Meyer; Secretary, Department of Family and Community Services
[2004] AATA 240
•18 February 2004
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2004] AATA 240
ADMINISTRATIVE APPEALS TRIBUNAL )
) No V03/391
GENERAL ADMINISTRATIVE DIVISION ) Re SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES Applicant
And
RAYMOND AND BARBARA MEYER
Respondents
DECISION
Tribunal
Mrs Joan Dwyer, Senior Member
Date18 February 2004
PlaceMelbourne
Decision 1. The decision under review is set aside.
2. The matter is remitted for reconsideration in accordance with the following directions:
(i) The value of shares held by Mr and Mrs Meyer in Thirty Third Deltalux Pty Ltd be calculated in accordance with the principles explained by Tamberlin J in Repatriation Commission v Harrison (1997) 148 ALR 590;
(ii) The debts arising under s 1224 of the Social Security Act1991 (“the Act”) (up to 30 September 1997) and 1223(5) of the Act (on and after 1 October 1997) be calculated applying the assets test as set out in the Act.
(iii) Under s 1237AAD of the Act there be a waiver of part of the debts, so that the amount of overpayment recovered be not more than it would have been if the section headed “Unsecured Loans” in para 4.6.6.30 of the Guide to Social Security Law (T85 p411) had been applied to the benefit of Mr and Mrs Meyer.
3. The Tribunal reserves liberty to the parties to apply for the hearing to be resumed if there is difficulty in implementing the directions or there is an unreasonable delay in resolving the matter.
[sgd] Mrs Joan Dwyer
Senior Member
CATCHWORDS
SOCIAL WELFARE – Social Security payments – review of decision of SSAT to raise and recover overpayments of age pension but to waive all but $3,199.34 and $3,342.91 of the debts – respondents sole directors and shareholders in private company – asset test applied including over company shares using valuations respondents supplied – data-matching with Australian Taxation Office raised question as to genuine value of shares – respondents borrowed money from company to purchase investments – overpayment raised when value of loan taken into account in determining value of shares in company for asset test – value of investments purchased also taken into account – not appropriate to lift the corporate veil so as to give shares a nil valuation – appropriate to take value of loan into account in valuing shares – finding that respondents received payments of age pensions not payable to them under Social Security Act 1991 – debts raised – finding that debts arose under s 1224(1)(b)(i) of Social Security Act 1991 to 30 September 1997 because respondents made false statements – finding that debts from 1 October 1997 arose under s 1223(5) because of receipt of payments greater than should have been paid – not appropriate to waive the debts under s 1237A(1) Social Security Act 1991 as not solely due to Centrelink administrative error in not contacting respondents to verify value of shares – not appropriate to waive the debts under s 1237A(2) Social Security Act 1991 as value of property was able to be easily determined – appropriate to waive the debts under s 1237AAD as three requirements satisfied – finding that respondents and accountant did not knowingly make a false statement – finding of special circumstances due to failure of Centrelink to apply beneficial Instruction applied to others in similar circumstances – decision under review set aside – matter remitted for reconsideration in accordance with directions.
Social Security Administration Act 1999
Social Security Act 1991, ss 1223(5), 1224, 1236, 1237A(1), 1237A(2), 1237AAD
Re King and Secretary, Department of Social Security (1994) 34 ALD 583
Repatriation Commission v Harrison [1997] 956 FCA (17 September 1997)
Re King and Repatriation Commission (1990) 12 AAR 375
Melwood Units Pty Ltd v Commissioner of Main Roads [1979] AC 426
Leichhardt Municipal Council v Seatainer Terminals Pty Ltd (1981) 48 LGRA 409
Re Beadle v Director-General of Social Security (1984) 6 ALD 1
Beadle v Director-General of Social Security (1985) 60 ALR 225 (Beadle’s case).REASONS FOR DECISION
Mrs Joan Dwyer, Senior Member INTRODUCTION
1. This is an application by the Secretary, Department of Family and Community Services (“the Secretary”) under s 179 of the Social Security Administration Act 1999 for review of a decision of the Social Security Appeals Tribunal (“the SSAT”) made 6 March 2003. That decision set aside decisions made by a Centrelink officer on 25 June 2002 to raise and recover overpayments of age pension; of $19,661.58 paid to Mr Meyer; and $30,563.68 paid to Mrs Meyer. In substitution, the SSAT decided:
2. Set aside the decision to raise and recover a debt of $19,661.58 from Mr Meyer and send the matter back to the Chief Executive Officer of Centrelink in accordance with the directions that there is a debt to the Commonwealth of $19,661.58, however all but $3,199.34 of the debt is to be waived;
. . .
4. Set aside the decision to raise and recover a debt of $30, 563.68 from Mrs Meyer and send the matter back to the Chief Executive Officer of Centrelink in accordance with the directions that:
(a)there is a debt to the Commonwealth in respect of the periods 8 October 1992 to 22 June 1993 and 26 April 1994 to 19 December 2000;
(b)there is no debt in respect of the period 23 June 1993 to 25 April 1994; and
(c)all but $3,342.91 of the debt is to be waived.
2. The SSAT on 6 March 2003 also affirmed decisions of a Centrelink Officer made 15 December 2000 to reduce the rate of age pension payable to Mrs and Mr Meyer due to the value of combined assets, including shares in a private company valued at $129,416. Those decisions are not the subject of this review.
3. Ms King, an advocate with Centrelink, appeared for the Secretary. Mr Evans, a Chartered Practising Accountant, appeared for Mr and Mrs Meyer on the first day of hearing. On the resumed hearing Mr Pointon, a solicitor, appeared. Mr and Mrs Meyer and Mr Evans gave evidence on the first hearing day. On the resumed hearing Mr Judkins, a Certified Practising Accountant and Registered Company Auditor, gave evidence for Mr and Mrs Meyer. Evidence on behalf of the Secretary was given by Mr Davies, a National Income and Assets Advisor with Centrelink. The Tribunal had before it the documents (“the T documents”) lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (“the AAT Act”) and also the exhibits tendered during the hearing.
4. This application raises questions as to the valuation of shares in private companies. It also involves consideration of the waiver provisions of the Social Security Act 1991 (“the Act”).
5. In his statement of case for Mr and Mrs Meyer, and at the commencement of the hearing, Mr Evans seemed to be primarily concerned with the question of waiver. He did not challenge the raising of the overpayments on the basis of the share valuations, which had been adopted by the Secretary in reducing the rate of pension from 20 December 2000. However, when the Tribunal indicated that in considering the issue of waiver, especially under s 1237A(2) of the Act, it may conclude that the value of the shares was at any time “able to be easily determined” from the company’s balance sheet, Mr Evans, for the first time, suggested that he wished to call expert evidence on that issue. He then requested an adjournment. Ms King did not object to the requested adjournment. It was therefore granted.
6. The hearing resumed on 18 February 2004.
7. The problems came to light as a result of data matching between Centrelink and the Australian Taxation Office (“ATO”). In discussion at the commencement of the hearing, I referred to the decision of Re King and Secretary, Department of Social Security (1994) 34 ALD 583. In that matter the Tribunal said in its concluding comments at pp598-599:
(55) We feel we should point out that it appears to us that were it not for the Data Matching Program (Assistance and Tax) Act 1990 (Cth) there is no way in which the department would have become aware of Mr Darren King's income from the trust. That legislation is probably the reason why we have recently noticed an increase in the number of Social Security matters involving money held on trust by or for a person who claims to be entitled to payments under the Act. Sheppard J said, in Director-General of Social Services v Hales (1983) 47 ALR 281 at 321; 5 ALN N162, of the Act:
“The legislation provides for the payment of a variety of benefits to different classes of people who will usually have one thing in common; they will be impecunious and in straitened circumstances.”
That is not always the case these days. The issue now, in some matters, is whether there is an entitlement to benefits, because of the way in which the applicant's finances are arranged, in spite of the applicant not in truth being impecunious. This seems to present some conflict with the concept of social security payments as income support and provides new complex issues with which decision makers, the SSAT, this tribunal and the courts have to grapple.
Those comments are applicable to this matter, even though it is now almost ten years since Re King was decided.
THE EVIDENCE
8. The background facts are not in dispute. I find:
(i)At all relevant times Mr and Mrs Meyer were the sole directors and shareholders of a private company, Thirty Third Deltalux Pty Ltd (“the Company”).
(ii)In 1992 the Company owned a property at Mollymook in New South Wales comprising a number of rental holiday flats. Mr and Mrs Meyer lived in one of the flats and operated the business.
(iii)In 1992 Mr and Mrs Meyer decided to sell the property.
(iv)The property was sold for $500,000 with settlement on 30 July 1992. The proceeds were distributed as follows (see T64):
Cheque to R & B Meyer $ 38,882.03
Payout of company mortgage $ 25,655.91
Cheque to Evans and Metcalfe, Accountants $241,641.02
Settlement on private home of Meyer’s at Ulladulla NSW $182,927.14
Total$489,106.10
The cheque to Evans and Metcalfe was used to purchase investments for Mr and Mrs Meyer, in their own names.
(v)On 30 June 1993, Mr Meyer signed a document headed “Offer to Borrow” in which he and Mrs Meyer agreed to borrow $307,340.62 from the company. The loan was expressed to be repayable at a date to be agreed. Interest was said to be payable at 8.5%, to be calculated as agreed by the parties, from a date to be agreed by the parties. At the same date mortgage documents were prepared, but the mortgage was never registered (T69 p 328).
9. Mr Meyer, in his evidence, explained that Mr Evans had been his and his wife’s accountant for over 30 years, since he first purchased his own business, a newsagency, in Creswick. He said that, even though he and Mrs Meyer had moved to New South Wales, they had always retained Mr Evans as their accountant. They had sold the newsagency and then had a motel and a hotel before purchasing the holiday flats. He had always relied on Mr Evans for all his financial advice. Mrs Meyer confirmed that evidence.
10. Mr Meyer and Mr Evans said that Mr Meyer had relied on Mr Evans to such an extent that the financial details on every review form in the T documents, signed by Mr and Mrs Meyer, except one, were, in fact, filled in by Mr Evans. Mr Meyer either visited Mr Evans at the time, or else posted him the relevant review form. The only exception was T13 which is dated 29 April 1993. Mr Meyer said it was filled in by a Centrelink Officer, on his instructions, when he took it to the office to protest about the number of reviews which were being sent out to him and Mrs Meyer.
11. Although Mr Meyer complained that he and his wife had been asked to complete too many reviews, the T documents do not support that analysis. The only income and investments review forms lodged after the original claim on 29 September 1992 (T p 38) are:
29 April 93 T13, p63
26 April 94 T118, p593
1 August 96 T25 p143
12. The review at T13 appears to be the first completed review form in the T documents. It was sent some six months after Mrs Meyer lodged her application for age pension on 29 September 1992. When Mrs Meyer lodged her application for age pension, she also lodged a Partner Details Form and forms providing details of her assets, income and investments. Mr Meyer did not lodge his claim for age pension until 1 November 1996, in anticipation of turning 65 on 4 November 1996 (T29).
13. The Income and Investments module lodged on 29 September 1992 (T13 p38) showed that Mr and Mrs Meyer each had 5,000 ordinary shares in the company, valued at $6,000. Mr Evans said he had completed that form. He said that in his opinion the value of the shares was their paid up value of $1.00 each. The Balance Sheet for 30 June 1992 (T65 p 321) shows paid up capital of $10,000. Mr Evans acknowledged that if that were so, he had made an error in filling in the form, but considered it insignificant.
14. The Income and Investments module (T13 p38) also gives details of managed investments held by Mr and Mrs Meyer totalling $160,000, and annuities purchased for $50,000 each, held by Mr and Mrs Meyer. The undisputed evidence is that those investments were purchased with the proceeds of the sale of the Mollymook property.
15. Mr Evans explained that he did not consider it appropriate to wind up the company and distribute the proceeds of sale of the Mollymook property to Mr and Mrs Meyer, as that would have attracted capital gains tax and income tax as a distribution. He decided instead to characterise the payment of money to them, to enable them to buy a new home, and to provide retirement income, as a loan from the company.
16. In order to avoid that loan being characterised as a distribution, and thus attracting income tax, Mr Evans arranged for the execution of the “Offer to Borrow” and Mortgage documents (T68 and T64). He said it was never intended that the loan would be repaid as, in reality, it was a loan from Mr and Mrs Meyer to Mr and Mrs Meyer.
17. The Tribunal was puzzled that the amount of the loan was expressed to be only $307,342.62 rather than the sum of $463,450.19 made up as follows (see T64):
Cheque to R & B Meyer $ 38,882.03
Cheque to Evans and Metcalfe, Accountants $241,641.02
Settlement on private home of Meyer’s at Ulladulla NSW $182,927.14
Total$463,450.19
18. Mr Evans explained that the calculation had taken into account the amount of $119,913.00 undistributed profits shown as shareholder funds in the financial statements of the company as at 30 June 1992 (T65 pp320-322). That, in part, explains the discrepancy.
19. The financial statements of the company for the year ended 30 June 1995 (T74 P360-361) show that there were 10,000 $1.00 shares issued to Mr and Mrs Meyer as at 30 June 1994. However there is also an unsecured loan of $276,394.00 to Mr and Mrs Meyer as at 30 June 1994. The T documents do not include the financial statements as at 30 June 1993 or 30 June 1994, but presumably they also showed the loan. It reduced gradually over the years with small distributions being made to Mr and Mrs Meyer, until 29 March 1996, when the loan was reduced as a result of shares being redeemed by the company and then cancelled (R3).
20. The Secretary contends that the value of Mr and Mrs Meyer’s shares in the company must be calculated taking into account, as an asset of the company, the value of the loan from the company to them. On their behalf it is submitted that as the loan is in effect a loan from them to them, and as it was never intended to be repaid, there was no obligation to treat it as an asset of the company, when calculating the value of the shares in the company. Mr Judkins, in his statement (R4), set out extracts from the Statement of Accounting Concepts issued by the Australian Accounting Research Foundation. They stated that an asset should be recognised in Financial Statements only when it is probable that “the future economic benefit measured in the asset will eventuate”. Further, it was contended that it is unjust to take into account as an asset of the company, the loan to Mr and Mrs Meyer in assessing the value of their shares in the company, and also the assets purchased by Mr and Mrs Meyer with the loan money. It was submitted that, in effect, one asset had been counted twice.
21. It was suggested to Mr Evans, when he gave evidence, that the shares should have been valued in the Centrelink forms he completed on behalf of Mr and Mrs Meyer according to their asset value, as shown in the financial statements of the company. He responded that as there was never any intention that the loan would be repaid, and as it was the only asset of the company, there should in fact be a nil valuation. He did not explain how that approach could be reconciled with his reliance on the loan agreement to avoid his clients being taxed on the basis that the loan to them was in reality a distribution.
22. In Repatriation Commission v Harrison [1997] 956 FCA (17 September 1997) Tamberlin J allowed an appeal from a Tribunal decision under the Veterans' Entitlements Act 1986 (“the VE Act”), which has very similar asset and income test provisions to those in the Act. The issue in that matter, as in this, concerned the valuation of the shares in a private company. Mr and Mrs Harrison held all the shares in two private companies and the only assets of the companies were loans to Mr and Mrs Harrison.
23. The question in Harrison was whether the rate of service pension payable under the VE Act should be reduced, as a result of the shares in the two private companies being included as part of Mr and Mrs Harrisons’ assets for the purposes of the VE Act.
24. The AAT held that the value of the shares should be regarded as nil. The AAT referred with approval to a decision of Re King and Repatriation Commission (1990) 12 AAR 375 saying:
. . . As stated by Senior Member Watterson in Re King and Repatriation Commission “the proper approach to valuation ... requires a careful examination of the particular circumstances ...”.. In this case there are two companies which are separate legal entities to the applicants. Although the companies hold assets in the form of loans, those loans are repayable in effect from Mr and Mrs Harrison to Mr and Mrs Harrison. To attribute a separate value to them would be in effect to double count their asset level and provide a gross asset level which was both unrealistic and unrealisable. In the Tribunal’s view, the determination of the value of a person’s assets for calculation as to the rate of pension is a test which is designed to determine the net worth of a person or a couple in a manner which allows a comparative determination to be made with others who are claiming a similar pension. It would be an unreasonable outcome in the unusual circumstances of this case to simply rely on the fact that the companies are a separate legal entity. It is appropriate to lift the corporate veil and to consider the reality of the situation and the nature of the relationship between the applicants and the companies. The way in which the Department has calculated the assets provides an unfair result and a result which is inconsistent with a beneficial interpretation of the requirement in the legislation to value a person’s assets. .. . .
25. Tamberlin J allowed the appeal on the ground that the Tribunal had been in error in “lifting the corporate veil” and in failing to recognise the separate legal existence and identity of the corporate entities from that of their shareholders and directors. He stated that to be “. . . well-settled . . . and, subject to limited exceptions, . . . the law of Australia. . . ..”
26. His Honour then went on to consider the appropriate method of valuation of the shares in the private companies. He found that there was an error of law in giving the shares a nil valuation. His Honour said:
Nil valuation
The Commission further submits that there was no evidence before the AAT to support a reduced valuation of the debts owed to the companies by the respondents and therefore the AAT had no alternative but to value the debts at face value.
The respondents submit that the attribution of a “nil” value must be accepted as correct because if the shares were sold, then, on a winding-up basis, the price received for the shares would be cancelled by the assumed collection of the debt and their financial position would not be advanced.
However, s 41-F1 is concerned with the value of the shares and not with the ultimate financial effect which would result, as a practical matter, if the value of the shares were realised by the respondents.
The legislature has recognised in s 52Y of the Act that the application of the assets test may well result in financial hardship. There is provision for some relief against the consequences of the asset test where severe financial hardship would result from its application. It is possible that the value of the shares could not in practice be realised. In such a case, as the AAT points out, it may be that s 52Y could apply so as to enable the Commission to ignore the value of the shares because there was no market for the purchase of the shares. However, there is no evidence before me, nor was there any before the Tribunal, which would attract the application of that section. The section only applies in circumstances where severe financial hardship might result if s 52Y were not applied.
It does not of course necessarily follow if a hypothetical sale basis of valuation were chosen that, if the shares were able to be sold, they would realise an amount equal to the amount of debts outstanding by the respondents. No doubt a prospective reasonably informed and willing but not anxious purchaser would seek to make some profit from the transaction. This being so, the hypothetical purchaser may not be prepared to pay an amount equivalent to the proper value of the only asset of the companies in order to obtain the amounts owed by the respondents. This circumstance points to the need for further consideration to be given to the questions raised before the AAT.
There is no suggestion in the material that if the shares were to be sold and the debts realised, the respondents, who are the debtors, would not have been in a position to repay those debts. In this important respect the present matter is clearly distinguishable from the authority referred to by the respondents, namely Re King and Repatriation Commission (1990) 12 AAR 375, particularly at 378-379.
In King the AAT assessed the value of a debt at less than its face value because the company owing the debt did not have the necessary sufficient asset backing or capacity to repay the loan at its face value. The amount of the debt was about $225,000. However, the value of the total assets of the debtor was only $66,850. Accordingly, the loan asset was valued, after some adjustments, at $60,750.
That case is different from the present because the exercise in that case was directed to valuing the asset comprised by the debt, whereas in the present case the approach taken by the AAT was in effect to arrive at a net result by offsetting the respondents’ loans from the company against the value of the shares. This is quite a different exercise.
The respondents also submit that the appropriate value to be assigned to the shares is one of fact and not law and that therefore this Court should not review the finding of a “nil” valuation.
While it is correct to say that the attribution of specific value to an asset involves a question of fact, the valuation exercise itself can involve questions of law in circumstances where, for example, there has been a misdirection as to the relevant valuation principles which should apply or where such principles have been ignored: Melwood Units Pty Ltd v Commissioner of Main Roads [1979] AC 426 at 432; Leichhardt Municipal Council v Seatainer Terminals Pty Limited (1981) 48 LGRA 409 at 434 per Hope JA.
Accordingly, I consider that the AAT reasons disclose an error of law in arriving at the “nil” valuation. (emphasis added)
27. In this matter, there was no evidence that if a “hypothetical sale” basis of valuation were adopted, the value shown in the financial statements could not have been realised. As the evidence was that the money borrowed was used for the purchase, by Mr and Mrs Meyer, of a home and investments it would seem that those assets would have been theoretically available to discharge the loan.
28. Applying the Federal Court decision in Harrison, I find the appropriate valuation of the shares in the company at any relevant time must take into account the value of the loan to Mr and Mrs Meyer, as shown in the company’s financial statements at that time. That is the value that should have been attributed to the shares in considering the application of the assets test to Mr and Mrs Meyer.
THE DEBT
29. Having found that the shares should be valued in accordance with the value of the company’s net assets as shown in the company’s financial statements, it is necessary to consider the raising of overpayments resulting from the undervaluations made by Mr and Mrs Meyer in their completed review forms. As set out in paragraph 9c of the Secretary’s Statement of Facts and Contentions, the values attributed to the 10,000 shares in the company in documents signed by Mr and Mrs Meyer were as follows:
Date
Current Value ($)
Source
Evidence at the Hearing
29/9/92
12,000
T6 p38
Details completed by Mr Evans
29/4/93
5,000
T13 p63
“50c/share” details completed by Centrelink Officer
26/4/94
Nil
T118 p593
Details completed by Mr Evans
1/8/96
Do not own shares in a private company
T25 p143
Details completed by Mr Evans
30. The value of the loan was written down in the company’s records by notional distributions up to the tax free threshhold, and as a result of the redemption of shares (R3). As calculated in the Applicant’s Statement of Facts and Contentions, the value of the loans at various dates was as follows:
Financial Year
Net asset value ($)
Source
Distribution ($)
Source
1992/93
307,340
T68 p327
1993/94
276,394
T74 p360
30, 143
T74 p359
1994/95
270,394
T74 p360
6,000
T74 p359
1995/96
143,416
T75 p364
4,000
T75 p363
1996/97
139,416
T76 p368
4,000
T76 p367
1997/98
135,416
T77 p372
4,000
T77 p371
1998/99
129,416
T78 p376
6,000
T78 p375
1999/2000
125,816
T81 p387
4,000
T81 p386
31. Until 1 October 1997, s 1224(1) of the Act provided:
(1) If:
(a) an amount has been paid to a recipient by way of pension, benefit or allowance under this Act or the 1947 Act; and
(b) the amount was paid because the recipient or another person:(i) made a false statement or a false representation; or
(ii) failed or omitted to comply with a provision of this Act or the 1947 Act;
the amount so paid is a debt due by the recipient to the Commonwealth.
32. That section was repealed with effect from 1 October 1997. From that date s1223(5) provided:
Incorrectly paid amount
(5) If:
(a) an amount (the received amount) has been paid to a person by way of social security payment on or after 1 October 1997; and
(b) because the received amount had not been correctly calculated using the relevant rate calculator, or for any other reason, the received amount is greater than the amount (the correct amount) of social security payment that should have been paid to the person under this Act;
the difference between the received amount and the correct amount is a debt due to the Commonwealth.
33. I find that debts to the Commonwealth arose under those sections. I find that Mr and Mrs Meyer did receive payments of age pension that were not payable to them under the Act. Thus debts arose at the relevant times under each of those sections. From 8 October 1992 until 30 September 1997, the debt arose under s 1224(1)(b)(i). The amounts were paid to Mr and Mrs Meyer because, by signing the relevant documents, they had made a false statement. From 1 October 1997, the debt arose under s 1223(5) because Mr and Mrs Meyer received amounts of age pension greater than the amount that should have been paid to them.
WAIVER
34. As to waiver, reliance was placed on three provisions of the Act:
s 1237A(1) – waiver due solely to administrative error
s 1237A(2) – waiver due to underestimating the value of property
s 1237AAD – waiver due to special circumstances.
Waiver due to administrative error
35. Section 1237A(1) provides:
Administrative error
(1) Subject to subsection (1A), the Secretary must waive the right to recover the proportion of a debt that is attributable solely to an administrative error made by the Commonwealth if the debtor received in good faith the payment or payments that gave rise to that proportion of the debt.
Note: Subsection (1) does not allow waiver of a part of a debt that was caused partly by administrative error and partly by one or more other factors (such as error by the debtor).
36. It was submitted by Mr Evans and Mr Pointon for Mr and Mrs Meyer that s 1237A(1) should be used to waive either the whole of the debt or the part of the debt which arose between 26 June 1993 and 25 April 1994.
37. The administrative error relied on as requiring waiver of the whole debt was said to be that Centrelink never contacted Mr and Mrs Meyer or their accountant to verify the value of the shares. In particular, reliance was placed upon a note, at T8 p43, where a Centrelink Officer has written in respect of Mrs Meyer’s claim dated 29 September 1992:
Shares are held in a private company owned by Barbara and Raymond Meyer. The company ceased trading 30.7.92. The company is being wound up (dissolved). Accountant Robert Evans of Evans & Metcalf Accountants Ballarat. Please contact accountant and confirm that business is being dissolved and find out about value of shares and disbursement of assets of business.
38. While it would have been preferable for Centrelink to have made the enquiry suggested, I cannot find that there was an obligation on Centrelink to do so. Centrelink staff were entitled to rely on the information provided to them. It would impose too onerous a burden to expect them to verify all information. Further, even if contact had been made with Mr Evans, he would probably have given a valuation of the paid up value of $1.00 per share. That was his evidence at the hearing. In any event, the overpayment was clearly attributable to the undervaluation in Mrs Meyer’s income and investments module (T6 p38).
39. For similar reasons, although there may have been an administrative error in the failure of Centrelink officers to contact Mr Evans to investigate the different share valuations Mr and Mrs Meyer provided at different times, namely $12,000, $5,000 and nil, it does not attract a waiver under s 1227A(1) of the Act, because the overpayments were not solely attributable to that administrative error.
40. The SSAT decided to waive the debt in respect of the period 23 June 1993 to 26 April 1994, because from 22 June 1993 Centrelink deleted the $12,000 it had previously maintained as the value of the shares. In fact, it seems the deletion may have been from payday 6 May 1993 (T16 p74). It is not known exactly why that occurred. The T documents at T15-16 pp 72-74 contain some pages of a bank statement in the name of the company. On p 74, there is an entry showing a deposit of $10,000 into the company’s account on 29 September 2002. There are also two handwritten notes on the document, presumably written by a Centrelink Officer, saying:
U/D shares to Nil. Proceeds transferred to A/C 117 515 593
Deposit of $10,000 above is value of shares held in 33rd Delta Lux Pty Ltd as advised in income asset R/V dated 30.4.93. U/D’d form pending 6.5.93.
41. There are other entries to show that that instruction was followed up by deleting the shares from the assessment and calculating arrears from 6 May 1993. From 23 June 1993 to 25 April 1994, the rate of age pension paid to Mrs Meyer did not take into account the value of the shares in the company. The SSAT found that this was “entirely due to Centrelink error”.
42. The Secretary submitted that the error was not “attributable solely to an administrative error” made by Centrelink, but it was also attributable to the undervaluation of the shares by Mr and Mrs Meyer.. It was submitted that any error by Centrelink was only responsible for any debt that arises as a result of not taking the shares into account, at the value of $5,000, as notified on T13, dated 29 April 1993.
43. Mr Evans sought to cross-examine the Centrelink officer who was responsible for the instruction to delete the value of the shares. Ms King did not make the officer available, but she conceded that there was Centrelink error in deleting the shares from the assets of Mrs Meyer.
44. It is impossible to understand how the Centrelink officer could have believed that a $10,000 deposit, to the credit of the company, could have represented the proceeds of the sale by Mr and Mrs Meyer to the company of shares which they had valued at 50c each, making a total of $5,000 in April of that year.
45. Without the relevant officer giving evidence, I can make no finding on that issue beyond the concession of error by Ms King. However, the evidence before me does not satisfy me that the deletion of any value for the shares was solely attributable to Centrelink error. From 26 April 1994, the nil valuation at T118 p593 was the cause of the omission from the asset test calculation of any value attributable to the shares.
46. I do not find that s 1237A(1) requires that any part of the debt be waived.
Waiver due to underestimating the value of property
47. Section 1237A(2) provides:
(2) If:
(a) a debt arose because the debtor or the debtor’s partner underestimated the value of particular property of the debtor or partner; and
(b) the estimate was made in good faith; and
(c)the value of the property was not able to be easily determined when the estimate was made;
the Secretary must waive the right to recover the proportion of the debt attributable to the underestimate.
(3)For the purposes of this section, a proportion of a debt may be 100% of the debt.
48. I have decided that this section does not apply. I accept that Mr and Mrs Meyer signed the various forms prepared for them by Mr Evans, and by a Centrelink Officer in good faith. But I cannot find that the value of the property was not able to be easily determined when the incorrect estimates were made. Reference to the company’s financial statements would have allowed the value of the shares to be easily determined by taking into account the value of the assets of the company, including the loan to Mr and Mrs Meyer.
49. In regard to whether Mr Evans was able to easily determine the value of the shares , he and Mr Pointon submitted that before the decision in Harrison, in 1997, it was not clear law, that the value of the loan should be treated as an asset of the company for the purpose of valuing the shares. However, Tamberlin J in Harrison regarded himself as applying well settled law, not as making new law.
50. Both Mr Judkins and Mr Evans gave evidence that where a loan has been written off, or is recognised as non-recoverable, it should not be treated as a company asset. Mr Evans, in his Statement of Case at para 2(d) asked the rhetorical question, “Where in the regulations does it state that the assets are to be valued for Centrelink purposes at the values notified to the Australian Taxation Office?” At para 3(a) he contended,
In determining the value of a person’s or couple’s assets it is reasonable to include the value of shares held in a private company provided that they have the same value.
The only item in the Balance Sheet of the company was a loan to the Meyers which would never be repaid, in other words it was forgiven.
As far as the Meyers were concerned, the company had no value and their only asset was the investments in their own names, made from funds taken out of the company. This is what you would expect most people would assume.
It is only because of the above that the Meyers did not include the loan in any share valuation.
51. Lay people may look at the position in that way. But I find that analysis was not open to Mr Evans, as the accountant who arranged for the preparation of a loan agreement and mortgage document, in order to persuade the Australian Taxation Office that the advance of money to Mr and Mrs Meyer was a loan and not a distribution.
52. I find that once the transaction between the company and Mr and Mrs Meyer was characterised by Mr Evans for tax purposes as a loan, and shown as an asset in the financial statements of the company, he should have understood that it would have to be taken into account in valuing the shares in the company.
53. I find that the value of the shares was able to be easily ascertained by reference to the financial statements of the company.
Waiver due to special circumstances
54. Section 1237AAD of the Act provides:
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 a false representation; or
(ii) failing or omitting to comply with a provision of this 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.Note: Section 1236 allows the Secretary to write off a debt on behalf of the Commonwealth.
55. As I said at the hearing, I am persuaded that it is appropriate to exercise the discretion under s 1237AAD to waive part of the debt in this matter.
56. As to para (a) of s 1237AAD(1), I find
That the debt did not result from Mr or Mrs Meyer or Mr Evans knowingly:
(i) Making a false statement or false representation; or
(ii) Failing or omitting to comply with the provision of the Act; and
57. I find that Mr and Mrs Meyer believed that the information Mr Evans wrote into the asset forms was correct. I have already said that in my view Mr Evans should have appreciated that it was not appropriate to treat the loan as written off or “forgiven” for Centrelink purposes, while relying on it to prevent his clients being liable to pay capital gains tax, and to avoid them being taxed on the money they borrowed from the company as if it were a distribution. But while I am satisfied that Mr Evans should have understood the inconsistency in his position, the Statement of Facts and Contentions he prepared and his evidence satisfy me that he did not recognise the problem. Thus I find that he did not “knowingly” make a false statement or representation.
57. Ms King submitted that the Tribunal should not find that the debt did not result wholly or partly from the debter or another person knowingly “making a false representation or statement”.. She relied on the tax returns signed and lodged by Mr and Mrs Meyer. However, those tax returns do not ascribe a current value to the shares in the company. Nor do the financial statements value the shares. The only share value in the financial statements is the paid up value of $1.00 per share (T74 p361, T75 p 365, T78 p377, T81, p 389, T82, p 397). The financial statements show the undistributed profits in the company, and the unsecured loan to Mr and Mrs Meyer. I have found that the true share value could be easily determined from the financial statements, but I do not find that Mr or Mrs Meyer or Mr Evans had determined that value. I do not find that they knew they had made false statements.
58. I also find that there are special circumstances (other than financial circumstances alone) that make it desirable to waive part of the debts in this matter. In making this finding, I rely particularly on the evidence of Mr Davies, who gave evidence over the telephone on behalf the Secretary. Mr Davies is employed by Centrelink as a National Income and Assets Advisor, specialising in assessment of businesses. He has been employed by Centrelink for 12 years and has been a National Policy Advisor for the last 2 years. He said in his statement that prior to that he had been employed by Area South Australia as a Complex Assessment Team Leader. He said the principle function of himself and his staff was the assessment of private trusts and private companies.
59. The main contention made on behalf of Mr and Mrs Meyer in this matter has at all times been that it is unjust to count as their assets for asset test purposes the investments they purchased with the money the subject of the loan agreement, and, at the same time to take the loan into account in valuing their shares in the company. By taking the loan into account, in valuing the shares, it is contended that Mr and Mrs Meyer are in fact being assessed on the same assets twice. It was submitted, in effect, that if the loan were not offset against the assets purchased with the loan then Mr and Mrs Meyer were being unfairly disadvantaged.
60. When Ms King called Mr Davies as a witness, she asked him for his response to the claim made on behalf of Mr and Mrs Meyer, that it was an injustice not to deduct the value of the loan from the value of the assets purchased with the proceeds of the loan. Mr Davies immediately replied that Mr and Mrs Meyer would not be assessed taking the loan as an asset for the purpose of valuing the shares, and also taking into account the investments they had purchased with the loan money. He said that if Mr and Mrs Meyer could establish that they had bought those investments with the money they had borrowed from the company, that amount of the loan would be deducted from the assessment of their assets.
61. When the Tribunal and the representatives of Mr and Mrs Meyer expressed surprise at the evidence he was giving, in view of the contentions made on behalf of the Secretary, Mr Davies referred to an Instruction (“the Instruction”) in the Guide to the Social Security Law (“the Guide”), a manual used within Centrelink offices. He said that the Guide is also available for public perusal on the Centrelink web-page.
62. At the time Mr Davies was giving evidence, the Tribunal did not appreciate that the Instruction was in the T Documents (T85 p411). After an adjournment, the Instruction was obtained. It states, at 4.6.6.30, under the heading “Encumbrances Loans Against Assets”
Unsecured Loans
If a customer has an unsecured loan AND provides evidence that the loan was specifically obtained to purchase the asset, the outstanding amount of the loan IS deducted from the value of the asset.
Exception: The value of an asset tested income stream CANNOT be reduced by the amount of an unsecured loan.
63. That instruction is consistent with the policy Mr Davies was explaining before the adjournment. Ms King said that the paragraph had been in existence at all relevant times.
64. When Ms King resumed calling the evidence of Mr Davies, he said that the department follows the decision of Harrison, so that the corporate veil is not lifted in valuing shares in a private company, and the value of the shares is ascertained by taking into account the assets of the company, including any loan to the shareholders. He added, however, that there is then a second stage of the assessment. He said the value of the assets is then reduced by taking into account the outstanding amount of any loan, used to purchase assets, such as managed investments, which have been taken into account in the asset test.
65. Mr and Mrs Meyer have both annuities and managed investments. Mr Davies explained that the annuities purchased by Mr and Mrs Meyer for $50,000 each are regarded as “an asset tested income stream”. Thus, he said that the value of the outstanding unsecured loan used to purchase the managed investments, which as at 29 September 1992 (T6 p 38), totalled $160,000.00, would be deducted from the value of Mr and Mrs Meyer’s assets, but the sum of $100,000.00, being the purchase price of two $50,000 annuities (T6 p39), would not be able to deducted from their assets.
66. Mr Davies was quite definite that Mr and Mrs Meyer are entitled to the benefit of the beneficial interpretation of the Act set out in 4.6.6.30 of the Guide, which is applied in the way he described.
67. Mr Davies acknowledged that the interpretation given in the Guide is more beneficial than the provisions of the Act. The Act, in s 1121, only allows deduction of the value of a charge or encumbrance over a particular asset which is taken into account for the assets test. Section 1121(1) provides:
(1) If there is a charge or encumbrance over a particular asset of the person, the value of the asset, for the purposes of calculating the value of the person's assets for the purposes of this Act, is to be reduced by the value of that charge or encumbrance.
…
Thus, the Act does not provide for reductions of assets in regard to loans to purchase assets if there is no charge or encumbrance over those assets.
68. It is unfortunate that the injustice or unfairness to people in the position of Mr and Mrs Meyer is not recognised in the Act. The Tribunal is bound by the Act in considering whether or not an overpayment arises. However, there is a discretion under s 1237AAD to consider whether there are special circumstances that make it desirable to waive part of the debt. The standard statement as to special circumstances is that in Re Beadle v Director-General of Social Security (1984) 6 ALD 1 and Beadle v Director-General of Social Security (1985) 60 ALR 225 (Beadle’s case). In Re Beadle, the Tribunal said at 3:
An expression such as ‘special circumstances’ is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. 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.
69. That passage was approved by the Federal Court in Beadle’s case. The Court said at 230,
While we would place less emphasis on one dictionary definition of special, we are in broad agreement with the approach of the Tribunal and are in agreement with its conclusion.
70. We consider that it must be very unusual or uncommon and also exceptional, for the Tribunal to be faced with a matter in which the case put for the Secretary is, in the view of a Centrelink National Policy Advisor specialising in the relevant field, inconsistent with the practice within Centrelink. Mr Davies in his statement, made 25 November 2003 had said,
Irrespective of what the assets of a particular company consist of, including an asset which is a loan to the shareholders, we will assess the net assets of the company as an asset of the shareholders who are Centrelink customers.
In particular section 1122 of the Social Security Act directs us to assess the outstanding loan balance as an asset for a company as it is for an individual person.
If the customers did not own the company then the owners could take legal action to recover the value of the company assets including the loan to the customers. The company could then be sold for its net asset value, which would include the value of the loan to the customers.
As long as the loan was included as an asset of the company then we would include their share of the net assets, based on their shareholding, under the net asset backing method in valuing private companies.
However, in his evidence, he made it clear that that is merely the first stage of the assessment. He was quite clear that for asset test purposes, Instruction 4.6.6.30 of the Guide would apply so that the assets would be reduced by the amount of the loan used to purchase assessable assets.
71. On Mr Davies’ evidence I find that the benefit of 4.6.6.30 of the Guide would generally be given to people in the position of Mr and Mrs Meyer, by Complex Assessment Officers applying the guide.
72. I find that it is an unusual, uncommon and exceptional circumstance that the Instruction was not applied in this matter. It would have reduced Mr and Mrs Meyer’s assessable assets by taking into account the outstanding amount of the loan up to $160,000.00, being the amount of the loan used to purchase their managed investments.
73. I also find that there are other matters which, while not in themselves sufficient to allow a waiver under s 1237A(1) of 1237A(2), are appropriate to take into account. I refer to the poor administration in not following the suggestion of a Centrelink officer to discuss the whole issue of the valuation of the shares with Mr Evans in October 1992, or at any later stage. Quite different valuations of the shares in the company were given at different times. Also there was the further significant error when, in June 1993, without any clear instruction to do so, the value of the shares was deleted from the assets of Mrs Meyer so that, for almost a year, there was no value ascribed to those shares, rather than the $5,000 which had been notified on 29 April 1993 (T13 p63).
74. Looked at overall, I find that Mr and Mrs Meyer have been unfortunate in the way this matter has been dealt with by Centrelink officers over the years. If the Secretary’s submissions were accepted, the result would be that Mr and Mrs Meyer, for assets test purposes, would be treated as if they owned almost twice as many assessable assets as they do own. That would be an unjust result. Mr Davies said that generally people in their position are treated in a more beneficial way. I find that there are special circumstances that make it desirable to waive part of the debts.
75. I consider that it is more appropriate to waive than to write-off the debt. The matter has been prolonged. Mr and Mrs Meyer should be able to regard this matter as closed, once a new calculation of the overpayment is made. Further, write-off is not available.. Section 1236 provides:
(1) Subject to subsection (1A), the Secretary may, on behalf of the Commonwealth, decide to write off a debt, for a stated period or otherwise.
(1A) The Secretary may decide to write off a debt under subsection (1) if, and only if:
(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.
(1B) For the purposes of paragraph (1A)(a), a debt is taken to be irrecoverable at law if, and only if:
(a)the debt cannot be recovered by means of deductions, or legal proceedings, or garnishee notice, because the relevant 6 year period mentioned in section 1231, 1232 or 1233 has elapsed; or
(aa) the debt cannot be recovered by means of deductions or setting off because the relevant 6 year period mentioned in section 86 of the A New Tax System (Family Assistance) (Administration) Act 1999 has elapsed; or
(b) there is no proof of the debt capable of sustaining legal proceedings for its recovery; or
(c) the debtor is discharged from bankruptcy and the debt was incurred before the debtor became bankrupt and was not incurred by fraud; or
(d) the debtor has died leaving no estate or insufficient funds in the debtor's estate to repay the debt.
(1C) For the purposes of paragraph (1A)(b), if a debt is recoverable by means of:
(a)deductions from the debtor's social security payment; or
(b)deductions under section 84 of the A New Tax System (Family Assistance) (Administration) Act 1999; or
(c)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.
….
On the evidence before me , the circumstances of the matter are not such as to allow the debts to be written off under s 1236 of the Act.
76. At the conclusion of the hearing, after the parties had requested lengthy adjournments in order to see if they could reach a compromise, I indicated that I had prepared a decision which I would deliver if they could not reach a compromise. They did not resolve the matter and I therefore decided:
(1) That the decision under review be set aside.
(2) That the matter be remitted for reconsideration in accordance with the following directions:
(i)The value of shares held by Mr and Mrs Meyer in Thirty Third Deltalux Pty Ltd, be calculated in accordance with the principles explained by Tamberlin J in Repatriation Commission v Harrison (1997) 148 ALR 590;
(ii)The debts arising under s 1224 of the Act (up to 30 September 1997) and 1223(5) of the Act (on and after 1 October 1997) be calculated applying the asset test as set out in the Social Security Act 1991.
(iii)Under s 1237AAD of the Act there be a waiver of part of the debts so that the amount of overpayment recovered be not more than it would have been if the section headed “Unsecured Loans” in para 4.6.6.30 of the Guide to Social Security Law (T85 p411) had been applied to the benefit of Mr and Mrs Meyer.
(3) That liberty be reserved to the parties to apply for the resumption of the hearing, in case there should be difficulty in following these directions or an unreasonable delay in resolving the matter.
I certify that the 76 preceding paragraphs are a true copy of the reasons for the decision herein of Mrs Joan Dwyer
Signed: Josephine McKay
AssociateDate/s of Hearing 16 October 2003 & 18 February 2004
Date of Decision 18 February 2004
Advocate for the Applicant Ms King
Solicitor for the Respondent Mr Pointon
Representative of the Respondent Mr Evans
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