Thamm; Secretary, Department of Family and Community Services

[2000] AATA 153

DECISION AND REASONS FOR DECISION [2000] AATA 153

ADMINISTRATIVE APPEALS TRIBUNAL      )

)     No  S98/389

General Administrative DIVISION         )          

Re      SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES        

Applicant

And    MOSTYN WILLIAM THAMM        

Respondent

DECISION

Tribunal       Senior Member WJF Purcell         

Date2 March 2000

PlaceAdelaide

Decision      The Tribunal sets aside the decision under review, and affirms the decision of the delegate of 23 March 1998, that the respondent's losses from primary production could not be offset against the income from investments for the purposes of calculating fortnightly payment of Age Pension.           

(Signed)
  WJF PURCELL
  (Senior Member)
CATCHWORDS
SOCIAL SECURITY – pensions, benefits and allowances – Age Pension – income test – deemed income – whether partnership losses from primary production can be offset against income from investments – policy guidelines – meaning of "income" considered – "necessarily related" considered
Social Security Act 1991 ss. 8, 1072, 1075, 1077, 1081, 1083, 1084
Income Tax Assessment Act 1936
Secretary, Department of Social Security and Garvey (1989) 19 ALD 348

REASONS FOR DECISION

2 March 2000  Senior Member WJF Purcell

1. This is an application for review of a decision of the Social Security Appeals Tribunal (SSAT) dated 31 August 1998 which set aside a decision of an authorised review officer of the applicant (the Department) dated 14 April 1998, which had affirmed a decision of a delegate of the Department dated 23 March 1998.  The SSAT decided that the respondent's partnership losses from primary production could be offset against income from investments, for the purposes of calculating fortnightly payments of Age Pension under the Social Security Act 1991 (the Act).

2. The evidence before the Tribunal comprised documents lodged pursuant to s.37 of the Administrative Appeals Tribunal Act 1975 (the T documents). The Department was represented by Mr Underwood, and the respondent appeared on his own behalf.

3. The respondent, who practised as an accountant until about 1997/98, has been in receipt of Age Pension since June 1993, as has his wife.  They are partners in a farming business, and had owned also two coin operated laundrymat businesses, which were sold in early 1995.  They are trustees and beneficiaries, along with other family members, in a family trust known as the "Pinedale Trust" (the Trust), which owns the property upon which the farming business is conducted.  The partnership paid rent to the Trust for the use of the farming land.

4. In January 1995 the partnership sold both laundrymats for a total of $60,597.  In a statement dated 7 February 1995 the respondent advised that $10,000 had been deposited in their joint account to pay off a $9,565 overdraft, and a further $5,189 placed into this same account, $30,000 placed in a 90 day term deposit in the joint names, $28,852 of which was lent to the Trust to enable farm house extensions to be carried out, and $15,000 was placed in an "Access Harry" account in their joint names.  This was spent subsequently on house extensions and a holiday.

5. The respondent and his wife sold their Glen Osmond home in 1997, and the proceeds of sale, $130,000, were invested in various shares and investments in their joint names.  They provided copies of four income tax returns to the Department from 1991 to 1997, being individual, partnership and trust returns.  On 4 January 1996 the respondent wrote to the Department in part as follows (T23/158):

   "In the past our business of primary production has been excluded in arriving at our pension entitlement.  I have been given no explanation for this.  We work hard on our farm to eradicate pest plants (gorse and bracken fern) to provide more productive land.  We have put capital into a large dam we had sunk to enable us to irrigate pastures all of which is clearly business activity.  I believe there has been an error in the treatment of this activity in the past and request that the matter be referred to a review officer."

6. On 16 March 1998 the respondent prepared a statement for the Department, in part as follows (T28/186):

   "I wrote a letter to Dept of Social Security on 4/1/96 in which I requested my case be referred to a review officer, and again in a letter dated 30/1/96. What I wanted the review officer to look at is why the loss from our farming partnership cannot be offset against our other assessable income. Our pensions went up soon after that so I assumed it had been sorted out but my letter dated 25/2/98 from Centrelink indicates income of $10,973.60 pa is being assessed when our actual net income is NIL. I have been given a copy of Guide 31.1220-31.1223 and 31.2120 to 31.2121 and sections 1075(1) and (2) of the Social Security Act. I still don't accept that the investments aren't part of our partnership activity and would like the matter to be referred to a review officer."

7. On 23 March 1998 the delegate wrote to the respondent stating that he had reviewed the decision not to offset losses from the farming partnership against the other income, and had forwarded the case to an authorised review officer.  On 14 April 1998 the authorised review officer affirmed the decision.  The respondent applied for review, and on 31 August 1998 the SSAT set aside the decision and in the course of its Reasons for Decisions stated (T2/8-9):

   "The investment which yielded the income in issue was made from the proceeds of a sale of a partnership asset, namely a laundry.  In the Tribunal's view this investment and the proceeds from that investment, constitute a partnership business.
   The Tribunal has therefore concluded that under section 1075(1A) the losses from the primary production can be offset against the income from the investments as both of the above form a part of the ordinary business of the partnership.  The Social Security Act does not specifically deal with the question of how a partnership should be treated in relation to the offsetting of losses against profits.  The authorised review officer relied upon guideline 31.2120 which states that if a person is involved in two or more unrelated businesses, then no offsetting is allowed.
   Although the Tribunal has made its decision based upon the legislation, it is interesting to note that this guideline actually appears to allow the offsetting.

   'When a partnership runs more than one business activity within the partnership, a loss on one activity can be offset against the profit from another activity.  Remember that each activity must be run under the one partnership.  A loss made by a partnership cannot be offset against income from another source (including income from another partnership) unless the partnerships are involved in related activities (see guideline 31.1223).'

   The review officer appears to have become confused between the two guidelines referred to above.  The authorised review officer made his decision based on the fact that the primary production and the financial investments were not related income sources.  However, the income sources only need to be related, according to the Department's guidelines, when there is more than one partnership involved.
   Both the primary production and the financial investments are run by the same partnership and therefore, under the Department's own guidelines, the offsetting should be allowed."

8. Under Part 3.10 – General provisions relating to the ordinary income test – Division I – Ordinary Income concept, s.1072 of the Act provides:

   "1072     General meaning of ordinary income 

   A reference in this Act to a person's ordinary income for a period is a reference to the person's gross ordinary income from all sources for the period calculated without any reduction, other than a reduction under Division 1A.

   …

   Division 1A - Business income

   1074       Ordinary income from a business – treatment of trading stock

   …

   1075      Permissible reductions of business income

   1075(1)Subject to subsection (2), if a person carries on a business, the person's ordinary income from the business is to be reduced by:

   (a)losses and outgoings that relate to the business and are allowable deductions for the purposes of section 51 of the Income Tax Assessment Act 1936 or section 8-1 of the Income Tax Assessment Act 1997, as appropriate; and

   (b)depreciation that relates to the business and is an allowable deduction for the purposes of subsection 54(1) of the Income Tax Assessment Act 1936 or Division 42 of the Income Tax Assessment Act 1997; and

   (c)amounts that relate to the business and are allowable deductions under subsection 82AAC(1) of the Income Tax Assessment Act 1936.

   1075(2)If, under Division 1B, a person is taken to receive ordinary income on a financial investment, that ordinary income is not to be reduced by the amount of any expenses incurred by the person because of that investment.

   Division 1B – Deemed income from financial assets

   1076      Deemed income from financial assets - persons other than members of couples

   …

   1077      Deemed income from financial assets – members of pensioner couples

   1077(1)    This section applies to the members of a pensioner couple.

   1077(2)If one or both of the members of a couple have financial assets, the members of the couple are taken, for the purposes of this Act, to receive together ordinary income on those assets in accordance with this section.

   1077(3) If the total value of the couple's financial assets is equal to or less than the couple's deeming threshold, the ordinary income the couple is taken to receive per year on the financial assets is the amount worked out by multiplying the value of those assets by the below threshold rate.

   1077(3A)If the total value of the couple's financial assets exceeds the couple's deeming threshold, the ordinary income that the couple is taken to receive is worked out as follows:

   …

   1077(4)Each member of the couple is taken, for the purposes of this Act, to receive, as ordinary income during each week, an amount worked out under the following formula:

   …

   1081Deeming threshold

   …

   1081(2)    The deeming threshold for a pensioner couple if $51,200.
                  …

   1083        Actual return on financial assets not treated as ordinary income

   1083(1)Subject to subsection (2), any return on a financial asset that a person actually receives is taken, for the purposes of this Act, not to be ordinary income of the person.

   1083(2)If, because of a determination under subsection 1084(1), a financial investment is not to be regarded as a financial asset for the purposes of section 1076, 1077 or 1078, subsection (1) does not apply to any return on the investment that the person actually receives.

   1084Certain money and financial investments not taken into account

   1084(1)The Minister may determine that:

   (a)specified financial investments; or

   (b)   a specified class of financial investments;

   are not to be regarded as financial assets for the purposes of section 1076, 1077 or 1078.

   1084(3)A determination under subsection (1) must be in writing.

   1084(4)A determination under subsection (1) takes effect on the day on which it is made or on such other day (whether earlier or later) as is specified in the determination."

9. The Department argues that the partnership is not a separate legal entity; and that the income and assets of the partnership are ultimately the property and income of the individuals contributing to the partnership. One of the foundations of the income test under the Act is that income may only be reduced by deductions specified in the Act. The respondent's bank accounts, shares and the loan to the Trust are subject to the deeming provisions in Division 1B of Part 3.10 of the Act. Section 1075(2) of the Act provides that no deduction from income on a financial investment is attributable to any expenses incurred by the person because of that investment. There is nothing in the Act that allows deemed income to be disregarded or reduced by losses incurred by another enterprise.

10. The Department maintains that the only deductions permissible are those specified in s.1075 of the Act, and those relate only to deductions allowed from business income under the Income Tax Assessment Act 1936 (the Assessment Act). It allows concessionary treatment of profits and losses within a partnership where the disparate enterprises have some overlap in interests. In this matter, however, the partnership conducted two discreet activities, farming and investment. Each business activity must be considered separately. The Department argues finally, that the deeming provisions should be applied to income from the respondent's investments, without any losses being applied against them to reduce that source of income; and the loss made by the farming enterprise should be treated as nil income, rather than as a negative rate of return.

11. The respondent submits that the Department has at all times looked at an individual's situation and disregarded the existence of the partnership which conducts businesses which are related business activities within the partnership.  As the capital employed in the partnership is the same capital as was employed in the a laundry business, the current businesses are related.  In addition, the partnership should be considered separately from individuals, under the Act, and that the two business activities could be said to be linked and related, as it was the partnership which was conducting the businesses, not the individuals.

12. The respondent submits also, that although deeming provisions apply to income from shares, the losses from the farming activity should be offset against the total income of the partnership, as determined after application of the deeming provisions.  As to the applicability of offsetting within partnerships, he relies on the Guide Issue No. 7876 17/1/1997 (the 1997 Guidelines) in particular guideline 31.2120 which reads:

    "When a partnership runs more than one business activity within the partnership, a loss on one activity can be offset against the profit from another activity. Remember that each activity must be run under the one partnership. A loss made by a partnership cannot be offset against income from another source (including income from another partnership) unless the partnerships are involved in related activities (see guideline 31.1223)."

and 31.1223 which reads:

"If a customer is involved in more than one business for example, two partnerships or a sole trader business and a partnership the losses from one business may be offset against the profit from another business if both the businesses are involved in the same activity (for example, a farming concern where a partnership, that a customer has an interest in, operates a farm with a private company, that the same customer has an interest in, owns the farm land).  If the activities of the businesses are unrelated, then no offsetting is allowed."

1. I have outlined in a brief and general way the parties' submissions.  Over a considerable period of time the respondent has forwarded carefully prepared, lengthy written submissions to the Department and to the Tribunal.  I have taken all of these submissions into account in my deliberations.

2. On the evidence, the respondent and his wife have carried on the farming enterprise whilst the respondent continued to practise as an accountant, and they were both involved in the coin operated laundry business.  Those businesses were sold in January 1995, but it was not until the home at Glen Osmond was sold during the 1997/98 tax year that the partnership could describe its main business as "primary producers and investors".  

3. In August 1990 the concept of deeming a set income against accounts held by financial institutions was introduced by Parliament. From 1 July 1996 deeming of income was extended to all financial assets including shares. The only permissible reductions under the Act are those outlined in s.1075 of the Act which relate to business income only. Sub-section 1075(2) specifically excludes any reduction of income from financial investments, resulting from any expenses incurred by the person, because of that investment. I accept the Department's submission that this investment income is in effect "quarantined" from other sources of income for the purpose of permissible reductions of business income.

4. The respondent relied heavily in his submissions upon various Departmental Guidelines, the most pertinent of which, in my view,  is Guideline 4.7.1.40 introduced in November 1998 (the 1999 Guidelines), and unamended at the time of the Hearing.  The Guideline reads in part:

   "…
   Assessment of business losses
   If a business runs at a loss, a nil amount is included in the income (section 8(1) – 'income' test. Only the customer's share of the net result from a partnership, trust or company (1.1.C.215) is assessed.
   Business losses from the current year, OR from previous years, are generally NOT allowed as deductions from other profits (1.1.P.428) or income derived from unrelated sources, such as:

• earnings,

• superannuation,

• profits from investments, or

• profits from unrelated businesses.

  Explanation: Although the Taxation Office allows losses to be deducted from other income, this is not the case for income testing of pensions or allowances.
  Losses which can be offset
  Losses within a sole trader business or partnership CAN be offset against the profits or other NECESSARILY RELATED activities if a customer is involved in:

• a business or partnership which operates in more than one field, OR

• 2 businesses, each operating under a different business structure.

  Explanation: Necessarily related means that if the activity which made a loss had not occurred, then the income from the other activity would:

• not have been earned, or

• have been substantially less.

  Example: A customer:

• has an interest in a partnership that consists of a farm operation AND a quarrying operation, OR

• is a sole trader in the same situation.

  …"

1. These Departmental Guidelines do not, of course, have the force of law, but they were provided to the respondent, in the course of the appeal process, and have influenced him in his approach to this matter.  The difficulty for the respondent, however, is that the Guidelines must not be read selectively.  Under the Guidelines losses within a partnership can be offset against the profits of other "necessarily related activities".  This means that if the activity which made a loss (in this case the farm) had not occurred, then the income from the other activity (the investments) would, either, not have been earned, or have been substantially less.  It is clear on the evidence, that the two activities are separate and discreet, and in no way interdependent.  I reject the respondent's submission that because the capital to undertake the investment enterprise came from the laundry partnership, it is related.   On the evidence the subsequent sale of their jointly owned home provided the $130,000 capital for investment.  In any event, in my view, the businesses are not necessarily related for the purposes of application of the Guidelines.

2. The concepts of "income" for the purposes of the Assessment Act and the Act differ. The Full Court of the Federal Court in Secretary, Department of Social Security and Garvey (1989) 19 ALD 348 said at 351-2:

   "In defining 'income' the Act was concerned with what amount was available to a pensioner to meet commitments and outgoings after the pensioner had drawn together the net returns of various sources of income.  It was not concerned with what amount was left in the pensioner's hands after that income had been received and had been applied to various commitments and outgoings including the losses of business activities that had produced no net income.  There would have been an expectation underlying the Act that any applicant for income assistance in the form of a pension would have corrected or relinquished any such activities which occasioned loss.  The purpose of the relevant part of the Act was very clear, namely to maintain a basic level of income for those who were unable to receive sufficient income to provide for themselves.  It was not the purpose of the Act to provide a further source of income for a person who had applied his or her income to maintain a business conducted at a loss or upon outgoings incurred in acquiring or maintaining assets:  see Read v Commonwealth of Australia (1988) 15 ALD 261; 78 ALR 655 per Brennan J at 662.
   In our opinion, the decision in Haldane-Stevensen v Director-General of Social Security does not depart from that view in any way.
   With respect to his Honour, we are of the view that the definition of 'income' in the Act does not permit the 'negative yield' of one source of income to be off set against the yield from other sources.  In truth, a 'negative yield' is no more than a demonstration of the lack of a source of income.  The loss sustained by the failure of that source to provide an excess of income over the expenditure incurred in that activity has no relevance to any other source of income."

With respect, I adopt their Honours reasons.

1. In my view, the enterprises/businesses undertaken by the respondent, were distinct and separate, and the deemed income from the share investments should not be reduced by any losses incurred by the farming business.  The loss from the farming business should be treated, in my view, as "nil" income, for the purposes of the income test and the Act.  I consider that the SSAT decision must be set aside, therefore, and the original decision of the delegate affirmed.

2. For these reasons, the Tribunal sets aside the decision under review, and affirms the decision of the delegate of 23 March 1998, that the respondent's losses from primary production could not be offset against the income from investments for the purposes of calculating fortnightly payment of Age Pension.

I certify that the 20 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  19 November 1999 & 14 January 2000
Date of Decision  2 March 2000
Counsel for the Applicant        Mr J. Underwood
Solicitor for Applicant               Centrelink
Counsel for the Respondent    In person
Solicitor for the Respondent    -