Stojanovski and Secretary, Department of Social Services (Social services second review)

[2017] AATA 1283

Stojanovski and Secretary, Department of Social Services (Social services second review) [2017] AATA 1283 (17 August 2017)

Division:GENERAL DIVISION

File Numbers:         2017/0206

2017/0207

Re:Simeon Stojanovski

Milica Stojanovska

APPLICANT

AndSecretary, Department of Social Services

RESPONDENT

DECISION

Tribunal:Ms N Isenberg, Senior Member

Date:17 August 2017

Place:Sydney

The decision under review is affirmed.

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

Ms N Isenberg, Senior Member

CATCHWORDS

SOCIAL SECURITY – age pension – cancellation of age pension – combined assets of Applicants exceeded the limit for age pension to be payable – whether the value of the Applicant’s investment property is reduced for the purposes of the assets test -  whether investment property was unencumbered at the time of cancellation – whether guarantee over the property is a charge of encumbrance – decision affirmed

LEGISLATION

Social Security Act 1991 (Cth), ss 11, 44, 55, 1064, 1118, 1121, 1129, 1130

CASES

Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634

Smith and Secretary, Department of Family and Community Services [1999] AATA 267

SECONDARY MATERIALS

Guide to Social Security Law, version 1.235

REASONS FOR DECISION

Ms N Isenberg, Senior Member

17 August 2017

Background

1. The Applicants are a married couple and they have been paid the age pension for some time.  They live in their own unencumbered home.  They own another investment property (“the property”), and have borrowed money secured against that property.  On 21 May 2016 Centrelink decided to cancel their age pension on the basis that the value of their combined assets exceeded the limit for age pension to be payable.  On 10 October 2016, that decision was affirmed on internal review and by the Social Services and Child Support Division of this Tribunal (“AAT1”).

   Issues

2. The issue to be decided is whether, for the purposes of the assets test, the value of the property is reduced. 

   Relevant legislation and policy

3. The legislation relevant to this application is contained in the Social Security Act 1991 (“the Act") and the Social Security (Administration) Act 1999 (“the Administration Act”).

4. Government policy set out in the Guide to Social Security Law (“the Guide”) is also relevant, and is usually applied in the absence of cogent reasons not to follow such policy: Drake and Minister for Immigration and Ethnic affairs (No 2) (1979) 2 ALD 634 at 645.

5. The Act provides that the rate of age pension is worked out using Pension Rate Calculator A: s 55. Module A of s 1064 of the Act provides a Method Statement for calculating the rate of pension. The effect is that, depending on a person’s assets, age pension can be reduced to nil: s 44 of the Act. The person’s principal home is disregarded in calculating the value of a person’s assets: s 1118.  However, where a person owns real estate that is not the person’s principal home, the market value of that property is included in the assessment of the person’s assets. 

6. Subsection 11(13) of the Act provides, relevantly, that, for the purposes of the application of the Act to a social security pension, an asset of a person is an unrealisable asset if:

   (a)the person could not reasonably be expected to sell or realise the asset; and

   (b)the person could not reasonably be expected to use the asset as a security for borrowing.

7. Subsection 1130(1) of the Act provides that, if s 1129 applies to a person (access to financial hardship), the value of any unrealisable asset of a person and a person’s partner is to be disregarded in working out the person’s social security pension maximum payment rate. 

8. Section 1121 of the Act relevantly states:

   1If there is a charge or encumbrance over a particular asset of the person, the value of the asset, for the purposes of calculating the value of the person's assets for the purposes of this Act (other than Division 1B of Part 3.10), is to be reduced by the value of that charge or encumbrance.

   …

   2Subsection (1) does not apply to a charge or encumbrance over an asset of a person to the extent that:

   (a)the charge or encumbrance is a collateral security; or

   (b)the charge or encumbrance was given for the benefit of a person other than the person or the person's partner.

   ...

9. Subsections 11(2) and 11(3) of the Act clarify that the value of an asset, charge or encumbrance relates to the value of the person’s interest in the asset (where an asset is owned jointly or in common).

10. The term “charge or encumbrance” is not defined in the Act. However, Instruction 4.6.6.10 of the Guide relevantly states:

    Assets are generally assessed at their net market value (1.1.M.40). The net market value is the amount a person would expect to receive if they sold the asset on the open market, less any valid debts or encumbrances (1.1.E.108).

11. Instruction 1.1.E.108 of the Guide states:

    Usual types

    The usual types of encumbrances are:

    ·a registered mortgage,

    ·a bank overdraft secured by lodgement of title deeds,

    ·accumulated interest,

    ·arrears of rates,

    ·other outstanding local government charges,

    ·amounts outstanding to water, sewerage or electricity authorities if the charges are recoverable by statute against the property,

    ·a solicitor's lien for costs and fees,

    ·a banker's lien for money advanced, and

    ·legally enforceable liens against stock and other farm assets.

    Excluded security loans

    An excluded security is the amount of a charge or encumbrance that is:

    ·a collateral security (fall back security that is provided in addition to the principal security),

    ·provided for the benefit of a third party.

    Consideration

12. On 21 May 2016, the Applicants’ age pensions were reassessed and cancelled as a result of an automated consumer price index increase to the value of the property, to a valuation of $1,000,000.  Although the Applicants initially disputed the valuation, after an independent valuation, that is no longer the case.  Centrelink contended that the property is to be included when applying the assets test to the Applicants, and in doing so the applicants’ rate of age pension was reduced to $0.

13. Mr Stojanovski gave evidence, with the assistance of an interpreter in the Macedonian language.  His wife apparently deferred to him in business matters.  His evidence was somewhat confused.  Altogether, the Applicants’ evidence was very unsatisfactory, and the submissions on the Applicants’ behalf were also largely unhelpful.

14. What follows is the sequence of events, as best as I could make out.  The Applicant said he owned a trucking business, SMS Transport.  In March 2004 he borrowed $680,000 from Citibank to finance the purchase of equipment for the business.  The Applicants’ solicitor said that the loan was for the benefit of SMS Transport Pty Limited, but I had no evidence of the company’s incorporation.Mr Stojanovski said it was a company “but it was only me”.  He then said he needed the money for his “son’s business”.  His solicitor also submitted that Mr Stojanovski and his son were the “founders” of both SMS Transport Pty Limited and GMS Transport Pty Limited, which appeared to be at odds with Mr Stojanovski’s evidence.  I did not have any documents which might have clarified the position.  Clarification may have assisted in ascertaining important aspects of the loan, including if the property was security for the loan, and if the loan was in fact for business purposes (cf see below in relation to refinancing).  It is also unclear whether the money was loaned to SMS, GMS or to Mr Stojanovski and his son, personally, as each apparently claimed part of the amount as a debt on their individual tax returns, according to the Applicants’ daughter-in-law, who wrote on behalf of GMS.  Curiously, although Mr Stojanovski said he ceased working with SMS in 2010 when his son ‘took it over’, he continued to claim deprecation on the business equipment until at least the 2013 tax year.  Mr Stojanovski said he made the Citibank re-payments out of his wages; he also said he and his son made the payments.

15. In 2010 the Applicants refinanced the loan with the Commonwealth Bank (“CBA”) which took a registered mortgage (dealings AF755707 and AC58503U) (“the 2010 loan”).  The loan application noted the purpose was to refinance an existing home loan and for the purchase of a house.  The loan was in the sum of $600,000 and was for a term of 30 years at an interest rate of 6.43%.  On settlement, the Applicants’ then solicitor directed CBA to pay approximately $488,100 to Citibank.  Mr Stojanovski said that the money went straight to pay off the Citibank loan.  There was no evidence as to whether the balance was drawn down, and if so, to whom it was paid.  Mr Stojanovski also said, somewhat in contradiction to the loan application, that the money went straight to GMS for trucks and other equipment for the business.  He said he had borrowed the money for “them” to run the business.  He said he worked at GMS as a driver until his retirement in June 2012, and this was confirmed by his daughter-in-law, GMS’ ‘Accounts Manager’ in a letter dated 20 March 2017.  Mr Stojanovski said that the business benefited by being able to purchase trucks and other equipment.  When asked if there was any formal agreement between him and his wife, on the one hand, and GMS or his son on the other, as to loan repayments, he said that there was not. 

16. Mr Stojanovski said on the one hand, that he did not know how the loan was paid off, although he also said his son had mortgaged his home.  In any event, by 21 February 2012 the loan had been repaid, according to a bank statement for the period 1 January 2012 – 21 February 2012.  On that date, CBA issued the Applicants with a discharge of mortgage, but the mortgage was not discharged at that time.  It was submitted that this was because the Applicants’ address was incorrectly recorded and the discharge was sent to the wrong address.  This however, is entirely speculative.  Having said that, for reasons which are not clear, the Applicants did not register the discharge of mortgage on the title until very recently.  The daughter-in-law said nothing in the letter of 20 March 2017 about how the loan repayments were made, however I accept Mr Stojanovski’s evidence that they were made by “his son”, although this may mean by his son’s company, GMS.  Again, this could have been readily clarified by the Applicants providing a more comprehensive statement from GMS, their son, or their daughter-in-law.  In any event, I find that following Mr Stojanovski’s retirement, repayments were not made by the Applicants.  I find that the majority of the funds were used to pay off the Citibank loan which had financed the Applicants’ and their son’s business, and possibly afforded finance for the son’s home, according to the loan documents. 

17. In May 2012 there appears to have been discussions about another loan (“the 2012 loan”).  Part of a letter of offer from the CBA was available, curiously, again in relation to refinancing the Citibank loan.  The Applicants provided part of a document dated with the headings “Facility Information...Better Business Loan - Fixed Rate Residential Secured” which sets out the terms: the facility amount was $630,000 and the term was 25 years at a rate of 5.99% per annum with monthly payments of $4,890.00, secured by the property.  In the event of a default, the CBA had the power to sell the property.  The document relevantly states:

    Security for all facilities is as follows unless otherwise specified

    Status            Details

    New                A Guarantee unlimited as to the amount by GMS Transport Carrier   Pty Ltd.

    New                A Guarantee limited to $630,000 by Simeon Stojanovski supported   by:

    Existing          A First Registered Mortgage by Simeon Stojanovski and Milica   Stojanovska over [the property].

    New                A Guarantee limited to $630,000 by Milica Stojanovska supported   by:

    Existing          A First Registered Mortgage by Simeon Stojanovski and Milica   Stojanovska over [the property].

    New                A First Registered Mortgage by Goce Stojanovski and Mirjana   Stojanovski over Residential Real Property located at [their home].

18. Again, full details of the transaction were not provided.  The Applicants’ solicitor submitted that CBA had retained the certificate of title as security for the 2012 loan.  Despite the loan document, Mr Stojanovski contended that he and his wife were not guarantors, but were mortgagors under a mortgage registered over the property.  Mr Stojanovski said he would ‘never’ be a guarantor.  He said the bank never asked him to be a guarantor.  He said he thought it was for 3 years, and not 28 (sic).  Mr Stojanovski had told AAT1 that the guarantee over the property was to secure their son’s residence. 

19. The Applicants’ solicitor provided a Better Business Loan approval dated 26 June 2017 for approximately $562,000 in favour of the Applicants’ son and daughter-in-law.  The security for the loan was to be a registered mortgage over the couple’s home.  The letter also indicated that the guarantee provided the Applicants, secured by a registered mortgage over the property was to be released. 

20. It was submitted on behalf of the Applicants that half the loan secured by the mortgage was for the benefit of SMS, which was owned by Mr Stojanovski and for GMS where Mr Stojanovski used to work and therefore he would benefit from the loan.  As Mrs Stojanovski is his partner, she would similarly benefit.  Consequently, it was submitted the value of the property should be reduced by 25%.

21. Centrelink made two alternative submissions.  Firstly, it contended that, if the 2010 loan were fully paid off by 21 February 2012, as appears to be the case, then the full value of the property was unencumbered.  I accept that submission and find that the whole value of the property should have been included in any assets test applied to the Applicants from that date. 

22. For completeness, I will also deal with the Respondent’s alternative submission; if the property remained as collateral security for the 2012 loan, although it was conceded this was unclear, the benefit of that collateral security was to a person other than the Applicants – either GMS or the Applicants’ son and daughter-in-law personally. As a consequence, the offsetting of the loan amount from the valuation of the property is not available: s 1121 of the Act.

23. Doing the best I can with the available evidence, it appears that the Applicants were prevailed upon to provide the property as collateral security by way of guarantee for either a loan to GMS or to the Applicants’ son and daughter-in-law.  There was no registered mortgage; CBA simply retained the title deed after discharge of the 2010 loan.

24. With respect to this alternative submission, Centrelink referred me to Smith and Secretary, Department of Family and Community Services [1999] AATA 267 (“Smith”), where the issue of whether or not a guarantee is considered to be a charge or encumbrance was considered.  There, Mr Smith, borrowed money to purchase income-producing assets.  The loan was secured by way of guarantee provided by Mr Smith and his wife, with a registered first mortgage over their property.  SM Handley found that the guarantee was not a charge or encumbrance:

    30... The words “charge or encumbrance” are not defined in the Act in the Tribunal's view, however, it is clear from cases such as Re Fawthrop and Repatriation Commission (1993) 19 AAR 290, that the words ‘'charge” and "encumbrance” refer to a form of security which specifically attaches to an asset. By contrast, a guarantee or indemnity is a promise or undertaking to honour the performance of an obligation, a form of security which does not specifically attach to an asset. Ultimately, a guarantee or indemnity can only be enforced by [judgment] of the courts.

25. The Tribunal in Smith found that the guarantee was not a charge or encumbrance and therefore did not, therefore, come within the purview of s 1121(1). I find that the guarantee given by the Applicants in this matter, similarly, was not a charge or encumbrance over the property. Even if it were, it was only provided as collateral security, and s 1121(2)(a) would preclude it being offset against the value of the property. Furthermore, as the beneficiaries of the borrowing were either GMS or the Applicants’ son and daughter-in-law, the charge or encumbrance was for the benefit of persons other than the Applicants. Consequently, the value of the property is not to be reduced when applying the assets test to the Applicants.

    DECISION

26. The decision under review is affirmed.

I certify that the preceding 26 (twenty -six) paragraphs are a true copy of the reasons for the decision herein of Ms N Isenberg, Senior Member

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

Associate

Dated: 17 August 2017

Date of hearing:	31 July 2017
Solicitors for the Applicant:	Ms G Bozinovska, Bozinovska & Co
Solicitors for the Respondent:	Mr A Baril, Department of Human Services