McGuigan and SECRETARY, DEPARTMENT OF EDUCATION, EMPLOYMENT AND WORKPLACE RELATIONS

[2010] AATA 593

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 593

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2009/3067

GENERAL ADMINISTRATIVE DIVISION		)
Re		REECE McGUIGAN

Applicant

And SECRETARY, DEPARTMENT OF EDUCATION, EMPLOYMENT AND WORKPLACE RELATIONS

Respondent

DECISION

Tribunal Mr S E Frost, Senior Member

Date11 August 2010

PlaceSydney

Decision The decision under review is set aside and, in substitution, the Tribunal decides to waive the debt under s 1237AAD of the Social Security Act 1991.

...................[sgd]......................

S E Frost
  Senior Member

CATCHWORDS

SOCIAL SECURITY- youth allowance- overpayment- special circumstances- waiver of debt- write off of debt- decision set aside- debt waived.

LEGISLATION

Social Security Act 1991 ss 1067G, 1236, 1237AAD,

CASES

Angelakos v Secretary, Department of Employment and Workplace Relations[2007] FCA 25

Re Beadle and Director-General of Social Security(1984) 6 ALD 1

Groth v Secretary, Department of Social Security[1995] FCA 1708

REASONS FOR DECISION

11 August 2010 Mr S E Frost, Senior Member       

1.      Over a period of about 15 months in 2007 and 2008, Reece McGuigan (the Applicant) was paid youth allowance by Centrelink.  His youth allowance entitlement had been calculated by reference to the income of his father and his father’s partner (to whom I will refer collectively, for the sake of convenience, as his “parents”), with whom he was living at the time.

2.      Towards the end of 2008, however, Centrelink reviewed the Applicant’s position and formed the view that the youth allowance payments that had been made should not have been made.  Centrelink raised a debt against him, in the amount of over $6,000.  The Applicant disputes this debt.  Centrelink’s internal review of the original decision, and a subsequent review by the Social Security Appeals Tribunal (SSAT), has affirmed the debt.  The Applicant has now applied to this Tribunal for further review of the decision to recover, what Centrelink asserts, is the overpayment that was made.

The issues

3.      There are three issues before the Tribunal:

·The first issue is whether the Applicant has been overpaid youth allowance and if, as a consequence, he owes a debt to the Commonwealth.

·The second issue is whether the debt, if there is one, can or should be written off, either for a stated period or otherwise.

·The third issue is whether the debt, if there is one, should be waived.

The first issue – is a debt owed to the Commonwealth?

4.      The Applicant’s father, Ross McGuigan (Mr McGuigan), represented the Applicant in these proceedings.  Mr McGuigan agreed that the Applicant had been overpaid.  I also understood him to agree that the amount of overpayment identified by Centrelink, namely $6,143.93, is correct.

The second issue – should the debt be written off?

5. The write off of debts of this nature is governed by s 1236 of the Social Security Act 1991 (the Act). Under s 1236(1), the Secretary (or the Tribunal on review) may write off a debt, “for a stated period or otherwise”, but only if, according to s 1236(1A):

(a)the debt is irrecoverable at law; or

(b)the debtor has no capacity to repay the debt; or

(c)the debtor’s whereabouts are unknown after all reasonable efforts have been made to locate the debtor; or

(d)it is not cost effective for the Commonwealth to take action to recover the debt.

6. Paragraphs (a), (c) and (d) do not apply. However, with respect to paragraph (b), s 1236(1C) says that:

… if a debt is recoverable by means of:

·deductions from the debtor’s social security payment; or

·deductions under section 84 of the A New Tax System (Family Assistance)(Administration) Act 1999; or

·setting off under section 84A of that Act;

the debtor is taken to have a capacity to repay the debt unless recovery by those means would result in the debtor being in severe financial hardship.

7. Since (a), (c) and (d) do not apply, the question is simply whether, in terms of paragraph (b) of s 1236(1A), the Applicant has “capacity to repay the debt”. The debt can only be written off if it is concluded that the Applicant does not have this capacity.

8.      The Applicant prepared a “Current Income and Expenditure Statement” which his father provided to the Tribunal on 10 May 2010.  It disclosed a net weekly wage of $330 and weekly expenses totalling $294, leaving a surplus of $36 which is the amount remaining for discretionary spending.  In addition to that, he owes his parents $780, of which they are apparently not pressing for repayment but which he says he is trying to repay but is “struggling at present”. 

9. Of course, the repayment of debts owed to members of a person’s family should not, as a general rule, take priority over the repayment of debts owed to the Commonwealth in circumstances where a person received benefits that he or she was not entitled to. And so, putting that debt aside, the Applicant’s weekly surplus of $36 indicates that, while he has little capacity to repay the debt to the Commonwealth, it is not the case that he has no capacity to repay it, by modest fortnightly instalments. It is not possible, therefore, to write off the debt under s 1236 of the Act.

The third issue – should the debt be waived?

10. Mr McGuigan submits, on behalf of the Applicant, that the debt should be waived under s 1237AAD of the Act because of the “special circumstances” of the case. In summary, his proposition is that:

·     The Applicant and his parents made every effort to provide Centrelink with accurate information;

·     The Applicant’s father, in particular, was very careful in his dealings with Centrelink because his elder son had been overpaid youth allowance a few years earlier and Mr McGuigan did not want that outcome repeated with the Applicant;

·     Centrelink was slow to act on information provided, or failed to process information correctly, and this contributed to the mistaken payments and to late identification of the problem; and

·     the Act operates unfairly.

11.     The overpayment arose because of the content of information provided to Centrelink, either by the Applicant or by Mr McGuigan, and the way Centrelink processed that information.

12.     To understand fully the background to the overpayment, it is necessary to provide a brief sketch of Mr McGuigan’s financial affairs during the 2006 and 2007 financial years.  During those two years, Mr McGuigan was a full-time salaried teacher with the NSW Department of Education and Training.  He also, as he explained to me, “put money into shares”.  He only ever invested in “blue chip” shares, but he borrowed heavily for the purpose.  At the same time, he also paid a “put protection fee”, which he described during proceedings as an “insurance policy on the value of the shares”.  In this way, he hoped to benefit from an expected appreciation in the value of the shares, but also sought to protect himself in the event that the share values fell.

13.     Unfortunately for him, the share values did fall, and they fell markedly.  The protections that he had put in place were not robust enough to save him from significant losses, which were considerable enough in each financial year to offset the entire salary income he had earned from his teaching activities.  Therefore, arithmetically, his income in each year (assuming the accuracy of his income tax returns) was negative, although for income tax purposes it was “nil”, with losses apparently able to be carried forward to subsequent years.  The effect on Mr McGuigan, in a financial (and, no doubt, emotional) sense, was catastrophic: he was declared bankrupt in September 2008.

14.     In a Centrelink form titled “Parent(s)/Guardian(s) details” (known as a “Module JY” form), signed on 9 July 2007 in respect of the “base tax year” of 2005/2006, Mr McGuigan provided the following information:

·     What was/is your taxable income for the tax year? – NIL

·     In the tax year, did you receive (or expect to receive) any income not already included in Question 7 (above) classified as net passive business losses (including negative gearing)? – No

·     Were you a wage or salary earner who claimed (or will claim) a tax deduction for a business loss? – No

15.     The question dealing with “net passive business losses” included an instruction to “refer to the Notes section at the front of this form”.  The Notes section gave the following explanation:

Net passive business losses (NPBL)

NPBL include net losses from rental properties (negative gearing) and non-property passive income investments such as shares.  The value of such losses is added back to parental income.

A passive income earning investment is an investment in which a parent is usually engaged for less than 17.5 hours per week (on average) working on that investment.

16. That explanation is broadly consistent with Module F (Parental income test) of the Youth Allowance Rate Calculator at the end of s 1067G of the Act.

17.     At this point it is necessary to explain why the questions set out in paragraph 14 above are asked on the Module JY form.  The questions have their origin in Modules F and G of the Youth Allowance Rate Calculator, and in the definitions of certain expressions in the Act.  In particular:

·Point 1067G-F10 in Module F of the Rate Calculator explains that the combined parental income of a person (here, the Applicant) for a particular tax year is the sum of the following amounts for each of the person’s parents:

(a)the parent’s taxable income for that year;

(b)the parent’s adjusted fringe benefits total for that year;

(c)the parent’s target foreign income for that year;

(d)the parent’s net passive business loss for that year.

Relevantly, it follows that if a parent incurs a net passive business loss, then the amount of the loss must be added to the parent’s taxable income to determine the parent’s parental income.

·Subpoint 1067G-F11(4) in Module F defines net passive business loss as the difference between:

(a)the total amount of the person’s loss or outgoings for that year that are or will be deductible under the Income Tax Assessment Act because they were necessarily incurred in relation to a passive business; and

(b)the gross income from the business for that year.

·A passive business (subpoint 1067G-F19A(1)) is a business “in relation to which the person is usually engaged for less than 17.5 hours in a week” – which I find applicable in this case, given Mr McGuigan’s status as a full time teacher.

·A business (subpoint 1067G-F19A(2)) is defined to include “the earning of income as a rentier”.  The word “rentier” is not defined in the Act but it has the following dictionary definitions:

o   one who has a fixed unearned income, as from rent, interest on bonds, etc. (Macquarie);

o   a person living on income from property or investments (Oxford);

o   a person living on dividends from property, investments, etc. (Australian Concise Oxford).

·Module G can apply to a person (such as the Applicant) if, among other things, the person has a parent who is a designated parent (point 1067G-G2).

·Section 10B(3) of the Act says that a parent of a person is a designated parent if:

...

(e)the parent derived income from salary or wages in the base tax year and has claimed, or will claim, a tax deduction for a business loss (whether for that year or a previous year) that does not consist only of a net passive business loss;

...

18.     It is clear from Module A that after applying Module F to the Applicant’s circumstances, the Applicant has a parental income test reduced rate (Step 8 of Module A) of nil.  That renders it unnecessary to resort to Module G of the Rate Calculator.  As a consequence, the third question set out in paragraph 14 above, relevant only to Module G and not to Module F, can have no bearing on the calculation of the Applicant’s entitlement to youth allowance, and no bearing on the eventual overpayment to him.

19.     That circumstance puts the second question in paragraph 14 above, and Mr McGuigan’s answer to it, under intense scrutiny.  It is clear that the question was designed to identify a parent who incurred a “net passive business loss”.  The reason is obvious: the net passive business loss has to be added to the parent’s taxable income.  But the question itself is poorly expressed, asking not simply “Did you have a net passive business loss?” but the much more complex “Did you receive (or expect to receive) any income ... classified as net passive business losses?”  It is quite plain, as a matter of common sense, and as confirmed by the definition of “net passive business loss”, that an amount “classified as [a] net passive business loss” cannot ever be an amount of “income” that a person “receive[d]” or “expect[ed] to receive”.  On that basis, one would imagine that no parent would be able to answer “yes” to that question, and yet that is the only answer that would trigger follow-up action by Centrelink, by way of a re-examination of the child’s entitlement to youth allowance.

20.     Mr McGuigan’s answer of “no” to that question led to Centrelink’s continued payment of youth allowance to the Applicant.  It was a data-matching exercise undertaken some 12 months later in relation to information held by the Australian Taxation Office that highlighted Mr McGuigan’s status as a parent who had incurred a net passive business loss.  By then, of course, the Applicant had been paid over $6,000 to which he was not entitled.

21.     Now, the rationale for adding net passive business losses to taxable income is presumably that the combined figure provides a more reliable indicator of a parent’s true ability to support a child financially.  It is apparently assumed that, if a parent can afford to incur losses, the losses should not be taken into account in determining true financial capacity (in other words, once deducted, the losses are added back).  That assumption seems unobjectionable when the losses are modest by comparison with a parent’s salary or wage income.  But where the losses are so large (as they were in Mr McGuigan’s case) that they exceed not only the gross income derived from the “passive business” but also the salary and wage income as well, there arises what appears to be a very significant anomaly, as demonstrated by the table below.  The table assumes the case of a parent with salary or wage income of $50,000 and gross passive business income of $20,000 (that is, a total gross income of $70,000).

Passive business losses and outgoings	Net passive business loss	Taxable income	Parental income
30000	10000	40000	50000
40000	20000	30000	50000
50000	30000	20000	50000
70000	50000	0	50000
90000	70000	0	70000
120000	100000	0	100000

22.     The table demonstrates that, provided the losses and outgoings incurred in connection with the passive business do not exceed the total gross income (lines 1 to 4), the “parental income” will not exceed the income derived from salary or wages.  However, once those losses and outgoings exceed the total gross income (lines 5 and 6 are examples), the parental income rises above that figure and, as the losses increase, the “parental income” can even exceed the total gross income derived from both salary or wages and the passive business (line 6).  Curiously, the more ruinous the result, the greater the parental income.  That is, of course, contrary to the presumed rationale that the “taxable income plus losses” figure will indicate a parent’s true capacity to provide financial support for the child.

23. Returning now to the question of waiver of the debt, it should be noted that s 1237AAD of the Act is a discretionary provision. It provides as follows:

The Secretary may waive the right to recover all or part of a debt if the Secretary is satisfied that:

(a)the debt did not result wholly or partly from the debtor or another person knowingly:

(i)making a false statement or false representation; or

(ii)failing or omitting to comply with the provisions of this Act, the Administration Act or the 1947 Act; and

(b)there are special circumstances (other than financial hardship alone) that make it desirable to waive; and

(c)it is more appropriate to waive than to write off the debt or part of the debt.

24.     The question under this provision comes down entirely to paragraph (b), there being no suggestion that either the Applicant or his father made a false statement or false representation that resulted in the debt.  The Secretary’s Statement of Facts, Issues and Contentions suggested that Mr McGuigan had incorrectly stated in one of his responses to Centrelink that he was not “self-employed”, but that answer, even if incorrect (which is doubtful, given his primary status for income-generating purposes as a salaried employee), was not at all responsible for the overpayment.  The Secretary asserted that Mr McGuigan’s response prevented early identification of Mr McGuigan as a “designated parent” but, as I have already indicated, at paragraph 18 above, that issue is entirely irrelevant to the Applicant’s circumstances.

25.     Paragraph (b) directs attention to the question whether there are “special circumstances (other than financial hardship alone)” in the Applicant’s case.  The provision enables a flexible response to a wide range of situations which could give rise to hardship or unfairness due to rigid application of a requirement for recovery of debts.

26.     The phrase “specialcircumstances” is not defined in the Act; however, it has been judicially considered on numerous occasions in connection with the above provision or similar provisions, including:

·     Re Beadle and Director-General of Social Security(1984) 6 ALD 1, where the Tribunal said, at 3:

The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. ... This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.

·     Groth v Secretary, Department of Social Security[1995] FCA 1708; (1995) 40 ALD 541, where Kiefel J in the Federal Court said, at 545:

... it is sufficient to observe that it would require something to distinguish [the] case from others, to take it out of the usual or ordinary case.

·     Angelakos v Secretary, Department of Employment and Workplace Relations[2007] FCA 25; (2007) 100 ALD 9, where Besanko J in the Federal Court stated, at 18:

There is less risk of overstatement if the words ‘unusual’ or ‘uncommon’ [as referred to in Beadle] are emphasised. Those words indicate, correctly in my view, the fact that there must be something that distinguishes the case from the ordinary or usual case.

27.     The Applicant’s circumstances are that:

·he was paid youth allowance which he and his father were led by Centrelink to believe he was entitled to, but was not;

·the mistaken payment arose from Mr McGuigan’s answer (which was strictly correct) to an imperfect question which could not accurately have been answered in any other way;

·in any event, Module F of the Rate Calculator paints an unrealistic picture of Mr McGuigan’s capacity to support the Applicant financially during the relevant years;

·assuming the correctness of Mr McGuigan’s tax returns and the Tax Office’s assessment of his taxable income (this latter assumption underpins the definition of “assessed taxable income” in point 1067G-F12 in Module F), Mr McGuigan had no capacity to support the Applicant financially during the relevant years;

·the Applicant is in debt to his parents (one of whom is bankrupt);

·the Applicant earns a modest income and has little money left after reasonable living expenses;

·repayment of the debt will impose on the Applicant a financial burden which can accurately be described as “financial hardship”.

28.     Those circumstances, taken together, amount, in my opinion, to “special circumstances (other than financial hardship alone)” and provide a foundation for the exercise of the discretion to waive the debt. 

29.     In the special circumstances of this case, I consider it appropriate to waive the debt.

Decision

30. The decision under review is set aside. I substitute a decision to waive the debt under s 1237AAD of the Act.

I certify that the 30 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member Frost

Signed:         .....................................................................................
  Associate B. Dhanasar

Dates of Hearing  3, 12 and 27 May 2010
Date of Decision  11August 2010
Appearance for the Applicant   Mr Ross McGuigan         
Solicitor for the Respondent     Mr A Carter, Sparke Helmore Lawyers