Secretary, Department of Social Security v McLaughlin
[1997] FCA 1456
•18 DECEMBER 1997
FEDERAL COURT OF AUSTRALIA
SOCIAL SECURITY - disability allowance and partner allowance - means test - definitions of “income” and “income amount” - general approach to construction - whether definitions limited to net gain or benefit - payment under industry de-regulation scheme - whether loan - whether “income” or “income amount”.
Social Security Act 1991 s 8
Dairy Industry Act 1973 (WA)
Re Hungerford and Repatriation Commission (1990) 21 ALD 568
Read v The Commonwealth (1988) 167 CLR 57
Secretary, Department of Social Security v Garvey (1989) 22 FCR 132
Rose v Department of Social Security (1990) 21 FCR 241
Haldane-Stevenson v Director-General of Social Security (1986) 9 FCR 73
SECRETARY, DEPARTMENT OF SOCIAL SECURITY v BRIAN McLAUGHLIN and FAYE McLAUGHLIN
WAG 5 OF 1997
FRENCH J
PERTH
18 DECEMBER 1997
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
WAG 5 of 1997
GENERAL DIVISION
ON APPEAL FROM THE GENERAL ADMINISTRATIVE
DIVISION OF THE ADMINISTRATIVE APPEALS TRIBUNAL
CONSTITUTED BY ASSOCIATE PROFESSOR R F FAYLE,
SENIOR MEMBER
BETWEEN:
SECRETARY, DEPARTMENT OF SOCIAL SECURITY
APPLICANT
AND:
BRIAN MCLAUGHLIN
FIRST RESPONDENT
AND
FAYE MCLAUGHLIN
SECOND RESPONDENT
JUDGE:
FRENCH J
DATE OF ORDER:
18 DECEMBER 1997
WHERE MADE:
PERTH
MINUTE OF ORDERS
THE COURT ORDERS THAT:
The appeal is allowed.
The decision of the Tribunal is set aside.
The matter is remitted to the Tribunal to be dealt with according to law.
The Applicant to pay the Respondents costs of the appeal.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
WAG 5 of 1997
GENERAL DIVISION
ON APPEAL FROM THE GENERAL ADMINISTRATIVE
DIVISION OF THE ADMINISTRATIVE APPEALS TRIBUNAL
CONSTITUTED BY ASSOCIATE PROFESSOR R F FAYLE,
SENIOR MEMBER
BETWEEN:
SECRETARY, DEPARTMENT OF SOCIAL SECURITY
APPLICANT
AND:
BRIAN MCLAUGHLIN
FIRST RESPONDENT
AND
FAYE MCLAUGHLIN
SECOND RESPONDENT
JUDGE:
FRENCH J
DATE:
18 DECEMBER 1997
PLACE:
PERTH
REASONS FOR JUDGMENT
INTRODUCTION
The applicants were milk vendors who were paid to withdraw from the industry as part of a deregulation process supervised by the Dairy Industry Authority of Western Australia. The payments were treated by the Department of Social Security as income and disability and partner’s allowances payable to the applicants were cancelled accordingly. The applicants appealed to the Social Security Appeals Tribunal and succeeded in having the cancellation decisions set aside. The Secretary of the Department appealed from that decision to the Administrative Appeals Tribunal. He now appeals to this Court from the decision of the Administrative Appeals Tribunal. The question on the appeal is whether the payments made to the applicants were “income” for the purposes of the Social Security Act 1991.
FACTUAL BACKGROUND
Brian and Faye McLaughlin operated a milk round in Western Australia for about thirty years up to 1995. In 1980 they and their partners acquired a licence to operate their milk vending business in Rockingham. The licence was issued under the Dairy Industry Act 1973 (WA) by the Dairy Industry Authority (the Authority), established by that Act. In or about 1991 they ceased making household deliveries and began delivering to shops and shopping centres. This was a more profitable line of business.
The licence conferred the sole right to deliver milk to shops in a specific area.
In 1993, the milk distributors and vendors industry was undergoing rationalisation. The Authority administered a scheme to provide financial adjustment assistance for milk distributors and vendors wishing to leave the industry. On 16 July 1993 the Authority wrote to Mr McLaughlin enclosing an application for assistance under the scheme known as the “Distribution Adjustment Assistance Scheme” (DAAS). The letter said, inter alia:
“You may apply for DAAS assistance at any time during the eligible period to June 30 1994, if you arrange a sale of your entire milk distributor/vendor business to an existing licencee.”
Deregulation of the industry was initiated in or about 1994 with the termination of further licensing by the Authority to be effective from 3 February 1995. Distribution of milk and dairy products was to be the responsibility of dairy processing companies under contractual arrangements with vendors. The DAAS was made available to those who were in the industry but were not able to secure contracts in the deregulated environment.
On 7 July 1994, Masters Dairy Limited, for whom the McLaughlins had been distributing milk products, wrote to them advising that it could not offer them a contract after the coming into operation of deregulation. They were advised by the company to apply for assistance under the Scheme while it was available.
On 22 March 1995, the McLaughlins applied for assistance. They were required in the application form to identify the volume of licensed milk products which they had sold for a consecutive eight week period between 1 April 1994 and 30 June 1994.
On 4 July 1995, they made an agreement with the Authority relating to the provision of assistance. The terms of the agreement are referred to in greater detail below. It provided for a covenant of indefinite duration by them not to engage in the business of milk distribution or milk vending in Western Australia. In consideration of that covenant the Authority agreed to pay them a sum of $121,950 on specified terms and conditions. These included a covenant to repay the sum on demand if made within three years after the signing of the agreement. After that time the McLaughlins would no longer be liable to repay the money. The covenants under the agreement could only be discharged by repayment of the money advanced or a release by virtue of the expiry of the period of three years. The practical effect of the agreement was to secure the McLaughlins’ withdrawal from the industry for at least three years.
The payments under the agreement were made in two instalments, the first of which was the sum of $60,975 paid in July, the balance being paid in September 1995.
Mr McLaughlin was in receipt of a Disability Support Pension and his wife was in receipt of a partner allowance at the time the payments were made. On 28 July 1995 they wrote to the Department of Social Security advising of the first payment.
On 28 November 1995 a delegate of the Secretary of the Department wrote to Mr McLaughlin advising that he was not eligible to receive Disability Support Pension until on or after 18 October 1996. Mrs McLaughlin’s partner allowance was disallowed also.
The McLaughlins requested that the decisions be reviewed internally by the Department. On 6 March 1996 an Authorised Review Officer wrote to Mr McLaughlin affirming the decision to refuse payment. The decision was based upon the characterisation of the two Authority payments as “income” for the purposes of the Social Security Act 1991.
The McLaughlins appealed to the Social Security Appeals Tribunal. On 17 June 1996, the Tribunal decided to set aside the decision and send the matter back to the Secretary for reconsideration in accordance with directions that the money received by Mr & Mrs McLaughlin for the sale of their business should be considered an asset and not income. The Secretary appealed from that decision to the Administrative Appeals Tribunal.
The Administrative Appeals Tribunal did not agree with the conclusion of the Social Security Appeals Tribunal that the money was an asset. However, it was of the view that the money was not income. Its decision, given on 13 December 1996, was expressed as follows:
“The Tribunal sets aside the decisions of the Social Security Appeals Tribunal of 17 June 1996 and in their stead DIRECTS the applicant to reconsider its decisions as evidenced at T37 and T46 on the basis that the said sum of $121,950 received by the respondents is not “income” as defined by s 8(1) of the Social Security Act 1991.”
The Secretary appeals from that decision to this Court on the ground that the Tribunal erred in law in construing and applying the definitions of “income amount” and “income” in subs 8(1) of the Social Security Act 1991.
STATUTORY FRAMEWORK
Sections 8(1) and 8(2) of the Social Security Act 1991 provide in the relevant parts:
“8(1) In this Act, unless the contrary intention appears:
.
.
.
“earned, derived or received” has the meaning given by subsection (2);
.
.
.
“income”, in relation to a person, means:(a)an income amount earned, derived or received by the person for the person’s own use or benefit; or
(b)a periodical payment by way of gift or allowance; or
(c)a periodical benefit by way of gift or allowance;
but does not include an amount that is excluded under subsection (4), (5) or (8);
“income amount” means:
(a) valuable consideration; or
(b) personal earnings; or
(c) moneys; or
(d) profits;
(whether of a capital nature or not);
8(2) A reference in this Act to an income amount earned, derived or received is a reference to:
(a)an income amount earned, derived or received by any means; and
(b)an income amount earned, derived or received from any source (whether within or outside Australia).”
None of the exclusions contained in subss (4), (5) or (8) of s 8 have relevance to this application.
THE DEED OF AGREEMENT
The agreement under which the payments were made was between the Dairy Industry Authority and Mr & Mrs McLaughlin, designated respectively as “the Authority” and “the Borrower” in the text of the deed. The terms of the deed made provision for covenantors to guarantee the obligations of the McLaughlins but no covenantor was specified as a party.
The recitals were in the following terms:
“A.The Authority has decided to implement the Scheme to assist those engaged in milk distribution to adjust to the termination of licencing.
B.The Borrower has completed the Application Form and the Authority has decided to grant assistance to the Borrower pursuant to the Scheme.
C.The terms upon which the Authority is prepared to extend that assistance are contained in this Agreement.
D.The Covenantors, in consideration of the assistance proposed to be provided by the Authority to the Borrower, have entered into this Agreement.”
Definitions in cl 1 included:
“”Business” means the business or businesses conducted by the Borrower and for which a milk distributor/vendor licence or licences have been issued to the Borrower by the Authority;
“Date of Repayment” means three years after the signing of this Agreement;
“Money Secured” means:
(i)all money, including the Principal Sum, lent, advanced or otherwise made available by the Authority to the Borrower by this Agreement and from time to time remaining outstanding;
(ii)all money payable or to become payable for stamp duty on Agreement and which remains unpaid from time to time;
(iii)all legal and other costs, charges and expenses incurred in the preparation of and incidental to this Agreement or which may be incurred by the Authority as a consequence of the failure of the Borrower or any Covenantor to perform any agreement or obligation by this Agreement.
(iv)interest payable under this Agreement and which is due and unpaid upon all money referred to in (i), (ii) and (iii) above; and
(v)any other money due payable or owing to the Authority by the Borrower or the covenantors by this Agreement;
“Principal Sum” means the sum of $121 950.00 calculated in accordance with the Scheme Information Sheet and the Application recommended by the Independent Assessment Agent and approved by the Authority.”
The primary covenants were contained in cl 2 headed “ENGAGEMENT IN THE INDUSTRY”.
“2.1In consideration of the Borrower covenanting and undertaking to the Authority that it shall not be engaged in any manner nor received any payment (whether by way of salary, wages, dividends, kind or otherwise) nor have any legal or beneficial interest, actual or continent, in the business of milk distribution or milk vending in the State of Western Australia, the Authority shall pay to the borrower the Principal Sum on the terms and conditions specified by this Agreement.
2.2The Covenantors, in consideration of the payment by the Authority by clause 2.1 and advanced pursuant to the provisions of clause 3 of this Agreement, have entered into this Agreement with the Authority and the Borrower and have agreed to provide the representations, warranties and covenants contained in this Agreement.”
Clause 3 provided for the terms of payment of the principal sum.
“3.1Subject to the terms and conditions of this Agreement the Authority shall give the Borrower:-
(a)fifty per cent (50%) of the Principal Sum within fourteen (14) days upon receipt of a signed Deed of Agreement.
(b)the remaining fifty per cent (50%) of the Principal Sum, by a date 3 months after the date of payment of the first portion.
3.2Interest shall accrue on that part of the Principal Sum as has been paid by the Authority to the Borrower at a rate equivalent to the large overdraft bank rate plus two per centum (2%) charged by the principal trading bank of the Authority from time to time. The interest shall be calculated monthly in arrears and shall be due and payable in accordance with clause 4 of this Agreement.”
Clause 4 set out the terms of repayment and release.
“4.1The Borrower shall repay the Money Secured in full to the Authority upon demand on or before the Date for Repayment if the Borrower, the Covenantor or any Associated Person breaches any of the terms of this Agreement.
4.2If no demand is made by the Authority prior to the Date for Repayment, the Borrower shall be no longer obliged to repay the Money Secured and neither the Borrower nor the Covenantors shall be liable to the Authority with respect to the Money Secured.”
THE REASONING OF THE ADMINISTRATIVE APPEALS TRIBUNAL
The first question which the Tribunal posed for itself was whether the amounts received under the agreement were loans. It concluded that they were not:
“In substance the arrangement was to pay over the principal sum to the applicants for their enjoyment without any intention to repay but in the unlikely event of a breach of covenant within three years and the DIA seeking to exercise its discretion to recover, a similar amount becomes payable to the DIA at that time, such amount bearing interest from the date of demand. That is, there are, in substance two distinct amounts, a payment to the respondents upon entering the agreement and a contingency payment to the DIA upon the occurrence of certain events.”
The second question was whether or not the moneys were income under s 8 of the Social Security Act 1991. Reference was made to the interpretation, by the Tribunal, in Re Hungerford and Repatriation Commission (1990) 21 ALD 568, of similar provisions in s 35(1) of the Veterans Entitlements Act 1986.
The interpretation in that case, adopted by the Tribunal in this, was:
“... that the basic meaning which should be ascribed to the words “personal earnings, moneys, valuable consideration and profits” is that they “relate to gains derived by a person as a result of the provision by that person of consideration in the form of personal exertion or other services or the disposition of property....whether of a capital nature or not.”
The effect of the agreement in relation to the McLaughlins was “to extinguish any rights they may otherwise have had as licensed milk vendors”. The payment did not therefore constitute consideration for the disposal of any property.
The question then remained whether the payments were valuable consideration or a profit in the hands of the respondents. After referring to Re Hungerford (supra) again, the Tribunal concluded that the payment was not a profit as there was no disposal of property. The payment was “... compensation for the extinguishment of their business and in consideration of the respondents entering into the restrictive trade covenant referred to above”. The payment was therefore not income.
THE GROUNDS OF APPEAL
The grounds of appeal set out in the Secretary’s application are as follows:
“The Tribunal erred in law in construing and applying the definitions of “income amount” and “income” in subsection (1) of s 8 of the Act.
PARTICULARS
(a)In July and September 1995 respectively, the Respondents received from the DIA two lump sum payments of monies (“the sums”) amounting in total to $121,950 pursuant to an Agreement between them and the DIA entered into on 4 July 1995 (“the Agreement”).
(b)The Tribunal found that the sums were in the form of consideration for the Respondents entering into a restrictive trade covenant that they should not engage in the milk distribution or milk vending business effectively for a period of three years.
(c)The Tribunal also found that the sums were not “valuable consideration”, “personal earnings”, or “profits” within the meanings of those terms in the definition of “income amount” in subsection (1) of s 8 and hence did not constitute “income” within the meaning of the latter term in that subsection, in consequence of which they should not be taken into account when assessing the entitlements of the Respondents to Disability Support Pension and Partner Allowance respectively.
(d)The Tribunal did not, or did not adequately, address the issue whether, for the purposes of the definition of “income amount” and therefore that of “income”, the sums were “monies” within the extended terms of the first-mentioned definition.
(e)The Tribunal should have found the sums were, in their legal nature, “ monies” and hence together constituted an “income amount”.
(f)The Tribunal, having also effectively found that the sums:
(i)were received by the Respondents;
(ii)were available to them for their own use or benefit; and
(iii)did not fall within any of the exclusions under subsection
(4), or (8) of s 8 of the Act;
should therefore have found that the sums were “an income amount...received by the [Respondents] for [their] own use or benefit” and thus “income” within the meaning of that term in s 8(1) of the Act.
(g)Further and alternatively, in construing the definition of “income amount” in s 8(1) of the Act, the Tribunal further erred in holding that the terms “personal earnings, monies, valuable consideration and profits where they appear in the definition of “income amount” necessarily require that the sums must relate to gains derived by a person as a result of the provision by that person of consideration in the form of personal exertion or other services or disposition of property whether of a capital gain or not.
(h)Even assuming (which the Applicant does not concede), that an element of gain needs to be established for an “income amount” to fall within the definition of “income” in s 8(1) of the Act, the Tribunal, having found that the sums were received by the Respondents in consideration of their having entered into a restrictive trade covenant under the Agreement, should have held that the necessary conditions of a gain had been satisfied in the circumstances, so that the sums were “income” for the purposes of determining the Respondents’ entitlement to benefits provided under the Act.”
NOTICE OF CONTENTION
The McLaughlins filed a Notice of Contention seeking to affirm the Tribunal’s decision on the following grounds, in addition to those relied upon by the Tribunal:
“1.Having regard to the terms of the deed of agreement dated 4 July 1995 between the Dairy Industry Authority and the Respondents, the letter to the Social Security Appeals Tribunal from the Dairy Industry Authority of Western Australia dated 23 May 1996 and the fact that the appeal to the Tribunal proceeded on the basis that there was no dispute about the relevant facts that were sufficiently documented in the documents before the Tribunal the Tribunal erred in law in holding that the amounts paid to the Respondents were not loans and the Tribunal should have found that the amounts were loans and were therefore not income within the meaning of that term in subsection 8(1) of the Social Security Act 1991;
2.The milk vending business carried on pursuant to the licence issued by the Dairy Industry Authority to Mr and Mrs McLaughlin was carried on by Stepick Pty Ltd as Trustee for the McLaughlin Family Trust (“the Trust”) the sums received by the Respondents were received by them on behalf of the Trust the sums were not income within the meaning of that word in subsection 8(1) of the Social Security Act 1991 because they were not for the Respondents’ own use or benefit.”
The latter contention was not pressed at the hearing.
CHARACTERISATION OF THE PAYMENTS
The definitions of “income” and “income amount” in the Social Security Act indicate that like their statutory predecessors they are of wide application. This meets the public policy requirement that “public expenditure is directed to those who stand in actual need of the periodic support which income-related pensions provide” - Read v The Commonwealth (1989) 167 CLR 57 at 69 (Brennan J). The purpose of the applicable provisions of the Act is to “maintain a basic level of income for those who [are] unable to receive sufficient income to provide for themselves” - Secretary, Department of Social Security v Garvey (1989) 22 FCR 132 at 136.
The concept of “income” defined in the Social Security Act is entirely different from that embodied in the comparable provisions of the Income Tax Assessment Act 1986 - Read v The Commonwealth (supra) at 69. The general approach to construction was considered in Rose v Department of Social Security (1990) 21 FCR 241 at 244:
“The Act is a remedial provision in that it gives benefits to persons and thereby remedies Parliament’s perceptions of injustice. It calls for no narrow or pedantic construction; but, as mentioned earlier, it contains both enabling and excepting provisions which do not therefore necessarily require beneficial interpretation. It depends on the particular statutory provision and an analysis of its language and purpose. Aids to construction, including the principle of liberal interpretation of remedial provisions, are generally invoked when there is some ambiguity on the fact (sic) of the particular statutory provision. That is not the case here with the definition of “income” in its introductory general words with which this case is concerned.”
However wide the scope of the term “income”, in my opinion it would not extend to a bona fide loan. Counsel for the Secretary argued to the contrary, submitting that even if characterised as a loan the payments made to the McLaughlins were for their immediate benefit, alleviating their need for the support provided by the disability and partner allowances.
It was contended for the McLaughlins that the parties to the deed had agreed it was a loan and that the appeal proceeded on the basis that there was no dispute about the relevant facts. But the relevant facts did not extend to the characterisation of the agreement as a loan. True, the agreement used the designation “Borrower” to describe the McLaughlins and referred to the “Principal Sum” as “lent, advanced or otherwise made available by the Authority”. But in my opinion the substance of the transaction was not a loan but a payment on a condition of non-engagement in the industry for a minimum of three years. As the Tribunal observed an intention to repay is an essential attribute of a loan of money whereas in the present case:
“In substance the arrangement was to pay over the principal sum to the applicants for their enjoyment without any intention to repay but in the unlikely event of a breach of covenant within three years and the DIA seeking to exercise its discretion to recover, a similar amount becomes payable to the DIA at that time, such amount bearing interest from the date of demand. That is, there are in substance two distinct amounts, a payment to the respondents upon entering the agreement and a contingency payment to the DIA upon the occurrence of certain events.”
The ground relied upon in the Notice of Contention is therefore not made out.
The general approach to the construction of the terms “income” and “income amount” outlined above was relied upon by the Secretary. There was no significant dispute on that question. The primary submission of the Secretary was that the amounts paid to the McLaughlins constituted “moneys” within the definition of “income amount” in s 8. The moneys were received by the McLaughlins and were for their own use or benefit. On this basis it was said the payments satisfy the requirements of the definition of “income” in s 8(1).
Counsel for the McLaughlins submitted however that the Social Security Act 1991 is concerned with net income or net gain. There was no net gain to the McLaughlins because they paid a price for the money received by way of their covenants not to carry on business as milk vendors or distributors and their contingent liability to repay the money. The decision of the Full Court of this Court in Haldane-Stevenson v Director-General of Social Security (1986) 9 FCR 73 was relied upon for the proposition that income relates to a “net gain”.
The Court in Haldane-Stevenson was concerned with the definition of “income” in s 18 of the Social Security Act 1947 which was in substantially similar terms to that in s 8 of the present Act. In Haldane-Stevenson, McGregor and Pincus JJ said, at 75:
“It will be noted that the definition of “income” makes no reference to expenses or deductions. It leaves uncertain the answer to the question whether gross income or net income is meant. Having regard to the purpose of reducing the pension by reference to income earned, we are of the view that, at least in general, net income is meant.”
The proposition that “in general” net income is meant does not exclude the possibility of a wider application. Read v The Commonwealth (supra), also relied upon by the McLaughlins, is of limited assistance in this case as the “income” in question there was the issue of additional units in a unit trust.
What the Tribunal has sought to do and the Court is invited now to do is to read down the definition of “income” and “income amount”. That reading down involves not just a choice of meanings to be attributed to the existing words of the definitions but the introduction into the definitions of words of limitation which the legislature has not seen fit to enact.
The definition of “income” extends to income amounts “received” by a person. There is no requirement in the Act that such amounts are received in exchange for anything. They may therefore extend to gifts. This is reinforced by the extension of the definition of “income” to “a periodical payment by way of gift or allowance”.
There is no requirement in the definition for the payment received to constitute a net gain. Absent such a requirement a payment of money received by a person for that person’s own use or benefit is a payment of an income amount. No doubt examples may be generated and multiplied of apparently startling or unfair results of this construction. The receipt of the proceeds of the sale of a house or a lottery win may constitute “income” for the purposes of the Act. Such debates, however, are best reserved for the legislature. There is, in my opinion, no room in the language of the definitions of “income” and “income amount” for the kind of construction adopted by the Tribunal.
The amounts paid were income and should be treated as such.
CONCLUSION
It was submitted for the McLaughlins that if the appeal were to be successful there is in Mrs McLaughlin’s case an issue that will need to be considered by the Tribunal which appears to have been overlooked, that is whether or not the moneys received by Mrs McLaughlin should be treated as “income” only in the fortnight of receipt. In the circumstances it seems to me that the best course is to allow the appeal and remit the application to the Tribunal to be dealt with according to law.
I certify that this and the preceding thirteen (13) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice French
Associate:
Dated: 18 December 1997
Counsel for the Applicant: Mr P. Johnston with
Mr T. CareySolicitor for the Applicant: Australian Government Solicitor Counsel for the Respondent: Mr P. Martino Solicitor for the Respondent: Pullinger Stewart Date of Hearing: 12 June 1997 Date of Judgment: 18 December 1997
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