Smart and Secretary, Department of Family and Community Services
[2003] AATA 1335
•22 December 2003
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2003] AATA 1335
ADMINISTRATIVE APPEALS TRIBUNAL )
) No S2002/293 &
| GENERAL ADMINISTRATIVE DIVISION | ) No. S2002/294 | ||
| Re | WALTER LLOYD SMART JUNE EDNA SMART | ||
Applicants
| And | SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES |
Respondent
DECISION
| Tribunal | Deputy President D G Jarvis |
Date22 December 2003
PlaceAdelaide
| Decision | The Tribunal sets aside the decision under review and remits the matter to the delegate with the following directions: 1. that the applicants’ eligibility for payment of age pensions for the period 11 July 1996 to 11 September 2001 be reassessed on the basis that the indebtedness of W.L. & J.E. Smart & Son Pty Ltd to each of the applicants is not to be included as an asset for the purposes of the Social Security Act 1991; and 2. that the respondent pay to the applicants the amounts previously deducted from their age pensions in consequence of the inclusion in their assets of the face value of that indebtedness. |
D.G. Jarvis
(Signed)
Deputy President
CATCHWORDS
SOCIAL SECURITY – pensions benefits and allowances – age pension – assets test – departmental recovery – meaning of “loan” – valuation of loans – loans arising from sale of applicants’ business to family company – unsustainable value attributed to goodwill giving rise to loan accounts – loans owing by a family company to applicants not treated as assets – debts not caused by administrative error – special circumstances – relevance of financial hardship – debts waived –SSAT decision set aside.
Social Security Act 1991 s1122, s1237A and 1237AAD
Re Boyd and Secretary, Department of Social Security (1994) 36 ALD 331
Re Gordon and Department of Social Security (1992) 27 ALD 381
Olds Discount Co Ltd v John Playfair Ltd [1983] 3 All ER 275
Chow Yoong Hong v Choong Fah Rubber Manufactory [1962] AC 209
Heitzman v Gowenlock (1891) 7 TLR 611
Sekhon v Secretary, Department of Family and Community Services [2003] FCAFC 190
Secretary, Department of Social Security v Hales (1998) 82 FCR 154
Re Callaghan and Secretary, Department of Social Security (1996) 45 ALD 435
Re Beadle and Director-General of Social Security (1984) 6 ALD 1
Beadle v Director-General of Social Security (1985) 7 ALD 670
Groth v Secretary, Department of Social Security (1993) 40 ALD 54
Riddell v Secretary, Department of Social Security (1993) 30 ALD 31
Re Ivovic and Director General of Social Services (1981) 3 ALN 61
REASONS FOR DECISION
| 22 December 2003 | Deputy President D G Jarvis |
Introduction
On 21 September 2001 Centrelink decided to raise and recover debts of $28,926.64 from each of the applicants, Walter Lloyd Smart and June Edna Smart, due to overpayment of the age pension for the period 11 July 1996 to 11 September 2001. This decision was made because Centrelink ascertained that during this period, substantial amounts were owed to the applicants by their company W.L. & J.E. Smart Pty Ltd (“Smart Company”). If these amounts were regarded as assets in the form of loans owing to them, then during part of the above period the applicants would have been ineligible to receive an age pension, and thereafter would have been ineligible to receive an age pension at the full rate. The Social Security Appeals Tribunal (the “SSAT”) affirmed the original decision maker’s decision on 15 July 2002.
The applicants subsequently applied for review of the SSAT’s decision. I heard the applications for review together, as the same issues were involved in each matter. The applicants were represented by their accountants, Messrs S MacKenzie and J Fulford. Mr C Goldsworthy, an advocate employed by Centrelink, represented the respondent.
The documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (the “T-Documents”, exhibit R1) and also exhibits A1 to A14 were received into evidence. The applicants gave oral evidence, and they also called their accountants Messrs S MacKenzie and J Fulford, and also their family doctor, Dr John A Cross, to give oral evidence. Centrelink did not adduce any evidence other than to tender the T-Documents. I accept the oral evidence of the applicants and the other witnesses called in support of their application.
I have decided to set aside the SSAT’s decision and to determine instead that the applicants are entitled to be paid the full amount of the age pension during the period in question, and that the deductions previously made by Centrelink in partial recovery of the debts raised should be refunded to the applicants.
Issues for Determination
The issues raised by the proceedings before me are as follows:
(a)whether the respondent correctly treated the indebtedness of Smart Company to the applicants as a loan within the meaning of s 1122 of the Social Security Act 1991 (the “Act”);
(b)if during the period under review (namely, 11 July 1996 to 11 September 2001) there was an overpayment to the applicants of their age pension and this constituted a recoverable debt owing to the Commonwealth:
· should that recoverable debt be waived pursuant to s 1237A of the Act on the grounds that it arose solely due to administrative error on the part of Centrelink; and
· if not, should that recoverable debt be waived pursuant to s 1237AAD of the Act on the grounds of special circumstances.
Smart Company was not in a position during the period under review to repay the indebtedness, and was subsequently deregistered. If, notwithstanding this, the indebtedness of Smart Company to each of the applicants constituted a loan within the meaning of s 1122 of the Act, the assets of the applicants would have included so much of the face value of the indebtedness as for the time being remained unpaid, and not the recoverable amount of that debt. This follows from the wording of s 1122 of the Act, which refers to assets in the form of loans (see Re Boyd and Secretary, Department of Social Security (1994) 36 ALD 331). However, if the indebtedness did not constitute a loan within the meaning of s 1122 of the Act, then the indebtedness was of no value, and would not have affected the applicants’ entitlement to an age pension.
Background
At the outset of this matter the parties agreed that for the purposes of the proceedings before me certain of the background findings made by the SSAT could stand as agreed facts, subject to one exception, to which I refer in paragraph 7 below. The facts as narrated by the SSAT and as so agreed by the parties are as follows.
6.1Both Mr and Mrs Smart applied for an age pension on 18 April 1996. That pension was granted on 2 May 1996. An Income and Investments form and a Module A form were also lodged on that day. Income and Assets forms were sent to Mr and Mrs Smart for completion on 22 July 1996 and also on 20 October 1997. On both the claim form and the subsequent Income and Investment forms, Mr and Mrs Smart advised Centrelink that they were self employed. In questionnaires subsequently sent to the applicants, they advised Centrelink that they owned shares in Smart Company. This company manufactured furniture. The applicants also said that they owned two properties from which the furniture business was conducted, namely 1 Arkaba Road, Kilkenny and 3 Arkaba Road, Kilkenny.
6.2Mr and Mrs Smart also advised Centrelink in the income and investment forms that they had ceased working in the business and in fact the business had ceased operating on 17 January 1996 when the building and equipment were destroyed by fire.
6.3Although both Mr and Mrs Smart indicated in their original claim form in April 1996 the existence of a loan, in the subsequent review forms they answered “No” to the question “Do you have any bonds, debentures, unsecured notes or loans?”.. This was question 5 in the Income and Investments questionnaire received on 2 May 1996 (T4), and question 8 in later Income and Assets Review questionnaires received on 16 September 1996 (T5) and 20 October 1997 (T6).
6.4In the Income and Asset Review questionnaire received at the Enfield DSS office on 2 May 1996, Mr and Mrs Smart also advised that they owned shares in a company W.L. and J.E. Smart & Son Proprietary Limited and each indicated that they owned 33.3% of the shares in that company. They also advised in that questionnaire that the value of the shareholding was nil on the basis that the business conducted by the company had been totally destroyed by the fire in January 1996. This information was repeated in the subsequent Income and Assets Review questionnaire received at Enfield DSS Office on 26 September 1996.
6.5In the latter questionnaire received on 16 September 1996 Mr and Mrs Smart also indicated that they each had a 50% interest in each of the properties at 1 Arkaba Road, Kilkenny and 3 Arkaba Road, Kilkenny and valued them respectively at $54,000 and $60,000. A further property at 57 Beatrice Street, Prospect had been sold and net proceeds of $6,000 had been paid into a CPS Credit Union account.
6.6A further Income and Assets Review questionnaire was issued to Mr and Mrs Smart on 2 September 1997 and a completed questionnaire was received by Enfield Centrelink Office on 20 October 1997. Accompanying this questionnaire was the Deed to the Arkaba Family Trust (“the trust”) which had been made on 1 May 1997 and which named the company W.L. & J.E. Smart & Son Proprietary Limited as the trustee. In that questionnaire Mr and Mrs Smart again indicated in answer to question 8 that they did not have any Government bonds, debentures, unsecured notes or loans. They again advised in the questionnaire that they owned 20,000 shares in the company W.L. & J.E. Smart & Son Proprietary Limited and that the value of the shareholding was nil.
6.7Subsequently a letter was posted to Mr and Mrs Smart on 19 November 1997 asking them to provide various financial details relating to the trust. The information requested was not in fact supplied for some considerable time, possibly not until February 1999 or later.
6.8An interview between Mr and Mrs Smart and a Centrelink officer on 2 December 1997 records that Mr and Mrs Smart were intending to transfer the Arkaba Road properties to the trust and they were advised to notify Centrelink when this had been completed and also whether it was characterised as a gift or a loan.
6.9A letter dated 29 August 2001 was sent to Mr Smart advising that the loans to the company W.L. & J.E. Smart & Son Proprietary Limited and also to the trust were to be regarded by Centrelink as assets with a consequent reduction in the amount of pension payable.
6.10On 21 September 2001 (T17) a decision was made that Mr and Mrs Smart had been overpaid age pension and that overpayment constituted a recoverable debt.
6.11Mr and Mrs Smart sought a review of that decision which was affirmed by the original decision maker in a letter sent to each of them and dated 7 November 2001 (T21).
6.12Mr and Mrs Smart requested a review of that decision in a letter from their accountants dated 13 November 2001 (T22). An authorised review officer examined the decision and affirmed it in a letter to them dated 5 April 2002 (T23).
6.13Mr and Mrs Smart, again through their accountant, sought that the existing decision be reviewed by the Social Security Appeals Tribunal and a hearing was convened for 1 July 2002 (T2).
6.14Mr and Mrs Smart worked in the business of making furniture for approximately 40 years. Mr Smart said that over the years they had not taken any profits from the business but had ploughed everything back into the business and had established a loan account to reflect that. He said that he and his wife had lived very frugally, had always driven cheap motor vehicles and had not taken holidays. What profits they had made were used to buy improved and expensive machinery.
6.15In January 1996 the factory which was situated at numbers 1 and 3 Arkaba Road, Kilkenny was destroyed by fire. Mr Smart said that the buildings were damaged as was much of the machinery. He said that in particular the more recently acquired machinery which had some plastic components and digital operation were completely destroyed. Some of the older and less sophisticated machinery was salvageable and subsequently he had managed to restore some such machinery to working order. Because of the age of those machines he said their value as assets of the business was negligible.
6.16Mr Smart said that although the business was insured it was under-insured. Nevertheless, the proceeds from the insurance company had been used to pay redundancy entitlements for his employees and to pay off creditors. Mr Smart said that many of their employees had been with them for many years and he felt morally bound to put their redundancy entitlements before the needs of himself and his wife in disposing of the insurance proceeds.
6.17Mr Smart said that at the time, and given the fact that he and his wife were then well in their sixties, he had determined that he would not attempt to revive the business and it was for that reason that some months later both he and his wife lodged claims for age pension.
6.18Mr Smart also said that his son, Martin, had worked for some years in their business and although they had supported him during the time that he lived at home, they had not paid him a wage for his work but he had always worked on the understanding that he would ultimately take over the business and run it and their daughters would inherit their home in due course.
6.19At the time of the fire Mr Smart said that his son, who was as devastated as they were by the loss, had obtained a job at Electrolux. He has worked there ever since. He currently works from 4:30 am to approximately 3:00 pm. Mr Smart said that he thought his son, who had always loved making and repairing furniture, had lost heart after the fire and needed the security of a regular paid job.
6.20Mr Smart said that subsequently his son had recommenced working at the Arkaba Road properties but he characterised this as more of a hobby, although he agreed that his son accepted work and received payment and had in fact continued to keep business records and lodge tax returns. He said that whatever work Martin did was done in his spare time and there were no other employees working in the business.
6.21Mr Smart said that his son-in-law, who is a financial planner, helped him and his wife to complete the forms from Centrelink. He said that if he did not acknowledge in those forms that there was a loan owing to him it was because he had no expectation that that loan would ever be recoverable. In relation to Centrelink’s query as to why he had not liquidated the company, Mr Smart said that it would have cost him approximately $3,000 to do so.
6.22Mr Smart acknowledged that his son’s business, which was operated through the vehicle of the trust, had recently made a modest profit (approximately $6,000) which he thought had been distributed to the trustee (W.L. and J.E. Smart & Proprietary Limited) and offset against the various loan accounts held by himself, his wife and his son.
6.23The properties at 1 and 3 Arkaba Road, which had originally been owned by Mr and Mrs Smart, had subsequently been sold to the trust for approximately $70,000, and this was apparently offset against their loan accounts.
6.24In relation to the trust, Mr and Mrs Smart acknowledged that there were assets including the properties at Arkaba Road, Kilkenny and some plant and equipment, although as this was very old, it was of negligible value. The land and buildings at Arkaba Road were worth $198,000 but the trust also owed $135,000 to their son Martin as well as the $71,000 owed to Mr and Mrs Smart. (I note that the debt of $71,000 has reduced to $41,453.47 according to draft accounts as at 30 June 2003, being exhibit A14).
6.25Mr Smart said that he felt it was only fair to keep the business going after fire had destroyed it in order to retain it for Martin, since he had worked for no wages for approximately ten years and it had been an understanding between them that the business would be passed on to him.
6.26Having recited the above matters, the SSAT then made the following findings:
· Mr and Mrs Smart for many years operated a furniture business located at numbers 1 and 3 Arkaba Road, Kilkenny.
· Mr Smart was born on 27 August 1927 and Mrs Smart was born on 14 January 1933.
· On 5 December 1990 the company W.L. and J.E. Smart & Son Proprietary Limited was incorporated.
· On 17 January 1996, fire destroyed much of the plant and equipment of the business and damaged the buildings located at 1 and 3 Arkaba Road, Kilkenny.
· The insurance payout from the fire was used to pay redundancy entitlements for employees and to satisfy creditors.
· On 18 April 1996 Mr and Mrs Smart lodged claims for age pension at Enfield DSS. They both indicated on their claim form that they had money on loan.
· On 2 May 1996 Mr and Mrs Smart were granted age pension.
· In Income and Assets Review forms received on 2 May 1996, 16 September 1996 and 20 October 1997, Mr and Mrs Smart answered “No” to the question as to whether they had any loans.
· On 1 May 1997 a deed establishing the trust was entered into. A copy of that deed was supplied to Centrelink.
· On 19 November 1997 a letter was sent to Mr and Mrs Smart requesting financial details of the trust.
· On 13 March 1998 Mr and Mrs Smart gifted the properties at 1 and 3 Arkaba Road, Kilkenny to the trust.
· On 17 May 2001 Mr Smart transferred his 10,000 shares in the company W.L. and J.E. Smart & Son Proprietary Limited to his son, Martin, for consideration of one dollar.
· On 17 May 2001 Mrs Smart transferred her 10,000 shares in the same company to her daughter-in-law, Sarah, for consideration of one dollar.
· On the same date both Mr and Mrs Smart resigned as directors of the company.
· Information obtained from the balance sheets provided indicate the following noncurrent unsecured liabilities to W.L. and J.E. Smart & Son Proprietary Limited and the trust.
Financial Year
Company
Trust
1995/96 $133,014.25 (Mr Smart) $ 72,882.00 (Mrs Smart 1996/97 $245,893.25 (both) 1997/98 $187,232.85 (Mrs Smart) $ 6,496.40 (Mr Smart $ 2,511.30 (Mrs Smart) 1998/99 $172,869.82 (both) $89,560.01 (both) 1999/2000 $166,758.36 $38,793.00 (Mr Smart) $38,793.00 (Mrs Smart)
The applicants’ accountants said that the SSAT’s finding that on 13 March 1998 the applicants had gifted the properties at 1 and 3 Arkaba Road, Kilkenny to the trust was incorrect, and that in fact they sold the properties to the trust. I accept that this was so, but nothing turns on this issue in the proceedings before me.
In addition to accepting the facts referred to in paragraph 6 above as qualified by paragraph 7 above, I find that for many years the applicants carried on their furniture manufacturing business in partnership, and that during the financial year 1990/91, they sold their business to Smart Company. It was also agreed between the parties that when this transaction occurred, the applicants’ former accountant attributed a value of $350,000.00 to the goodwill of the partnership business, and Smart Company agreed to pay that amount to the applicants for goodwill, together with the price of other items purchased at that time. The applicants’ present accountants understand that the sale transaction comprised an oral offer and a written acceptance, apparently as a means of avoiding ad valorem stamp duty on the transaction, but they have no documents evidencing the terms of the transaction other than the accounts of the partnership and Smart Company for the financial year in question. These comprise exhibits A7 and A8. The accountants further state that Smart Company was insolvent at all times during the relevant period, and that the loan had no commercial value (exhibit A10).
In his evidence before me, which I accept, Mr Smart said that he left school at the age of 13½.. He said he was not an educated man and he left his business affairs in the hands of his accountants and lawyers. He did not understand the basis of the transaction whereby Smart Company acquired the interest of the applicants in the partnership business. He left this matter to his former accountant. In particular, he did not understand that as a result of the transaction, he and his wife were owed some $400,000.00 by the company. He first became aware of this only about six months ago, when his son found all of the earlier accounting records of the partnership and the company going back over a period of more than 40 years, and his accountant then explained the loan accounts to him.
Mr Smart said further that the profitability of his business was such that he and his wife never had any money in their pocket. They would invest any profits in new machinery. On some occasions they had to borrow money to pay their income tax. Neither of the applicants ever drew large sums of money from the business, and the wages which they received were less than a tradesman’s wages. They always drove old vehicles and had never had a proper holiday. He said that his wife had worked in the business for more than 30 years without drawing a proper salary. He further said that his wife looked after the family’s domestic finances, and she was having great difficulty in managing to maintain the membership of their private health fund on the age pension payments they were receiving, but they regarded it as very important to maintain this membership.
Mr Smart also said that he and his wife had been assisted in filling out their claim form for an age pension at the Regency Park Centrelink office. He thought that the officer there, who had been very helpful, suggested a change to their answer to one of the questions, but he could not remember which question this was. He agreed that when filling in the claim for the age pension, both he and his wife had ticked “Yes” to the portion of question 9 of the form which includes the question:
“Q9. Do you have any other investments or money on loan?”
However, he said that he did not understand that this question referred to a loan from Smart Company, and he had no idea when he filled out that form that the company was indebted to him to the extent of approximately $400,000.00. His answer “Yes” to that question therefore did not refer to that indebtedness. He told the Tribunal that he had only recently learned of the “loan” when it was explained to him by Mr Fulford. He also said that he might have thought that the question was referring to any money they may have had in the bank and, at that time, they had a little money in the bank. I note in passing that question 5 of T4 refers to “loans”, although the heading to the question refers to “Money on Loan”, and perhaps the form would be clearer if this wording were repeated in the text of question 5.
Mr Smart said further that after the company had paid out all of its creditors and staff, which was following the fire, it had no assets and was insolvent. I find from the material before me that Smart Company was not in a position, at any time during the period under review, to repay to the applicants the balance of its indebtedness to them.
Mr Smart told the tribunal that he has a history of 4 or 5 admissions into Ashford Hospital and that he suffers from heart problems. He said that upon being told by an officer of the respondent that his house would be sold to recover the debt after his death, he collapsed on the floor in shock.
Mrs Smart
Mrs Smart also gave evidence to the Tribunal. She said that the debts to Centrelink had upset her greatly and that she was shocked to learn of their existence. In particular, Mrs Smart said she became very upset when she learnt that the respondent had threatened to take the title to their house in satisfaction of the debts. Mrs Smart gave evidence about her history of poor health including cancer for which she had an operation 12 months ago, and she confirmed that exhibit A2, a health summary sheet prepared by Dr Cross, was a true record of the state of her health.
Dr Cross
Dr Cross gave evidence by telephone and explained the health status and history of the applicants. Dr Cross was the treating doctor for both the applicants for a period of 30 years until February 2003. He confirmed that, amongst other things, Mr Smart suffers from hypertension and has had past episodes of super ventricular tachycardia. Exhibit A1 records Mr Smart’s past and present medical conditions and Dr Cross has recorded on that document that both of the abovementioned conditions are likely to be aggravated by worry and stress. Dr Cross also explained that in 2001 Mr Smart was diagnosed as having vertebro basilar insufficiency and palpations and, in those circumstances, it would be reasonable to assume that stressful circumstances would be likely to lead to another vascular event. Dr Cross then explained that Mrs Smart has several present health problems, including hypertension, a mastectomy as a result of breast cancer, cancer re-occurrence leading to radiotherapy, non-insulin dependent diabetes mellitus, a metastatic deposit resulting in a skin lesion and a medical history including a pituitary tumour. He identified all of these conditions as being affected by worry, anxiety or stress. Dr Cross explained that patients who have a malignancy that has spread are best treated in an environment that “cocoons” them from stresses and that a less stressful environment may improve the quality of life of such a person. He said that stress may also decrease immunity, and impacts upon the management of hypertension.
Mr Fulford
Mr Fulford told the Tribunal that he had been the accountant for Mr and Mrs Smart since 1998. Having examined the records of Smart Company and the trust he explained that the partnership that had run the furniture making business ceased in the 1990/1991 financial year. The financial statements show that in the course of selling the business to Smart Company, an amount for goodwill was recorded and credited as a loan. He said Smart Company continued to exist until it was deregistered in 2001. Mr Fulford stated that prior to the fire, the company was not in a position to pay any money to the applicants and that the company’s assets were nil. He said by reference to draft accounts that as at 30 June 2003 the indebtedness of the trust was around $41,000, and he conceded that the trust could sell its assets, being the properties on Arkaba Road, to repay the applicants.
Mr MacKenzie
Mr MacKenzie is an accountant with MacKenzie Coultas accountants and gave evidence as to the cost of deregistration of a company in 1996, being $1500 to $2500 depending on the complexity of the company. He said that it has only become possible to deregister a company for as little as $60 in recent years. Mr Mackenzie told the Tribunal that once he became aware of the pension implications of Smart Company’s registered status, he took steps to capitalise the loan accounts and deregister the company.
In exhibit A6, Mr MacKenzie examines whether the sum of $350,000 attributed to goodwill at the time when the partnership business was sold to Smart Company could be justified. After analysing the profits of the partnership from 1983 onwards, he concludes that the business did not make any super profits (or goodwill), and only earned enough to pay the partners. He therefore concludes that when the business was transferred to the company it had no value, and the figure for goodwill was merely a “paper entry” raised by the applicants’ then accountant. He said the bringing to account of this figure for goodwill did not accurately reflect the situation, and it should never have been raised. He further said that it did not reflect a physical transfer of funds or value to the company from the Smarts. He said that Mr and Mrs Smart “never contributed a real asset to the company but, rather, a notional asset was incorrectly and artificially created”. Mr MacKenzie’s opinion was not challenged, and I accept his conclusion.
Legislation
Section 43 of the Act provides for the qualification of persons for an age pension, and the rate of the age pension is determined according to Part 3.2 of the Act. Module G of the rate calculator contained in s 1064 has regard to an applicant’s assets. Section 1118 provides that certain assets, including the principal home of an applicant, are to be disregarded in calculating the value of the person’s assets.
Assets in the form of loans are dealt with in s 1122 of the Act. This provides as follows:
“1122. 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.”
The Act does not contain a definition of “loan” or of the concept of lending money.
Provision is made in s 1237A(1) and s 1237AAD for (respectively) the waiver of indebtedness to Centrelink in consequence solely of administrative error, and a discretionary waiver where special circumstances exit. These sections provide as follows:
“1237A (1) Subject to subsection (1A), the Secretary must waive the right to recover that proportion of a debt that is attributable solely to an administrative error made by the Commonwealth if the debtor received in good faith the payment or payments that gave rise to that proportion of the debt.”
“1237AAD The Secretary may waive the right to recover all or part of a debt if the Secretary is satisfied that:
(a)the debt did not result wholly or partly from the debtor or another person knowingly:
(i)making a false statement or false representation; or
(ii)failing or omitting to comply with a provision of this Act or the 1947 Act; and
(b)there are special circumstances (other than financial hardship alone) that make it desirable to waive; and
(c)it is more appropriate to waive than to write off the debt or part of the debt.”
Consideration of Issues Arising
During the hearing of this matter, I raised the issue of whether the indebtedness of the company to the applicants constituted the lending of money within the meaning of s 1122 of the Act, or whether instead, the transaction which gave rise to the indebtedness should be characterised as a contract for the sale and purchase of assets, with the purchase price being left outstanding; that is, that vendor finance had been provided by the partnership to the company.
Mr Goldsworthy on behalf of Centrelink submitted that whilst there was no definition of “loan” in the Act, the indebtedness of Smart Company to the applicants should nevertheless be regarded as a loan under s 1122. He submitted that:
(a)the applicants derived some benefits from the creation of the loan, in that:
· if Smart Company were to be sold, the indebtedness would have to be repaid;
· any profit made by the company could be offset against the outstanding indebtedness; and
· if the company had had adequate insurance at the time of the fire, there would have been adequate funds to repay the indebtedness;
(b)when Smart Company was established, the arrangements were intended to have a real effect, that is, that it was intended that the company would have an obligation to repay the indebtedness established as a result of the transaction;
(c)the indebtedness was recorded in the accounts of Smart Company as a loan, and he referred in this respect to the company accounts included in T10;
(d)the accounts were certified as correct by the applicants in their capacity as directors of the company; and
(e)the indebtedness had the quality of a loan in that there was a requirement to repay the amount concerned, and it was in fact being repaid. He referred in this regard to exhibit A9, which shows the balance of the indebtedness in each year from 1991 to 2001.
I do not think that the applicants would necessarily receive the so-called benefits referred to in paragraph (a) of Mr Goldsworthy’s submissions. But even if this were so, and even if Mr Goldsworthy’s remaining submissions were correct, the matters in question do not, in my opinion, assist in arriving at a correct characterisation of the indebtedness which arose as a result of the sale transaction.
A somewhat similar issue to the question which arises in the present matter was considered in Re Gordon and Department of Social Security (1992) 27 ALD 381. There the question was whether an applicant for unemployment benefits should have his benefits reduced as a result of deeming him to be receiving interest on a debt secured by mortgage. The mortgage in question was provided as a term of a contract for the sale of property by the applicant, and secured payment of a portion of the price which was payable to him interest free on monthly instalments over a period of 23 months. Deputy President Forgie decided that the terms of sale and bill of mortgage did not constitute a loan, since there was no contribution of money by the applicant to the purchasers in consideration of their promising to repay it. She referred in her decision to a number of authorities, including Chitty on Contracts (26th ed.) 1989, paragraphs 3576 to 3577, which included a passage reading:
“Loans distinguished from other forms of debt … at common law not every form of indebtedness amounts to a loan. A person who buys goods on credit is not borrowing money from the seller. And a company which issues loan or debenture stock as a consideration for the acquisition of property is not borrowing money …”
Deputy President Forgie went on to find that the obligation to pay the relevant indebtedness was created by the contract of sale, and she looked at the substance of the actual transaction to determine whether there had been a loan. She concluded at 386 that:
“There is no evidence that Mr Gordon in his capacity as mortgagee actually advanced the full purchase price to the purchasers and immediately received it back in his capacity as the vendor of the land. There is no evidence in the contract of sale of any loan of money from Mr Gordon to the purchasers with a promise by those purchasers to repay the money in the sense in which a loan is usually understood. What there was amounted to a promise by the purchasers to pay the purchase price by instalments.” (emphasis added).
I agree with Deputy President Forgie’s approach and analysis in this matter.
I also refer to Olds Discount Co Ltd v John Playfair Ltd [1938] 3 All ER 275, which entailed the sale of book debts sought to be impugned under money lenders legislation. Branson J held that the transaction was not a money lending transaction at all, but a transaction under which the plaintiffs purchased from the defendants certain book debts for certain payments, subject to certain terms as to the collection of the book debts and obligation to pay the balance of the purchase price of the book debts after that. The court took the view that it was the nature of the agreement entered into, and not its object, which the court had to look to in order to decide whether in any particular case the agreement was a money lending agreement or otherwise.
This decision was approved by the House of Lords in Chow Yoong Hong v Choong Fah Rubber Manufactory [1962] AC 209, a case where the appellant endorsed certain uncleared cheques over to the respondents whose bank, for a special charge, afforded them facilities for drawing on such cheques at once. Their Lordships said at page 216:
‘There are many ways of raising cash besides borrowing. One is by selling book-debts and another by selling unmatured bills, in each case for less than their face value. Another might be to buy goods on credit or against a post-dated cheque and immediately sell them in the market for cash. Their Lordships are, of course, aware, as was Branson J., that transactions of this sort can easily be used as a cloak for money lending. The task of the Court in such cases is clear. It must first look at the nature of the transaction which the parties have agreed. If in form it is not a loan, it is not to the point to say that its object was to raise money for one of them or that the parties could have produced the same result more conveniently by borrowing and lending money. But if the Court comes to the conclusion that the form of the transaction is only a sham and that what the parties really agreed upon was a loan which they disguised, for example, as a discounting operation, then the Court will call it by its real name and act accordingly.”
Finally, I refer to Heitzmann v Gowenlock (1891) 7 TLR 611, where an agreement for the purchase of a public house was subject to the purchaser being able to obtain loans from brewers and distillers to the amount of £3,600. When the plaintiff was unable to raise the full amount of these loans, the vendor offered to leave £200 of the purchase price unpaid and to give the purchaser bills to this amount. The purchaser refused this, and the Court of Appeal found that as he was unable to arrange the loans, the contract was at an end and he could recover his deposit. The Master of the Rolls said at 612 that “leaving the purchase money unpaid with the vendor upon certain terms was not an arranging of a loan within the meaning of the contract”. Lord Justice Kay said at 612 that “leaving the purchase money unpaid was not arranging a loan, but merely leaving a debt unpaid.”
On the above authorities and on the material before me, I find that the indebtedness of Smart Company to the applicants did not constitute a “[lending] of an amount” or a “loan” within the meaning of s 1122 of the Act. In the present matter, Smart Company did not pay any funds to the applicants that were then lent back to Smart Company. No doubt it was intended that the indebtedness would be repaid by Smart Company over time, but that does not alter the character of the indebtedness. Further, the reference in the accounts of Smart Company to the indebtedness as “loans” did not, in my opinion, alter the character of the indebtedness. The indebtedness represented the unpaid purchase price of the assets sold by the applicants to the company, and the applicants had, in effect, provided vendor finance by not requiring the purchase price to be paid at the time of the transaction.
As mentioned in paragraph 5 above, I accept that if the indebtedness had constituted loans within the meaning of s 1122 of the Act, the value of the assets of the applicants would have to include the remaining unpaid balance. However, if (as I have found) the indebtedness did not constitute loans owed to the applicants, then the valuation of their assets for the purposes of calculating their entitlement to an age pension would entail determining the proper value of the indebtedness owing to them by Smart Company. I find that that indebtedness had no value, because in view of the Smart Company’s financial circumstances there was no prospect of the indebtedness being repaid during the period under review.
Waiver
As a result of the respondent’s determination that the applicants had an undeclared loan, the subsequent re-calculation of payable pension when the face value of that loan was included led to a decision to raise and recover a debt in the amount of $28,926.64 against each of the applicants. By letter dated 9 May 2002 (T24) the applicants requested consideration of their situation under the hardship provisions. However, at the date of the hearing before this Tribunal that request had not been acted upon by the respondent. The applicants had not sought review of that application and so it was not within the jurisdiction of the SSAT and, accordingly, it is not competent for this Tribunal to consider the hardship provisions in relation to the matters presently before the Tribunal. The applicants, nevertheless, invited the Tribunal to consider waiver of the debts on the basis of administrative error or special circumstances, pursuant to s 1237A(1) and s 1237AAD of the Act respectively. For the sake of completeness, and in case I am wrong in my conclusion that the indebtedness is not a loan, I will now address the waiver arguments.
I will first consider the issue of waiver as a result of administrative error by the Commonwealth. The applicant submitted that, if the indebtedness does constitute a loan such that the applicants’ assets were not properly recorded at the time of application, then the respondent was in error in granting the pension to the applicants in the first place. Mr Fulford referred to the applicants’ dependence upon professional advisers and therefore, their reliance upon the respondent making the right decision at the time of application. Messrs Fulford and MacKenzie also drew the Tribunal’s attention to the publication entitled Centrelink Information – A Guide to Payments and Services 2001-2002 in which, according to the applicants, loans, financial investments and other assets are described by reference to their “value” and not their “amount” (see exhibit A13). The booklet in question was not one that existed in 1996, when Mr and Mrs Smart applied for their pensions, and there is no evidence before the Tribunal that the applicants had regard to any predecessor of this booklet when disclosing their assets at the time of application.
The respondent submitted that at the time of application, and upon a positive response to question 9 of the application form, the applicants were issued with an income and investment questionnaire. That questionnaire appears in exhibit R1 at T4 pages 26 to 33 and, in answer to question 5 “Do you have any Bonds, Debentures, Unsecured Notes or Loans?”, Mr Smart ticked the “No” box. In those circumstances, if the indebtedness amounts to a loan, there was no way for the respondent to have known that the asset existed and accordingly, there was no error on the part of the respondent.
The Federal Court recently considered the term “attributable solely to administrative error” in Sekhon v Secretary, Department of Family and Community Services [2003] FCAFC 190. In that case, the majority of the Full Federal Court (Heerey J, dissenting) held that a debt was not caused solely by Centrelink's error as there were multiple causes for the debt. Nicholson J, in the majority, emphasised that s 1237A(1) applies only where the debt concerned was caused solely by an administrative error by the Commonwealth. He said to apply the word "solely" not in relation to the attribution but in relation to the error was not correct. He also noted that s 1237A(1) is couched in mandatory terms.
Following the reasoning of the Federal Court in that case, and noting that in order to validly waive a debt pursuant to s 1237A there must be a debt due to the Commonwealth, the test is whether the debt is attributable solely to an administrative error rather than whether it was solely an administrative error of Centrelink that caused the debt.
In the present matter, the decision to recover the debt from Mr and Mrs Smart is not attended by any administrative error. The respondent calculated the rate of pensions payable at the time of the application on the information it had been provided by the applicants. I note that exhibit A10, page 6, is a Centrelink note which says “assets verified and updated”, but Centrelink had not been provided with any information in the review questionnaires sent to the applicants after they lodged their initial application which would have indicated the existence of loans owing to them by Smart Company (see paragraph 6.3 above). In my view, in these circumstances the note by Centrelink in A10 does not constitute an administrative error by Centrelink. In any event, the applicants contributed to Centrelink’s failure to assert the indebtedness at an earlier time by answering “No” to the loan question in the subsequent questionnaires. If (contrary to my conclusion) the indebtedness of Smart Company amounts to a loan, this accordingly would not be a situation in which the debt could be attributed solely to an administrative error by the Commonwealth. In my opinion, there is no basis for waiving the debt pursuant to s 1237A(1).
I now turn to the issue of waiver pursuant to s 1237AAD of the Act, in which the decision maker has a discretion to waive all or part of a debt if, inter alia, there are special circumstances that make it desirable to do so. A very helpful analysis of the history of this section is included in Secretary, Department of Social Security v Hales (1998) 82 FCR 154 at 161. After providing this history, French J said at pages 161 and 162:
“… the appropriate course is first to consider the words themselves having regard to their statutory context and apparent purpose. The section confers upon the Secretary a discretion to waive the right to recover all or part of a debt. That discretion is only enlivened when the Secretary is satisfied that the three conditions in pars (a), (b) and (c) of the section are met. It does not follow that the Secretary is then obliged to waive the debt.
The first condition is negative, the second condition requires consideration of special circumstances that make it “desirable to waive” and the third condition requires the waiver be considered more appropriate than write off. The exercise of the discretion thus enlivened may be informed by other considerations which were not required to support satisfaction of the three necessary conditions. It is important in this case to say however that in some cases the satisfaction of the three conditions may be sufficient to persuade the Secretary to waive without reference to any further matter.”
His Honour went on to say (at page 163.2) that he did not accept the proposition that the class of circumstances which may support satisfaction of the condition in s 1237AAD(a) is mutually exclusive of the class of circumstances which may support satisfaction of the “special circumstances” condition in s 1237AAD(b).
Section 1237AAD(a) is the first statutory criterion, and involves determining whether the debtor or another person knowingly made a false statement, representation, or failed or omitted to comply with a provision of the Act. In this context “knowingly” was explained in Re Callaghan and Secretary, Department of Social Security (1996) 45 ALD 435 at 445 in the following way:
“There is nothing in s 1237AAD which suggests that the word “knowingly” should be given any meaning other than that a person has actual knowledge, rather than constructive knowledge, that he or she is making a false representation or that he or she is failing or omitting to comply with a provision of the Act. That actual knowledge is to be ascertained by reference to the statements of the person as to his or her actual state of knowledge at the time and to events surrounding the false statement or the act or omission.”
This analysis has been endorsed in numerous subsequent decisions (see, for example, Re Secretary, Department of Family and Community Services and Jonauskas (2001) 65 ALD 553).
I find that Mr and Mrs Smart did not declare the existence of the Smart Company indebtedness in answer to the respondent’s enquires as to whether they had any loans. On the hypothesis on which I am now proceeding, namely that (contrary to my earlier conclusion) the applicants did in fact have loans, they failed to advise Centrelink of the existence of the loans as assets, even though they were valueless. However, I find that the applicants were themselves unaware of the existence of the indebtedness of Smart Company to them until it was recently explained to them by their accountants. In those circumstances they did not knowingly fail to advise the respondent, as they had no actual knowledge of the loans in question.
The next condition precedent which must be considered is whether there are special circumstances (other than financial hardship alone) such that it is desirable to waive the debts (see s 1237AAD(b)). In Re Beadle and Director-General of Social Security (1984) 6 ALD 1 at 3 Toohey J stated:
“An expression such as “special circumstances” is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context, which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they have a particular quality of unusualness that permits them to be described as special.”
In the same case on appeal (1985) 7 ALD 670 at 674, the Full Federal Court reiterated the need to avoid limiting the scope of what might constitute special circumstances when it explained that:
“We do not think it is possible to lay down precise limits or precise rules. The matter is one for the Director-General bearing in mind the purpose for which the power is given. The phrase ‘special circumstances’, although lacking precision, is sufficiently understood in our view not to require judicial gloss.”
In a later case, Groth v Secretary, Department of Social Security (1995) 40 ALD 54, at 545, Keifel J, after referring to the Federal Court’s decision in Beadle, observed that special circumstances:
“would require something to distinguish Mr Groth’s case from others, to take it out of the usual or ordinary case …. It would of course follow that if one were to conclude that something unfair, unintended or unjust had occurred that there must be some feature out of the ordinary.”
In Riddell v Secretary, Department of Social Security (1993) 30 ALD 31, the Full Court of the Federal Court said at page 38:
“Each particular case must be considered on its merits. It is the essential nature of the provision to create a broad discretion to meet the great variety of circumstances which must occur, raising considerations of individual hardship, need, fairness, reasonableness, and whatever else may move an administrator, keeping in mind the scope and purposes of the Act, to make a decision one way or the other.”
In my opinion, applying the above principles to the present matter, Mr and Mrs Smart can demonstrate several factors that either alone or in conjunction, amount to unusual, uncommon or exceptional circumstances. In so finding I refer to the following matters.
(a)The re-calculation of the payable pension was based upon the face value of the outstanding balance of the “loans” owing to the applicants by Smart Company. However, except to the extent of the relatively insignificant price of the plant and equipment purchased by Smart Company from the applicants, the “loans” should never have existed in the first place. I refer in this regard to paragraph 18 above, and to Mr MacKenzie’s conclusion that the bringing to account of the amount of $350,000 for goodwill should never have occurred, because the partnership business transferred to Smart Company by the applicants had no value. The figure raised for goodwill by the applicants’ former accountant represented a notional asset which had been “incorrectly and artificially created” (exhibit A6).
(b)Mr Smart only attended school to the age of 13 and this contributed to his resultant dependency upon professional advisers in both his business and personal dealings. It is clear that neither he nor Mrs Smart had any understanding of the creation of the loan accounts in their favour, and that the existence and significance of the loan accounts was not known to them until the position was explained by their current accountants after the re-calculation of their pension entitlements had occurred.
(c)Even if the “loans” had been correctly raised in the first place, Smart Company had never been in the position to re-pay the loans, and they were assets which had no value. I consider that this, of itself, would not amount to special circumstances, because s 1122 of the Act effectively values loans at the face value of the amount for the time being outstanding, and it would not be appropriate to use s 1237AAD to negate specific requirements as to valuing assets in other parts of the Act. However, it seems to me that the fact that the loans are, in fact, valueless is a matter which can be taken into account in conjunction with other relevant facts in determining whether or not special circumstances exist.
(d)Mrs Smart is elderly and in poor health and is vulnerable to deterioration, or at the very least an impairment in her quality of life, in circumstances of stress.
(e)Mr Smart is also elderly and in poor health, and I refer to his hypertension and history of heart problems, and note the particularly deleterious effect of the respondent’s threat to take the title to the applicants’ house in satisfaction of the debts.
(f)The fire of 17 January 1996 that destroyed the warehouse and most of the equipment central to the furniture business was a most unfortunate event, and no doubt exacerbated the health problems of the applicants.
(g)The respondent failed to action the request of the applicants, by letter dated 9 May 2002 from Mr MacKenzie, to have their pension payments reconsidered in light of the hardship provisions in the Act.
As against these matters, Mr Goldsworthy in the course of his submissions referred the Tribunal to the indebtedness of the trust to the applicants and the capacity of that trust to repay the loans if it were to sell its properties at 1 and 3 Arkaba Road. He said that this amounted to a potential source of funds for the applicants such that they cannot be said to suffer from financial hardship. I accept that the applicants could call up the balance of their loan account with the trust, and according to the draft accounts (exhibit A14) the balance owing to them as at 30 June 2003 was $41,453.47. On the evidence before me, there might be a small deficiency in the net assets of the trust, if it were wound up, so that the amount recoverable by the applicants from the trust might be a little less than the balance of their loan account, and even the full amount of the loan account would not be enough to meet the total of the debts of $28,926.64 raised against each of the applicants. However, the applicants’ interest in the trust would go a significant way towards ameliorating the financial hardship which the applicants would otherwise suffer as a result of action by the respondent to recover the debts raised against them, as to that extent there is force in Mr Goldworthy’s argument. Certainly financial hardship is often an important element in finding that there are special circumstances that make it desirable to waive the debt. Nevertheless, in Secretary, Department of Social Security v Hales (supra) French J said at 162 that the “exclusion of financial hardship alone as a special circumstance does not mandate its inclusion in the range of matters constituting such circumstances for the purpose of enlivening the Secretary’s discretion”. I accordingly conclude that the absence of financial hardship does not exclude a finding of special circumstances under s 1237AAD(b) of the Act. I further find that the matters referred to in paragraph 41 above constitute special circumstances that make it desirable to waive the debts.
The final pre-condition to the exercise of discretion is whether it is more appropriate to waive than to write off the debt or part of the debt (see s 1237AAD(c)). In considering this issue I have also taken into account the applicants’ financial position, as well as the amount of the debts in question. Even if the applicants called up their loan account from the trust and that amount was repaid in full, there would still be a shortfall of the order of $15,000 owing by both applicants. Further, putting the applicants in a position where they were forced to call up the debt from the trust, so that the trust in turn would be potentially required to sell the properties from which the applicants conducted their business over more than 40 years and from which their son is presently still operating to a very limited extent, would undoubtedly cause further stress to the applicants. On the evidence of Dr Cross, stress is likely to exacerbate the medical conditions from which the applicants are suffering. Further, there is no prospect that the applicants’ financial position will improve so that they will have some capacity to repay the debts. As against these matters, I also take into account the interest of the community in the recovery of public moneys. (See Re Ivovic and Director of Department of Social Services (1981) 3 ALN 61). On balance, I have concluded that it would be more appropriate to waive than to write off the debt or part of it, and accordingly s 1237AAD(c) is satisfied.
In view of my above findings, I conclude that the discretion to waive the debts is enlivened. It seems to me that the matters to which I have referred above, in the context of finding that the three conditions precedent have been satisfied, are all factors relevant to the exercise of this discretion. It is also necessary to consider whether there are other considerations to take into account in exercising the discretion to waive the debt in addition to those already taken into account in addressing the three conditions precedent. In this regard, in my opinion, the absence of undue financial hardship would be a very material factor. Indeed, I note that in Hales (supra) French J said (at p 162.7):
“It may be that there will be a few cases in which the Secretary will be satisfied that there are special circumstances in the absence of financial hardship. It may be that there are few cases in which having found special circumstances to exist, the Secretary would exercise the discretion to waive in the absence of financial hardship.”
Earlier on the same page, His Honour had said:
“The concept of special circumstances is broad. A constellation of factors, including financial circumstances, may fall within it. The express exclusion of financial hardship alone as a special circumstance is an indicator that it would otherwise be included.”
On the evidence before me, I find that the applicants may not suffer undue financial hardship if the respondent proceeded to recover the overpayment of pension and the applicants called upon the trust to repay their loan account, and if by arrangement with Centrelink the balance of the debts was paid by modest deductions from ongoing pensions payments. However, any recovery action from the trust would involve the risk of problems for the applicants to which I have referred in paragraph 43 above.
It is also necessary for the Tribunal to keep in mind the approach in Re Ivovic and Director General of Social Services (supra) to the effect that in considering a discretion such as that conferred by s 1237AAD, the decision maker must have regard to whether, by exercising the discretion in a particular case, he will be achieving or frustrating ends or objects which are conformable with the scope and purpose of the Act; the decision maker should keep this dominant principle in mind, but must nevertheless be prepared to respond to the special circumstances of any particular case by reason of which strict enforcement of the liability created would be unjust, unreasonable or otherwise inappropriate. It is also necessary for the Tribunal to bear in mind the wider public interest of recovering moneys to which a recipient of social security payments is not entitled. As part of the exercise of the discretion conferred on the Tribunal, I must also consider whether all or part of the debt should be waived.
Having weighed up the various considerations referred to in paragraphs 44, 45 and 46 above, and all of the facts of the present matter, I have reached the conclusion that (if my decision is wrong and the indebtedness of each of the applicants is in law a loan) this is an appropriate matter for the exercise of my discretion under s 1237AAD and for the waiver all of the $28,926.64 debt which has been raised against each applicant.
For the above reasons, I set aside the decision under review and remit the matter to the delegate with the following directions:
(a)that the applicants’ eligibility for payment of age pensions for the period 11 July 1996 to 11 September 2001 be reassessed on the basis that the indebtedness of Smart Company to each of the applicants is not to be included as an asset for the purposes of the Act; and
(b)that the respondent pay to the applicants the amounts previously deducted from the age pensions in consequence of the inclusion in their assets of the face value of that indebtedness.
I certify that the 48 preceding paragraphs are
a true copy of the reasons for the decision herein
of Deputy President D G Jarvis
Signed: .......................................................................................
N. Quirke Associate
Date/s of Hearing 27 October 2003
Date of Decision 22 December 2003
Representative of the Applicants Mr S MacKenzie, Accountant
Advocate for the Respondent Mr C Goldsworthy
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