for the disposal of his shares.
It is not contested that the value of the Company’s net assets was $160,666, as shown in the most recent balance sheet.
It follows, that for the purpose of calculating the Applicant’s rate of age pension according to the assets test from 12 December 2019 until 12 December 2024, his assets include $150,666, being the attributable assets of the Company at the date of disposal minus $10,000, pursuant to sections 1123, 1124 and 1126AA of the Act.
For those reasons, the reviewable decision is affirmed.
Decision
The reviewable decision made on 23 April 2021 is affirmed.

I certify that the preceding 61 (sixty-one) paragraphs are a true copy of the reasons for the decision herein of Mrs J C Kelly, Senior Member

.................................[sgd].......................................
Associate
Dated: 8 December 2022

Date of hearing:

17 February 2022

Applicant:
Advocate for the Applicant: In Person
Ms P Wilson, BMG Chartered Accountants

Solicitor for the Respondent: Ms L Boyd, Hunt & Hunt Lawyers

[2022] AATA 4207

8 December 2022

Key Legal Topics

Areas of Law

Administrative Law

Statutory Interpretation

Legal Concepts

Judicial Review

Procedural Fairness

Statutory Construction

Date of hearing:	17 February 2022
Applicant: Advocate for the Applicant:	In Person Ms P Wilson, BMG Chartered Accountants
Solicitor for the Respondent:	Ms L Boyd, Hunt & Hunt Lawyers