Stewart and Secretary, Department of Families, Housing, Community Services and Indigenous Affairs

[2011] AATA 271

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 271

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2010/2503 &  

GENERAL ADMINISTRATIVE DIVISION		)               2010/2501
Re		Mr Alexander C Stewart & Mrs Dora Edwina Stewart

Applicants

And Secretary, Dept. Families, Housing, Community Services & Indigenous Affairs & Min, Dept. Education, Employment & Workplace Relations

Respondents

DECISION

Tribunal M D Allen, Senior Member and  Mr Jenkins, Member

Date21 April 2011

PlaceSydney

Decision

The decision under review is SET ASIDE and the Tribunal substitutes its decision, namely:

1. That Mr Alexander Stewart was overpaid Disability Support Pension in the sum of $6,524.63 during the period 3 March 2008 to 19 February 2009 and that this sum remains a debt due to the Commonwealth of Australia.
2. That Mrs Dora Edwina Stewart was overpaid Newstart Allowance in the sum of $674.47 for the period 3 March 2008 to 11 July 2008 and that this sum remains a debt due to the Commonwealth of Australia.
3. The abovementioned debts are to be written off for a period of 12 months as and from the date of this decision.

.................[sgd]......................

M D Allen, Presiding Member  

CATCHWORDS

SOCIAL SECURITY:  Overpayment of Social Security Benefits.  Applicants structured affairs so that a substantial part of income of children channelled through private company to take advantage of tax losses.  Benefit derived by part repayment of Applicants’ loan to company from profits generated by this arrangement.  Held income of company properly attributed 50 per cent to each Applicant.  No special circumstances to justify waiver of Social Security debt.

LEGISLATION

Social Security Act 1991, Sections 1207, 1207Q, 1207X, 1236, 1237A, 1237AAD

CASES

Re Hanrick v Secretary, Department of Families, Housing, Community Services & Indigenous Affairs [2003] AATA 549

Secretary, Department of Social Security v Ellis (1996-7) 24 AAR 535

Dranichnikov v Centrelink [2003] FCAFC 133

REASONS FOR DECISION

21 April 2011 M D Allen, Senior Member and  Mr Jenkins, Member  

1.      By Application made 18 June 2010 the Applicants sought review of decisions by the Social Security Appeals Tribunal affirming prior determinations to recover:

(a)In the case of Mr Stewart, a Disability Support Pension (“DSP”) debt in the sum of $6,524.63 for the period 3 March 2008 to 19 February 2009; and

(b)In the case of Mrs Stewart, a Newstart Allowance debt in the sum of $674.47 for the period 3 March 2008 to 11 July 2008.

2.      The issues in this matter were:-

(i)        Whether the Applicants were overpaid Social Security benefits in the stated periods.

(ii)       Was the income of Gamaro Pty Ltd (“Gamaro”) correctly attributed to the Applicants; and

(iii) Do circumstances exist pursuant to Sections 1236, 1237A or 1237AAD of the Social Security Act 1991 (“SSA”) that permit the writing off or waiver of the Applicants debts to the Commonwealth, either in part or in full.

3.      Although a matter raised by the Respondent’s Statement of Facts and Contentions, no issue was raised before us as to whether the attribution of the income of Gamaro Pty Ltd should be apportioned as to 50 per cent to each Applicant.

4.      The circumstances giving rise to the alleged overpayments are quite straight forward although their legal effect is not.

5.      In the period 16 September 2003 until 20 February 2009 Mr Stewart was in receipt of a DSP and Mrs Stewart had been in receipt of Newstart Allowance at various times, in particular from March 2007 to 12 July 2008.

6.      Mr Stewart was in receipt of DSP having been diagnosed with Chronic Fatigue Syndrome (“CFS”).

7.      In December 2005 the Applicant’s son Michael was involved in a motor vehicle accident and as a result was charged with indictable offences.

8.      Mr Stewart is by profession an engineer and he appreciated that Michael had a defence to the more serious charges proffered against him but that it would require particular expertise to obtain evidence to place before a jury and in particular any barrister engaged to conduct Michael’s defence would have to have a proper appreciation of the scientific principles involved.

9.      To this end two barristers were briefed but their instructions withdrawn as they could not understand the issues in Michael’s case.  An expert in vehicle behaviour was also engaged who gave evidence in Michael’s case.

10.     The briefing of counsel and the engagement of the expert to report and give evidence cost more than Michael was able to meet from his own resources, therefore the family rallied around him and undertook a scheme to enable the family as a group to raise sufficient funds to cover Michael’s legal costs.

11.     At this stage it should be mentioned that Michael was at one stage granted Legal Aid, but the New South Wales Legal Aid Commission insisted on briefing a barrister nominated by them, although the Counsel already briefed by the Stewart family had offered to take the case at legal aid rates of fees.

12.     Having experienced two counsel who had been unable to understand the scientific concepts underlying Michael’s defence, Mr and Mrs Stewart felt that they had no alternative but to reject legal aid and for the family to continue to pay Michael’s legal costs.

13.     The method adopted, following consultation with their accountant was that an existing company structure, namely Gamaro, of whom the Applicants were the directors and shareholders, had accumulated tax losses, which losses could be utilised to generate funds.

14.     The strategy was that Michael Stewart and his brother Joseph Stewart converted their employment status from employees of their respective employers and PAYE taxpayers to that of contractors.  The former employers then contracted with Gamaro for the services of Michael and Joseph Stewart.

15. Gamaro incurred expenses, for example it had to pay workers compensation insurance. Details of the expenses are at Document T13 page 163 of the documents prepared pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 in the matter of Mr Stewart.

16.     Both Michael and Joseph Stewart took extremely frugal advances from Gamaro to cover their own cost of living expenses.  Gamaro was then able to set off the existing tax losses against income and as a result the company was able to pay to the Applicants the sum of $29,007.52, being most of the amount of $30,087.99 representing profit made by Gamaro.  This sum is reported in the books of Gamaro through the part repayment of an existing loan by the Applicants to Gamaro.

17.     At all times the only shareholders and directors of Gamaro were the Applicants.  Mr Stewart stated in evidence that he had wished his sons to become directors but they had not.  Notwithstanding the legal position as to directors, all decisions regarding the company had been made by the entire family acting together and in concert.

18.     The profit generated by Gamaro was used to pay Michael Stewart’s legal fees and an acquittal was obtained on the more serious charges proffered against him.

19.     The Respondent has maintained that the repayment of part of the existing loan from the Applicants to Gamaro constituted income in their hands.

20. Section 1207 SSA states:

“This Part sets up a system for the attribution to individuals of the assets and income of private companies and private trusts (sections 1207Y and 1208E).

• Attribution starts on 1 January 2002.

• For an asset or income to be attributed to an individual:

(a)     the company must be a designated private company or the trust must be a designated private trust (sections 1207N and 1207P); and

(b)     the company must be a controlled private company in relation to the individual or the trust must be a controlled private trust in relation to the individual (sections 1207Q and 1207V); and

(c)     the individual must be an attributable stakeholder of the company or trust (section 1207X).

•  A company or trust will be a controlled private trust or a controlled private company if the individual passes a control test or a source test.

•  An individual will not be an attributable stakeholder of a trust if the trust is a concessional primary production trust in relation to the individual.

• The asset deprivation rules and the income deprivation rules are modified if attribution happens.”

21.     At paragraph 54 of the Statement of Facts and Contentions filed on behalf of Mr Stewart (and equally applicable to Mrs Stewart) Mr Stewart concedes that Gamaro is both a designated private company and a controlled private company.

22.     For the Applicants, it was submitted that Gamaro was a controlled private company not only in regards to the Applicants but also as regards Michael and Joseph Stewart.

23. Section 1207Q SSA states:

(1)  For the purposes of this Part, a company is a controlled private company in relation to an individual if the company is a designated private company and:

(a)  the individual passes the control test set out in subsection (2); or

(b)  the individual passes the source test set out in subsection (3).

Control test

(2)  For the purposes of this section, an individual passes the control test in relation to a company if:

(a)  the aggregate of:

(i)  the direct voting interests in the company that the individual holds; and

(ii)  the direct voting interests in the company held by associates of the individual;

is 50% or more; or

(b)  the aggregate of:

(i)  the direct control interests in the company that the individual holds; and

(ii)  the direct control interests in the company held by associates of the individual;

is 15% or more; or

(c)  the company is sufficiently influenced by:

(i)  the individual; or

(ii)  an associate of the individual; or

(iii)  2 or more entities covered by the preceding subparagraphs; or

(d)  the individual (either alone or together with associates) is in a position to exercise control over the company.

Source test

(3)  For the purposes of this section, an individual passes the source test in relation to a company if:

(a)  the individual has transferred property or services to the company after 7.30 pm, by standard time in the Australian Capital Territory, on 9 May 2000; and

(b)  the underlying transfer was made for no consideration or for a consideration less than the arm's length amount in relation to the underlying transfer.

No double counting

(4)  In calculating the aggregate referred to in paragraph (2)(a), a direct voting interest held because of subsection 1207R(2) is not to be counted under subparagraph (2)(a)(i) to the extent to which it is calculated by reference to a direct voting interest in the company that is taken into account under subparagraph (2)(a)(ii).

(5)  In calculating the aggregate referred to in paragraph (2)(b), a direct control interest held because of subsection 1207T(4) is not to be counted under subparagraph (2)(b)(i) to the extent to which it is calculated by reference to a direct control interest in the company that is taken into account under subparagraph (2)(b)(ii).”

24. We accept the submission that Michael and Joseph Stewart passed the control test as set out in Ss1207Q(2) SSA. Paragraph 1207Q(2)(c) SSA refers to a company being “sufficiently influenced” by an individual. The evidence of both Mr Stewart and Joseph Stewart was that the Applicants, together with Michael and Joseph Stewart, took the important decisions as to the business of the company. We accept that legally control rested with the directors Mr and Mrs Stewart, but paragraph 1207Q(2)(c) SSA does not refer to control but to “influence” and we accept Mr Stewart’s evidence that the Applicants together with Michael and Joseph Stewart acted in concert regarding the affairs of the company.  Accepting that, it can be said that Michael and Joseph Stewart “influenced” the company to a sufficient extent that it can be said they exercised control of the company.

25. As submitted by the Applicants, we accept that Michael and Joseph Stewart passed the source test as set out in Ss1207Q(3) SSA.

26.     The Profit and Loss Statement for Gamaro (see T13 p163) shows that whereas Professional Fees of $59,360.29 were earned by the company, only $18,900.00 was paid out by way of contract payments.  That is to say, that whereas the Profit and Loss Statement of Gamaro shows that a profit of $30,087.99 was obtained from a fee base of $59,360.29, the persons who earned the fees by personal exertion, namely Michael and Joseph Stewart, were only paid $18,900.00.  After adjustments by the Respondent (see T37 p123) the profit for the relevant period, which was from 3 March 2008 to 30 June 2008, was $34,484.18 obtained from a fee base of $53,481.75, comprising $14,937.75 in respect of Michael and $38,544.00 in respect of Joseph, with Michael only being paid in the amount of $13,329.76.  As we see it, this illustrates that to some extent Michael and to a greater extent Joseph Stewart not only transferred services to the company, that is to say their ability to earn fees, but that between them this transfer was made for a consideration of less than an arms length amount.

27.     The above conclusion is consistent with the evidence that Michael and Joseph Stewart between them drew a minimal amount from the company in order to maximise the amount ultimately available to pay Michael Stewart’s legal costs.

28. Having found that both Michael and Joseph Stewart satisfy both the control and the source test in section 1207Q SSA, then as Gamaro is a controlled private company in relation to both Applicants, together with Michael and Joseph Stewart, then s1207X SSA applies. That section, inter alia, states:

“(1)  For the purposes of this Part, if a company is a controlled private company in relation to an individual:

(a)  the individual is an attributable stakeholder of the company unless the Secretary otherwise determines; and

(b)  if the individual is an attributable stakeholder of the company--the individual's asset attribution percentage in relation to the company is:

(i)  100%; or

(ii)  if the Secretary determines a lower percentage in relation to the individual and the company--that lower percentage; and

(c)  if the individual is an attributable stakeholder of the company--the individual's income attribution percentage in relation to the company is:

(i)  100%; or

(ii)  if the Secretary determines a lower percentage in relation to the individual and the company--that lower percentage.

…

(5)  In making a determination under this section, the Secretary must comply with any relevant decision‑making principles.”

29.     The “relevant decision making principles” referred to in Ss1207X(5) SSA are the Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2000.

30.     Paragraphs 6 and 7 of Part 2 of the said Principles state:

“6  Application

(1) This Part applies if, but for a determination by the Secretary, the individual would be an attributable stakeholder of the company or trust.

(2) The Secretary must consider the relationship between the individual and the company or trust having regard to:

(a)   the reason why, but for a determination, the individual would be an attributable stakeholder; and

(b)   the circumstances mentioned in this Part.

(3) In particular, the Secretary must consider whether the effect of one or more of the circumstances mentioned in this Part, in relation to the individual and the company or trust, provides a sufficient basis on which to determine that the individual is not an attributable stakeholder of the company or trust.

7  Circumstances affecting relationship with company or trust

(1) The Secretary must consider whether there are relevant circumstances that make it inappropriate for the individual to be an attributable stakeholder of the company or trust.

(2) For subsection (1), relevant circumstances include the extent to which the relationship between the individual and the company or trust is affected by any of the following circumstances:

(a)   circumstances arising from the legal structure of the company or trust;

(b)   circumstances arising from the administrative arrangements of the company or trust;

(c)   whether, having regard to the relationship between the individual and the company or trust, the individual can reasonably be expected to exercise effective control in relation to the company or trust.”

31.     Notwithstanding our finding that Gamaro is a controlled private company in relation to both Michael and Joseph Stewart we are satisfied that they were not attributable stakeholders in the company as:

(a)The legal structure of the company at all times was that the sole directors and shareholders were the Applicants;

(b)The administrative arrangements of the company were such that, although Michael and Joseph Stewart influenced the business of the company and were the source of its income, both effective legal control and any financial interest in the profit of the company remained with the Applicants; and

(c)Again, although Michael and Joseph were influential in the affairs of the company, effective control lay with the directors and shareholders, namely, the Applicants.

32.     It seems to us whether the payment to the Applicant is regarded as income per se, or more accurately income which enabled a return of capital, being the realisation of part of a personal asset in the form of a loan owing by the company to the Applicants, the attribution of 50 per cent to each Applicant is in accord with the Attribution Principles and reflects the actuality of the situation.

33.     The result therefore is that the decision to regard each Applicant as receiving 50 per cent of the income of Gamaro is correct.  That the income received was then applied to the payment of Michael’s legal costs is not to the point.  The Applicants were able to use their company structure to utilise prior tax losses and although that is entirely proper, however, as Senior Member McCabe said in Re Hanrick and Secretary, Department of Families, Housing, Community Services and Indigenous Affairs [2003] AATA 549 at paragraph 20:

“If one is to make use of complicated structures in the course of managing one’s affairs in order to take advantage of the legal consequences of those structures one cannot ignore the structure and its consequences when it suits one to do so.”

34. Section 1236 SSA provides that debts may be written off in certain circumstances. S1236 SSA states inter alia:

“(1)  Subject to subsection (1A), the Secretary may, on behalf of the Commonwealth, decide to write off a debt, for a stated period or otherwise.

(1A)  The Secretary may decide to write off a debt under subsection (1) if, and only if:

(a)  the debt is irrecoverable at law; or

(b)  the debtor has no capacity to repay the debt; or

(c)  the debtor's whereabouts are unknown after all reasonable efforts have been made to locate the debtor; or

(d)  it is not cost effective for the Commonwealth to take action to recover the debt.

(1B)  For the purposes of paragraph (1A)(a), a debt is taken to be irrecoverable at law if, and only if:

(a)  the debt cannot be recovered by means of deductions, or legal proceedings, or garnishee notice, because the relevant 6 year period mentioned in section 1231, 1232 or 1233 has elapsed; or

(aa)  the debt cannot be recovered by means of deductions or setting off because the relevant 6 year period mentioned in section 86 of the A New Tax System (Family Assistance) (Administration) Act 1999 has elapsed; or

(b)  there is no proof of the debt capable of sustaining legal proceedings for its recovery; or

(c)  the debtor is discharged from bankruptcy and the debt was incurred before the debtor became bankrupt and was not incurred by fraud; or

(d)  the debtor has died leaving no estate or insufficient funds in the debtor's estate to repay the debt.

(1C)  For the purposes of paragraph (1A)(b), if a debt is recoverable by means of:

(a)  deductions from the debtor's social security payment; or

(b) deductions under section 84 of the A New Tax System (Family Assistance) (Administration) Act 1999 ; or

(c)  setting off under section 84A of that Act;

the debtor is taken to have a capacity to repay the debt unless recovery by those means would result in the debtor being in severe financial hardship.

(2)  A decision made under subsection (1) takes effect:

(a)  if no day is specified in the decision--on the day on which the decision is made; or

(b)  if a day is specified in the decision--on the day so specified (whether that day is before, after or on the day on which the decision is made).

(3)  Nothing in this section prevents anything being done at any time to recover a debt that has been written off under this section.”

35.     Currently the Applicants have no capacity to pay the debts although there may be a capacity in the future to obtain repayments from subsequent entitlements to Social Security benefits.  At present the Applicants are dependent upon their credit card for survival and Mrs Stewart has ongoing requirements for medical treatment.  Mr Stewart has had some periods of employment but still suffers from CFS and is at an age where it is difficult to attract an employer.

36.     We are satisfied that although the Applicants may in the future have the ability to repay the debts, currently they do not.  The debts should therefore be written off for a period of twelve months.  Further write off or manner of recovery can then be reconsidered.

37. Section 1237A SSA provides that a debt may be waived if attributable to administrative error. This section does not apply to the Applicants.

38. Section 1237AAD SSA states:

“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 a false representation; or

(ii)  failing or omitting to comply with a provision of this Act, the Administration 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.

Note 1:       Section 1236 allows the Secretary to write off a debt on behalf of the Commonwealth.”

39.     The test of what constitutes “special circumstances” was stated by Carr J in Secretary, Department of Social Security v Ellis (1996-7) 24 AAR 535 at page 539 as being one for which it was impossible to lay down precise limits or precise rules. It is however one requiring something to distinguish the Applicants case from others, to take it out of the usual or ordinary case.

40.     That to establish special circumstances the case must be “out of the ordinary” was reaffirmed by the Full Court of the Federal Court in Dranichnikov v Centrelink [2003] FCAFC 133 at paragraph 66.

41.     In this matter we do not regard the situation of the Applicants as being so far out of the usual to invoke special circumstances.  The Applicants arranged their affairs to take advantage of a company structure but that had the effect that they obtained income which in turn impacted upon their entitlements to Social Security benefits.

42.     That the income obtained by the Applicants was totally expended upon their son’s legal fees in a successful attempt to have him acquitted on a serious driving offence and remain out of gaol is of itself not a special circumstance.  That the family rallied around their son and brother is to be commended but it is not a special circumstance to so arrange your affairs that that effectively the taxpayer is subsidising private legal fees.

43.     The decision under review will be SET ASIDE to the extent that we have provided for a period of twelve months in which the debts are to be written off, but in all other aspects the Decision under Review is Affirmed.

I certify that the 43 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member M D Allen

Signed:         ..............[sgd].............
  K. Lynch, Associate

Date/s of Hearing  12 & 15 April 2011
Date of Decision        21 April 2011
Solicitor for the Applicant                Stephen Hodges Solicitors
Solicitor for the Respondent         Centrelink Legal Services