Widawska and Secretary to the Department of Family and Community Services
[2003] AATA 971
•29 September 2003
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2003] AATA 971
ADMINISTRATIVE APPEALS TRIBUNAL N2002/461
GENERAL ADMINISTRATIVE DIVISION
Re: Ursula Widawska
Applicant
And: Secretary to the Department of Family and Community Services
Respondent
DECISION
Tribunal: P.J. Lindsay, Senior Member
Date: 29 September 2003
Place: Sydney
Decision:The decision of the SSAT is set aside. In substitution the Tribunal decides that Ms Widawska has incurred a debt for overpaid age pension as follows:
(a) in applying the ordinary income test, an amount of age pension was overpaid from 1 July 1995 to 30 June 1996 due to the applicant’s receiving director’s remuneration of $2,905. The calculation of the amount overpaid and of the debt is remitted to the respondent to be carried out in accordance with this decision.
(b) as a result of either the application of the deeming provisions to financial assets, being amounts received by the applicant on the sale of her property and invested by UW Enterprises Pty Limited for her benefit, or the earning of ordinary income in respect of amounts of interest received by that company for the applicant’s benefit, some amounts of age pension were overpaid during 1996-97 and 1997-98. The calculation of the amount of the debt is remitted to the respondent to be carried out in accordance with this decision and reasons herein.
(c) as a result of applying the ordinary income test, some amounts of age pension were overpaid from 1 July 1996 to 5 June 2001 by reason of receipt of amounts of income in the form of director’s remuneration, and derivation of amounts of rent paid by UW Enterprises Pty Limited for the applicant’s use or benefit. The calculation of the amount of the debt is remitted to the respondent to be carried out in accordance with this decision and reasons herein.
(d) amounts paid by Ms Widawska to the Commonwealth Bank of Australia from 1989 to 1991 are not loans or financial assets of the applicant and thus the amounts are not subject to the deeming of income provisions of the Social Security Act 1991.
(e) the debt for overpaid age pension is not to be waived or written off.
………………….………………
P.J. Lindsay
Senior Member
© Commonwealth of Australia (2003)
Administrative
Appeals
Tribunal
ADMINISTRATIVE APPEALS TRIBUNAL )
)N2002/461 & N2002/402
GENERAL ADMINISTRATIVE DIVISION ) Re URSULA WIDAWSKA Applicant
And
SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES
Respondent
CORRECTION
Tribunal P.J. Lindsay, Senior Member Date26 November 2003
PlaceSydney
1. It has come to the Tribunal’s attention that the decision made in this matter on 29 September 2003 omitted the file number N2002/402 from the cover page of the decision.
2.
To correct the omission, the front page is now amended by adding the file number N2002/402.
-------------------------
P.J. Lindsay
Senior Member
CATCHWORDS
SOCIAL SECURITY – age pension – income test – payment to creditor under mortgage securing third party’s liability to creditor – whether payment under mortgage creates a loan due by third party to mortgagor - sale of applicant’s residence – failure to disclose investment of sale proceeds – decision set aside
Social Security Act 1991 ss 8, 9, 1072, 1076, 1081, 1083, 1118, 1224
Income Tax Assessment Act 1997Re Secretary, Department of Social Security and Vonhoff [1998] AATA 390
Commercial Bank of Australia v Amadio (1983) 151 CLR 447
Haldane-Stevenson v Director-General of Social Security (1985) 9 FCR 73
Re Anstis and Secretary, Department of Family and Community Services [1999] AATA 760REASONS FOR DECISION
P.J. Lindsay, Senior Member
1. Ms Ursula Widawska, the applicant, has applied for review of a decision of the Social Security Appeals Tribunal (SSAT) dated 21 February 2002. The Secretary to the Department of Family and Community Services, the respondent, has also applied for review of the SSAT’s decision. In brief, the SSAT decided that, by reason of the applicant’s income, in particular income deemed to have been received on a loan to a private company, she had been overpaid age pension in certain periods.
2. At the hearing, Mr S. Hodges, solicitor, appeared for the applicant and Mr J. Kenny, of Centrelink’s advocacy and administrative law team, represented the Secretary. Ms Widawska was the only person to give evidence at the hearing. The Tribunal had before it the documents (T documents) lodged pursuant to s.37 of the Administrative Appeals Tribunal Act 1975 (the AAT Act).
background
3. Ms Widawska has received the age pension since 19 November 1992. In her application for the pension dated 30 September 1992 (T6), she stated that she ceased employment on 19 March 1989, until then having been the managing director of Clean and Tidy Pty Limited (the company) and was not doing any part-time or casual work. Her only assets were household effects valued at $5,000 and an investment in a superannuation policy valued at $33,272. She answered ‘no’ to the question “Do you own any shares? This includes shares in private companies and overseas companies”. She did not refer to having made any loans. The Department of Social Security (the Department) wrote on 9 November 1992 to inform her that she would receive the age pension. The letter also asked her to notify them should her assets increase above $112,750 or if her income should exceed $43 a week (T11). Similar letters were sent subsequently: 16 January 1993 (T12) and 20 September 1993 the relevant amounts being $44 income a week and assets exceeding $113,000. (T15).
4. It was not until 29 November 1996 when the Department conducted an income review that Ms Widawska disclosed that she had been paid $55.87 a week in wages by the company (by then re-named as UW Enterprises Pty Limited) during the 1995-96 financial year (T27). She also disclosed her ownership of shares in the company. Provision of this information resulted in her pension being reduced. Subsequently, Centrelink wrote a number of letters (7.2.97 T44, 13.5.97 T47, 4.8.97 T53) to the applicant reminding her to advise them if her income increased above $2,905 a year ($0.16 in 4.8.97 notice), financial investments increased above $1,004 or other assets increased above $125,996.
5. On 13 February 2001 Ms Widawska completed a Centrelink questionnaire sent to pensioners involved in private companies (T65). She stated that she was a director and sole shareholder in the company and that its business was “commerce”. The company’s only assets were plant and equipment with a market value of $2,624. Ms Widawska answered in the negative to the question “Does the company owe money to any associates?”. Her response to the question “Are there any other liabilities of the company?” was “$81,571 – losses since 1983 owed to sole director/shareholder (see balance sheet).” Ms Widawska noted that during the financial year 1999-2000 the company had paid her fees of $1,877. She said that the company did not provide her, as its sole director and shareholder, with any benefits such as the payment of personal living expenses or any non cash benefits.
6. Centrelink sent Ms Widawska a response dated 28 May 2001 that noted that she had provided three different versions of a profit and loss statement for the 1999-2000 financial year. Centrelink requested financial statements and income tax returns, including her personal returns, for the financial years 1993-94 to 1998-99. Subsequently, on 8 June 2001 Centrelink raised a debt of $23,363.09 for overpaid age pension. Centrelink’s reasons were: “The correct amount of your income from the deeming of your loan to your company UW Enterprises P/L and the earnings from the company were not taken into account in the payments made to you as you failed to notify Centrelink about the loan you had made to your company. With this, and your earnings from the company a substantial debt has been calculated.” (T74). The debt covered the period from 2 July 1992 to 5 June 2001. Centrelink noted that in that period, Ms Widawska received $81,293.09 in pension but Centrelink considered her entitled only to $57,930.00. The authorised review officer who re-examined Centrelink’s decision to raise the debt found the decision to be correct, but referred the calculation of the debt back to the relevant branch office. On appeal, the SSAT decided that Ms Widawska had been overpaid pension as a result of the application of the ordinary income test and the deeming of income provisions. There was no basis for waiving or writing off the debt. However, the SSAT decided that there was no overpayment of pension in the period 19 November 1992 to 30 June 1995, nor was there any debt for overpaid newstart allowance for the period 25 June to 11 November 1992.
7. During the hearing, Mr Kenny withdrew the Secretary’s application in relation to the provisions in the Social Security Act 1991 (the Act) that applied prior to 1 July 1996 to deem the accrual of income on the loan by the applicant to the company. The issues in the matter are thus:
· whether Ms Widawska has a financial asset being a loan to the company;
· if so, whether the deeming of income provisions in the Act apply to the loan;
· whether work related expenses should be taken into account in determining the applicant’s employment income;
· whether as a result of applying the ordinary income test and the income deeming provisions, Ms Widawska has a debt for any of the financial years from 1995-96 to 2000-01 inclusive;
· whether it is appropriate to waive any debt found to be due by the applicant to the Secretary.
evidence
8. Ms Widawska was born in Poland on 12 November 1932. She qualified as an accountant in that country and later migrated to Australia in 1958.
9. Ms Widawska’s evidence regarding the background to this matter is set out in her statutory declaration made on 11 July 2002, which was admitted into evidence as Exhibit A1. Ms Widawska declared:
5. Between 1975 and 1986 I ran a business known as UW Printing.
6. In 1976 I purchased the property at 29 Myuna Road, Dover Heights (Myuna Road). I paid the full purchase price from my own funds. I borrowed money from Commonwealth Bank of Australia (CBA) to renovate Myuna Road. …
7. By about 1980, I had paid off all the monies due under the mortgage to CBA.
8. I purchased a cleaning business known as “Clean and Tidy” on 10 November 1986. I borrowed $85,000 from CBA. This loan was a small business loan and in addition there was an overdraft facility. The business was conducted by Clean & Tidy Pty Ltd (the company). …
9. I arranged the loan from CBA from the branch at Greenacre in Sydney. The bank manager, Mr Harry Burgess, was personally known to me from my previous dealings with him at Rose Bay North. I signed a mortgage and I understood that the mortgage was to be registered on the title to Myuna Road. The mortgage secured the loan and overdraft.
10. For a couple of years, the cleaning business ran well and the company made the regular payments due to the CBA under the loan contract.
11. In early 1989, I closed the cleaning business. The introduction of the Tax File Number system made a big difference to the administration of cleaning businesses. Many cleaners previously worked under assumed names and did not want employment with a Tax File Number. Several long term employees of the company left. I decided to close the business and then ran into problems with the union. The company became involved in a dispute and retained legal representation at considerable cost.. Payments due to the company under a state government contract were withheld and this caused the company to pay all creditors out of the overdraft facility, thereby incurring extra interest. When we eventually closed, the company did not have the money to pay the long service leave and other entitlements of the cleaners that were retrenched. These were also paid from the overdraft. I still had my liability under the company’s loan from to CBA [sic], which I paid regularly with my own money.
12. I borrowed and scraped together all the money that I could to pay the debts of the company. Eventually, I was able pay every dollar due to the bank and the other creditors. I used up all my personal savings and borrowed money to do this. I was worried that the bank would sell Myuna Road, by then the only asset that I had left. …
15. After I closed the cleaning business, I studied so as to enable me to practise as an accountant. I continued to run the company as a vehicle to start my accountancy business.
16. My current alleged loan to the company is made up predominantly of the amounts that I paid to CBA to pay out the loan plus the overdraft and other creditors. The current turnover of the company is very small and consists solely of the fees that I generate in my accountancy practice. In the last financial year, the company incurred a loss. …
18.I established that the mortgage I signed securing repayment of the loan and overdraft with Myuna Road was never registered by CBA. This came as a surprise to me. I had always thought that the mortgage was registered. My only explanation for the failure to register the mortgage is that I understand that CBA had a practice of taking unregistered mortgages over the properties of staff and other valued customers. I had established a good credit rating by my repayment of my housing loan. I knew Mr Burgess from my previous dealing with him and he may have chosen not to register the mortgage.
…
10. A statutory declaration made by Bruce Henry Meers dated 10 July 2002 was admitted into evidence (Exhibit A2). Mr Meers has known Ms Widawska for about twenty-seven years, having met her in the mid-1970s when each of them was involved in different printing businesses. He has been in business for over twenty years and has been a director of companies and general manager of businesses. Mr Meers declared:
5. On about 1986 [sic], Ursula told me that she was going to buy a cleaning business. She told me that she needed to borrow from the bank to buy it. I understood that the loan was between $80,000 and $100,000.
6. I was aware (because Ursula told me) that she secured the loan to her company by way of mortgage over the title to her home at Dover Heights. Also, on the basis of my experience in business and banking I can say that no bank or finance company would have lent that amount of money without security. …
9. I again met up with Ursula some time later (I think about July 1991) and she said to me ‘I have managed to pay out all of the company’s liability to the bank and to the other creditors. I used all of my savings to pay the bank.’ …
11. On 10 November 1986 Ms Widawska and her sister Joanna Widawska each bought one ordinary $1.00 share in the company (then named Clean and Tidy Pty Limited), the only issued shares at the time. On the same day the company purchased a cleaning business. Although para 8 of Ms Widawska’s statutory declaration refers to her borrowing $85,000 from the Commonwealth Bank of Australia (CBA), she informed the Tribunal that the five year loan was actually made to the company. A journal entry dated 10 November 1986 in the company’s books of account records a liability of $85,000, being a “Comm. Bank Small Bus. Loan” (annexure to Exhibit A1). The narration stated “As per purchase agreement Clean. Business bought from C & T P/L as trustee for the Filipoff Family Trust”. The other side of the journal entry recorded the company’s acquisition of goodwill ($73,680) and plant and equipment ($11,320) of the cleaning business.
12. The company’s balance sheet at 30 June 1997 disclosed the following (annexure to Exhibit A1):
Current Liabilities
- Creditors 27,183.94
- Commonwealth Bank 58,036.61
- Comm. Bank Loan (part repayable in 12 months) 26,748.00
111,968.55
Non Current Liabilities
- Comm. Bank Loan (repayable after 12 months) 49,098.37
- U. Widawska - Loan Account 7,673.14
56,771.51
13. In evidence Ms Widawska said that the CBA’s loan to the company was for five years and was secured over her home at Dover Heights. A copy of the certificate of title to the applicant’s property at Dover Heights was annexed to her statutory declaration. It was apparent therefrom that any mortgage given by Ms Widawska to the CBA was not registered.
14. The company’s financial statements for the years ended 30 June 1989, 30 June 1990 and 30 June 1991 record the rapid and substantial fall-off in the company’s sales revenue. In the 1989 financial year (T103-334) the company’s sales were $287,573, with the cleaning business contributing $255,490 and the balance coming from the print brokerage business that the company took over from Ms Widawska on 10 November 1986. In the following year sales revenue had declined to $48,728 (T105-350). In the 1991 financial year, the company’s print brokerage was earning sales revenue of $26,192 (T107-358).
15. Ms Widawska’s evidence was that the company stopped its activity in the cleaning industry in 1989. Ms Widawska said that when the company began to struggle to pay the bank and other creditors, because of changes in practices applying in the cleaning industry, she started paying the money due under the CBA loan and overdraft in order to protect her house. She said she borrowed to pay the bank. It would appear from the company’s financial statements that the CBA loan was fully repaid at some stage during the 1990-91 financial year. Her evidence was that she did not make a loan to the company when she made the payments to the CBA. She acknowledged, however, that she did put money into the company from time to time to pay some of its smaller trade debts. She could not remember receiving any notices or correspondence from the bank calling in the security that she had given.
16. Unfortunately, there are no records available in relation to the CBA’s loan to the company, the mortgage or any other security or guarantee given by Ms Widawska, or details of payments made to the bank pursuant to the loan or the mortgage. By letter dated 20 June 2002 the CBA informed the applicant that
… numerous efforts have been made on your behalf to secure documents in regard to your repaid small business loan for Clean and Tidy Pty Ltd taken out in 1986. We wish to advise that as the loan was repaid over 7 years ago there will be no documents available the Bank only holds documents and paperwork for repaid loans for 7 years from the repaid date. Therefore as the loan was repaid in 1989 there would be no file available, as after 1996 it would have been destroyed. (annexure to Exhibit A1).
17. On 30 September 1992 Ms Widawska signed the claim form for her age pension. She answered ‘no’ to whether she owned any shares in private companies (T6-38). In cross-examination she explained her answer on the basis that the company had not paid dividends. The claim form asked whether she had any investments or other money on loan, to which the answer also was ‘no’. Mr Kenny asked the applicant why she did not disclose her interest in the item referred to as ‘Creditors and borrowings’ in the company’s balance sheets (1990-91: $75,898; 1991-92: $74,898). Ms Widawska said she did not consider that she had made a loan to the company. In addition, she said she did not treat the amount shown as ‘Creditors and borrowings’ as her asset. It was put to Ms Widawska that as an accountant, she would be aware that a debt to her was an asset. Her response was that the company did not owe her anything because she had not made a loan to the company. Her explanation for recording the amount she paid the bank as ‘borrowings’ in the company’s accounts was that was the way the accounting system required the amount to be shown. Ms Widawska told the Tribunal that she knew she would not be paid any money by the company and instead of having recorded her payments to the bank as a loan by her to the company, she should have treated the payments as a contribution of capital.
18. During the 1992 financial year the company issued an ordinary share to Ms Judy Feyzeny (T108-371), an accountancy lecturer and a friend of the applicant. In cross-examination Ms Widawska said that it was necessary for Ms Feyzeny to become a shareholder and director in the company so that she could supervise the applicant’s preparation of tax returns, and thus enable the applicant to attain the experience necessary for registration as a tax agent. Reflecting its exit from the cleaning industry, the company changed its name to UW Enterprises Pty Limited on 11 March 1991 (T69-229). The directors’ report for the 1991-92 year stated that the company’s principal activity was print brokerage, but in addition it commenced providing professional services as accountant, business consultant and tax agent (T108).
19. The SSAT found that Ms Widawska had lent money to the company. Ms Widawska disputed the SSAT’s calculations of the amount of loans that she has made to the company in the 1991-92, 1992-93 and 1993-94 financial years. The SSAT’s findings in relation to the yearly balance of the loans the applicant made to the company, are as follows:
Year Shareholder loan $
91-92 104,092
92-93 104,545
93-94 98,29394-9593,653
95-9690,768
96-97 85,129
97-98 82,221
98-99 85,564
99-00 85,156
00-01 86,244The applicant’s evidence was that during the 1994-95 financial year Ms Feyzeny contributed approximately $35,000 to the company by way of loan. Ms Feyzeny ceased being a director and shareholder during 1995. According to the applicant, Ms Feyzeny made the loan to assist the company become established in its new business.
20. During lengthy cross-examination Ms Widawska agreed that she sold her home at Dover Heights for $665,000 early in September 1996 but she did not cease living there for some time. In return for reducing the sale price, the purchasers allowed her to occupy a room in the house. Out of her sale proceeds she paid back debts of around $50,000 and the legal fees on her sale. As she did not engage an estate agent, there was no commission payable on the sale. She said that almost immediately on completing her sale, she bought land at Berrima in the southern highlands. A transfer document dated 3 July 1997 (T116) noted that she paid $97,500 to the vendor of the Berrima property. She said she built a house and moved there in February 1998. Ms Widawska said she was the owner-builder of her house at Berrima and very soon after completing the sale of the Dover Heights property, she began buying the necessary building materials – timber, windows, tiles - and equipment. Ms Widawska’s evidence was that she outlaid approximately $600,000 on building products and tradesmen. However, she lost about $60,000 worth of bathroom appliances and hot water equipment, for which she did not recover insurance, while the house was under construction. In cross-examination she stated that she submitted a building application to the local council more than six months prior to completing the purchase. Her evidence was that she erected improvements on the Berrima land before she had purchased the property because she trusted the vendor.
21. Ms Widawska said she did not inform Centrelink of the sale of her home at Dover Heights because that was her principal residence and she was using the money from the sale to buy another principal residence. At the time of moving to Berrima she destroyed all her records relating to payments to the CBA in respect of the loan and overdraft to the company.
22. Ms Widawska was asked if she could explain the sharp fluctuations in the company’s interest income over a number of years: $900 (1994-95); $3,450 (1995-96); $25,405 (1996-97); $15,972 (1997-98) and $936 (1998-99). She said that friends and clients asked her to invest money on their behalf. Requested by Mr Kenny to name the friends, Ms Widawska refused saying that client confidentiality prevented her. Initially she denied that the interest income was connected with the investment of the proceeds of the sale of her home, but then she admitted that the proceeds were so invested for only about three months. She said that the decision to invest the money in the company’s account was based on advice she received from her solicitor. Ms Widawska explained that she had only a savings account in her name and so it was more practical to deposit the money in a company account that allowed her to draw cheques. She has not kept the bank statements regarding the money invested in the company’s account. No income tax was paid on the company’s interest income because the interest and fee income was more than offset by accumulated losses. Mr Kenny put it to her that the investment of the money in the company’s account allowed her to access accumulated tax losses in the company, which Ms Widawska denied.
23. The company’s profit and loss account included an item ‘Rent’ as follows: $0 (1995-96); $3,179 (1996-97); $3,469 (1997-98) and $0 (1998-99). Ms Widawska’s explanation was that the rent was paid for storing the company’s furniture as well as household furniture and effects. This evidence conflicted with her evidence that she reduced the price of the Dover Heights property in return for use of a room as an office and in which she lived for at least a year. The Dover Heights office was still the company’s business address at the time of lodging its 1999 income tax return (T57).
24. In relation to interest expense ($3,403 in 1995-96; $3,666 in 1996-97; $3,547 in 1997-98; but $0 in 1998-99) Ms Widawska said that none of it was paid to her. She said that the amount of $3,666 was interest on the loan by Ms Feyzeny, and the same was disclosed in the notes to the accounts. Ms Widawska was unable to inform the Tribunal about the items expensed by the company as ’Other’ ($21,260 in 1996-97; $12,134 in 1997-98; and $936 in 1998-99). She informed the Tribunal that part of the company’s expenses, such as telephone, car and electricity, was in fact personal expenditure.
25. In the 1998-99 profit and loss statement an amount of $431 was disclosed for rates and taxes. Ms Widawska explained that the company’s office is located in her home at Berrima. The company does not pay rent to her but instead pays the rates.
26. Ms Widawska’s income tax returns disclose the following:
1995-96 (T23)
Income – allowances, benefits, tips, director’s fees etc. $4,434
Deductions:
–work related motor vehicle expenses
(depreciation, petrol, registration, insurance and repairs) $1,429
–other work related expenses
(half cost of upkeep of lawn) $ 100
1996-97 (T48)
Income – allowances, benefits, tips, director’s fees etc. $2,210
Deductions – work related motor vehicle expenses $2,649
1997-98 (T54)
Income – salary $1,574
- allowances, benefits, tips, director’s fees etc. $7,069
Deductions – work related motor vehicle expenses $7,124
1998-99 (figures based on company’s P&L, T57))
Director’s fees $1,500
Director’s Allowance $5,851
Deductions – $ 0
1999-2000 (T59)
Income - unfranked dividends $1,877
Deductions - 0
2000-01(T125)
Income - allowances, benefits, tips, director’s fees etc. $2,600
Deductions - 0
27. However, the company’s profit and loss account for 1996-97 (T50) discloses the payment not only of $2,210 in Directors’ Remuneration but also Directors’ Allowances of $2,770. The reference to dividends in 1999-2000 should be to Directors Fees in accordance with the P&L.
28. The applicant did not deny receiving, among others, the following correspondence from Centrelink:
- letter dated 20 September 1993 that required her to inform Centrelink if her income went above $44 a week;
- an income review dated 19 November 1996 (T27) in respect of her age pension. The review sought information about recipients assets, financial and other, and income including employment;
- a letter dated 3 December 1996 (T31) informing Ms Widawska about the rules for calculating income on financial investments under the income deeming rules and the value of her financial investments. The letter required Ms Widawska to inform Centrelink if her financial assets went above $46,045.15 or her income (except from financial assets) increased above $2,905.
applicable legislation
29. Given the concession made by the respondent during the hearing, the Tribunal does not have to consider the deeming of income rules that applied before 1 July 1996. The following sections in the Act are relevant to this application:
Section 8(1)
income, in relation to a person, means:
(a) an income amount earned, derived or received by the person for the person's own use or benefit; or
(b) a periodical payment by way of gift or allowance; or
(c) a periodical benefit by way of gift or allowance;
but does not include an amount that is excluded under subsection (4), (5) or (8).
Note 1: See also sections 1074 and 1075 (business income), sections 1076-1084 (deemed income from financial assets), sections 1095 to 1099D (income from income streams), section 1099F (exempt bond amount does not count as income) and section 1099K (refunded amount does not count as income). …
Note 3: income is equivalent to ordinary income plus maintenance income.
income amount means:
(a) valuable consideration; or
(b) personal earnings; or
(c) moneys; or
(d) profits;
(whether of a capital nature or not).
ordinary income means income that is not maintenance income or an exempt lump sum.
Note 1: for maintenance income see subsection 10(1).
Note 2: amounts received as a series of periodic compensation payments may result in reduction of the person's rate of social security pension or benefit under Part 3.14: if this happens the amounts are not counted as ordinary income (see section 1171).
Note 3: For provisions affecting the amount of a person's ordinary income see sections 1072 and 1073 (ordinary income concept), sections 1074 and 1075 (business income), sections 1076-1084 (deemed income from financial assets) and sections 1095-1099D (income from income streams).
Section 9 Financial assets and income streams definitions
9(1) In this Act, unless the contrary intention appears:
financial asset means:
(a) a financial investment; or
(b) a deprived asset.
Note: For deprived asset see subsection 9(4).
financial investment means:
(a) available money; or
(b) deposit money; or
(c) a managed investment; or
(d) a listed security; or
(e) a loan that has not been repaid in full; or
(f) an unlisted public security; or
(g) gold, silver or platinum bullion; or
(h) an asset-tested income stream (short term).
Section 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 2 or 3.
Note 1: For ordinary income see subsection 8(1).
Note 2: For other provisions affecting the amount of a person's ordinary income see sections 1074 and 1075 (business income), sections 1076 to 1084 (deemed income from financial assets) and sections 1095 to 1099D (income from income streams).
30. Section 1076 provides for the calculation of deemed income based on a single person’s financial assets, including attributing that deemed income as being received in equal weekly amounts over the following year. Subsections 1076(2) and (3) provide:
(2) A person who has financial assets is taken, for the purposes of this Act, to receive ordinary income on those assets in accordance with this section.
(3) If the total value of the person's financial assets is equal to or less than the person's deeming threshold, the ordinary income the person 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.
31. Subsection 1118(2) provides relevantly that
If:
(a) a person sells the person's principal home; and
(b) the person is likely, within 12 months, to apply the whole or a part of the proceeds of the sale in acquiring another residence that is to be the person's principal home;
so much of the proceeds of the sale as the person is likely to apply in acquiring the other residence is to be disregarded during that period for the purposes of this Act.
consideration and findings
32. Mr Hodges submitted that the monies paid by Ms Widawska to the CBA under the mortgage securing the bank’s loan to the company, should not be regarded as having been lent by her to the company, but rather should be treated as in the case of ReSecretary, Department of Social Security and Vonhoff [1998] AATA 390. Although Vonhoff’s case involved a guarantee, Mr Hodges submitted that its reasoning applied equally to payments made by a mortgagor under a mortgage securing a loan to another party. Mr Hodges went further and submitted that it should be inferred from the applicant’s giving the mortgage, that she also gave a guarantee in relation to the loans to the company by the CBA. In his written submissions Mr Hodges contended that the mortgage contained a guarantee and he cited Commercial Bank of Australia v Amadio (1983) 151 CLR 447 in support. Consequently, Ms Widawska was paying out her own personal obligation under the security she had given.
33. Mr Kenny urged the Tribunal to find that Ms Widawska was not an honest witness. He sought to distinguish Vonhoff’s case because it concerned a guarantee, the terms of which were known, in contrast to the paucity of documentary evidence regarding the mortgage. Mr Kenny submitted moreover that, assuming a guarantee was given by the applicant, there was no evidence as to its terms and in particular no indication whether the guarantor was liable under the guarantee even where the borrower is not in default. Mr Kenny criticised the decision in Vonhoff submitting that it did not make findings about any arrangements that may have existed between the guarantor and borrower. He contended that Ms Widawska commenced paying the company’s obligations under the bank loan in the belief that she would be repaid. Mr Kenny argued that Vonhoff did not give sufficient weight to the accounting treatment of the loan and submitted that the accounting treatment raises a presumption that the parties intended a loan to arise between them. This is especially so, in Mr Kenny’s submission, where the person who pays the company’s creditor controls the company and has chosen to record the payment as their loan to the company. Mr Kenny submitted that the correct way to assess ordinary income amounts, such as a director’s allowance, is to exclude the allowance but otherwise not to deduct or take into account work related expenses.
34. In coming to its decision in this case, the Tribunal has taken into account the evidence of the parties and the submissions. Ms Widawska’s evidence is to be treated with caution as the Tribunal found her explanations of certain transactions to be unconvincing and has found that she has made some false statements to Centrelink. The Tribunal also observes that the applicant’s standard of preparation and presentation of the company’s financial statements has been poor and at times chaotic (for example, three different versions of the profit and loss account for the 2000 financial year were submitted to Centrelink with no clear explanation offered for the discrepancies.)
Director’s allowance and salary
35. Ms Widawska received income in the form of salary and director’s allowance from the company during the years 1992-93 to 2000-01. Such classes of income are personal earnings and so an ‘income amount’ (s.8(1)) and thus ‘income’ (s.8(1)). It has been held by the Full Federal Court that the concept of income in the Act requires the reduction of an income amount by items of cost or expenditure that are “associated” with the income amount (Haldane-Stevenson v Director-General of Social Security (1985) 9 FCR 73,75).
36. In applying that principle, the Tribunal would reduce the salary or director’s allowance by amounts of work related expenses or other expenses that are associated with earning that income. The Tribunal does not accept the respondent’s submission that the correct method of ascertaining income is to exclude allowances and then ignore associated expenses. This method would be acceptable where the allowance and the expense to be covered by the allowance are approximately the same in amount. In a case where the amounts are not comparable or, as is the case here, where in some years either there is no evidence that the expense was incurred for the purpose for which the allowance was paid or evidence of the amount expended, the Tribunal’s approach is to reduce the allowance only by expenses in respect of which there is evidence as to association and amount. The Tribunal is cognisant of the further holding in Haldane-Stevenson that the process of ascertaining income for the purposes of the Act is not the same as that for calculating taxable income under the Income Tax Assessment Act 1997 (the Income Tax Assessment Act). Having regard to the substantiation rules in Division 900 of the Income Tax Assessment Act, however, the Tribunal considers the information in the returns to be more reliable than information in the financial statements. Thus, in relation to expenses that have for tax purposes been claimed as incurred in earning salary or director’s allowance, the Tribunal considers that such expenditure would be associated with the income. As to the amount of income the applicant has received from the company, the Tribunal agrees with the SSAT’s approach of taking into account relevant amounts disclosed in Ms Widawska’s tax returns, where available, if those amounts differ from the amounts shown in the company’s financial statements.
37. The Tribunal finds, therefore, that Ms Widawska’s income, in the form of personal earnings, received from the company is as follows:
-1992-93: salary of $77.
-1993-94: director’s fee of $1,264.
-1994-95: director’s fee of $705 and allowance of $200.
-1995-96: due to a discrepancy between the company’s financial statements and the applicant’s income tax return, the Tribunal relies on the following information from the tax return: director’s remuneration of $4,434 reduced by motor vehicle expenses of $1,429 and work related expenses of $100, leaving a net figure of $2,905.
-1996-97: due to a discrepancy between the company’s financial statements and the applicant’s income tax return, the Tribunal relies on the following information from the tax return: director’s remuneration of $2,210 reduced by $2,649 resulting in nil income for the year.
-1997-98: due to a discrepancy between the company’s financial statements and the applicant’s income tax return, the Tribunal relies on the following information from the tax return: director’s remuneration of $7,069 and salary of $1,574 reduced by work related expenses of $7,124, leaving a net figure of $1,519.
-1998-99: director’s allowance of $5,851 and director’s fee of $1,500, and there being no satisfactory evidence of costs associated with earning that income, the net figure is $7,351.
-1999-2000: the financial statements show $1,877.15 in director’s fees, which the applicant’s tax return discloses as an unfranked dividend. The Tribunal accepts the financial statements as more reliable for two reasons. First, the current year profit of $815.27 was less than the amount purportedly distributed as a dividend. Secondly, the financial statements for the following year did not reverse or correct the disclosure of the director’s fee of $1,877.15. There are no expenses associated with the director’s fee, so the net figure is $1,877.15.
-2000-01: director’s fee of $2,600. As the motor vehicle expenses are claimed by the company and there is no evidence of costs incurred by the applicant that are associated with the director’s fee, the net figure is $2,600.
Sale of Dover Heights home
38. Ms Widawska’s evidence concerning the sale of her former residence at Dover Heights and her dealing with the sale proceeds was not convincing. The Tribunal finds that settlement of the sale of the property, which was unencumbered, occurred around 5 September 1996 and the consideration was $665,000. The Tribunal is reasonably satisfied that settlement of the purchase occurred around 3 July 1997. It is improbable that Ms Widawska incurred expenses of the magnitude given in her evidence on building her home at Berrima, prior to settling the purchase of the property. The Tribunal rejects the applicant’s evidence that, even before she had purchased the land at Berrima, she had outlaid approximately $600,000 in costs associated as an owner-builder of her new house.
39. Ms Widawska’s explanation about the source of the funds invested by the company to earn interest of $25,405 (1996-97) and $15,972 (1997-98) was also improbable. The Tribunal does not accept that Ms Widawska invested the settlement monies in the name of the company because her solicitor insisted she do so or because she was unable to establish an income earning account in her name that would have allowed her to draw cheques. Similarly the Tribunal rejects her evidence that part of the interest was attributable to funds given to her to invest on behalf of friends or clients. As an accountant and registered tax agent, the applicant would have been aware of the need to invest such funds as trustee. Moreover the Tribunal accepts the respondent’s submission that, as an accountant and tax agent, Ms Widawska would be aware of the potential benefit of investing the money in the company’s name thus permitting the resultant interest income to be offset by the company’s losses. The Tribunal finds, therefore, that the interest disclosed in the company’s financial statements for the two years under discussion was more likely than not interest that had its source in funds that Ms Widawska received from the sale of her home at Dover Heights.
40. On a number of occasions, such as 9 November 1992 (T11), Centrelink had written to inform Ms Widawska that she must tell Centrelink if the value of her assets went above $112,750. As a result of selling her home, there was a change in the value of the applicant’s assets in that she had cash of approximately $610,000 under her control after paying off loans, other debts and costs associated with the sale. The Tribunal is satisfied that the applicant failed to notify Centrelink of the change in the nature of her assets. Centrelink notified Ms Widawska by letter dated 20 September 1993 (T15) that she must inform them if her income exceeds $44 a week. Centrelink sent her an income review letter dated 19 November 1996 (T27) to the Dover Heights address. The letter stated that it contained questions about her income and assets to check that she was receiving the right amount of pension. It also asked whether she had changed her address and whether she owned her own home. Both her answers to the income review letter were misleading in that she did not disclose that she no longer lived at Dover Heights. Additionally and more significantly, her answers did not inform Centrelink that she was earning income on an asset valued at approximately $610,000 under her control (allowing $55,000 for payment of debts, legal expenses and other costs). The applicant, an accountant and registered tax agent, ought to have appreciated that she had to notify Centrelink of changes in the kind of assets she held and their value. The Tribunal finds that the funds under the applicant’s control, and earning interest for her through the company during 1997-98, would have decreased by approximately $110,000 when she completed her purchase of the Berrima land in July 1997.
41. The Tribunal rejects Mr Hodges’ submission that s.1118(2) excused Ms Widawska from reporting her investment of the sale proceeds. Although the sale proceeds may be disregarded in assessing entitlement to the age pension under the asset test, those proceeds are taken into account in assessing entitlement to the age pension under the income test (Re Anstis and Secretary, Department of Family and Community Services [1999] AATA 760). Accordingly, the Tribunal accepts the respondent’s submission that any overpayment of pension subsequent to the income review and relating to income in respect of the sale proceeds, was made in consequence of the knowingly false statement about her assets.. The Tribunal is satisfied that, during the 1996-97 financial year, sale proceeds of $610,000 were available for investment and some or all of the said amount was invested by the company for the applicant’s own use or benefit. During the financial year 1997-98 the Tribunal finds that the amount of $500,000 was available to her for investment and some or all of that amount was invested by the company for her own use or benefit. As the sale proceeds are a financial investment, and thus a financial asset, they are subject to deeming under s.1076 of the Act. Even if the sale proceeds are not a financial asset, the Tribunal finds that the whole of the interest of $25,405 (1995-96) and $15,972 (1997-98) is ordinary income earned on the applicant’s sale proceeds. That is, the Tribunal finds that the amounts of interest disclosed in the company’s financial statements was income that the applicant earned, received or derived for her own use or benefit (s.8).
42. The Tribunal is satisfied that certain expenses that were paid by the company are amounts of income that have been “ … earned, derived or received by the person for the person’s own use or benefit” (s.8(1)). Taken from the company’s financial statements(t50 and T55), these amounts are the rent items of $3,179 (1996-97) and $3,469 (1997-98). Ms Widawska’s evidence concerning the storage of the company’s furniture and equipment is not accepted. She used the Dover Heights house as an office and place of business at least until the time of lodging the company’s 1999 income tax return. There was no need to pay for storage of this property. The Tribunal is satisfied that the expenses relate to storage of household or other personal effects, not office equipment or furniture. The Tribunal finds that these amounts of rent expenditure are to be included in the applicant’s income for the years in question as the amounts were constructively received by the applicant and thus derived for her own use or benefit.
Vonhoff’s case
43. The facts in Vonhoff’s case, so far as presently relevant, were that a discretionary trust purchased the business of a restaurant. To finance the purchase, a bank provided a bill facility to the trustees of the trust, Mr and Mrs Vonhoff. They entered into unlimited guarantees in respect of their trustee obligations under the bill facility. The guarantees were supported by registered mortgages given by Mr and Mrs Vonhoff over certain parcels of Torrens title land. Soon after completing the purchase, it became apparent that the business was not going to be successful. Before any demand under the guarantee was made, the Vonhoffs, from their personal funds, began meeting the trust’s obligations under the bill facility.
44. Deputy President Forgie’s decision in Vonhoff noted that the term ‘loan’ is not defined in the Act and thus referred to the analysis of ‘loan’ offered in Chitty on Contracts (26th edition, 1989) which in part states (at pars 3574, 3576-7):
Definition of loan. A contact of loan of money is a contract whereby one person lends or agrees to lend a sum of money to another, in consideration of a promise express or implied to repay that sum on demand, or at a fixed or determinable future time, or conditionally upon an event which is bound to happen, with or without interest. …
Loans distinguished from other forms of debt. … at common law not every form of indebtedness amounts to a loan. …
But it must be stressed that what matters is the real legal nature of the transaction and not its economic nature, and the courts will not go behind the actual agreement made unless there is evidence that the parties did not intend the relationship between them to be governed by the ostensible agreement which they have made.
45. Deputy President Forgie then referred to these definitions in Butterworths Australian Legal Dictionary:
'Guarantee': A promise to answer for the debt, default or miscarriage of another: Bank of New South Wales v Permanent Trustee Co of New South Wales Ltd (1943) 68 CLR 1; Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245; 77 ALR 205.
'Guarantor': A surety; a person who binds himself or herself to answer for the debt, default or miscarriage of another.
46. The following definition relevant to the current matter appears in the Real Property Act 1900 (New South Wales):
Mortgage—Any charge on land (other than a covenant charge) created merely for securing the payment of a debt.
47. Deputy President Forgie concluded in Vonhoff as follows:
[56]. Once a guarantor has paid a debt secured by a guarantee, the result is not that the guarantor has lent the money to the debtor. Instead, the guarantor has met his own obligation to the creditor on the default of the debtor. The guarantor may then seek to recover from the debtor the money he or she has paid under the guarantee. There may or may not be a contractual arrangement between them or the guarantor may rely on the doctrine of subrogation to place him in the position of the creditor against the debtor.
This conclusion accords with the following statement of the law in Meagher, Gummow and Lehane’s Equity Doctrines & Remedies (Butterworths, 4th edition, 2002) “ … that subrogation is a creature of equity and does not depend upon principles of contract.” Although the authors do allow that the parties – the surety and the debtor – may vary their rights by contract: “ … whilst subrogation is not the product of an implied term, that is not to deny that parties my contract on terms which exclude or modify what would otherwise be their equitable right of subrogation”. [at 9-015]
48. It is necessary to set out a number of findings. First, the purchase of the cleaning business by the company was financed by a loan from the CBA to the company in November 1986. The Tribunal accepts that it is established commercial practice for a lender to require the directors of a private company, especially one with $2.00 paid in capital, to offer some form of security for a loan to the company. Despite there being no relevant documentary evidence and the Tribunal’s rejection of her evidence about other matters, Ms Widawska’s evidence that she secured the repayment of the loan to the company by way of a mortgage over her home at Dover Heights is accepted. The evidence of Mr Meers supports the finding. Further the Tribunal accepts Mr Hodges’ submission that the mortgage contained a guarantee. The Tribunal makes this finding on the basis that it is common commercial practice for a bank to require a director of a borrowing company to be required to act as guarantor of the company’s debts and to grant security by way of mortgage for any indebtedness arising under the guarantee. Amadio’s case is an example of a bank requiring a personal guarantee to be secured by mortgage.
49. The Tribunal accepts Ms Widaska’s evidence that she commenced to pay the bank once the cleaning business declined, and presumably defaulted under its loan from the bank, so as to protect her house from being taken by the mortgagee. Though her payments may have had the effect of keeping the company afloat, the Tribunal finds that the payments were made as a consequence of the applicant’s personal liability undertaken to secure the loan to the company.
50. The Tribunal rejects the respondent’s alternative submissions that Vonhoff’s case was wrongly decided or that its reasoning did not extend to considering the arrangements between the surety and the principal debtor. The Tribunal respectfully adopts Deputy President Forgie’s reasoning. There was no evidence of an express agreement by the company to pay the applicant. The Tribunal does not infer such an agreement merely by reason of the accounting treatment given to the discharge of the company’s liability to the bank. Thus the Tribunal concludes that, at law and in equity, Ms Widawska’s payments do not constitute a loan to the company.
51. It follows from the above that, and noting the respondent’s concession in respect of the so-called loan, Ms Widawska has not been overpaid the age pension during the period 19 November 1992 to 30 June 1995. The Tribunal agrees with the SSAT that in 1995-96 Ms Widawska received income of $2,905 from the company. She was required by a notice dated 20 September 1993 to inform Centrelink if her income went above $44 a week. She did not do so. Thus she did not comply with s.1224 of the Act that provided that an amount of pension that was overpaid due to a false statement or representation, or a failure or omission to comply with a provision of the Act, was a debt due to the Commonwealth. Centrelink must calculate the amount of the debt resulting from the overpayment. In addition, in respect of the years from 1996-97 to 5 June 2001, being the rest of the period under review, the Tribunal finds that there was an overpayment of age pension. The applicant did not comply with notices from Centrelink dated 20 September 1993, 7 February 1997, 13 May 1997 and 4 August 1997 to inform Centrelink of increases in income and financial assets. The overpayment arose in part by reason of Ms Widawska’s failure to notify Centrelink of the increase in her financial assets on receipt of the proceeds of sale of her home which she invested, through the company, during 1996-97 and 1997-98. Nor did she inform Centrelink of the amount of interest income to which she was entitled by reason of the company’s investing her money. Also contributing to the overpayment was income paid to her by the company as director’s remuneration but not fully disclosed to Centrelink. Finally the overpayment was contributed to by her failure to notify Centrelink of income amounts constructively received in the form of the company’s payment of rent for storage of her household effects and furniture being $3,179 (1996-97) and $3,469 (1997-98).
52. The debt, being the overpayment of age pension, arises from Ms Widawska’s false statements and omissions regarding her financial assets and income. There was no evidence before the Tribunal regarding waiver or write off of the debt. The Tribunal finds that the debt is not due to any administrative error on Centrelink’s part. Rather, the debt results from Ms Widawska’s acts alone. There was no evidence regarding special circumstances. The Tribunal notes that the applicant is still active in her business and has some capacity to repay the debt. The Tribunal accepts, therefore, that there is no basis for waiving or writing off the debt.
decision
53. The decision of the SSAT is set aside. In substitution the Tribunal decides that Ms Widawska has incurred a debt for overpaid age pension as follows:
(a) an amount of age pension was overpaid from 1 July 1995 to 30 June 1996 as a result of applying the ordinary income test to an amount of $2,905 received as director’s remuneration. The calculation of the amount of the debt is remitted to the respondent to be carried out in accordance with this decision.
(b) as a result of applying either the deeming provisions to financial assets, being amounts received by the applicant on the sale of her property and invested by the company for her benefit, or the ordinary income test in respect of amounts of interest received by the company ($25,405 (1996-97) and $15,972 (1997-98)) for the applicant’s benefit from investing the sale proceeds, some amounts of age pension were overpaid during 1996-97 and 1997-98. The calculation of the amount of the debt is remitted to the respondent to be carried out in accordance with this decision.
(c) as a result of applying the ordinary income test, some amounts of age pension were overpaid from 1 July 1996 to 5 June 2001 by reason of her receiving amounts of income in the form of director’s remuneration, and her earning or deriving amounts of rent paid by the company for her benefit. The calculation of the amount of the debt is remitted to the respondent to be carried out in accordance with this decision.
(d) amounts paid by Ms Widawska to the CBA from 1989 to 1991 are not loans or financial assets of the applicant and thus the amounts are not subject to the deeming of income provisions of the Act.
(e) the debt for overpaid age pension is not to be waived or written off.
I certify that the 53 preceding paragraphs are a true copy of the reasons for the decision herein of PJ Lindsay, Senior Member:
Signed: .......................................................................................
AssociateDate of Hearing 29 October 2002
Submissions received 13 November 2002 and 3 March 2003
Date of Decision 29 September 2003
Applicant’s solicitor Mr S HodgesRespondent’s representative Centrelink
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