Varela; Secretary, Department of Families, Community Services and Indigenous Affairs
[2006] AATA 640
•21 July 2006
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2006] AATA 640
ADMINISTRATIVE APPEALS TRIBUNAL )
) No Q2006/308
GENERAL ADMINISTRATIVE DIVISION
)
Re SECRETARY, DEPARTMENT OF FAMILIES, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS Applicant
And
SHARON VARELA
Respondent
DECISION
Tribunal Deputy President P E Hack SC Date21 July 2006
PlaceBrisbane
Decision The decision under review is affirmed.
................Signed...............
Deputy President
CATCHWORDS
SOCIAL SECURITY – family tax benefit – adjusted taxable income – assessable income nil - net rental property loss – overpayment of benefit – waiver – special circumstances – decision under review affirmed
A New Tax System (Family Assistance) Act 1999 s 58, Schedule 1, Schedule 3 cl 2, 3, 4, 5
A New Tax System (Family Assistance) (Administration) Act 1999 s 25, s 71, s 101
Social Security Legislation Amendment Act (No 2) No 109, 1994
Re Callaghan v Secretary, Department of Social Security (1996) 45 ALD 435
Groth v Secretary, Department of Social Security (1995) 40 ALD 541
Holmes and Secretary, Department of Family and Community Services [2003] AATA 888
Secretary, Department of Family and Community Services v Chamberlain [2002] FCA 67; (2002) 116 FCR 348
REASONS FOR DECISION
21 July 2006 Deputy President P E Hack SC Introduction
1.Mrs Sharon Varela received family tax benefit in the year ended 30 June 2005. It is common ground that she was paid $2073.20 more than she was entitled to receive.
2.The issue in this case is whether, in the somewhat unusual circumstances that exist, the debt of $2,073.20 should be waived. The Social Security Appeals Tribunal thought so. But the Secretary of the Department of Families, Community Services and Indigenous Affairs now seeks a review of that decision in this Tribunal.
Background
3.What follows was not in dispute. Mrs Varela is married and has two children. She has been receiving family tax benefit for a number of years. In October 2003 Mrs Varela was seconded from her employment in Australia to a position in New Zealand. During the entirety of the 2005 income year Mrs Varela and her husband earned income in New Zealand and paid tax in accordance with that country’s tax system. That income was, for Australian tax purposes, exempt income.
4.Mrs Varela continued to receive family tax benefit whilst in New Zealand. It is, apparently, portable.
5.In August 2004 Mrs and Mr Varela became concerned at the way in which house prices were increasing in Australia. They wanted a house to come back to so they acquired a property at Wellington Point. It was rented out from 6 September 2004. The property was “negatively geared”, that is to say, the borrowing expenses, interest and property outgoings exceeded the rental income. In the 2005 income year the total rental property loss was $19,375.00.
6.The scheme under which family tax benefit is paid requires the recipient to provide an estimate of their expected income and, where there is a spouse or partner, the expected income of the spouse or partner. Mrs Varela informed Centrelink in June 2004 and again in February 2005 of an “income update”. But Mrs Varela did not inform Centrelink that she was incurring rental property losses.
7.I do not say this critically of Mrs Varela; indeed, on the view I take of the facts, she had no reason to think that the negatively geared rental property had any relevance to her family tax benefit. But unfortunately for Mrs Varela it is a relevant consideration and the amount of net rental property losses is one component that goes to determining the figure that the legislation describes as the “adjusted taxable income”.
8.It is sufficient for present purposes to note that in September 2005 a reconciliation was undertaken by Centrelink of the adjusted taxable income of Mrs and Mr Varela. Because the net rental property losses of $19,375.00 had not been brought into account, as they should have been, in determining the amount of family tax benefit to which Mrs Varela was entitled there was an overpayment of $2,073.20.
9.Centrelink made demand on Mrs Varela for payment of this amount. Mrs Varela sought internal review which was unsuccessful but she succeeded at the Social Security Appeals Tribunal. That Tribunal, on 6 April 2006, decided to set aside the decision to raise and recover the family tax benefit debt of $2,073.20 and substituted a new decision that the right to recover that debt was waived with effect from 6 September 2005.
The Legislation
10.The legislation in issue here is to be found in the A New Tax System (Family Assistance) Act 1999 (the Family Assistance Act) and the A New Tax System (Family Assistance) (Administration) Act 1999 (the Administration Act).
11.By virtue of s 58 of the Family Assistance Act the annual rate of family tax benefit is to be calculated in accordance with the Rate Calculator in Schedule 1 to that Act. That Schedule provides a mechanism that involves working out amongst other things, the “individual’s adjusted taxable income”. That figure is worked out by using Schedule 3.
12.Clause 2 of Schedule 3 is in these terms,
(1)For the purposes of this Act and subject to subclause (2), an individual’s adjusted taxable income for a particular income year is the sum of the following amounts (income components):
(a) the individual’s taxable income for that year;
(b) the individual’s adjusted fringe benefits total for that year;
(c) the individual’s target foreign income for that year;
(d) the individual’s net rental property loss for that year; and
(e) the individual’s tax free pension or benefit for that year;
less the amount of the individual’s deductible child maintenance expenditure for that year.
13.By virtue of Clause 3(1), where the individual is a member of a couple, the individual’s adjusted taxable income includes the adjusted taxable income for that year of the individual’s partner.
14.It is relevant to remark that the evident purpose of the adjustment made by Clause 2 to ascertain adjusted taxable income is to ascertain a figure of income actually available within a family. Thus, in the case of an employee receiving fringe benefits, the value of those benefits is not brought into account in the employee’s taxable income. But the effect of Clause 4, which describes the mechanism for working out adjusted fringe benefits total, appears to me to be to bring the actual value to the employee of the benefits into the equation when working out the adjusted taxable income.
15.Similarly with net rental property losses. An individual who has a taxable income in Australia can quite legitimately reduce that taxable income by negative gearing. Thus, in the ordinary case, the individual’s taxable income has been reduced by the amount of the net rental property losses.
16.The fact that target foreign income, as defined in Clause 5, and tax free pensions and benefits are brought into the equation to determine adjusted taxable income, suggests that the legislative purpose of the concept of adjusted taxable income was to determine as precisely as possible what resources – income or benefits – were available to a family.
17.There is nothing that I can discern in the extensive material for this legislation that touches upon the policy considerations in issue however there was a similar scheme in relation to family payments. Amendments to the family payment rate calculator to take into account net rental property losses were effected by the Social Security Legislation Amendment Act (No 2), No 109, 1994. The Supplementary Explanatory Memorandum circulated by the Parliamentary Secretary to the Minister for Social Security in relation to the Senate amendments relating to net rental property losses contained the following,
Family payment (FP) is subject to an income test which takes into account the income of the applicant and his or her partner. Job search allowance (JSA) and sickness allowance (SA) for those aged under 18 years (under age) are also subject to an income test which takes account of the applicant’s parents’ income (the parental income test).
Currently, the income test for FP and the parental income test for JSA/SA is based on ‘taxable income’ as defined in the Income Tax Assessment Act 1936 (the Tax Act). If a person has rental property, the Tax Act allows the person to deduct certain expenses from the income gained from the property. Any resulting income losses can be offset against other income of the person with the person paying tax on the net figure – ‘taxable income’. This process is known as ‘negative gearing’. Since the net taxable income figure is also used in income testing of FP and JSA/SA, a person also gets the benefit of ‘negative gearing’ for social security purposes.
As announced in the 1993 Budget, the income test for FP and the parental income test for ‘under age’ JSA/SA will be amended from 1 January 1995 so that these deductions will be included as income. Accordingly, income testing arrangements will be more equitable and improve targeting of these payments. This measure follows on from the decision in the 1992 Budget to add back to taxable income the value of certain employer provided fringe benefits for the purposes of applying the income tests for these same payments.
18.It is finally necessary to note two provisions in the Administration Act. Section 71 creates a debt due to the Commonwealth by a person who receives by way of family tax benefit an amount greater than the amount that should have been received. In addition s 101 is relevant. It provides,
101. 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 the family assistance law; 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
19.Mr McQuinlan, who appeared for the Secretary, accepted that if paragraph (a) and (b) of s 101 were made out then paragraph (c) would be made out. In light of this concession, which, in my view, was properly made, the issues that fall to be determined are,
· did the debt result wholly or partly from, in effect, Mrs Varela knowingly breaching a provision of the legislation; and
· are there special circumstances.
A knowing breach
20.The case for the Secretary on this aspect of the matter was somewhat fluid. In the Secretary’s Statement of Facts and Contentions the case was advanced on the footing that Mrs Varela had knowingly made a false statement “when she reported that she and Mr Varela had no Australian income or losses for the relevant year”.
21.That allegation ought not, in my view, have been made. It was based upon a misreading of a document by way of a Centrelink diary note dated 8 February 2005 which purports to show that Mrs Varela had reported to Centrelink in those terms. However Mrs Varela said, and her evidence was not disputed, that on that occasion she merely sent a message updating her projected foreign income for the year. She made no comment about net rental property losses because she was not aware of a need to do so. I have no hesitation in accepting her evidence on that aspect of the case and generally.
22.But beyond that there was no evidence before the Secretary that could possibly sustain an allegation of knowing breach. Mr McQuinlan sought to remedy that deficiency by obtaining leave to further cross-examine Mrs Varela about two letters said to have been sent to her informing her of the need to let Centrelink know of, inter alia, the acquisition of rental property. But, it transpired those letters had been sent to an address in the ACT that Mrs Varela had left some months earlier to go to New Zealand and had informed Centrelink of her address in that country. Mrs Varela denied that she had received those letters.
23.On the evidence it seems plain that Mrs Varela was not informed of any requirement to declare rental property losses and was not aware of any requirement to do so. Whilst it may be that by not doing so she may not have complied with s 25 of the Administration Act, it could not possibly be said that any non-compliance took place knowingly. Knowingly, in this context, means having actual knowledge of the falsity or omission: see Re Callaghan v Secretary, Department of Social Security (1996) 45 ALD 435 at p. 445.
24.An allegation of knowingly making a false statement or failing to comply with a provision of the statute is a serious matter. It is an allegation of criminal conduct. It ought only be made by the Secretary where there is clear and cogent evidence to sustain it. There was a complete absence of evidence to sustain it here, either at the time it was made or at the time of hearing.
25.I reject that aspect of the Secretary’s case.
Special circumstances
26.It is enough for present purposes to say of the phrase “special circumstances” that it requires that there be “something to distinguish [Mrs Varela’s] case from others, to take it out of the usual or ordinary case” : Groth v Secretary, Department of Social Security (1995) 40 ALD 541 at p. 545 per Kiefel J.
27.There are, in my view, two features of this case that make Mrs Varela’s circumstances special or unusual.
28.The first is that I accept that at no time was Mrs Varela made aware by Centrelink of the need to declare rental property losses. To the extent to which an attempt was made in the letters comprising Exhibit 5 that attempt failed when the letters were sent to the incorrect address. Prior to going to New Zealand and whilst there Mrs Varela had several conversations with Centrelink officials regarding her family tax benefit. She discussed the obligation to inform Centrelink of her updated income. She asked if there was anything else she needed to do and was not told of the need to inform Centrelink of net rental property losses.
29.Whilst the case is not one where the overpayment is attributable solely to an administrative error made by the Commonwealth, the fact that the overpayment could have been avoided by the provision by Centrelink of fairly simple advice to Mrs Varela is a relevant factor when considering the issue of waiver.
30.But the more compelling feature, as it seems to me, is that in my view the result for Mrs Varela is anomalous.
31.The feature of adding back net rental property losses to taxable income in this context was considered by the Tribunal, constituted by Member Allen, in Holmes and Secretary, Department of Family and Community Services [2003] AATA 888. In that case the Tribunal, having set out the extract from the Explanatory Memorandum set out above, said at [40] that,
… the intent of the amendment seems clear. A person who gains a taxation advantage by offsetting a rental property loss against other assessable income should not also be able to gain a social security advantage from the same loss, which would be the case if the person’s taxable income alone was used for calculating the amount of benefits payable.
I respectfully agree.
32.The situation in Holmes was somewhat different. Mrs Holmes, in fact, had no taxable income, her assessable income being significantly less that the amount of her rental property losses. Thus her taxable income, for the purposes of determining adjusted taxable income for family tax benefit purposes, was nil. It was said for Mrs Holmes that this resulted in an unjust or unfair outcome which constituted a special circumstance. Member Allen referred to the decision of Kiefel J in Secretary, Department of Family and Community Services v Chamberlain [2002] FCA 67; (2002) 116 FCR 348 and concluded that the result in that case was not be said to be unintended.
33.The decision in Chamberlain warrants attention. It concerned the application of a statutory provision that treated 50% of a lump sum compensation payment as being attributable to loss of earnings for the purpose of determining a pension preclusion period. The lump sum was $35,000 but the Tribunal accepted that $28,000 should be disregarded. The Tribunal had taken the view that the result was unfair, and that relief ought be granted, because Mrs Chamberlain would have to pay to the Commonwealth twice as much as she had received by way of compensation for economic loss.
34.But, as Kiefel J pointed out, the purpose and effect of a statutory deeming provision was to prevent any attempt, by either party, to prove the truth. Her Honour said, of the Tribunal’s decision,
[32] In the present case, the Tribunal considered that the application of the formulae was unfair to the applicant because she would have to pay more that she had received by way of compensation for economic loss, indeed twice as much. That factor will however be present in most cases and is an aspect of the application of the formulae. In my view it cannot, by itself, amount to a special circumstance, one out of the ordinary.
[34] The basis for the Tribunal’s view was its acceptance of what the parties to the settlement said had been offered and accepted for the economic loss component. It was far less than the statute assumed to be the case in applying the formulae. Again, however, this will be so in many, if not most, cases to which the Act applies. Further, the extent of the difference from the basis upon which the parties acted could not provide the necessary “special circumstances”. The statute has selected a figure which may operate in an arbitrary way.
35.The present case is, I think, quite different. In the overwhelming number of cases the statute operates in an orthodox way to add back into a recipient’s taxable income amounts of net rental property losses that have already been deducted from assessable income. Mrs Varela’s case is truly the exception. Perhaps other minds might have thought that the case for Mrs Holmes was also an exception. The learned Member who heard that seemingly did not take that view but I do not understand his decision to stand as authority for any proposition other than that the discretion in s 101 is, by and large, unfettered.
36.The legislative purpose to be served by of Clause 2(1) of Schedule 3 is to prevent a person who gains a taxation advantage from negative gearing (or, for that matter, the receipt of fringe benefits or a tax free pension) from also gaining a social security advantage from the same loss (or benefit). It does so, to use the words of the Secretary’s policy manual at clause 3.2.5, by adding back the loss. But where, as here, the loss had not been taken into account in determining the taxable income there is no question of adding back. The effect of the strict application of the statutory formula is to produce a result that is artificial and, in my view, unintended.
37.The responsible Parliamentary Secretary spoke of the purpose of improving “targeting” family payments. I take that to mean that the legislature intended that family payments and family tax benefit which followed it, was directed to those who, by reference to reality, rather than an artificially reduced taxable income, needed the support of those payments.
38.Had Mrs Varela been employed in Australia her taxable income and that of her husband would have been reduced by the amount of the net rental property losses before those losses were “added back”. I am unable to accept that the legislature intended that Mrs Varela’s family receive less support because she happened to be working in New Zealand.
39.I accept, of course, that in considering what amounts to special circumstances, it is to be borne in mind that Mrs Varela has received an amount of money that she was not entitled to receive. And I accept that there is an expectation that monies paid without entitlement will ordinarily be recovered. But the legislation admits of an exception in special circumstances. In my view the present case is such a case.
40.I affirm the decision under review.
I certify that the 40 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC
Signed: ...............Signed..............................................
Leisa, Pendle AssociateDate of Hearing 10 July 2006
Date of Decision 21 July 2006
For the Applicant Mr R McQuinlan, Departmental Advocate
Respondent appeared in person
3
2
0