MJDT and Secretary, Department of Families, Housing, Community Services and Indigenous Affairs
[2009] AATA 413
•5 June 2009
Administrative Appeals Tribunal
ADMINISTRATIVE APPEALS TRIBUNAL )
) No: 2008/4911
General Administrative Division )
Re: MJDT
Applicant
And: Secretary, Department of Families, Housing, Community Services and Indigenous Affairs
RespondentDIRECTION
TRIBUNAL: Mr RP Handley, Deputy President
DATE: 21 August 2009
PLACE: Sydney
The Tribunal directs the Registrar, pursuant to subsection 43AA(1) of the Administrative Appeals Tribunal Act 1975, to alter the text of the decision in this application as follows:
Delete the name mentioned in paragraphs 37 and 41 of the reasons for decision dated 5 June 2009 and substitute with “the applicant”.
....................[Sgd]....................
Mr RP Handley
Deputy President
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2009] AATA 413
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2008/4911
GENERAL ADMINISTRATIVE DIVISION ) Re MJDT Applicant
And
SECRETARY, DEPARTMENT OF FAMILIES, HOUSING, COMMUNITY SERVICES & INDIGENOUS AFFAIRS
Respondent
DECISION
Tribunal Ms Robin Hunt, Senior Member Date5 June 2009
PlaceSydney
Decision The decision under review is affirmed.
...................[Sgd]...................
Ms Robin Hunt
Senior Member
CATCHWORDS
SOCIAL SECURITY – disability support pension – reduced rate paid – attribution of control of company – effect of power of attorney – whether applicant controller of company during severe illness – attributable stakeholder – 100% attributable income – reviewable decision affirmed.
Administrative Appeals Tribunal Act 1975 (Cth) s 35
Powers of Attorney Act 2003 (NSW)
Social Security Act 1991 (Cth) ss 8, 1064, 1207, 1207B, 1207C, 1207N(1), 1207Q, 1207X, 1207Y,1208H
Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60
Minister for Immigration, Local Government and Ethnic Affairs v Roberts (1993) 41 FCR 82
Re Dainty and Minister for Immigration and Ethic Affairs (1987) 12 ALD 416
Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634
Re O'Meara and Secretary, Department of Families, Housing, Community Services and Indigenous Affairs [2008] AATA 1083
REASONS FOR DECISION
5 June 2009 Ms Robin Hunt, Senior Member introduction
1. On 9 April 2009, the tribunal, being satisfied that it is desirable to do so by reason of the confidential nature of the evidence, directed pursuant to subparagraph 35(2)(aa) of the Administrative Appeals Tribunal Act 1975, that the names of the applicant and his family members not be identified in any written reasons produced by the tribunal.
2. The applicant is self-represented and was assisted by his father at the tribunal hearing. He is seeking back payment of disability support pension at a higher rate than that he received from January 2003 to August 2007. He received a reduced rate until August 2007 because of a Centrelink finding that he should be attributed 100% control of a company of which he was a director and director’s fees paid to him therefore should be treated as income. The applicant agrees he received some director’s fees but denies he controlled the company. He wants back payment of the full rate to the date of grant of the pension.
reviewable decision
3. On 16 September 2008, the Social Security Appeals Tribunal (‘the SSAT’) affirmed an original Centrelink decision of 25 February 2003 (‘the attribution decision’) that the applicant be attributed 100% company income and assets of Company F because of his majority shareholding in the company.
issues
4. I must decide whether the applicant was correctly attributed 100% control of Company F, so that director’s fees paid to him should have been treated as income in calculating his rate of disability support pension, and if not, the date of effect of any favourable determination.
background
5. The background to these proceedings is set out in the Secretary’s Statement of Facts and Contentions lodged with the tribunal.
6. On 31 January 2003, the applicant applied for and was granted disability support pension from the date of application. Centrelink paid him less than the maximum rate based on the assessment of a “complex assessment officer” (‘CAO’) that his financial interest in Company F on 25 February 2003 diminished his entitlement.
7. Between 2003 and 2007, Centrelink sent notices to the applicant’s father requesting information about Company F for the purposes of reviewing the applicant’s entitlements. The applicant’s father complied with Centrelink’s requests by providing further financial information including the company’s balance sheets, profit and loss statements, and the applicant’s personal income tax returns. On each occasion, a CAO conducted an assessment of the applicant’s financial interest in Company F for the relevant period but no change to the attribution decision was made. On 17 October 2007, the applicant contacted Centrelink and requested a review of the attribution decision of 25 February 2003. A Centrelink authorised review officer affirmed the decision as did the SSAT on 16 September 2008.
8. On 21 October 2008, the applicant applied to this tribunal for review of the SSAT decision. The applicant represented himself at the hearing on 20 April 2009 and was accompanied by his father.
the applicant’s evidence
9. The applicant told the tribunal he established a financial planning company in 1999. In 2002, his health started to decline and he suffered a mini stroke between Christmas and New Year that year. He was hospitalised for several months and dropped to a mere 37 kilograms, which was half his usual weight. He said he was not expected to recover so he made a will and gave his parents general power of attorney in May 2003. In late May, he was transferred to a hospice for palliative care and his parents were advised that he had less than 48 hours to live. Despite the expectation of imminent death, he gradually regained some form of health with his mother’s support and his own determination and was discharged from the hospice in early August 2003. He then spent a further three to four months at home without going outside, having community nurses attend to him at home. From February 2004, he underwent 18 months of chemotherapy, which ceased in 2005. He is still under doctor’s care and guidance today.
10. On 1 May 2003, according to a copy of a document before me, the applicant executed a form of power of attorney prepared by a solicitor whereby he appointed his father and his mother as his attorneys with authority to act jointly and severally. The solicitor witnessed the applicant’s signature, on 21 May 2003, and certified that he explained the effect of the instrument to the applicant before he executed it. The applicant’s father gave oral evidence that his son made a will on the same day but only the front sheet of this document has been produced to the tribunal and it is undated.
11. The power was not made using the form prescribed under the Powers of Attorney Act 2003 (NSW). It did, however, contain a clause, which is similar to that in the prescribed form, and which gives power of attorney with the intention that it will continue to be effective if the donor lacks mental capacity after its execution. Clause 3 of the instrument reads:
This general Power of Attorney is given with the intention that it will continue to be effective notwithstanding that after its execution I suffer loss of capacity through unsoundness of mind.
12. An “attorney” is defined in the Macquarie dictionary as:
One duly appointed or empowered by another to transact any business for him or her.
13. The primary definition of “attorney” set out in the Oxford English dictionary is:
One appointed or ordained to act for another.
14. The Oxford dictionary goes on to set out that a private attorney is:
One duly appointed or constituted (by letter or power of attorney) to act for another in business and legal matters, either generally, as in payment, receipt, and investment of money, in suing and being sued, etc., or in some specific act, which the principal, by reason of absence, is unable to perform in person….
15. In the present case, the applicant’s power of attorney bestowed on his parents general power to act on his behalf. The terms of the power of attorney are unrestricted, reading, in part:
... the authority conferred on them … to do … anything I may lawfully authorise an Attorney to do.
16. The instrument also bestows on the applicant’s parents authority to “execute an assurance or other document, or do any other act, whereby a benefit is conferred on them or either of them”. In my view, this instrument represents a complete surrender of power by the applicant to his parents and this includes surrender of control of Company F.
17. The applicant told the tribunal that Company F was a family company, even though, on paper, he was the sole director before his illness and had the major shareholding. He denied he was the only person in the company performing work which generated income. He said all family members were involved in the company’s activities; shareholder meetings included both his mother and his father and his father acted as trustee for his brother. His father did the accountancy and financial administration for the company and his mother cleaned the company’s office and was co-signatory on the company chequebook. His father gave sworn oral evidence to similar effect.
18. The company had approximately eight staff members between 1999 and 2002. The applicant and his father said he never took a regular income from the company and only occasional director’s fees. In response to a question, the applicant agreed fees he received in 2002/2003 amounted to over $14,000. He also admitted that no one else took any director’s fees and that his father was never paid for his accountancy work. When asked by the Secretary’s advocate whether he owned 12 out of the 20 company issued A and B class shares (the only shares with associated voting rights), and therefore had effective control of the company by virtue of his ownership of more than 50% voting rights, the applicant said “Yes”.
19. The applicant stressed the gravity of his illness had impacted on his capacity and made him incapable of having control of the company. It was for this reason that he gave general power of attorney to his parents to operate all dealings in his place from May 2003. The only income that came into the company after he was admitted to hospital was ongoing “trail” income generated from mortgage business which he had established before he became ill. His role in the company ceased completely and his father took over the administration. His father gave evidence confirming his son’s submissions. He told the tribunal that he, like his son, was a qualified financial planner and he maintained the client base and saw clients from 2003 to the end of 2005 and early 2006, monitoring clients’ accounts and keeping them on the loan books. Otherwise, Company F’s clients would have refinanced their loans somewhere else. The applicant’s father gave evidence that the applicant’s mother at this time was also made a director of the company and took over signing any cheques that needed to be issued to pay outstanding liabilities.
20. The applicant’s father gave further oral evidence to the effect that he ran the company while the applicant was ill, and that he was qualified to do so in his own right. He said all the trail income coming into the company continued solely due to his efforts, including his going out to see the company’s clients and assessing their situations. If he had not, the clients would have taken their mortgages elsewhere and the company would have lost income. He also stated that he had discussions with his son about actions he took in running the company but that he did not always follow his son’s wishes or instructions. He gave evidence that he did what he believed was in the best interests of the company. As to the period before his son’s illness, the applicant’s father said that he and his wife always had a lot of input in the strategic operations of the company and regularly participated in meetings because of their substantial financial interest in the company. Both parents had invested money in the company which they secured through loan documents which they produced to the tribunal. In addition, the applicant produced bank records to the tribunal which bore out the claims that amounts were deposited to the company accounts consistent with the loan documents and evidence of the applicant and his father.
consideration and findings
21. The rate of disability support pension payable to a person is worked out using Pension Rate Calculator A at the end of section 1064 of the Social Security Act 1991 (‘the Act’). Module A of the Rate Calculator contains a method statement that explains the overall rate calculation process. This involves applying the ordinary income test and the assets test to the maximum payment rate to obtain the income reduced rate and assets reduced rate. The lower of these two rates, or the income reduced rate, if the rates are equal, is the provisional annual payment rate.
22. The Secretary’s advocate confirmed that no adjustment to the applicant’s rate was made by reference to assets but only by reference to attributable income. Section 8 of the Act defines income as “an income amount earned, derived or received by the person for the person’s own use or benefit” unless subsections 8(4), 8(5) and 8(8) specifically excludes it from assessment. This would appear to be an end of the matter as the applicant does not deny he received the income. However, the Secretary made adjustments to his pension on the basis of the special provisions about controlled private companies.
23. The relevant provisions about controlled companies came into effect on 1 January 2002 and are designed to attribute assets and income of a controlled private company to persons who control such a company.
24. The applicant does not dispute that Company F is a designated private company. Subsection 1207N(1) of the Act states that a company is a designated private company if it has consolidated gross operating revenue of less than $25 million, has assets of less than $12.5 million and has less than 50 employees. I find that the company is indeed a designated private company.
25. Section 1207Q of the Act states that a company is a controlled private company in relation to an individual if the company is a designated private company, and the individual can be seen as having control of the company because the person or an associate of the person has direct voting interests of 50% or more in the company. An “associate” includes relatives (parents and siblings) as defined in sections 1207B and 1207C. The applicant gave evidence that he holds 12 of the 20 voting right class of shares. The Secretary argued that Company F was a controlled private company because of this shareholding and voting rights. Neither party addressed the effect of the legislative provisions in regard to associates of the applicant.
26. Section 1207Q reads, in part:
1207Q (1) For the purposes of this Part, a company is a controlled private company in relation to an individual if the company is a designated private company and:
(a) the individual passes the control test set out in subsection (2); or
(b) the individual passes the source test set out in subsection (3).
Control test
(2) For the purposes of this section, an individual passes the control test in relation to a company if:
(a) the aggregate of:
(i) the direct voting interests in the company that the individual holds; and
(ii) the direct voting interests in the company held by associates of the individual;
is 50% or more; or
(b) the aggregate of:
(i) the direct control interests in the company that the individual holds; and
(ii) the direct control interests in the company held by associates of the individual;
is 15% or more; or
(c) the company is sufficiently influenced by:
(i) the individual; or
(ii) an associate of the individual; or
(iii) 2 or more entities covered by the preceding subparagraphs; or
(d) the individual (either alone or together with associates) is in a position to exercise control over the company.
….
27. In his application for review, the applicant stated, “As [Company F] is an entity in its own right in my opinion it is incorrect that all of the income is attributed to me. Whilst other shareholders held 40% I should have only been attributed to the balance and not to 100%”.
28. The applicant and his father based their submissions and supporting evidence about control of the company on the replacement role of the parents in running the company when the applicant lost the capacity to do this. They also argued that loans from the applicant’s parents to the company supported the applicant’s argument that his father was controlling the company. The applicant’s father, as directed by the tribunal, provided copies of the company bank statements to show the money lent to the company by the applicant’s parents was paid into the company accounts and not to the applicant personally.
29. In terms of findings in cases such as Re O'Meara and Secretary, Department of Families, Housing, Community Services and Indigenous Affairs [2008] AATA 1083, which the advocate for the Secretary drew to my attention, I find the test given is of little assistance in the present case other than reminding me that I must look at the legal structure of the company arrangements. The tribunal stated in that case, in relation to a trust, rather than a company:
… Regard must be had to the circumstances arising from the legal structure of the Trust, from the administrative arrangements with respect to the Trust and whether an individual can be reasonably expected to exercise effective control.
30. In the present case, I accept that the applicant could not be reasonably expected to exercise effective control. I also accept the evidence of the applicant’s father as to the administrative arrangements and note this is borne out by execution by the applicant of the power of attorney. The applicant was in extremis when he executed the power of attorney and incapable of control of the company. However, I note that section 1207Q provides that the role of associates affects the determination of whether a designated company is a controlled private company. In other words, the structure of the company must be considered for the control test.
31. Section 4.12.1.30 of the Guide to Social Security Law, sets out:
Determining a Controlled Private Company from 01/01/2002
Control test for private companies
The control test, in conjunction with the associate's rule, is used to determine the level of control a stakeholder exercises in relation to a designated private company. Effective control of a private company generally rests with those persons who hold VOTING POWERS or GOVERNING DIRECTOR powers. This reflects the absolute power held by these people as they can retain profits within the structure, or reduce or eliminate profits by paying themselves higher wages or director's fees. They can also issue more shares to themselves, thus diluting the value of minority shareholdings. Control can rest with one person, a couple or multiple stakeholders.
Factors for establishing whether a private company is a controlled private company with respect to an individual
The legislation includes the following criteria:
·the sum of the direct voting interests in the company that the person and the person's associates have is 50% or more, OR
·the person, alone or with associates, is beneficially entitled to 15% or more of the capital or dividends of the company, OR
·the company is sufficiently influenced by the person, an associate of the person or 2 or more entities covered by the preceding factors, OR
·the person (alone or with associates) is in a position to exercise control over the company.
32. It is plain from the evidence of the applicant and his father that, although the applicant surrendered control of Company F during the period for which he seeks a higher rate of pension, the legislation and policy set out above prevents his being considered an individual who is not affected by the provisions of section 1207Q. Although he no longer controlled Company F in any practical sense nor in a legal sense for other purposes, as he had given power of attorney to his parents, the effect of section 1207Q must prevail for social security purposes.
33. As the sum of the direct voting interests in the company that the applicant holds together with his associates, his parents, is 100% (60% and 40% respectively), subparagraph 1207Q(2)(a) results in the applicant “passing the control test” under the section. As the guidelines explain, the control test, in conjunction with the associate's rule, is used to determine the level of control in a designated private company. It follows that the applicant is prevented from arguing that he has not received income from a company which he “controls” despite his incapacity during the times in question.
Attribution
34. Under the attribution rules in Part 3.18 of the Act, the assets and income of a company can be attributed to the person or persons who control the company. In particular, section 1207 specifies that the assets and income of a private company are attributed to an individual if the company is a designated private company, and, in relation to the person, is a controlled private company, and the person is an attributable stakeholder of the company.
35. Subsection 1207X(1) defines an “attributable stakeholder” and provides rules for determining an individual’s income and assets percentage. The section states:
(1) For the purposes of this Part, if a company is a controlled private company in relation to an individual:
(a) the individual is an attributable stakeholder of the company unless the Secretary otherwise determines; and
(b) if the individual is an attributable stakeholder of the company—the individual’s asset attribution percentage in relation to the company is:
(i) 100%; or
(ii) if the Secretary determines a lower percentage in relation to the individual and the company—that lower percentage; and
(c) if the individual is an attributable stakeholder of the company—the individual’s income attribution percentage in relation to the company is:
(i) 100%; or
(ii) if the Secretary determines a lower percentage in relation to the individual and the company—that lower percentage.
36. In terms of subparagraph 1207X(1)(a), an individual is an attributable stakeholder unless determined otherwise, and, to be able to determine otherwise, a decision-maker needs to refer to the Social Security (Atributable Stakeholders and Attribution Percentage Principles 2000. These principles were furnished by the Secretary as an annexure to the Statement of Facts and Contentions. The principles were formulated under section 1209E of the Act and are dated 11 December 2000. Under clause 9 of Part 2 of these principles, I must consider whether the applicant has received a benefit from distributions made by the company. As to benefits during the period in question for the review, I note that the applicant did receive income in the form of director’s fees. I find that these receipts were relevant benefits for the purposes of subparagraph 1207X(1)(a) and find that the applicant is an attributable stakeholder of Company F.
Attributable percentage
37. Another issue raised by the applicant was whether the loans from his parents to Company F affect his attributable percentage. Section 1207Y of the Act gives a formula for calculating the attribution percentage of income. As the applicant is an attributable stakeholder in Company F for attribution periods beginning on and after 1 January 2002, he is taken to have received ordinary income at an annual rate equal to his income attribution percentage worked out pursuant to the formula contained in subsection 1207Y(1) of the Act.
38. Part 4 of the principles details factors determining the income attribution percentage for the purposes of subparagraph 1207X(1)(c)(ii) of the Act. These considerations are the same as those that apply to Part 2 of the principles previously referred to above. As well, section 4.3.9.60 of the Guide to Social Security Law relevantly states:
Dividends and distributions received from private companies and trusts ARE included
in the income support recipient's income. ….
39. Section 4.12.7.10 of the Guide to Social Security Law also states, in part:
The basic approach for the attribution of the income (section 8(1) - 'income') of a
private trust or private company is as follows:·Income from the entity for an attributable stakeholder will NOT be deemed,
actual income will be used and will generally be assessed on an annual basis from the income tax return.
40. While this tribunal is not bound to apply policy guidelines (see Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60), the tribunal will usually apply policy unless there are good reasons in a particular case for not doing so: see Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634 at 639-645; Re Dainty and Minister for Immigration and Ethic Affairs (1987) 12 ALD 416 at 417; and Minister for Immigration, Local Government and Ethnic Affairs v Roberts (1993) 41 FCR 82 at 86. In the present case, despite the lack of actual control in the applicant, I do not consider there is any strong reason not to adhere to policy and take his income received from Company F into account.
41. The applicant’s associates controlled his majority shareholding in the designated private controlled company during the period in question and, under the power of attorney, his father assumed his duties. The remaining shareholding was held by associates of the applicant, being his father and mother. The applicant received 100% of the income derived from the company. It follows, in my view, that he was correctly attributed with 100% of Company F’s income.
Do the loans to the company affect the attributable percentage?
42. The Secretary criticised the loan arrangements querying their existence and the validity of any advances made, saying they were not secured properly and not made at arm’s length. Company balance sheets furnished confirm some of the loan amounts and I accept the veracity of the applicant’s father as to the loans claimed and note that bank statements further confirm that the loans referred to were made. I do not agree with the Secretary’s submission that the loans have not been adequately demonstrated to exist.
43. Section 1208H of the Act deals with the effect of unsecured loans on the value of assests, explaining, in part:
1208H (1) For the purposes of the application of this Division to a particular
individual and a particular company or trust, if:
(a) the company … is the borrower under a loan; and
(b) the loan is not secured by a charge or encumbrance over one or more of the assets of the company… ;
the Secretary may, by writing, determine that the value of a specified asset of the company … is to be reduced by the whole, or a specified part, of the amount of the loan.
44. More relevantly, however, the loans were of no consequence to the control test and to the attribution of income or percentage of attributable income because the applicant’s assets were not considered in reducing his rate of pension. Only his income from the controlled private company was taken into account.
45. Therefore, I consider that the reviewable decision was correct although my reasons differ in some respects.
decision
46. The decision under review is affirmed.
I certify that the 46 preceding paragraphs are a true copy of the reasons for the decision herein of Ms Robin Hunt, Senior Member
Signed: ........................[Sgd]............................
Jennifer Wong, AssociateDate/s of Hearing 20 April 2009
Date of Decision 5 June 2009
Representative for the Applicant Self-representedSolicitor for the Respondent Ms J Maclean, Centrelink Legal Services and Procurement Branch
0
3
0