Stephens and Repatriation Commission - [2001] AATA 796

DECISION AND REASONS FOR DECISION [2001] AATA 796

ADMINISTRATIVE APPEALS TRIBUNAL )

) No S2000/318

VETERANS' APPEALS DIVISION          )
           Re      BERNARD GEORGE STEPHENS
  Applicant
           And    REPATRIATION COMMISSION
  Respondent

DECISION

Tribunal Senior Member WJF Purcell

Date19 September 2001
PlaceAdelaide

Decision      The Tribunal affirms the decision under review.
  (Signed)
  WJF PURCELL
  (Senior Member)

CATCHWORDS
VETERANS' AFFAIRS - veterans' entitlements - Service Pension - assets test - wife's 2,578 fully paid shares in an unlisted public company - value placed on shares – change in assets – whether overpayment had arisen – whether sufficient consideration of valuation principles
Veterans' Entitlements Act 1986 sections 54, 56B

REASONS FOR DECISION

19 September 2001 Senior Member WJF Purcell

This is an application for review of a decision of the Repatriation Commission (the Commission) of 29 November 1999, to raise and recover an overpayment of service pension in the sum of $976.50 for the period 6 November 1997 to 25 February 1999, pursuant to section 56B of the Veteran's Entitlements Act 1986 (the Act). The decision was affirmed by a Senior Review Officer on 12 July 2000.
The evidence before the Tribunal comprised the documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (the T Documents) together with exhibits tendered by the parties. The applicant who gave oral evidence was represented by his nephew, Mr M Fuller. Mr G Doube, Departmental advocate, represented the Commission.
The applicant has been in receipt of service pension since 19 March 1992. His service pension is assessed under the assets test, and one of the relevant assets was his wife's 2,578 fully paid shares in an unlisted public company, J & AG Johnston Limited (the Company). On the applicant's evidence, when he applied for pension in 1992, he sought advice from the then Company Secretary, as to the value of the shares, and was advised that they were worth $4.00 each. This was the value the applicant declared.
In August 1997 the Department of Veterans' Affairs (the Department) recorded, in error, via its computer system, that the Company shares had a "nil" value. When the applicant noted the error he contacted the then Secretary of the Company, who, he says, advised him that the Commissioner of Stamps had accepted, recently, a value of $2.50 per share. On 18 August 1997 the applicant advised the Department of its error, and entered a value of $2.50 per share.
On 20 January 1998 the applicant advised the Department of changes in assets held by his wife. The letter reads in part:
"I have to advise the following changes in assets held, in particular, those assets held by Mrs. Patricia M. Stephens.
1.    Argo Investments Ltd.
On 27/10/97, subsequent to an announcement by Argo of a new share issue, an application was lodged for 520 shares.
Certification of allocation, dated 27/11/97, was received in December 1997.
Mrs. Stephens now holds a total of 5750 shares in Argo Investments Ltd.
2.    Telstra Corporation Ltd.
      Subsequent to an application by Mrs. Stephens 600 shares in Telstra were allotted to Mrs Stephens and an Issuer Sponsored Holding Statement forwarded dated 25/11/97.
Purchases of the above shares were funded from Mrs. Stephens Adelaide Bank Savings Account.
There are no changes in respect of other shares held by Mrs. Stephens in J. & A.G. Johnston Ltd. (2578) or Coles Myer Ordinary 50c (226).
…"
On 10 February 1999 the applicant attended at the Department and advised that his wife had sold her shares in the Company for a value in excess of $36.00 per share. On the documentary evidence, the Department wrote to the Company on 16 July 1999 and sought information as to the value of the shares. It was not until 4 November 1999 that the Company replied in the following terms:
"We refer to your correspondence dated 16 July 1999.
Our Company is an unlisted public company.
The most recent valuation is summarised in the attached correspondence from our then advisers Price Waterhouse."
The Price Waterhouse letter of 31 October 1997, reads as follows:
"Valuation of the Issued Capital of J & AG Johnston Limited
We refer to instructions given to us by the Board of Directors of the company to undertake a valuation as of this date of the issued capital of J & AG Johnston Limited.
We understand that the purpose of the valuation is to determine a valuation range which members may wish to consider, for the purpose of affixing a value for the possible transfer of shares.
We have considered the various methodologies applicable to the valuation of the company's issued capital for this purpose, and have concluded that the most appropriate methodology to be applied is the capitalisation of maintainable earnings methodology.
Having used that approach, it is our opinion that the current value of the 291,790 ordinary issued shares is within a range of $25.67 and $28.01 per share."
On 29 November 1999 a delegate of the Commission determined that service pension payable to the applicant and his wife should be reduced retrospectively, for the period 6 November 1997 (the first pension payday after 31 October 1997, the date of the Price Waterhouse notification of valuation) to 25 February 1999 (the first pension payday after the applicant's advice of the redemption of the shares). The delegate determined that the applicant and his wife had not fulfilled their obligations to notify the Department of a change in their assets, and were in breach of section 54 of the Act, which as far as is relevant for the purposes of this review provides:
"54      Secretary may require notification of an event or change of circumstances
(1)       The Secretary may give a person:
(a)to whom a service pension or income support supplement is being paid; or
(b)whose claim or application for a service pension or income support supplement is under consideration by the Commission or the Administrative Appeals Tribunal; or
(c)       who is receiving benefits under Division 12;
a notice that requires the person to inform the Department, or an officer specified in the notice, if:
(d)       a specified event or change of circumstances occurs; or
(e)the person becomes aware that a specified event or change of circumstances is likely to occur.
(2)A person referred to in paragraph (1)(a) includes a person to whom the whole or a part of a pension is being paid for the purpose of being applied for the benefit of a pensioner.
(3)An event or change of circumstances is not to be specified in a notice under subsection (1) unless the occurrence of that event or change of circumstances might affect:
(a)       the payment to the person of the pension; or
  (b)       the provision of benefits under Division 12.
(4)       A notice under subsection (1):
  (a)       must be in writing; and
  (b)       may be given personally or by post; and
(c)must specify the period within which, and the manner in which the person is to give the information to the Department or specified officer.
(5)The period specified under paragraph (4)(c) must end not later than 14 days after:
(a)the day on which the event or change of circumstances occurs; or
(b)the day on which the person becomes aware that the event or change of circumstances is likely to occur.
…"
Section 56B of the Act provides:
"Where:
(a)a person who is receiving a service pension or income support supplement is given a notice under section 54; and
(b)the notice requires the person to inform the Department or a specified officer of the occurrence of an event or change in circumstances within a specified period (in this section called the "notification period); and
(c) the event or change in circumstances occurs; and
(d)the person does not inform the Department or specified officer of the occurrence of the event or change in circumstances within the notification period in accordance with the notice; and
(e)because of the occurrence of the event or change in circumstances, the person's rate of pension or income support supplement is to be reduced;
then, except where otherwise provided for by this Act, the pension or income support supplement becomes payable to the person at the reduced rate on the day on which the event or change in circumstances occurs."
On 1 December 1999, the applicant was advised of the decision, and that the lower of the Price Waterhouse values ($25.67) had been assessed as the value for the purpose of reduction of pension. He was advised also, that an overpayment had arisen in the sum of $976.50. On 14 December 1999, the applicant sought review of the decision in the following terms:
"Í write in response to letters forwarded to Mrs P.M. Stephens and me, dated 1.12.99, claiming repayment of alleged overpayments of income support pension – specifically amounts of $976.50 each, totalling $1953.00 which, in accordance with the terms of your letter, was repaid yesterday (13.12.99) Receipt No. AP458449. The purpose of this letter is to lodge an appeal against the decision, on the following grounds:
1.    The exercise conducted by Price Waterhouse was undertaken at the behest of the Board of Directors of J & AG Johnston Pty Ltd and it was my understanding that their estimate of the share value was based on a value relative to the total value of the capital value of the assets of the Company.
As you would be aware, such an evaluation may have no relationship to the market value of the Company's shares which is determined by what they will command in the market place. In this instance where shares could only be traded through existing shareholders, the value suggested by Price Waterhouse could well have been established as fictitious.
I draw your attention to the fact that no shares changed hands until the end of 1998 except for transfers from a deceased estate, the value for which, accepted by the Commissioner for Stamps S.A, was $2.50 per share.
2.    During the period in question a takeover bid for the Company was lodged by Edward Cove Ltd. with an offer of $36.80 per share.
This bid was resisted by major shareholders of J & AG Johnston Ltd. and the Directors, although no general meeting of shareholders was held to discuss the issue, advised shareholders that the bid would fail.
Edward Cove Ltd persisted in its approach to individual shareholders, extending the time for acceptance of their offer, on several occasions.
The Directors of J & AG Johnston and major shareholders continued to resist the takeover bid and as a consequence mini shareholders, such as Mrs Stephens, were in a glorious vacuum of uncertainty until the end of 1998 when an arrangement, to which we were not privy, was made between the Company and Edward Cove Ltd. which enabled shareholders who wished to take up the offer, to do so.
The sale of shares, to Edward Cove Ltd., by Mrs. Stephens was effected through receipt of payment of $36.80 per share on 20 January, 1999.
This information in respect of changes in our financial status was conveyed to Veterans' Affairs in February, 1999.
3.    Shareholders who elected to sell their shares were denied any dividend on those shares for the last six months of the 1998 financial year. In effect shares held by Mrs. Stephens were a non-income earning asset for the period mentioned.
4.    Until the scheme of arrangement between the Company and Edward Cove Ltd. was finalized any suggestion of a firm value for J & AG Johnston shares, on our part, would have been pure conjecture – in fact we were left in a complete state of flux, not knowing whether our shares could be sold or whether the status quo would be maintained.
If it had been the latter, the next sale of shares within the family company may have provided an indication of their real value to family members.
I submit this appeal for your consideration …"
On 16 June 2000 a Senior Review Officer wrote to the Company, in part, as follows:
"…
Previous enquiries made to your company have indicated that on 31 October 1997, the company's then advisers, Price Waterhouse, notified all shareholders that after a valuation of the issued capital, in their opinion the value at that time of ordinary issued shares in J & AG Johnston Limited was within a range of $25.67 - $28.01.
As such, the client's service pension was reassessed from November 1997 using the lower value of $25.67 per share, thus resulting in an overpayment.
It has been brought to my attention, that although Price Waterhouse had valued the shares as stated above, no shares were transferred from late 1997 until late 1998 when shares from a deceased estate were transferred. I believe these shares were transferred at a value of $2.50 each and that this value was accepted for stamp duty purposes.
In order that I may correctly determine, whether an overpayment of service pension has in fact occurred, would you please provide the following information:

was the estimated value of $25.67 - $28.01 per share accepted as at 31 October 1997
if so, when shares were transferred in late 1998, why was the value given at $2.50 per share
…"

On 7 July 2000 the Company wrote to the Department, and in response to its queries advised:
"1.The Company made no comment on the independent valuation of shares by Price Waterhouse. The Company passed on the information to shareholders.
2.The Company makes no comment in relation to the value of shares transferred from deceased estates as that is simply a matter between the parties involved in the transaction."
On 12 July 2000 a Senior Review Officer affirmed the decision, and the applicant has applied to the Tribunal for review of the decision.
The applicant gave evidence that in the light of the receipt over the previous years of low dividends by the family member shareholders, he and his wife gave no credibility to Price Waterhouse's valuation of $25.67 to $28.01 per share. They could not envisage any outside party paying that figure; and because of the pre-emptive rights situation, saw no prospect of such a purchaser becoming available. Their view of the valuation persisted until the directors, who controlled the Company, had reached agreement with the would be takeover Company. This agreement followed protracted litigation and lobbying. Until that had been resolved the valuation was in the applicant's words "fictitious".
The applicant submits that the material before the delegate was inadequate for the purpose of the decision. There was not sufficient consideration of valuation principles to support the decision. In addition, the differing valuations disclose a difference in approach to the value of a minority shareholding in the Company, as opposed to a majority shareholding. Given the history of the Company, the lack of a market for the shares, and the fact that there was no historical arms-length sales of shares the Priestly & Morris valuation of $8.00-$9.50 per share, which was provided to Edward Cove Ltd, the offerer of a takeover bid for the Company, makes the most nearly appropriate valuation of the shares. A substantial discount, if applied to the capitalisation of dividend approach, would closely align to the attributed value of the shares as claimed by the applicant, namely $2.50 per share.
The Commission argues that the applicant had an obligation to advise of changes of value in assets. Until the Price Waterhouse valuation was obtained by the Company there had been no transaction price available on which to base the value of the asset. It was precisely because of this situation that the company obtained the independent valuation, which it considered was credible. Just how credible the valuation was, became apparent some 10 months later, when Edward Cove Ltd made an offer of $36.80 per share. The market place showed eventually, that the Price Waterhouse valuation was quite conservative.
The Act obliges a pensioner to inform the Commission of any change in the value of assets. The applicant's wife advised on 20 January 1998 of changes in the nature of her shareholdings in Argo Investments Ltd and Telstra Corporation Ltd. She advised that there were no changes in respect of other shares, including the Company shares, when the Price Waterhouse valuation had been provided some 2 months earlier. I accept the applicant's evidence that he and his wife were suspicious of the Board's motives; and did not regard the valuation as credible. On the evidence, the receipt of the Price Waterhouse valuation was followed by protracted negotiations, and then litigation, and finally again, negotiations between the Board and the would-be takeover vehicle, Edward Cove Ltd. Finally, the impasse was resolved. The Company acquired Edward Cove Ltd, and made the Edward Cove Ltd offer unconditional. Shareholders could sell their share to Edward Cove Ltd for $36.80. The Company would selectively buy back then all the shares in the Company acquired by Edward Cove Ltd under the takeover offer.
I accept that this was a result which could not have been foreseen by the applicant and his wife when the Price Waterhouse valuation was provided. In addition, the applicant and his wife may not have taken careful note of their obligations as outlined in Departmental correspondence. The applicant, however, was being assessed by the Department under the assets test and the notification of a change in the value of shares was essential. No notification was provided until one year later, when the shares had been sold.
In my view, it may be appropriate for a delegate to examine various bases of valuation, in certain circumstances, in reaching an acceptable market value figure. It would be necessary to take into account, then, the applicant's wife's position as a minority shareholder in an unlisted public company subject to pre-emptive rights. In this matter, however, conflicting bases for the valuation of shares become irrelevant when the shares have been sold, and a value for the asset has been established. A party was prepared to purchase the shares, and the shares were sold for $36.80 per share. That is their value. The Commission has decided to attribute the lower of the Price Waterhouse range of values, namely $25.67 per share, to these assets.
I am satisfied, on the whole of the evidence, that the applicant and his wife did not fulfil their obligation to notify the Department of a change in their assets. I am satisfied, on the evidence, that the assessment of $25.67 per share determined by the Commission was appropriate in the circumstances prevailing as at 6 November 1997, and that an overpayment had arisen in the sum of $976.50 for the period 6 November 1997 to 25 February 1999.
For these reasons the Tribunal affirms the decision under review.
I certify that the 21 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member WJF Purcell
Signed:         .....................................................................................
  Personal Assistant
Date/s of Hearing  2 July 2001
Date of Decision  19 September 2001
Counsel for the Applicant        Mr M Fuller (nephew)
Solicitor for the Applicant         -
Counsel for the Respondent    Mr G Doube
Solicitor for the Respondent    DVA