O'Brien and Secretary, Department of Family and Community Services

[2002] AATA 848

DECISION AND REASONS FOR DECISION [2002] AATA 848

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No Q2001/1048

GENERAL ADMINISTRATIVE  DIVISION       )          
           Re      PETER WILLIAM O'BRIEN         
  Applicant
           And    SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES        
  Respondent

DECISION

Tribunal       Mr B J McCabe, Member  

Date27 September 2002

PlaceBrisbane

Decision      The Tribunal affirms the decision under review.      

(Sgd) B J McCabe
  Member
CATCHWORDS
SOCIAL SECURITY – assets test – loan by applicant to a family trust – value of loan – whether value of loan should be taken at face value

Social Security Act 1991

Repatriation Commission v Harrison (1997) 78 FCR 442
Re King and Repatriation Commission (1990) 12 AAR 375
Re Secretary, Department of Social Security and Doyle (1990) 59 SSR 803
Re Boyd and Secretary, Department of Social Security (1994) 83 SSR 1221
Re Joyce and Repatriation Commission (AAT 10410, 15 September 1995)

REASONS FOR DECISION

27 September 2002           Mr B J McCabe, Member              

Introduction

1. Mr Peter O'Brien, the applicant, applied for Newstart allowance in November 2000. The respondent rejected Mr O'Brien's application because he was unable to satisfy the asset test. Mr O'Brien made a further application for Newstart benefits in April 2001. He was initially assessed as being eligible but Centrelink changed its decision later in April. On 18 June 2001, Centrelink reversed its decision after a review and granted the allowance. A Complex Assessment Officer within Centrelink examined the applicant's affairs and, after calling for and receiving additional information, cancelled the Newstart benefits on 25 July 2001. The Social Security Appeals Tribunal has since affirmed the decision to refuse the application and cancel the benefits.

2. The confusion over Mr O'Brien's application arises because Centrelink has had some difficulty in analysing his financial affairs. The dispute focused on the treatment of a loan the applicant made to his family trust to purchase a business and shares that have since fallen in value. The respondent says the face value of the loan should be included in the applicant's assets. The applicant says the value of the loan should be discounted for a variety of reasons. If the value of the loan is significantly discounted, the total value of his assets would fall below the threshold imposed by the legislation and he would be eligible for Newstart assistance.
   The Material Before the Tribunal

3. The Tribunal was provided with the documents prepared under s 37. It heard oral evidence from Mr O'Brien, who represented himself. Mr O'Brien also provided the Tribunal with a number of documents including:

• A resolution of a general meeting of Prenavon Pty Ltd held on 6 May 2001 (Prenavon is the trustee of Mr O'Brien's family trust);

• A document entitled 'details of charge' dated 6 May 2001;

• A copy of an assessment notice from the Office of State Revenue dated 6 May 2001; and

• Three pages of notes of a meeting relating to the O'Brien family trust.

1. These documents were provided to the Tribunal after the hearing. The respondent was provided with the opportunity to respond in writing to the issues raised in the documents. That response was received by the Tribunal on 6 June 2002.
   The Facts

2. Mr O'Brien established a family trust. He is the sole beneficiary of that trust. He is also the only shareholder and director of Prenavon Pty Ltd, the trustee. Mr O'Brien is a self-educated small businessman. He has been involved in a number of businesses. During 2000, Mr O'Brien caused the trust to acquire a franchised business in Maroochydore for the trust. The trustee also purchased approximately $50,000 worth of Telstra shares as an investment. Both purchases were made out of funds provided to the trust by the applicant in 1997.

3. The shares have declined in value, and the business failed. The applicant ultimately closed the business, although he wishes to retain the shares. He says there is no point in selling the shares at the bottom of the market. He wants to preserve some assets so he can start again.  He acknowledged that he has limited appeal in the job market, and that his best chance is to be self-employed. Mr O'Brien possessed other assets, but a number of them have now been sold.

4. The decision in this case requires careful analysis of Mr O'Brien's loan to the trust. Is there anything in the documentation or other circumstances surrounding the loan which indicate whether the loan should be included in the assets test at its face value, or at a discount?

5. Mr O'Brien provided approximately $200,000 to the trust in 1997. As is often the case with family companies and trust arrangements, the advance was not documented as clearly as it might have been when it was made. Mr O'Brien subsequently corresponded with the Australian Tax Office over the documentation required to satisfy the ATO in relation to the applicant's tax affairs. After those discussions, the applicant generated appropriate documentation showing the amounts provided to the trust were loans, as opposed to capital investments. He said in his evidence the advances were originally regarded as being of a capital nature. In his words, they were designated as being on "capital account". It seems the arrangement was a fluid one. The applicant's decision to adopt a trust structure appeared to have been motivated in part by a desire to manage his tax affairs. The documentation was prepared with a view to satisfying the requirements of the Commissioner of Taxation.

6. Mr O'Brien produced a number of documents belonging to Prenavon Pty Ltd, including a resolution of a general meeting held on 6 May 2001 and related documents filed with the Office of State Revenue. The document provided to the Office of State Revenue includes the statement "that security/liability of the loan is limited to available funds".

7. The other documents evidence a similar intent: see, for example, document T38B at p 310.
   The Relevant Law

8. Applicants for Newstart assistance must satisfy an assets test. The law in relation to the assets test is found in Part 3.12 of the Social Security Act 1991. Section 1122 deals with the treatment of loans that are regarded as assets (that is, the debt – a chose in action – is valuable property in his hands).

9. The cases make it clear that loans made prior to 1986 were to be valued at their "real value". In Repatriation Commission v Harrison (1997) 78 FCR 442, Tamberlin J said the correct approach was to assess the likelihood of repayment and the ability of the debtor to repay: see also Re King and Repatriation Commission (1990) 12 AAR 375 and Re Secretary, Department of Social Security and Doyle (1990) 59 SSR 803. (The Veterans' Entitlement Act 1986 included a similar rule at s 52D.) There are some difficulties with this approach, of course: it requires the decision-maker to delve into the affairs of the applicant and make commercial assessments. That might be difficult for the respondent.

10. Loans made after 27 October 1986 are subject to s 1122. Section 1122 provides:

    "If a person lends an amount after 27 October 1986, the value of the assets of the person for the purposes of this Act includes so much of that amount as remains unpaid but does not include any amount payable by way of interest under the loan."

1. On its face, the section suggests the decision-maker should value the loan by subtracting the total of the repayments from the total amount advanced under the loan agreement or facility. The reference to the "amount [that] remains unpaid" suggests one must look at how much the contract obliges the debtor to repay, rather than make an assessment of how much the debtor is likely to pay in reality. The Tribunal explained in Re Boyd and Secretary, Department of Social Security (1994) 83 SSR 1221 that:

   "…the legislation, whilst capable of producing unjust results in some circumstances, nevertheless intended loans made after 27 October 1986 to be valued at face value."

1. The respondent has used the face value of the debt for the purposes of the assets test, although it has allowed some discounting. At the hearing, the respondent said the debt was worth $161,245 in the applicant's hands. The applicant disagrees. He says the wording of the trust and company documents in relation to the loan make it clear he is not necessarily able to compel repayment of the full amount of the loan at any given time. The loan is apparently intended to be a species of non-recourse loan in which the borrower's maximum liability at any point is confined to the value of its assets at that time, rather than an absolute amount fixed in the contract. The borrower is not liable for the difference between the amount realised from the sale of the assets and the book value of the loan.

2. This does not sound like an ordinary commercial loan arrangement. It has some of the features one would ordinarily associate with an investment rather than a loan. The recipient of the advance is not taking any risk: the risk of non-performance is carried almost entirely by the person making the advance. However the person making the advance does not get a return of the kind one would associate with an equity investment. The applicant decided to document the arrangement as a loan in accordance with what he understands to be the requirements of the Commissioner of Taxation. It was unclear from his evidence whether the documentation accurately reflected his view of the arrangement when the advance was made.

3. The applicant's argument has some attraction. If an advance is made pursuant to a loan, and the terms of the loan provide for repayment of an amount less than the face value of the loan, there is no reason why the discounted amount should not be the relevant figure for the purposes of s 1122. But the loan documentation must clearly evidence that intention. The documentation in this case does not meet that requirement. It seems to me the applicant is attempting to formalise and explain what was in fact a loose arrangement that had not been negotiated at arms' length. The documents were also prepared after the advance was made, apparently to satisfy the requirements of the Commissioner of Taxation.

4. There are similarities between the facts in this case and those in Re Joyce and Repatriation Commission (AAT 10410, 15 September 1995). The applicants in that case were trustees of a trust that had received a loan from the applicants, who were subject to an assets test. The applicants argued the proper value of the loan was the market value of the assets had the loan been called in and the assets liquidated. There had been no demand for repayment. Deputy President Forrest concluded there was no basis for preferring the market value of the assets at a point in time over the face value of the loan. The Deputy President acknowledged the assets would not have equalled the value of the loan at the time of the application, but added the value presumably changed over time and there might come a time when repayment could be made in full if the value of the assets appreciated: see para 19-21.

5. I agree with the approach of the Tribunal in Joyce. The applicant in this case would be on stronger ground if he had called up the loan from the trust so that a definite value might have been ascribed to the loan agreement. He has expressly refrained from doing that. He does not want to liquidate the shares while their price is at a low point. That is fair enough in light of his stated intention to use the shares as a source of capital for new business ventures. But the respondent cannot be expected to stand in the shoes of a kind of investor who provides support for the applicant's business investment strategy during lean times.

6. The respondent has a statutory obligation to determine the value of the applicant's assets. Section 1122 suggests the face value of the loan is to be considered for the purposes of the assets test, unless some other amount is repayable under the terms of the agreement. While it is not impossible for the respondent to ascribe a value to the shares held by the trust in this case – that was, after all, the approach that was taken prior to the amendments to s 1122 – it is a much more difficult task. The amendments to s 1122 were apparently motivated by a desire to simplify that task for the respondent.
   Conclusion

7. The applicant cannot succeed because I am not satisfied there was a clear agreement at the time of the advance that the amount repayable by the trust was limited to the value of the assets held by the trustee. But I do not think the applicant could succeed even if the loan agreement was clear on this point, as there has been no demand for repayment. The amount of the shortfall, and hence the value of the asset, has never been clarified. The respondent is therefore justified in having regard to the face value of the loan for the purposes of the asset test.

I certify that the 21 preceding paragraphs are a true copy of the reasons for the decision herein of Mr B J McCabe, Member

Signed:         Sarah Oliver
  Associate

Date of Hearing  14 May 2002 (at Gladstone)
Date of Decision  27 September 2002
The Applicant Appeared In Person
Solicitor for the Respondent    Mr R McQuinlan, Departmental Advocate