Salmon and Secretary, Department of Employment and Workplace Relations

[2007] AATA 1386

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2007] AATA 1386

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No  Q 2005/231

GENERAL ADMINISTRATIVE  DIVISION		)
Re		Robert Salmon and Veronica Salmon

Applicant

And Secretary, Department of Employment and Workplace Relations

Respondent

DECISION

Tribunal Senior Member Bernard J McCabe

Date30 May 2007

PlaceBrisbane

Decision The Tribunal sets aside the decision under review and remits the matter to the primary decision-maker for reconsideration in accordance with these reasons.

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SENIOR MEMBER

CATCHWORDS

SOCIAL SECURITY –  Disability Support Pension – income test – ordinary income – ownership of multiple business – offset of loss of one business against profits of second business – whether each business activity must be treated as a separate business – distinction between offset against business income and offset against personal income – offset allowed.

SOCIAL SECURITY – Disability Support Pension – assets test – business assets - assets of a primary production business – separate business where one is not a primary production business – necessary to distinguish between assets and liabilities of separate business

SOCIAL SECURITY – Disability Support Pension – assets test – personal assets – whether liabilities of business activities can be offset against value of farm – question of reconciliation of accounts remitted to respondent – waiver not a live issue

Social Security Act 1991 s1072, s1075, s1121, s1121A

Secretary, Department of Social Security v Garvey (1989) 19 ALD 348

Watson v Secretary, Department of Family and Community Services (2003) 128 FCR 564

Secretary, Department of Social Security v Ekis (1998) 52 ALD 246

REASONS FOR DECISION

30 May 2007  Senior Member B J McCabe

1.      Robert Salmon was in receipt of the Disability Support Pension (DSP) and his wife was in receipt of the wife pension. There is a dispute over whether or not they were able to satisfy the income and assets tests applied under the Social Security Act 1991 during the relevant period. The respondent says they did not, and has raised a debt against them. The dispute is complicated because the applicants have derived income from a number of sources, have carried on several different businesses and have acquired and disposed of a number of different assets.

2.      The respondent proposed that I examine the facts and make determinations on a range of matters before remitting the matter so the applicants’ entitlements (if any) could be calculated. I propose to follow that course. I have been provided with written submissions from both parties to assist me in that task.

3.      A number of matters of concern to the Social Security Appeals Tribunal (the SSAT) have been resolved. The parties formulated the issues that remain in dispute in different terms. I am satisfied those issues can be summarised as follows:

(a) Can loss-making activities in one business be offset against profitable activities in another business conducted by the applicants for the purposes of the income test?

(b) How should the decision-maker value assets for the purposes of the assets test when some of the assets in question are used for a primary production business and others are not?

(c) Should loans taken out to acquire rental properties be debited against those properties, or against other properties for the purposes of the assets test?

(d) What assets did the applicants own at particular points in time, and what was their value at those times?

(e) If there is a debt, should it be waived?

4.      The Secretary says the period under review commences on 1 January 2003 and concludes at the point in 2004 when the applicants began to receive the maximum rate. The applicants have been dispute with Centrelink over a longer period: the SSAT has already considered and resolved a claim relating to at least one other period. Mr and Mrs Salmon have nonetheless asked this Tribunal to consider the entire period during which the respondent says they were overpaid, stretching back to at least 2001. I propose dealing with the period outlined by the respondent, which was also the period discussed by the SSAT. My discussion in relation to that period might in any event be applicable to the longer-running dispute.

5.      I will deal with each of the matters referred to above in turn after providing a brief summary of the background facts.

factual background to the dispute

6.      Mr and Mrs Salmon own a farm. Like many farming families, they operated other businesses on the side to supplement their income. The Salmons’ principal business while they were receiving social security benefits was a traffic control business, although they also acquired a number of rental properties. Those business activities were mainly carried on through a partnership, although the traffic control business was carried on through a company called Traffic Man Pty Ltd at some point. The applicants were employees of that company.

7.      Mr Salmon told the SSAT that the traffic control business was a natural fit with the farming business. The traffic control business used farm tools and equipment, like the tractor, and the machinery used in the business was stored on the farm. It employed a number of people apart from the applicants, including members of the applicants’ family.

8.      Mr Salmon was injured and received lump sum compensation. He served a preclusion period but subsequently became qualified (subject to what follows) for the DSP.

Can loss-making activities in one business be offset against profitable activities in another business conducted by the applicants for the purposes of the income test?

9.      The applicants said I should treat the applicants’ various business activities as part of one larger business, or at least as necessarily-related businesses. That approach would allow the applicants to combine the outgoings relating to various income streams and offset them against their gross income. While that approach has the virtue of simplicity, I do not think it is correct. The farming and traffic management activities do use some of the same personnel and assets, but they are distinct activities providing different products to different customers in different markets. One of the businesses was sold separately. The fact of common ownership for a period is a coincidence. If one has regard to the ordinary meaning and usage of the word business, it is clear the separate activities are distinct businesses that have no necessary connection with each other. I will approach the issue with that distinction in mind.

10.     The applicants gave evidence that their farming business made a loss while the traffic management business made a profit. They say the losses from one should be offset against the profits of the other in order to calculate their total income. The respondent says that approach is wrong.

11. Section 1072 of the Act defines the general meaning of the expression ordinary income for the purposes of the Act. But s 1075 deals with the specific issue of income derived from a business. That section says income from a business can be reduced by losses, outgoings, depreciation and other allowable deductions contemplated by the income tax legislation that relate to that business. The respondent says each business activity must be treated as a separate business, and losses or outgoings incurred in the course of one business activity may not be claimed against income derived from another business activity. The respondent refers in particular to the decision of the Full Federal Court in Secretary, Department of Social Security v Garvey (1989) 19 ALD 348. In that case, the Court denied that “’the negative yield’ of one source of income [could] be set off against the yield from other sources.” The applicants say that decision was made before the law changed. Under the old law, the applicants said it was necessary to take the respondent’s preferred approach because the alternative view would allow individuals to offset business expenses against personal income. The applicants say s 1075 proceeds on a different basis. The section makes it clear business expenses can be offset against business income, but not personal or other income – which addresses the mischief described in Garvey. There is no need in the circumstances to take the narrower approach contended for by the respondent of distinguishing between income from particular business activities.

12.     The respondent also referred to the decisions of Finn J in Watson v Secretary, Department of Family and Community Services (2003) 128 FCR 564 and Drummond J in Secretary, Department of Social Security v Ekis (1998) 52 ALD 246. In both cases, the court spoke of expenses incurred in the course of running a business being deducted against income of that business.

13.     Neither of the individuals in Watson or Ekis engaged in multiple businesses. So when Finn J in Watson said (at [568] “[t]hose expenses, though, cannot be deducted from income from any other source…” his Honour may have been referring only to income derived from other non-business sources. He was not necessarily laying down a general rule that losses from one business could not be deducted against the income of another business carried on by the individual.

14.     The applicants’ counsel said in his written submissions that the social security legislation should be approached on the same basis as the deduction provisions in the income tax legislation. That legislation permits deductions relating to one business activity to be offset against income generated from another business. He said that was appropriate because, as Drummond J concluded in Ekis, the expression “carries on a business” in s 1075 has the same meaning as the expression “in carrying on a business” in the income tax legislation: ibid at 249-251.

15.     Drummond J’s reasoning in Ekis repays careful reading. His Honour explained the purpose of social security payments was to ensure that pensioners in lower income brackets received some support. It was appropriate that the person’s entitlement be assessed with reference to his or her gross income without taking into account deductions because, with few exceptions, the deductions available were likely to be limited. But his Honour pointed out that one of the exceptions to this approach recognised in s 1075 was in relation to outgoings in connection with business activity. His Honour said (at 250):

…the assumption would appear to be that, in contrast to the position generally obtaining in respect of deriving income from other sources, eg, work as an employee, a person would only derive a gross amount of income from carrying on a business at the cost of having to incur what might be substantial expenses, so that it would be unfair to ignore those expenses in determining such a person's pension entitlement.

16. Given his Honour’s view of the purpose of the legislation, it makes no sense to arbitrarily prevent the respondent from allowing what may be substantial expenses from one business activity to be offset against income from another business. To do so would present a distorted view of an applicant’s income. If the legislature had intended that result, it would have done so in clearer terms. I do not think the use of the word “that” in s 1075(1)(a) has the effect contended for by the respondent.

17.     It follows I am satisfied the applicants are entitled to offset outgoings incurred in connection with one business against income incurred from another business.

How should the decision-maker value assets for the purposes of the assets test when some of the assets in question are used for a primary production business and others are not?

18.     The applicants are also required to satisfy an assets test. The application of the test is generally straight-forward. It is dealt with in Part 3.12 Div 1 of the Act. One calculates the value of a person’s assets for the purposes of the test by assigning the market value to each asset less the value of a charge or encumbrance on that asset: s 1121. In other words, each asset and the debt owing in relation to it must be treated separately. Once the net value of each asset is added together, the total amount can be assessed against the limits applicable under the assets’ test. Complications arise where some of the assets in question are assets of a primary producer used in the course of primary production and the primary producer has liabilities incurred in the course of that primary production activity. In that case, s 1121A permits one to offset all of the primary production liabilities against the value of all of the primary production assets. If the total liabilities exceed the value of the total assets, the value of the primary production assets is taken to be nil for the purposes of the assets test.

19. The applicants argued that their business activities should be characterised as a primary production business, and its value should be assessed in accordance with s 1121A. I disagree. Given my conclusion that the traffic management and primary production activities constitute separate businesses, it is clear the applicants must distinguish the assets and liabilities that are connected with the primary production business (the net value of which may be nil: s 1121A) from the assets used in the traffic management business.

Should loans taken out to acquire rental properties be debited against those properties, or against other properties for the purposes of the assets test?

20. The respondent agrees that any loan secured by way of mortgage over a property should be deducted from the value of that property. There was initially some doubt as to the security offered in relation to the various loans to acquire rental properties. Mr Salmon produced evidence at the hearing showing that each of the loans raised to purchase the properties in Prince St, Alice St and Breimba St were secured in each case against the property purchased rather than against the applicants’ home: exhibit 4. I have no reasons to doubt that evidence. I am satisfied each loan was raised in respect of one of the named properties and the value of that property should be reduced by the amount outstanding on that mortgage: s 1121.

What assets did the applicants own at particular points in time, and what was their value at those times?

21.     The applicants say their household effects should be valued at $10,000 throughout the relevant period. They do not offer any evidence in support of this contention but the respondent says the valuation is acceptable. It seems the respondent has a practice of accepting valuations of up to $10,000 unless there is evidence to the contrary. In those circumstances, I accept the valuation. The applicants also accept the valuations given to the rental properties at various times set out in Annexure C to the respondent’s submissions. Those valuations take into account the liabilities secured against each property – which the applicants say represents a (welcome) departure from the respondent’s initial approach. I accept those valuations.

22.     The respondent prepared a table showing the value of motor vehicles owned by the applicants at various points during the relevant period. The table is contained in annexure C to the respondent’s submissions. It was prepared having regard to the applicants’ financial accounts. The applicants had the opportunity to comment on the data contained in the table. Mr Batley, for the applicant, suggested in written submissions that the picture painted by the table was effectively oversimplified because the arrangements with respect to cars were tangled up in the applicants’ relationship with the traffic management company. Mr Batley pointed out the company took over the traffic management business from the applicants. It acquired debts with respect to motor vehicles as part of the transaction and the applicants in turn became indebted to the company. Mr Batley conceded there was no evidence of this occurring other than the fact the financial accounts for 2003 record an increase in debt about the time of the purchase of the Statesman.

23.     The absence of evidence (apart from the word of the applicants) is troubling. I am not persuaded there is any reason to doubt the accuracy of the respondent’s calculations in annexure C. I accept them.

24. The applicants accept the respondent’s summary of the value of their farm from time to time. The summary is contained in annexure B to the respondent’s submissions. The applicants nonetheless contend that the liabilities arising in connection with other business activities can be offset against the value of the farm. It will be apparent from my conclusions in relation to the operation of ss 1121 and 1121A that I disagree. Primary production assets are treated as a single asset. The unencumbered value of that asset is reduced by the liabilities arising out of the generation of primary production income. Non-revenue liabilities arising out of other business activities are not considered when calculating the value of the farm. It follows I accept the respondent’s valuation.

25.     The respondent has calculated the amounts in the applicants’ bank accounts from time to time. The calculations are set out in annexure E to its submissions. The applicants provided an additional sheaf of statements and other documents which their counsel said might explain some of the gaps. The documents comprised annexure A to the applicants’ submissions. I was invited to infer that any remaining gaps ought to be filled by making certain assumptions. The submissions did not offer a detailed explanation of what use should be made of the information provided, and the respondent’s reply did not comment. I think a detailed reconciliation of the various documents is best left to the primary decision-maker, and I therefore remit that task to the respondent.

26.     That leaves only the shares. The respondent said the applicants owned NRMA shares in addition to IAG shares. The applicants pointed out NRMA Insurance Ltd changed its name to IAG. They are the same shares.

If there is a debt, should it be waived?

27.     It is inappropriate to resolve the question of waiver at this point. The respondent will need to reconsider the applicants’ claim having regard to the findings of fact and opinions as to law that I have set out in the course of these reasons. If a debt remains after that process, the question of waiver then becomes a live issue.

conclusion

28. The Tribunal sets aside the decision under review and remits the matter to the primary decision-maker for reconsideration in accordance with these reasons pursuant to s 43(1)(c) of the Administrative Appeals Tribunal Act 1975.

I certify that the 28 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe.

Signed:         .....................................................................................
  Associate:     Stephen O’Grady

Date of Hearing  10 July 2006
Date of written submissions     6 October 2006, 19 December 2006,
  2 January 2007
Date of Decision  30 May 2007
The applicants represented themselves at the hearing.

The respondent was represented by the Australian Government Solicitor.