Schubert and Secretary, Department of Family and Community Services

DECISION AND REASONS FOR DECISION [2000] AATA 162

ADMINISTRATIVE APPEALS TRIBUNAL )

) No S99/326

General Administrative DIVISION )

Re MARTIN SCHUBERT
Applicant

And SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES
Respondent

DECISION

Tribunal Senior Member J.A. Kiosoglous MBE

Date3 March 2000
PlaceAdelaide

Decision Pursuant to section 43 of the Administrative Appeals Tribunal Act 1975, the Tribunal sets aside the decision under review and in substitution therefor decides that the expenditure on charges and interest associated with Mr J. Schubert's personal loan is exempt for the purposes of the Family Actual Means Test.

(Signed)
J.A. KIOSOGLOUS MBE
(Senior Member)
CATCHWORDS
SOCIAL SECURITY – pensions, benefits and allowances – Youth Allowance – Family Actual Means Test – whether expenditure on loans and interest exempt amounts of income – consideration of "business of the person" – definition of "business" – definition of "carrying on a business" –- whether one transaction can constitute a "business" – question of intent of "business" activities – consideration of "necessarily related" to a business activity
Social Security (Family Means Test) Regulations 1998 Nos. 12, 15
Re McClymont and Secretary, Department of Employment, Education, Training and Youth Affairs (AAT 12373, 6 November 1997)
Re Catto and Secretary, Department of Employment, Education, Training and Youth Affairs (AAT 12468, 5 December 1997)
Graham v Lewis (1888) 22 QBD 1
Re Griffin, ex p Board of Trade (1890) 60 LJQB 235
Mercer v Dalley [1934 VLR 14]
Farrell v Bannister (1952) 52 SR 73
Colbron v St Bees Island Pty Ltd (1995) 56 FCR 303
Total Holdings (Australia) Pty Ltd v Federal Commissioner of Taxation (1978) 20 ALR 152

REASONS FOR DECISION

3 March 2000 Senior Member J.A. Kiosoglous MBE

This is an application by Martin Schubert (the applicant) for review of a decision of the Social Security Appeals Tribunal (SSAT) dated 5 July 1999 (T2) affirming an authorised review officer's (ARO) decision of 18 May 1999 (T15) which affirmed the delegate of the respondent's decision of 8 April 1999 (T7) to reject the applicant's claim for Youth Allowance due to the effect of the Family Actual Means Test.
The Tribunal received into evidence the documents lodged pursuant to s.37 of the Administrative Appeals Tribunal Act 1975 (T1-19), together with 2 exhibits lodged by the respondent (Exhibits R1-R2). The applicant was represented by his parents, John and Pam Schubert, and the respondent was represented by Mr James Underwood, a departmental advocate.
The issue before the Tribunal is whether or not an amount of $11,831, attributed to expenditure on interest and bank charges on a personal loan, should be exempt from consideration under the Family Actual Means Test.
history of the application
The factual background to this matter is not in dispute. The applicant's parents are self-employed and have interests in a family trust and a proprietary company.
Mr J. Schubert took out a personal loan in the amount of $150,000, secured over the family home, in May 1997 for the purpose of investing in shares. He subsequently bought shares in Lateral Trading Pty Ltd, which then went into liquidation.
Mr J. Schubert's personal 1997/98 tax return shows a deduction in the amount of $11,831 representing interest and charges on the personal loan.
The applicant applied for Youth Allowance on 29 March 1999 (T3/21-53) and his parents advised on the Family Actual Means Test form of a total expenditure for the 1997/98 tax year of $36,412, including $11,831 on personal loan interest. The total amount of the expenditure was sufficient to preclude the applicant from receiving Youth Allowance, as affirmed by the ARO and the SSAT.
legislation
Given the discreet nature of the question before the Tribunal the only relevant legislation is Regulation 15(2)(f), (g) and 15(3)(a) of the Social Security (Family Means Test) Regulations 1998, which provide:
"15. Amounts not included in actual means of person
….
(2)In working out actual means, the following amounts spent or saved in that tax year by the person are not included:
…
(f)spending or savings from any arm's length loan received by the person in that tax year;
(g)spending to repay a loan received by the person in that tax year, that is not an arm's length loan, or to pay interest on the loan;
…
(3)In addition, in working out actual means for that tax year, the following amounts are not included:
(a)subject to subregulation (4), an amount of assumed spending equal to the amount of the income or resources of a business of the person that is deductible under the Income Tax Assessment Act 1936 or Income Tax Assessment Act 1997 because the amount was, or will be, necessarily incurred in carrying on the business;
…"

applicant's submissions

Mr J. Schubert spoke to the Tribunal and stated that around December 1996 he and his wife started to think about new ways of deriving income due to a falling income in Mr Schubert's computer programming business. He told the Tribunal that they approached their accountant who advised them to invest in Lateral Trading Pty Ltd, as the accountant had put all of his superannuation into the venture. They also viewed a prospectus and a computer modelling demonstration showing annual returns of 25-30% for the previous three years.
He stated that they saw this investment as a new venture to generate income which could sustain their family in place of the revenue from the computer programming. He told the Tribunal that the investment was made in his name because the family trust would be unable to distribute the imputation credits, and that the only security available to get the necessary loan capital was in the family home. The company had no actual assets. He stated that the best tax advantages were to be gained by investing in his own name and not that of the trust or the company.
He submitted that had the venture been successful it would show up in the Department's assessments as "income" and that it was therefore inconsistent that costs of the venture would not be taken into account. He also submitted that it was a distortion of the family's actual means to not include the interest and that it is not appropriate to treat a person with more than one business interest differently than had the investments activity been his only business.
Mr Schubert told the Tribunal that the anticipated returns from Lateral Trading meant that at the time there appeared no need to diversify as one would normally expect to see in an investment "business".
He submitted that this "personal" investment is a business investment as its intention was to generate income within the context of their particular family environment, and on the basis that any income from the investment would be taken into account by the Department.
respondent's submissions
Mr Underwood, on behalf of the respondent, submitted to the Tribunal that the investment was personal in nature and was unrelated to the company or family trust, not appearing in any trust or company tax returns or accounts. He further submitted that the loan was used for the purposes of personal investment and personal tax deduction and that the interest was therefore not "necessarily incurred" expenditure in relation to the family's "business". He further submitted that the personal tax return of Mr J Schubert does not list 'investor' as an occupation.
He contended that it would be inconsistent to allow this interest to be exempt under the Family Actual Means Test given it would be allowed as a 'personal' deduction under the Parental Income Test.
He submitted that there was no recognisable business structure and that all of the money from the loan was put into the one investment, which is inconsistent with the notion of an investment "business".
discussion and findings
The Tribunal is satisfied, and so finds, that the applicable test in relation to this claim was the Family Actual Means test, and further that the interest monies cannot be exempted under Regulations 15(2)(f) and (g), given the loan relates to the 1996/97 tax year and the claim relates to the 1997/98 tax year.
The Tribunal is left to consider the applicability of Regulation 15(3)(a), which has two core elements that need examination. The first concerns the nature and scope of the phrase "business of the person". The second is the nature and scope of the phrase "necessarily incurred in carrying on the business".
business of the person
The first issue is whether the investment activity of the applicant constituted a "business", or whether it is simply a personal investment, in which latter case, Regulation 15(3)(a) would not apply.
The Tribunal is assisted in determining this question by Senior Member Muller's comments in Re McClymont and Secretary, Department of Employment, Education, Training and Youth Affairs (AAT 12373, 6 November 1997) wherein, albeit dealing with different legislative requirements, he outlined the basic concern of the legislation in this area, (at p 3 inter alia):
"…
It is the nett income available to the family to live on which gives an indication of the funds available to the family. It is irrelevant in this context to decide whether the rental property forms part of the family mainstream business activity or whether it is a side-line. The question is whether or not it is an activity designed to generate income. The whole thrust of the legislation is to determine what funds the family has available to it to spend on living expenses, investments and savings.
…"
In Re Catto and Secretary, Department of Employment, Education, Training and Youth Affairs (AAT 12468, 5 December 1997), Senior Member Allen discussed Re McClymont and stated (inter alia) at paragraphs 14-16:
"14. I agree with Senior Member Muller that what one must look to is whether the monies were used to generate income. As was pointed out in Re Marchant supra and adopted in Re Coleman supra, on a literal reading the regulations would require a self-employed shop owner to list as expenditure all money spent on stock as well as other expenditure even when that person might be making no profit at all and have no money available to spend.
15. In my view this is exactly the case here as the units, although constructed with the view of being sold for a profit, were sold at a loss and no profit was in fact made.
16. In conformity with the decision of Senior Member Muller in Re McClymont supra, I find that the amount which was the repayment of monies borrowed by Mrs Catto to finance the profit making scheme should not form part of the calculations of the family's income. I consider it totally artificial to seek to draw distinctions between a family's "main" business and other schemes. Quite often a person will have a main or core business but indulge in other activity which also brings in income, for example, a solicitor may deal in the buying and selling of property or an accountant may deal in shares. I do not regard it as logical to say that the practice as a solicitor or accountant in the above cases is a core activity and hence expenses are deductable but the other activities are extraneous and monies expended in trading have to be brought into account rather than nett profits."
One important caveat upon the authority of the decisions cited is that the Regulations have since undergone significant change, and indeed now fall under the auspices of a new Department. Whilst the Regulations have changed, the thrust of this enquiry can still be seen as answering the question of whether or not the investment was simply personal, or whether it was designed to "generate income". The notion of "income generation" is one which also accords with the core notion of a "business activity", as distinct from investments for capital growth or other purposes such as in a holiday "investment" property.
This idea of a "business" accords with the common law usage of that term. As Fry LJ noted in Graham v Lewis (1888) 22 QBD 1 at p5, "carrying on" a business requires that its object be some pecuniary gain (or "income generation"):
"I think that the expression "carry on business" is not ordinarily used in the sense of a person being busy or doing business merely. A butler employed to look after his master's plate and perform the other duties of his occupation may be a very busy man, but he could not be said to be carrying on business. … I think that the expression has a narrower meaning than that of doing business or having business to do. In my opinion it imports that the person has control and direction with respect to the business, and also that it is a business carried on for some pecuniary gain."

That decision has found application in many subsequent jurisdictions.

"Business" under the 1998 Regulations has the same meaning as in Regulation 12F of the previous Regulations (to which the Tribunal had regard in the above cited decision. In the 1998 Regulations, business is defined by reference to point 1067G-F19A, which provides:
"1067G-F19A.(1) In subpoint 1067G-F11(4):
passive business, in relation to a person, means a business in relation to which the person is usually engaged for less than 17.5 hours in a week.
1067G-F19A.(2) In this point:
business includes:
(a)       the carrying on of primary production; and
(b)       the provision of professional services; and
(c)       the earning of income as a rentier;
but does not include employment (whether or not the employment is remunerated by wages or salary)."
Whilst the applicant's investment would clearly be "passive" if a business at all, the Tribunal is not overly aided by this definition.
Mr Underwood submitted that the investment was more in the nature of a personal investment because all the money was put into one share holding, and in effect there was only one transaction. Mr Schubert, on the other hand, sought to characterise this transaction as being the only necessary one, given their view at the time (however misguided) that the returns from Lateral Holdings would outstrip any other investment. In the English Courts, Lord Esher MR characterised a business in Re Griffin, ex p Board of Trade (1890) 60 LJQB 235 at 237 in the following terms:
"Whether one or two transactions make a business depends upon the circumstances of each case. I take the test to be this: if an isolated transaction, which if repeated would be a transaction in business, is proved to have been undertaken with the intent that it should be the first of several transactions, that is, with the intent of carrying on a business, then it is a first transaction in an existing business. The business exists from the time of the commencement of that transaction with the intent that it should be one of a series."
This proposition finds support in the case law, and for illustrative purposes, the Tribunal notes that concerning real estate agency in Australia. Lowe J sitting in the Supreme Court of Victoria in Mercer v Dalley [1934 VLR 14] stated at p16 (inter alia):
"…
I think it may be conceded that a single act may be sufficient to establish that a person is exercising or carrying on such functions, if such single act is done in circumstances which indicate an intention that other acts of the same kind will follow. …"
Mercer found application in Farrell v Bannister (1952) 52 SR 73 in the New South Wales Supreme Court, and has also found application more recently in the Federal Court in Colbron v St Bees Island Pty Ltd (1995) 56 FCR 303 where Lindgren J remarked at p312 in relation to the notion of carrying on a real estate agent's business:
"… Essential to the definition of "real estate agent" in the New South Wales Act is the notion of the carrying on of a business – a notion which requires some continuity or repetition. I will assume that the course of activity denoted by the "carrying on" of a business can exist within the confines and for the purposes of a single transaction …
The definition of "real estate agent" in the Queensland Act contains the expression "either generally or in respect of any one transaction". This expression was considered in Freehold. The High Court held that a person who, in respect of one transaction, engaged in conduct which, if engaged in repeatedly, would constitute the carrying on of the business of a real estate agent, falls within the definition. In conformity with that decision, if Colbron, in Queensland, in respect of the "transaction" the subject of these proceedings, did acts which, if done repeatedly, would constitute the carrying on of a business described in the definition, he falls within the definition of "real estate agent" in the Queensland Act and acted as such in respect of the subject transaction. …"
In Colbron, his Honour was aided by a more definite statutory definition of "business" but the general principle is still clear, and it is a principle which this Tribunal finds compelling in relation to this current context. One transaction may constitute a business if such conduct engaged in repeatedly would constitute a business. In that event, one transaction will be seen as "carrying on a business".
In the taxation area, the notion of carrying on a business and necessarily related expenditure was considered in Total Holdings (Australia) Pty Ltd v Federal Commissioner of Taxation (1978) 20 ALR 152 wherein it was considered that holding shares and advancing by way of loans to a trading company in which the person had a substantial interest was a business to which interest payments were a necessarily related expense. As Mr Underwood conceded at the hearing, the Department would have no trouble in allowing the offsetting if the applicant had invested through either the family trust or the company mechanisms. It made sense however, in terms of maximising the potential income from the investment to put it in Mr Schubert's name and not in the company or trust names. In this way, it made business sense to personally invest the monies to maximise returns. It seems an inconsistent approach by the Department to insist that something will only be deemed to be a business if it has tax returns or company/trust structures independent of a person, given that it is in the Department's best interests for benefit recipients to maximise their potential income (thereby minimising the payable benefit) and given that the nature of a business should look not so much as to structure but to practice and intent.
"Intent" in this context relates to the substantive purpose of the activity under consideration. If the substantive purpose of the activity is income generation, and such income generation cannot be said to simply be an activity marginal to the person's primary income activity, or resulting just from funds derived from such a primary activity that are personally invested, then such an activity may constitute a business where there is potential for it to make a real contribution to the overall income of the person (or family) under consideration.
Mr J. Schubert told the Tribunal, and the Tribunal accepts it to be the case, that the intention of the investment was to generate income. In fact, it was intended to be the primary source of income. It cannot be considered to simply be an investment activity arising as a result of income from the other business activity. It was not the case that the family received income from their business and looked around as to how best to invest it, whether in the bank or in shares, because, as Mr J. Schubert told the Tribunal, their other income was declining, such that it became necessary to find another source of income, not simply to secure the existing source. This is supported by the fact of the substantial loan secured to effect the purpose of income generation. Had this venture been successful to the extent of the projections, then the income produced would indeed have been the bulk source of the family's income.

The Tribunal does not accept Mr Underwood's proposition that this activity cannot be considered to be a business simply because of the absence of separate tax returns or the involvement of trust or company structures. What is significant is the purpose of the activity and the means by which that purpose is affected, not the structure by which it is performed. In this case it made business sense to keep the investment out of the company structure for the reasons of being able to secure the loan necessary to generate sufficient capital for the business venture. It also made sense to keep it out of the trust for the purpose of receipt of imputation credits, which on Mr J. Schubert's understanding, would not be able to be distributed if the trust were to hold the investment. The fact that the Schuberts were mindful of ensuring that dividends would be payable on a regular basis also reinforces the Tribunal's opinion that the intent of this venture was income generation rather than asset protection or income security.
The further complication is the fact that the investment activity was simply one transaction which, in Mr Underwood's submission, does not accord with the idea of a business. The Tribunal is mindful of the authorities referred to above at paragraphs 26-30 in coming to the conclusion that this transaction was the first in a potential series of transactions within the scope of the investment activity of the Schuberts. It is reasonable to conclude that had the venture not quickly gone into liquidation, depending upon fluctuations in the market and other available investments, the Schuberts may have made other transactions down the line. In any event, in line with the Federal Court's comments in Colbron, the act of making an investment is one transaction which, if repeated, would constitute "carrying on" an investment business. In this case, the one transaction is sufficient to constitute a business of itself and the Tribunal so finds.
The new 1998 Regulations are certainly more explicit and more workable than the old Regulations dealt with in the Tribunal decisions quoted above. The new Regulations are not so specific however as to exclude an activity from being a business due to the absence of trust or company structures. The underlying point remains that the Department is interested in ascertaining the overall nett income available for family expenditure. A "business of the person" does not need to be a separate tax entity for the purposes of the Regulations, because it will be readily ascertainable in a case where the business is an aspect of the personal tax return, as to which part of the claimed personal tax deductions relate to that business aspect. It is further not explicit from the Regulations that only one business is allowed per family, and in this regard, the Tribunal concurs with the views of Senior Member Allen in Re Catto (supra).
As the investment activity in this case was clearly designed to generate income and such income would form a substantive part of the family's overall income, the Tribunal is satisfied that it is a "business of the person" for the purposes of Regulation 15(3)(a) of the Act and so finds.
necessarily incurred in carrying on the business
The second aspect of Regulation 15(3)(a) requires the amount of assumed spending (equal to the amount of the allowable deductions for tax purposes of a business of the person) to be necessarily incurred during the conduct of that business. It is implicit in this Regulation that deductions allowable under the tax acts will be allowable under the Regulations, for the tax acts require a similarly necessary related clause to be satisfied for the purposes of making a deduction.
Where a business of the person is contained within the personal income tax return, it is necessary to determine what amount of the claimed deductions is an expense related to that business activity.
In this case it is clear that there is interest payable in the amount of $11,831 on a personal loan in the 1997/98 tax year. If one then looks at the purpose of that loan, it is apparent that it was necessary for the purpose of raising capital for the investment business. Without that capital, the investment business would not have been able to generate sufficient potential income to achieve its business goal of being the primary source of income for the family.
It follows that the interest payable on such a loan is an expense relating to the investment business which can be said to be necessarily related, by virtue of the fact that without securing that loan, the investment business would not have been able to operate in the manner in which it was intended and in fact did (however much it subsequently turned out to be contrary to expectations).
The Tribunal being satisfied that the investment was a business of the person, and that the interest on the loan was a necessarily incurred expense in relation to that business, Regulation 15(3)(a) is satisfied and it is appropriate, and the Tribunal so finds, that the amount of $11,831 not be included in working out the actual means of the Schubert family for the purposes of the Family Actual Means Test.
decision
For the reasons given and pursuant to section 43 of the Administrative Appeals Tribunal Act 1975, the Tribunal sets aside the decision under review and in substitution therefor decides that the expenditure on charges and interest associated with Mr J. Schubert's personal loan is exempt for the purposes of the Family Actual Means Test.
I certify that the 42 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member J.A. Kiosoglous MBE
Signed:         .....................................................................................
  Personal Assistant
Date/s of Hearing  14 February 2000
Date of Decision  3 March 2000
Counsel for the Applicant        Mr & Mrs J. Schubert
Solicitor for Applicant               -
Counsel for the Respondent    Mr J. Underwood
Solicitor for the Respondent    Centrelink

[2000] AATA 162

3 March 2000

Key Legal Topics

Areas of Law

Social Security Law

Legal Concepts

Contract Formation

Implied Terms

Unconscionable Conduct

Res Judicata