RICHARD NOTLEY and SECRETARY, DEPARTMENT OF FAMILIES, HOUSING, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS
[2012] AATA 560
[2012] AATA 560
Division GENERAL ADMINISTRATIVE DIVISION File Number(s)
2012/0115
Re
RICHARD NOTLEY
APPLICANT
And
SECRETARY, DEPARTMENT OF FAMILIES, HOUSING, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS
RESPONDENT
DECISION
Tribunal Senior Member J L Redfern
Date 27 August 2012 Place Sydney The decision under review is affirmed.
..............[sgd]..........................................................
Senior Member J L Redfern
CATCHWORDS
SOCIAL SECURITY – pensions – ordinary income test – financial asset – financial investment – deemed income from loans – decision affirmed
LEGISLATION
Social Security Act 1991 s 9, 44, 1064, 1072, 1075, 1076, 1121
CASES
Fischer v Secretary, Department Of Families, Housing, Community Services and Indigenous Affairs (2010) 185 FCR 52; [2010] FCA 441
Secretary, Department of Family and Community Services v Draper (2003) 79 ALD 394; [2003] FCA 1409
REASONS FOR DECISION
Senior Member J L Redfern
27 August 2012
Mr Richard Notley lodged a claim for the age pension on 9 February 2011. He was 81 years old at the time and was said to be self-employed in accounting, tax and finance.
On 7 April 2011, Mr Notley’s claim was rejected by Centrelink on the basis that his income exceeded the allowable limit. His income was assessed as $101,944.19 per annum based on financial assets valued at $1,932,782. Mr Notley sought a review of the decision by an authorised review officer at Centrelink but the decision was affirmed. Mr Notley sought review from the Social Security Appeal Tribunal (SSAT) which also affirmed the decision. He now seeks a review of the decision by this Tribunal.
ISSUES FOR DETERMINATION
It is common ground that Mr Notley operates an investment portfolio for family, friends and clients and has done so many years. According to a balance sheet provided by Mr Notley as at 30 June 2012, the investment portfolio was valued at $1,609,401 and was described by Mr Notley in a handwritten balance sheet provided to Centrelink as “loans to clients”. The balance sheet also recorded liabilities described as “loans from clients” in the sum of $1,974,286.
Centrelink assessed these loans to clients as financial assets of Mr Notley in respect of which he was deemed under the social security legislation to have received income. Mr Notley contended that these loans should be offset against his liabilities to family, friends and clients to repay principal in respect of the investment portfolio.
The issue determination is whether Mr Notley’s financial assets were correctly assessed as at 9 February 2011 and, in particular, whether the value of his financial assets can be reduced by the value of the liabilities owed by Mr Notley for the purpose of applying the income test and in particular calculating his deemed income.
LEGISLATIVE FRAMEWORK
The relevant legislation is the Social Security Act 1991 (the Act) and the Social Security (Administration) Act 1999 (the Administration Act). The Secretary of the Department of Families, Housing, Community Services and Indigenous Affairs (the Secretary) is responsible for the administration of the Act, and has delegated a number of the functions and powers under the Act to Centrelink.
Section 44 of the Act provides that age pension is not payable if the rate of payment of the pension is nil. Section 1064 sets out how the pension rate is to be determined. The rate of the age pension is calculated by reference to an ordinary income test and an assets test. The application of the ordinary income test is affected by, relevantly, business income (Part 3.10, Division 1A: ss 1074 and 1075) and deemed income from financial assets (Part 3.10, Division 1B: ss 1076 to 1084A).
Section 1076 provides that a person who has financial assets is taken to receive ordinary income on those assets. The return is calculated by reference to the statutory deeming threshold and the value of the financial assets at the relevant time.
Section 9 provides that a “financial asset” means a “financial investment”, which includes “a loan that has not been repaid in full”.
Section 1072 provides that a reference to a person’s ordinary income is “a reference to the person’s gross ordinary income from all sources for the period calculated without any reduction, other than a reduction under Division 1A”. Division 1A deals with “Business Income” and provides that where a person carries on a business the person’s ordinary income from the business is to be reduced by losses and outgoings that relate to the business (s 1075(1)). However, if a person is taken to have received ordinary income on a financial investment, that ordinary income is not to be reduced by the amount of any expenses incurred by the person because of that investment (s 1075(2)).
Section 1121(1) deals with the effect of a charge or encumbrance on the value of assets. Because of its importance to the facts of this case, the provision is set out below:
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 (other than Division 1B of Part 3.10), is to be reduced by the value of that charge or encumbrance.
In summary, there are limited circumstances set out in the Act in which the value of a person’s financial assets can be reduced for the purposes of assessing ordinary income, and therefore entitlement to a social security pension.
BACKGROUND FACTS
Mr Notley is a self-employed accountant and auditor. His family had a printing business which borrowed money from family, friends and clients to assist in its operations. The business was sold over 20 years ago but instead of repaying the loans, Mr Notley reinvested the money borrowed. These investments were made at the request of the investors, or with their acquiescence, and were invested through solicitors. Any interest received was paid to the investors and Mr Notley kept a record of the investments and the interest paid.
Mr Notley does not have documented agreements with the investors and the investments were mostly undertaken in his name. Many of the loans have been in place for over 20 years. There was no agreement as to when the loans are to be repaid and Mr Notley did not consult with the investors about the investments. Mr Notley said he did not provide investors with statements and sent them a cheque each month for the interest. The investments were recorded as “loans from clients” to Mr Notley. Mr Notley would then on lend those funds to other clients through various solicitors’ mortgage schemes. These were recorded as ‘loans to clients’.
According to a handwritten balance sheet provided to Centrelink by Mr Notley by letter dated 16 March 2011, the “loans to clients” were valued at $1,609,401 but his liabilities, being the loans from his family, friends and clients, were valued at $1,974,286. Mr Notley told the Tribunal that there had been no problems with recovering the loans until a dispute arose relating to recovery of loans totalling $620,000 to the “Arundell Family” through solicitors, Picone & Co. No documents were provided about the proceedings that apparently ensued but Mr Notley said that as a result of these losses he borrowed money from his family to cover the repayment of the principal to his clients. He was proposing to sell his home to meet his debts.
Mr Notley provided his income tax returns for 2009 and 2010. According to the tax return for 2010, Mr Notley had income of $102,473, which included $69,062 for interest, and interest deductions of $77,722. Mr Notley therefore suffered a loss on the interest of approximately $9,000. He did not declare the interest as business income and said that he had ceased doing this several years ago “when questions were raised” by the Australian Taxation Office about the practice.
Mr Notley provided letters from investors to the effect that they had invested loans through Mr Notley’s Investment Portfolio. As referred to above, this was not in dispute.
Mr Notley said that his financial position had significantly changed since February 2011. He has been liquidating loans and has made significant losses.
SUBMISSIONS OF THE PARTIES AND CONSIDERATION
Mr Notley contended that his liability to repay loans to family, friends and clients, which now exceeded the loans payable to him, should be taken into account when assessing the value of his financial assets for the purpose of determining his deemed income. The Secretary contended that there is no provision within the social security legislation for liabilities and expenses to reduce the value of financial investments. Further, Mr Notley was not carrying on a business but, even if he was, the Act did not allow for his ordinary income to be reduced by the expenses incurred because of the investment.
Based on the balance sheets provided Mr Notley had unpaid loans owing to him in the sum of $1,609,401. There is no suggestion that Mr Notley held these investments on trust for investors. Mr Notley apparently had such a close relationship with his investors that there was no documentation in relation to these investments. Mr Notley was able to invest as he considered appropriate. He considered that he had a liability to those investors, being described as “loans from clients”, to repay the principal and interest to them. He recorded the principal, interest and payments in handwritten ledgers maintained by him. Mr Notley’s evidence was that the loans were not for an agreed term but he made oral agreements with investors about the rate of interest that was to be paid from time to time.
Given these facts, it is my view that there are no provisions within the Act that allow the value of Mr Notley's financial assets to be reduced or offset against his liabilities for the purpose of deeming provisions. My reasons follow.
Section 1076 of the Act sets out the deeming provisions for ordinary income, which is based on the value of the financial assets of a person. Financial assets include unpaid loans. There is no provision in s 1076 for the value of assets to be offset by the value of liabilities for the purpose of deeming income. Section 1075(1) allows for certain reductions in a person’s ordinary income in respect of losses and outgoings that relate to a business carried on by the person but ss (2) specifically excludes expenses incurred by a person relating to a financial investment being used to reduce the ordinary income deemed to have been earned from financial assets. Regardless of whether Mr Notley was carrying on a business, which is denied by the Secretary and was not argued by Mr Notley, this provision does not assist Mr Notley as it only relates to losses and outgoings, does not allow reductions in the value of financial assets and has no application in respect of deemed ordinary income in any event.
Section 1121 allows for charges and encumbrances to be taken into account in assessing the value of assets but even if it can be established that Mr Notley’s liabilities are charged against the “loans to clients”, which is disputed by the Secretary, the section does not apply to assist Mr Notley in respect of his deemed ordinary income.
The authority for this proposition is set out in Fischer v Secretary, Department Of Families, Housing, Community Services and Indigenous Affairs (2010) 185 FCR 52; [2010] FCA 441. In this case, it was argued that the total value of shares owned by the applicant should be offset by the margin loans that they secured. In other words, the value of the financial investments held by the applicant should be reduced to take into account the margin loans charged against those shares. The case involved consideration the construction of s 1121(1) following its amendment by the Social Security Amendment (Further Simplification) Act 2004, which came into effect on 25 March 2004. The words “other than Division 1B of Part 3.10” were inserted into ss 1121(1).
When introducing the Act as a Bill into Parliament the then Minister for Family and Community Services, Senator Kay Patterson referred to the decision of Stone J in Secretary, Department of Family and Community Services v Draper (2003) 79 ALD 394; [2003] FCA 1409 and stated, during the second reading debate, as follows:
Justice Stone’s decision relates to the interpretation of legislation for which technical amendments have been proposed in the bill, namely in items 25 to 28 of schedule 2 of the bill. Justice Stone held that loans secured against listed shares should be used to reduce the value of the shares in calculating deemed income under the income test. This is contrary to government policy, which is that the gross value of the shares should have been used to calculate deemed income. I am advised that the department has lodged an appeal to the full Federal Court against Justice Stone’s decision.
The government’s longstanding policy is that, when deemed income is calculated on the income test in relation to financial assets, the gross value of the financial assets is to be used, as income is derived from the full amount of the asset. On the other hand, when assets are valued under the assets test, the net value of assets is used where there is a charge or encumbrance in relation to an asset, as this is what would be received if the asset was realised. Items 25 to 28 of schedule 2 of the bill make the necessary amendments to ensure that the policy intention is stated unambiguously in the legislation.
In Fischer the applicant contended that the amendment to s 1121(1) did not affect the operation of s 1076 of the Act. Katzmann J rejected this argument, at [57] to [59], as follows:
57.… The applicant contended that the amendment to s 1121(1) does not affect s 1076. I reject that argument. Section 1076 appears in Division 1B of Part 3.10.
58.Another difficulty with the applicant’s argument on this point is that it gives the additional phrase no work to do. On its face the section now provides that the value of an asset is to be reduced by the value of any charge or encumbrance over it for the purposes of calculating the value of a person’s assets for the purposes of the Social Security Act – except for the purpose of deeming income from financial assets with which Division 1B is concerned. Thus, in the context of this case, for the purpose of deeming income from the applicant’s shares, the value of those shares is determined without reducing it by the value of the margin loan.
59.The words of the section do not admit of any alternative construction, let alone the one the applicant contends for. Senator Patterson’s remarks clarify that the purpose of the amendment was to put it beyond doubt that it was the gross value of an asset which was to be used for the purpose of deeming income from financial assets and there was to be no set off for any charge or encumbrance upon it. They do not support the applicant’s position.
Given that Mr Notley’s liabilities cannot be offset against his financial assets for the purpose of the income test, I accept, as did the SSAT, Centrelink’s calculation of deemed income of $71,927 per annum from Mr Notley’s financial investment. His total income was $101,944 per annum at the relevant time, which includes the deemed income from his financial investments, $22,192 from his accountancy business and $7,825 from rental income. The allowable income threshold for a single person at the date Mr Notley made his claim for the pension was $41,033.20. As such, Mr Notley was therefore not entitled to receive the age pension at the relevant time. As noted by the SSAT, if Mr Notley’s financial situation has deteriorated since he first made his application for the pension, he can retest his eligibility with Centrelink taking into account his new circumstances.
The decision under review is affirmed.
I certify that the preceding 28 (twenty eight) paragraphs are a true copy of the reasons for the decision herein of .......[sgd].................................................................
Associate
Dated 27 August 2012
Date of hearing 15 June 2012 Date final submissions received 25 June 2012 Applicant In person Advocate for the Respondent Ms H Schuster
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