Mein and Repatriation Commission
[2007] AATA 1560
•18 July 2007
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2007] AATA 1560
ADMINISTRATIVE APPEALS TRIBUNAL No N2005/1029 & 2007/0222
| VETERANS' APPEALS DIVISION | ||
| Re | James Mein | |
Applicant
| And | Repatriation Commission |
Respondent
DECISION
| Tribunal | Ms N Bell, Senior Member |
Date18 July 2007
PlaceSydney
| Decision | The reviewable decision, the subject of N2005/1029 is affirmed. The reviewable decision, the subject of 2007/0222 is set aside and instead the Tribunal decides that Mr Mein’s assets, in his attributed stakeholding in Barisa and by extension in Sabrol, together with his loan to Barisa should be disregarded for the purpose of calculating the rate of Mr Mein’s pension. |
..................[Sgd]....................
Ms N Bell Senior Member
VETERAN’S – Service Pension – Service Pension is Means Tested – Writing Down of the Value of Assets – Deprived Asset – Assets Unrealisable – Assets of Company are taken as assets of a stakeholder of that Company – Written Down amounts are included as Assets of the Company – Hardship – Severe Financial Hardship – Decision Under Review is Set Aside.
Sernak v Repatriation Commission [2003] AATA 975
Re Drake and Minister for Immigration and Ethnic Affairs (No. 2) 2 ALD 634
Repatriation Commission v Hall (1988) 78 ALR 687
Veterans’ Entitlements Act 1986
REASONS FOR DECISION
| Ms N Bell, Senior Member |
Mr Mein, who was granted a service pension in 2003, has for many years been involved in the promotion of a product called “N-FIX”. N-FIX is a soil nutrient that, among other things, breaks soil down to be friable, balances CO2 energy in gardens, creates PH balance and eliminates fungus and blue green algae. Mr Mein is an enthusiastic believer in the properties of N-FIX.
N-FIX trades through the company Sabroll Pty Ltd, of which Mr Mein is director and secretary. Sabroll does not break even. The business is run by Mr Mein’s daughter and her husband and Mr Mein is closely involved in its operations.
The company Barisa Pty Ltd holds 32 of the 100 shares in Sabroll. Mr Mein is a director, secretary and major shareholder of Barisa.
Mr Mein’s service pension is means tested. In particular, a person’s assets are taken into account to decide the rate of pension to be paid. After deciding that Mr Mein should be attributed with 40% of the assets of Barisa, the Repatriation Commission examined the total net asset value of Barisa and concluded that his share of the net asset value was so high that it precluded payment of the pension.
There is a dispute between Mr Mein and the Commission as to the effect of a writing down or reduction, by Mr Mein, of that asset value by some $1,250,000. Mr Mein maintains it reflects the true financial position of Barisa whereas the Commission contends there is no provision for such writing down.
There is also dispute about a reduction in value, by Mr Mein, of his loan to Barisa by some $328,000. Mr Mein maintains this reflects again the true worth of Sabroll and hence the value of Barisa. The Commission contends it is a deprived asset and should be maintained, after deduction of the allowable $10,000, for five years, in accordance with the relevant provisions of the Veterans’ Entitlements Act 1986.
Finally, Mr Mein made a request for the “hardship provisions” of the Act to be applied. These provisions allow for unrealisable assets to be disregarded if the normal application of the assets test would result in severe financial hardship. His application was rejected by the Commission.
issues
There is little argument about the percentage of the net asset value that should be attributed to Mr Mein. The Commission says it is clearly 40% (which includes 12.8% of the net value of Sabroll). Mr Mein says he has since distributed the redeemable share he held on behalf of his wife’s estate to his oldest daughter, leaving him with three of the ten shares in Barisa. However, the essential argument is about the total net value of the assets – the amount that the percentage should be applied to.
These three questions are posed by this application:
i.Does the statutory scheme allow for the writing down of an asset’s value?
ii.Is the reduction in value of Mr Mein’s loan to Barisa a deprived asset?
iii.Should the “hardship provisions” apply? That is, are any of the assets attributed to Mr Mein unrealisable and, if so, would the normal application of the assets test cause Mr Mein severe financial hardship?
does the statutory scheme allow for the writing down of an asset’s value?
The 2004 balance sheet for Barisa shows that, from an interest in the “Sabrol Debenture” in the amount of $1,254,389.90, an amount of $677,182.26 was deducted as “interest therein of others” and an amount of $488,946.37 was deducted as “provision for loss”. In the 2006 balance sheet for Barisa, an amount of $546,855.05 was deducted as “interest of others” and an amount of $707,534.85 was deducted as “provision for loss”.
Mr Mein said, in various letters and in his oral evidence, that his purpose in writing down those amounts as he did was to reflect the true value of Sabrol to Barisa – the result of losses over 18 years arising from that investment, despite “much trial and promotion”. He stressed that the assets in the Barisa balance sheets are only worth the amounts for which they can be realised. He also stressed that he has taken no benefit from the activities of either Barisa or Sabrol for some 20 years because he wanted to avoid penalties for exercising a preference over trade creditors whose interests are paramount.
The provisions of the Act govern how the assets of a private company may be valued and how any of that value may be disposed of without attracting a re-accrediting of the disposition as a deprived asset. In essence an asset owned by a company will be taken into account as the assets of a stakeholder of the company in the order of the percentage attributed to the stakeholder (s.52ZZR). The same rules concerning disposition of assets by individuals apply to “attributable stakeholders” in companies. That is, when assets are disposed of, the amount of the disposition, less the sum of $10,000.00, is to continue to be included in the person’s assets for five years starting on the day of the disposition (ss.52JA and 52ZZX). A person “disposes of assets of the company” when the person diminishes the value of all or some of the company’s assets (s.52 ZZX(6)(a)(iii)).
There is no provision that allows for the writing down of an asset. Nor does the statutory scheme allow for anything but the “book value” of a loan, as opposed to the “asset backing value” to be used in the calculation of the value of a loan to a company.[1]
[1] Sernak v Repatriation Commission [2003] AATA 975
For these reasons, the amounts written down by Mr Mein should be included in the assets of Barisa.
Is the reduction in value of mr Mein’s loan to barisa a deprived asset?
The 2002 balance sheet for Barisa shows a reduction of the value of Mr Mein’s loan to the company by $328,946.37. Mr Mein said that, because of Sabroll’s continual losses over the last 18 years and the specialised nature of its plant, Barisa has no resources with which to repay the loan made to it by him. The reduction in value of the loan, he said, simply reflects reality.
However, the provisions concerning disposition of assets (ss. 52JA and 52ZZX, discussed above) apply to this diminution in value so as to maintain the full value of the asset, minus the relevant disposal limit, for a period of five years. Apart from Mr Mein’s assertions, there is no evidence to support the reduction in value as anything other than a disposal of an asset.
In this instance the period of five years ends on 31 December 2007.
This, and my conclusion that Mr Mein’s writing down of the value of some assets must be reversed, means that his assets take him above the level at which the pension can be paid. That is the case whether Mr Mein’s attributed share is 40% or 30%.
should the “hardship provisions” apply?
The financial hardship provisions of the Act allow for an unrealisable asset to be disregarded in working out the person’s pension rate (s. 52Z(1)).
However, the Act sets out a number of requirements that must be satisfied before a person may have the benefit of the hardship provisions. There is some policy guiding the administrators of the scheme that I must have regard to Re Drake and Minister for Immigration and Ethnic Affairs.[2]
[2] (No. 2) 2 ALD 634
These are the requirements in the Act:
i.A pension is not payable because of the application of an assets test;
ii.The person would suffer severe financial hardship if the hardship provisions were not available to the person;
iii.The person has an unrealisable asset; and
iv.Either the person has not disposed of assets or it is determined in writing that that disposition should be disregarded for the purposes of access to the financial hardship provisions.
pension not payable
It is clear that the first requirement is satisfied; because of the application of the assets test, pension is not payable to Mr Mein.
severe financial hardship
As to the second requirement, severe financial hardship, I note that the policy that informs the administration of the provisions (IS 117) sets out the following criteria:
·The total annual rate of pension which would be paid under the assets test plus all other income received, is less than the maximum annual rate of pension;
·Readily available funds do not exceed, for a single person, $6,000.00; and
·There is no other course of action the person could reasonably be expected to take to improve his financial position.
There is no dispute that the first of these policy requirements is satisfied. As to the second, I accept Mr Mein’s evidence that he has no funds readily available in excess of $6,000.00. I also accept his evidence that he lives, rent free, with his daughter; that his only personal assets are his electric scooter, some furniture and personal belongings. He has a Visa card debt of approximately $10,000.00, that amount having been accumulated in an attempt to cover his living expenses; that his only income is a disability pension of some $250.00 per fortnight; and that his expenses for food are some $400.00 to $600.00 per month. Mr Mein said his medication costs are covered by his “Gold Card” and that he has no transportation costs. I note that Mr Mein is 85 years old and has very limited mobility.
The Full Federal Court in Repatriation Commission v Hall[3], on the question of what may constitute “severe financial hardship”, said:
We do not read this expression as requiring proof of destitution. The words must be read in the context in which they appear. The levels of pensions and benefits which the Veterans’ Entitlements Act and the Social Security Act provide and the levels of income and assets which will bring about a reduction in the rate of pensions or benefits provide some guide to the level of income which, in Australia, is accepted as requiring the provision of government assistance. It would be wrong to read the assets test provisions as requiring destitution when the income test provisions do not.
[3] (1988) 78 ALR 687 at 694
On an income of some $250.00 per fortnight, even with the benefit of accommodation provided by his daughter, Mr Mein is subsisting, with substantial debt, on an income well below the average social security payment level.
The third policy criterion, concerning available courses of action to improve his financial position, raises considerations that overlap to some extent with the question of whether the assets of Barisa are unrealisable. Mr Mein’s evidence was that he has tried to borrow against his property but was unsuccessful because of his age. He has six adult children and asked the oldest four to take over one of his shares in Barisa but they did not have the available funds to do so. He does not want to wind up the company because to do so would damage the interests of his daughter and son in law and the widows of the original investors. As to whether Sabroll, trading as N-FIX, could be sold as a going concern, he noted that it operates under a licence from owners of the N-FIX formula in the United States and, under the terms of the licence, the business could only be sold with U.S. approval and any purchaser would have to apply for a licence.
I note this evidence is not supported by documentation. However, it is not impossible and I have no reason to doubt that Mr Mein is a credible witness. Nor has his evidence been rebutted by any evidence to the contrary from the Commission. On this basis I accept Mr Mein’s evidence and conclude there is no course of action he could reasonably be expected to take to improve his financial position.
On this basis, I conclude that Mr Mein would suffer severe financial hardship if he could not have the benefit of the hardship provisions.
unrealisable asset
The term “unrealisable asset” is defined in the Act to include an asset that a person cannot, or cannot reasonably be expected to, sell or use as security for borrowing (s. 5L(11) and (12)).
The assets that Mr Mein seeks to have disregarded for the purposes of the assets test are the loan from Barissa to Sabroll and Mr Mein’s loan to Sabroll – or at least the written down or disposed of portions of each.
In Hall, the Full Court held that in considering whether a farmer could reasonably be expected to sell or realise a farm property and what income could reasonably be expected to be derived from the property, it was proper to have regard to the circumstances of the farmer and of other members of his family living on or deriving income from the land. Mr Mein gave evidence that, were he to exert influence over the other shareholders and have the companies wound up, it would disadvantage his daughter and son in law who have worked in the N-FIX business for some 15 years without adequate compensation. He also made mention of disadvantage to the widows of the original investors, but it was not clear to me what this disadvantage would be, apart from Mr Mein’s conviction that perseverance with the business would eventually result in a return on that investment which, if realised now, would be a substantial loss.
I have already mentioned Mr Mein’s evidence about the limitations associated with the U.S. licence and his failed attempt to have his children purchase his shares.
Mr Mein also gave evidence of his attempt to interest Dick Smith in purchasing his interest in the companies. This was unsuccessful.
I am also conscious that Mr Mein’s holding in Barissa has been assessed by the Commission at 40%. This is not a majority shareholding, although Mr Mein conceded that he is the most influential of the shareholders in Barisa. However, significant decisions relating to Barisa are not his to make alone. Similarly, I note that Barisa’s shareholding in Sabroll is only 12.8%. A purchaser of Mr Mein’s interest in the companies would face the same limitations, without the benefit of the particular influence Mr Mein enjoys because of his history with the N-FIX project.
I consider that the combination of these factors makes it unreasonable to expect Mr Mein’s assets in the companies to be realised. This means that Mr Mein’s interest in Barisa and, by extension, his interest in Sabroll are unrealisable assets.
There is also the practical difficulty of recovering moneys loaned to a company (Barisa) whose major asset is its investment in another, as yet unprofitable, company (Sabroll). Mr Mein gave evidence of the specialised nature of the plant held by Sabroll and the unlikelihood of realising its value were that plant to be sold. I consider that, in these circumstances, it is not reasonable to expect Mr Mein to realise the asset of his loan to Barisa.
disposition
The policy document IS117 says of disposed assets:
In certain circumstances the hardship rules may apply to you even if you have given away income or assets. This includes situations where the financial hardship currently suffered by you is not a direct result of the disposal of the income or asset or where you would have met the hardship criteria even if you had not disposed of the income or asset.
There is no evidence to suggest that, Mr Mein’s hardship is the direct result of his disposal of assets or that he would not meet the other requirements for the application of the hardship provisions if he had not written down the loan from Barrisa to Sabroll or reduced the value of his loan to Barissa. On this basis, and in compliance with the policy, I consider it is appropriate to determine that the dispositions should be disregarded for the purposes of access to the financial hardship provisions.
For the reasons set out above, the hardship provisions of the Act should apply. Mr Mein’s assets, in his attributed stakeholding in Barisa and by extension in Sabrol, together with his loan to Barisa should be disregarded for the purpose of calculating the rate of Mr Mein’s pension.
More than six weeks after the conclusion of the hearing, Mr Mein wrote to the Tribunal saying that he had only seen the Commission’s Statement of Facts and Contentions for the first time on the morning of the hearing. He also said, should the Tribunal decide his application against him, he wished to have the hearing reconvened so he could address the “errors of fact” made by the assessing officers of the Department of Veterans’ Affairs that only became apparent to him when he was “cross examined by Counsel” for the Commission. I referred Mr Mein’s correspondence to the legal representatives for the Commission. The Commission, through its solicitor, replied that it had filed and served its Statement of Facts and Contentions on 17 January 2007, some three months prior to the hearing, and that Mr Mein had in fact made reference to it in his correspondence of 22 January 2007. The Commission also said that Mr Mein had not been subject to cross examination, but rather the Commission was invited to assist the Tribunal by first setting out its position on the facts and law. The transcript reflects this. The questions Counsel asked Mr Mein were less in the nature of cross examination then they were an attempt to elicit further evidence from Mr Mein about realisation of assets and severe financial hardship. Mr Mein was given ample opportunity to give that evidence and to address the issues raised in his application.
In any event I have determined that his application under the hardship provisions should be granted.
Decision
The reviewable decision, the subject of N2005/1029 is affirmed.
The reviewable decision, the subject of 2007/0222 is set aside and instead the Tribunal decides that Mr Mein’s assets, in his attributed stakeholding in Barisa and by extension in Sabrol, together with his loan to Barisa should be disregarded for the purpose of calculating the rate of Mr Mein’s pension.
I certify that the 44 preceding paragraphs are a true copy of the reasons for the decision herein of Ms N Bell, Senior Member.
Signed: ………[ Sanjiv Shah ]………
Associate
Date of Hearing 30 March 2007
Date of Decision 18 July 2007Solicitor for the Respondent Ms A Nanson
Counsel for the Respondent Ms K Eastman
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