Reu and Secretary, Department of Families, Housing, Community Services and Indigenous Affairs

[2008] AATA 982

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 982

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          Nos  2007/4480 & 2007/4481

GENERAL ADMINISTRATIVE DIVISION		)
Re		JANICE MARGARET REU & HAROLD ARTHUR REU

Applicants

And SECRETARY, DEPARTMENT OF FAMILIES, HOUSING, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS

Respondent

DECISION

Tribunal Senior Member R W Dunne

Date5 November 2008

PlaceAdelaide

Decision The Tribunal affirms the decision under review.

..............................................

R W DUNNE
  (Senior Member)

CATCHWORDS

SOCIAL SECURITY – pensions, benefits and allowances – Age Pension – assets test – mortgage loan “totally lost” – continued inclusion of loan as asset – decision affirmed

Social Security Act 1991 ss 9(1), 11(1), 1064, 1122

Drake v Minister for Immigration and Ethnic Affairs [1979] 46 FLR 409  
Re Drake and Minister for Immigration and Ethic Affairs (No 2) (1979) 2 ALD 634
Re Downes and Secretary, Department of Family and Community Services [2002] AATA 737

REASONS FOR DECISION

5 November  2008   Senior Member R W Dunne   

1.      The applicants in this case are Mrs Janice Reu and her husband, Mr Harold Reu.  Mr and Mrs Reu are in receipt of Age Pensions, which are calculated under the assets test in the Social Security Act 1991 (“Act”).  On 30 July 2004, they invested $40,000 by way of a mortgage loan.  In March 2007, they were advised that their investment had been “totally lost”.  When they learnt of the loss, they informed the respondent (“Centrelink”), seeking to have the $40,000 removed from their assets record and the rate of their Age Pensions recalculated.  A Centrelink delegate decided to refuse their request and that decision was affirmed by an Authorised Review Officer.  They applied to the Social Security Appeals Tribunal (“SSAT”) for review of Centrelink’s decision, and the SSAT affirmed the decision of the Authorised Review Officer.  Mr and Mrs Reu have now applied to this Tribunal for review of the decision of the SSAT.

2. At the hearing, Mr and Mrs Reu represented themselves and Mr C Goldsworthy, from Centrelink Legal Services Branch, represented the respondent. The Tribunal received into evidence the documents and the supplementary documents lodged under s 37 of the Administrative Appeals Tribunal Act 1975 (Exhibits R1 and R2), together with the following:

·applicants’ outline of argument dated 2 May 2008 (Exhibit A1);

·email from Mr K Brandwood, Meertens Chartered Accountants, to Mrs Reu dated 18 June 2008 (Exhibit A2);

·respondent’s statement of facts and contentions dated 11 June 2008 (Exhibit R3);

·letter from Ms K M Walters, Centrelink Complex Assessment Officer, to applicants dated 3 January 2008 (Exhibit R4); and

·circular to creditors and/or investors from Meertens Chartered Accountants, regarding John West & Associates Pty Ltd (in Liquidation) (Exhibit R5).

issues for the tribunal

3.      The following are the issues for the Tribunal:

(a)      Should the mortgage loan of $40,000 be included as an asset for the purpose of calculating the rate of Age Pension for Mr and Mrs Reu?

(b)      If the mortgage loan should not be included as an asset, from what date should it be removed from Mr and Mrs Reu’s assets record with Centrelink?

(c)What arrears of Age Pension (if any) are payable to Mr and Mrs Reu?

legislation

4. The legislation that applied to the issues for the Tribunal is contained in the Act and relevantly reads as follows:

“9        Financial assets and income streams definitions

(1)       In this Act, unless the contrary intention appears:

…

financial asset means:

(a)       a financial investment; or

(b)       a deprived asset.

financial investment means:

…

(e)       a loan that has not been repaid in full; or

…

11       Assets test definitions

(1)       In this Act, unless the contrary intention appears:

…

asset means property or money (including property or money outside Australia).

…

1122Loans

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.”

background and evidence

5.      The applicants have been receiving the Age Pension since 19 July 2004 (in the case of Mr Reu) and since 12 January 2005 (in the case of Mrs Reu).  The mortgage loan investment of $40,000 was made to (or through) John West and Associates Pty Ltd (“JWA”) in a project called “MERCSHED”.  The investment was lost as a result of a mortgagee sale late in 2004 and Mr and Mrs Reu were informed of the loss in a letter sent to them by JWA dated 21 December 2004.  The letter was not received at the time because they were in Queensland caring for their daughter.  The investment, which came from funds held in the Adelaide Bank, was to be for four months, but only two monthly interest payments were received, apparently funded from capital.  They did not become aware of the loss of their investment until March 2007 and they advised Centrelink of their position on 26 March 2007.  On 24 July 2007, JWA was placed into voluntary administration.  Subsequently, Mr Austin Taylor of Meertens, Chartered Accountants, was appointed provisional liquidator of JWA.  Mr and Mrs Reu received no confirmation from the provisional liquidator regarding the status of their investment, whether they were listed as creditors or whether there was any prospect of recovering any of their funds.  A circular to creditors and investors was issued by Meertens dated 25 October 2007 (Exhibit R5).  The circular listed Mrs Reu as a lender to “MERCSHED” at 29 July 2004 in the amount of $40,000.  Mrs Reu was later advised by Meertens that a pooled proposal was being sought to enable a distribution to be made amongst lenders, which was the first time the applicants became aware they might receive some return of capital. 

6.      On 3 January 2008, a Centrelink Complex Assessment Officer (Ms K Walters) advised Mrs Reu in the following terms (Exhibit R4):

“…

I am writing to advise that as John West was placed in administration on 25 July 2007 and subsequently placed into liquidation on 27 September 2007 the loan ceases to be assessable from 25 July 2007.

However, the $40,000 will now be assessed as a debt, which does not attract deeming, until evidence is provided showing the amount that is recoverable.  I have enclosed a copy of topic 4.6.5.65 of the Guide to Social Security Law entitled Loans that No Longer Exist for your information.

…”

7.      It was Mrs Reu’s evidence that, attached to the letter dated 3 January 2008 was a copy of the “Guide to Social Security Law” policy document 4.6.5.65, which in part read:

“…

A loan no longer exists for social security purposes when:

…

·a company that borrowed the money is in administration and subsequently placed in liquidation, or loans to the company become subject to a deed of company arrangement.  In these cases, the loan is taken to have ceased to exist from the date that the company was placed in administration (see explanation 7).

·…

Explanation 7:  Where a loan has ceased to exist in these circumstances, the face value of the loan ceases to be assessable from the date the company was placed in administration.”

The reference to “Explanation 7” had been highlighted by Ms Walters.  She had also advised the applicants by telephone that the situation described in Explanation 7 applied to them.

8.      In an email from Meertens on 18 June 2008 (Exhibit A2), Mrs Reu was informed of the difficulty in estimating a dividend to creditors from JWA.  Meertens’ best estimate, if all assets realise expectation, was that creditors would receive in the order of 20 cents in the dollar. 

consideration

Should the mortgage loan be included as an asset for the purpose of calculating the rate of Age Pension for Mr and Mrs Reu?

9. By virtue of the application of the definitions of “asset”, “financial asset” and “financial investment” in ss 9 and 11 of the Act, the mortgage loan made by Mr and Mr Reu is clearly as asset for the purposes of the operation of the assets test in Module G of s 1064 of the Act.

10.     Mr and Mrs Reu originally maintained (in a letter dated 11 January 2008, which was before the Tribunal) that the “Guide to Social Security Law” policy documents 4.6.5.60, 4.6.5.65 and 4.6.5.110 applied to them, so that their Age Pensions should not be reduced because their mortgage loan (of $40,000) no longer existed. However, the letter from the Centrelink Complex Assessment Officer (Ms Walters) dated 3 January 2008 made it clear that, as JWA had been placed in administration on 25 July 2007, the $40,000 would be assessed as a debt, which did not attract deeming, until evidence was provided to show that the loan was recoverable. When this was done and the extent of the recovery was known, any adjustment to the Age Pensions of Mr and Mrs Reu would be made retrospective to 25 July 2007. In my view, this approach is correct and is supported by s 1122 of the Act which requires that, in relation to a loan, so much of the loan that remains unpaid is to be included in the “value of the assets” of a person. This means that the mortgage loan owed to Mr and Mrs Reu during the relevant period is to be treated as part of the value of their assets for the purposes of calculating the rate at which their Age Pensions are paid.

11.     The “Guide to Social Security Law” policy documents provide guidance to those who administer the Act. Whilst I am not bound to apply the guidelines in the policy documents (see Drake v Minister for Immigration and Ethnic Affairs [1979] 46 FLR 409), they will usually be applied unless there are cogent reasons in a particular case for not doing so: see Re Drake and Minister for Immigration and Ethic Affairs (No 2) (1979) 2 ALD 634 at 639-645. In the present case, there is no material before me to indicate that the guidelines should not be applied. Mrs Reu made reference to policy document 4.6.5.65 and to “Explanation 7”, which had been highlighted by Ms Walters. However, the policy document goes on to make a number of further observations, where a loan has ceased to exist in circumstances where the company that borrowed the money is in administration. The further observations, as part of “Explanation 7”, appear as follows:

“Explanation 7: Where a loan has ceased to exist in these circumstances, the face value of the loan ceases to be assessable from the date the company was placed in administration.

However, the value of any remaining debt the person has the right to recover is assessed in line with the administrator's/liquidator's estimate.

The determination that a loan ceases to exist can be made as soon as a company creditors meeting decides that the company in administration is to be placed in liquidation, or placed under a deed of arrangement.

Given that a loan can only be determined to have ceased to exist when the company is placed in liquidation, or placed under a deed of arrangement, and this decision is applied back to the date the company was placed in administration, people with investments in the company will need to have their eligibility to social security payments reassessed. Payments will need to be reassessed back to the date of administration to take account of the difference in the face value of the loan that has been assessed and the value as determined by the administrator/liquidator/deed of company arrangement. In many cases, arrears of income support payments will be payable.

The value of the debt owing to a person to be assessed for the period from when the company is placed in administration is the administrator's/liquidator's estimate of the expected return to creditors determined when it is decided the company is to be placed in liquidation/the loan is subject to a deed of company arrangement.”

12.     In my view, the guidelines in policy document 4.6.5.65 have been correctly applied to Mr and Mrs Reu’s circumstances.  To show that their mortgage loan no longer existed, they would need to provide evidence from a reliable source, such as the liquidator (Mr Austin Taylor of Meertens) or from the Australian Securities and Investments Commission.  The only evidence that has been produced so far is that contained in the email from Mr Brandwood, which suggests a dividend to creditors of around 20 cents in the dollar.  Of course, the final return to creditors may be more or less than this amount.  Mr and Mrs Reu contend that it is not unreasonable, despite Centrelink’s position, for the Tribunal to determine the value of the loan to be the amount which the liquidator presently determines (for example, 20 cents in the dollar) and for an adjustment to be made when the final dividend is paid.  The Age Pensions of Mr and Mrs Reu would then be adjusted upwards and any arrears paid to them.  They also contend that the adjustment and arrears of Age Pension should be made retrospective to the date their mortgage loan was “totally lost”, instead of the date JWA was placed into administration.  I am unable to accept this contention and accede to their request.  The face value of the mortgage loan must be taken into account.  As was said by Member Mr R G Kenny in Re Downes and Secretary, Department of Family and Community Services [2002] AATA 737 (at paragraph 23):

“23. The loans in this case must be given their face value rather than any reduced rate which would recognise a component of their unrealisability: see Re Ling and Secretary, Department of Family and Community Services [1999] AATA 797; Re Mendes and Secretary, Department of Family and Community Services [2000] AATA 22 and Re Hughes and Secretary, Department of Social Security (1992) 25 ALD 754. The terms of section 1122 are clear and their application in this case means that the value of the assets of the respondents must include the loans to the company in the amount of $337,100. …”

13. Mr and Mrs Reu would be understandably disappointed that their mortgage loan must continue to be taken into account at its face value. However, s 1122 stipulates a simple and unambiguous method for valuing a loan and necessarily precludes other methods of valuing, such as determining the amount recoverable commercially. They further contend that the Tribunal should determine a lesser amount, being the amount the liquidator eventually finds is recoverable, with the determination to be made retrospective to 21 December 2004. The Tribunal (standing in the shoes of the respondent) does not have the power or authority under the Act to make such a determination.

14.     For the reasons set out above, I consider that Mr and Mrs Reu’s mortgage loan is, and remains, an asset that should be taken into account in the calculation of their Age Pensions.  It follows that the loan should not be removed from their assets record with Centrelink and that there are no arrears of Age Pension presently payable to them.

decision

15.     The decision under review is affirmed.

I certify that the 15 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member R W Dunne

Signed:         .............J Coulthard............................................
  Associate

Date of Hearing  23 June 2008
Date of Decision  5 November 2008
Advocate for the Applicants     Self-represented

Advocate for the Respondent   Mr C Goldsworthy

Centrelink Legal Services Branch