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

[2018] AATA 776

Wills and Secretary, Department of Social Services (Social services second review) [2018] AATA 776 (6 February 2018)

Division:GENERAL DIVISION

File Numbers:         2017/4455; 2017/4456

Re:James Wills

Ursula Wills

APPLICANTS

AndSecretary, Department of Social Services

RESPONDENT

DECISION

Tribunal:Bill Stefaniak AM RFD, Senior Member

Dates:6 February 2018, 22 January 2018

Date of written reasons:        6 March 2018

Place:Sydney

For the reasons given orally at the conclusion of the hearing of this matter, the Tribunal affirms the decision of the Social Services and Child Support Division of the Administrative Appeals Tribunal dated 29 June 2017.

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

Bill Stefaniak AM RFD, Senior Member

CATCHWORDS

SOCIAL SECURITY OVERPAYMENTS – debts raised – whether debt should be waived – characterisation of income – where business run from place of residence – deductions

LEGISLATION

Social Security Act 1991 (Cth) – S 8(1)

CASES

Sekhon V Secretary, Department Of Family and Community Services [2003] 76 ALD 105

REASONS FOR DECISION

Bill Stefaniak AM RFD, Senior Member

6 March 2018

BACKGROUND

1. The decisions under review are the decision of the Social Services Support Division (the AAT1) made on 29 June 2017 which affirmed the decisions by an authorised review officer (ARO) from the respondent department made on 10 February 2017.

2. The ARO decided that the sum of $1,303.57 be waived from a debt of $4,234.30 that had originally been raised on 10 August 2016 against Mr Wills for overpayment of an aged pension (exhibit R1, T-documents, T20).  Mr Wills repaid the full amount of the original debt to the Commonwealth for the period 1 July 2014 to 30 June 2016 (the relevant period). Mr Wills was therefore reimbursed the sum of $1,303.57.

3. Mrs Wills had a debt of $5,291.38 raised against her on 10 August 2016 for overpayment of Newstart  Allowance for the period of 1 July 2014 to 30 June 2016 (the relevant period). Mrs Wills repaid the debt in full. Following the ARO decision, Mrs Wills was reimbursed $1,564.31 as the ARO decided to waive recovery of $1,564.31 from the original debt (exhibit R1, T-documents, T20 at p. 346). The debts related to Mr and Mrs Wills not declaring income from a family day care business they conducted in partnership together from their home. 

4. This tribunal must decide whether monies received by the applicants from their business during the relevant period should be characterised as ordinary income according to the definition contained in s 8(1) of the Social Security Act 1991 (Cth).

5. Secondly this tribunal must determine whether the gross and net amounts received during  the relevant period should be counted for the purposes of calculating Mr Wills’ pension and Mrs Wills’ Newstart Allowance

6. The final issue for determination is whether particular expenses claimed by the Applicants as offsets against an income from the business during the relevant period can be claimed as deductions. Examples of the deductions claimed include rent payable for part of the house, which had sometimes been described as repaying the interest on the loan taken out by the Applicants’ daughter; the whole or part of the house and contents insurance premium for the home; and the whole or part of loan interest liabilities in connection with a mortgage over the home. It should be noted that Mr and Mrs Wills paid the insurance premiums and the daughter paid the actual rates. This equated to an approximate 50/50 split of those liabilities.

7. The Respondent also wanted this tribunal to look at whether the amounts of $1,303.57 and $1,564.31, which were waived by the ARO, should, in fact, have been waived.  They were waived on the grounds of sole administrative error.

8. All parties accepted that the actual calculations done by the Respondent were correct.

9. Mr Wills is entitled to the aged pension and was so entitled during the relevant period.  Mrs Wills was receiving Newstart Allowance and a combination of the income from the business.

10. In 2012 Mrs Wills and her daughter purchased the home in which the Applicants lived and ran their family day care business.   Mrs Wills and her daughter purchased the home as joint tenants.

11. The Applicants appear to have contributed less to the purchase price of the property than their daughter.  They contributed either $150,000 or $170,000; it was not exactly clear but was certainly a bit less than 50% of the purchase price. Their daughter contributed the rest, which was $200,000 loaned to her by the bank and secured by a mortgage in her name.  The mortgage continued during the relevant period.

    EVIDENCE

12. Mr Wills gave evidence that he and his wife just wanted a loan on the business, but the bank would not give them one, and that is why their daughter came into the picture. Mrs Wills was the educator. She held the relevant qualifications and was the principal of the business. Mr Wills was the employee.  The business ran from their home and Mrs Wills was on the title. The bank loan was to the daughter and she was on the title accordingly.

13. Mr Wills also indicated that the joint tenancy was a convenient arrangement in terms of estate planning because he and his wife wanted their daughter to get the home when they passed on. As a joint tenant, of course, she automatically inherits it.  

14. The other part of the equation was that the business operated from home. The Applicants said this meant effectively 50% of the time most of the home was being used for the family day care business. For the other 50% of the time the home was the Applicants’ private residence.

15. There were issues in relation to exactly how many hours a week were spent on the business. Certain documentation indicated that Mrs Wills was devoting over 40 hours and Mr Wills 42 hours for the business.  Mr Wills gave further evidence that the business operated for 64 hours a week. Furthermore  when one  took into account the running around  involved in  stores and items needed  for the business and doing the necessary paper work involved, that would equate to about another 20 hours per week. In other words 50% of a full week (24 hours per day, times 7 days equals 168 hours divided by 2 equals 84 hours).

16. Profit and loss statements were presented to the respondent and they disclosed a number of expenses. One deduction claimed was 25% of Home and Contents Insurance (as the business only operated 50 per cent of the time from the home) and rent/interest repayments were claimed as rent at the rate of $200 per week which happened to equate to the repayments the daughter had to make on her mortgage to the bank.  (Interestingly, she would then pay that back- give or take a few dollars a week- for her children to attend the centre. There were no issues raised in relation to that.) The Applicants’ daughter would pay the rates which were similar in dollar terms to the insurance premiums.

17. The issue for determination was whether the gross income, and permissible business deductions in respect of the business have been correctly taken into account in the relevant period. Depending on the determination of that issue, whether debts were correctly raised against the Applicants for overpayment of the Aged Pension and Newstart Allowance. If the debts were correctly raised, should those debts be partially waived or recovered in full.

18. The ARO made a number of findings and gave some reasons for their decision. The ARO notes  (Between  6 July 2014 to 30 June 2016 the respondent department had sent letters to the Applicants about their respective pensions advising them to tell the department within 14 days if they had any changes to their own individual income or partner’s income.  The department was provided with profit and loss statements for the day care educator business which the department used that information to calculate the rate of aged pension and Newstart Allowance for the relevant period.  It took into account, the tax returns for the business for the 2014/15 and 2015/16 tax years and educator payment history reports that were provided by the business covering the periods 8 June 2014 to 2016.

19. It then found that the Applicants were overpaid their respective benefits in the sum of $5,291.38 for Mrs Wills and $4,234.40 for Mr Wills.  The Applicants asked for a review of that decision which was conducted and confirmed by the ARO. 

20. The ARO decided however that the respondent department would waive recovery of a portion of each debt raised-namely, so much of those two debts that related to the period 1 July 2014 to 30 June 2015.  

21. The department also decided, and the ARO concurred, that the mortgage payments made by the Applicants’ daughter were not a deductible expense and the Respondent would continue to assess the business income on that basis for the purpose of calculating the fortnightly rate.

22. The ARO went on to say that in the profit and loss statements during those two financial years “the rent or mortgage you and your partner referred to in these statements was the mortgage that was in the name of your daughter” (exhibit R1 T-documents, T20 at p. 343).  The ARO noted the address of the home was also the place from where the business operated and that the Applicant’s daughter did not reside there or have a role in the operation of the business. 

23. Of particular note are the ARO’s comments on the implication of purchasing a property for the purpose of a business (exhibit R1 T-documents, T20 at p. 343):

    “Section 51 of the Income Tax Assessment Act 1936 says where a taxpayer has incurred expenditure in borrowing money to finance the acquisition of property for a business, then this expense is an allowable deduction for the purposes of assessing the net income from the business. The mortgage is in your daughter’s name and this is formally your daughter’s expense.

    This means you and your partner have decided to use the income that you both earn from your business to pay for an expense that is in your daughter’s name.  As such, the department cannot accept that the payments that you and your partner paid for your daughter’s mortgage were deductible expenses for you and your partner’s business… 

    …the information provided by you and your partner’s Educator Payment History Reports shows that you and your partner did not advise the department about all of the income your business earned during the period 1 July 2014 to 30 June 2016.”

24. The ARO found the department’s calculation of the debt included an assessment of the expenses of running a business and agreed with the decision to raise the aged pension debt for Mr Wills and the Newstart allowance debt for Mrs Wills.

25. The ARO indicated that the department was required by law to recover a debt that has been raised in someone’s name but it can waive recovery of the debt if the circumstances of the debt meet certain criteria.  The ARO indicated that the department could waive recovery of a debt on the basis that an error made by the department was the sole cause of the debt and the ARO went on to say (exhibit R1 T-documents, T20 at p. 344):

    “I found the portion of your debt relevant to period 1 July 2014 to 30 June 2015 was caused solely by the department’s error to accept your daughter’s mortgage payments as a deductible expense for you and your partner’s business.  The department has calculated that this error resulted in the overpayment of the Aged Pension to the amount of $1,303.57 during this period. I accept that you received this amount of your debt in good faith” 

26. That relates to Mr Wills.  He went on to say:

    “The department will now waive recovery of $1,303.57 of your debt under section 1237A of the Social Security Act 1991.”

27. The ARO made an identical finding in relation to Mrs Wills except in her case the sum was $1,534.38.  The ARO said:

    “On 17 June 2015, the department sent you a letter advising you that your daughter’s mortgage payments were not allowable deductable expenses for you and your partner’s business. You and your partner still listed these mortgage payments as business expenses in the profit and loss statement you and your partner lodged with the department after 17 June 2015. The department should not have allowed this business expense as a deductible expense when calculating the rate of your Newstart Allowance after 17 June 2015. However, you and your partner contributed to the overpayment of your Newstart Allowance after this date by including these expenses in your Profit and Loss statement when the department clearly advised you and your partner that this expense was not an allowable business deduction. As such, you and your partner contributed to the overpayment of your Newstart Allowance after 17 June 2016. For this reason, the department is unable to waive recovery of the portion of your debt relevant to the period 1 July 2015 to 30 June 2014[sic] under section 1237A of the Social Security Act.”

28. It was noted at the hearing that Mr and Mrs Wills have in fact repaid the entire debt as the result of the ARO decision and the AAT1 decision. It was also indicated to the Tribunal that they have also received the waived portion back as well.

29. If I found the ARO and the AAT1 were correct, nothing would happen. The Applicants have already been refunded their portion and they have already paid the actual debt as ascertained by the review officer and accepted by the AAT1.

30. Should I accept the respondent’s argument, then that repayment made to the Applicants would have to be repaid to the Respondent. The AAT1, looking at this matter, considered the issues, took into account what the applicants said and then decided (exhibit R1 T-documents, T2 at p. 18 [34]-[36]):

    34. The tribunal ascertained that [the applicant’s daughter] has no interest in the business partnership other than that her two children attend family day care for four days per week (rotated with pre-school attendance). Given that interest repayments are on a mortgage in the name of a third person not connected with the business the tribunal concluded that they could not legitimately be claimed as deductions against business income for social security purposes. 

    35. In relation to Mr Wills’ argument that 50 % of mortgage payments could be claimed as rent because home ownership is divisible (that is, 50% of the property is owned by [the applicant’s daughter] and 50% is owned by Mrs Ursula Wills) this is not supported by the way in which the property title is held.  Joint tenants (as in the case at hand) have an equal interest in the whole of the property unlike tenants in common who have distinct shares in the property.

    36.Given the way in which the tenancy is held the tribunal does not accept Mr Wills’ argument that Ms Wills is both a renter and an owner and therefore the FDC business should be able to claim rental deductions as an allowable expense. The tribunal does not accept this claim that should rental deductions not be allowed then 50% of overhead expenses (such as insurance and rates should be allowed as an offset).  Under social security policy to which the tribunal is to have regard (in the absence of compelling reasons not to) a percentage of insurance and rates can only be claimed in respect of a specific portion of the house that is set aside exclusively for family day care purposes. That is, it is an exclusive purpose use that determines the percentage of overhead expenses that can be claimed.  In the tribunal’s view the formalisation of day care for grandchildren into a business activity necessarily results in some blurring of domestic/private and commercial arrangements and in the current circumstances the tribunal was unable to find that the percentage of expenses claimed for overhead costs should be increased beyond that which Mr Wills originally claimed in profit and loss statements and income tax returns lodged with the Australian Taxation Office (ATO).  In this respect the tribunal observes that the expenses that Mr and Mrs Wills have been able to successfully claim from the ATO do not necessarily reflect expenses allowed by Centrelink. 

31. And then it goes on to talk about bad debts written off against income.  It looked at the question of should recovery of debts be waived and at paragraph 43 said:

    “Social Security law assumes that debts will be repaid because taxpayer funds that have been incorrectly paid should generally be recovered.  There are, however, some provisions under the law that allow debts to be written off or waived.  When a debt is written off, it means that an administrative decision has been made either to temporarily or permanently refrain from undertaking recovery action for the money owed.  This does not mean that the debt is extinguished because enforcement proceedings may be instituted at a later stage. The write off provisions are contained in section 1236 of the Act and the tribunal finds that the statutory requirements are not met in this case: the debts are recoverable at law, there is capacity to repay (in fact they have been repaid), the whereabouts of the debtors are known and it is considered cost effective for the Commonwealth to recover debts of this size. They therefore cannot be written off.”

32. The Tribunal dealt with sole administrative error and said:

    “Section 1237A of the Act makes in mandatory to waive recovery of a debt (or part of a debt) that arises solely from an administrative error if the debtor/s received the money in good faith, that is, they honestly believed that they were entitled to the money that they received. 

    The requirement that the debt be due solely to an administrative error means that the only cause that objectively can be ascribed to the relevant debt is an administrative error.  The law about sole error is very strict. Contributory actions of a debtor (even if minor) can prevent such a finding. 

    In the matters at hand the authorised review officer found that the portion of debts relevant to the period 1 July 2014 to 30 June 2015 ($1,303.57 in Mr Wills’ case and $1,564.31 in Mrs Wills’ case) was caused solely by Centrelink error in accepting Mr Wills’ daughter’s mortgage payments as a deductible expense against their business income and applied the mandatory waiver provision.  However, following the written advice by Centrelink, dated 17 June 2015, sole administrative error no longer applied and recovery of the portion of the debts relevant to the period 1 July 2015 to 30 June 2016($2,930.83 in Mr Wills’ case and $3,727.07 in Mrs Wills’ case) could not be waived under this provision of this Act.” 

33. Mr Wills argued both at the AAT1 and also before this Tribunal that he and his wife did not contribute to the overpayments following Centrelink’s advice.  They continued to receive their respective payments in good faith. They put in their application and Centrelink actually accepted that, so they thought that having raised the matter in late June 2015 with Centrelink after receiving the notification from Centrelink dated 17 June 2015, that Centrelink must have accepted that it, perhaps, had made an error, because Centrelink continued to make these deductions.

34. Mr Wills made a submission to Centrelink dated 26 June 2015 requesting a review of the disallowed rent payments in the light of Centrelink’s decision as to home ownership.  He queried that if the payments were reclassified as interest payments, would deductions then be allowed?  Centrelink did not respond.  In fact, Centrelink increased the respective income support payments in October 2015 following the provision of a 31 July 2015 profit and loss statement. That statement reclassified the rent expenses as interest expenses.

35. Mr Wills logically assumed that Centrelink had accepted his submission and that is why he did not think anything further of it.

36. The  AAT1 said:

    “whilst Centrelink’s failure to respond in timely fashion to Mr Wills’ submission may have contributed to his belief that Centrelink had accepted his argument the debt was not due solely (meaning only or to the exclusion of all else) to administrative error from 1 July 2015. The test as set out by the Federal Court in Sekhon v Secretary, Department of Family and Community Services (2003) 76 ALD 105 states that the error must be the only cause that can objectively be ascribed to the relevant overpayment/s.  This means that there can be no waiver of recovery of the remaining portions of the debts under this provision.”

1. The AAT1 correctly stated that the error of the department has to be the sole cause for the overpayment. It said in this case, because as at 17 June 2015, Centrelink advised the Applicants of the problem that after that time and because of that notification, even if Centrelink continued to make deductions and, indeed in this case actually, increased the amount of money it paid to the applicants, it was the mere fact of that notification that made the situation one where it was not just Centrelink who made the error. It was not the only cause, and that, effectively, meant for the second year, financial year 2015/16, that the debt could not be waived.

2. The question of special circumstances was also looked at.  Mr Wills felt that Centrelink had accepted his submission on classification of the rent payments and they have now changed the rules. He said it is very difficult getting accurate information out of Centrelink and that he had, at times, even been told incorrect information.

3. He also felt that it was possible to be both a renter and a homeowner but the legislation only catered for one or the other and he thought the whole situation was quite unfair, particularly as Centrelink had effectively led him up the garden path and continued to pay him and his wife and even increased their payments.

4. The Tribunal concluded there were not special circumstances that warranted a waiver and that the principle that taxpayers are ordinarily entitled to expect debts would be recovered and it would be very unusual to direct Centrelink to repay moneys to a person with no entitlement in the first place

5. I must say that it certainly is normal practice that, if money had been proven to be paid incorrectly, and despite the logic in Mr Wills and Mrs Wills argument, that clearly has been the case here, one would normally expect that that money would be repaid. There is a very strong principle that if an error has been made, and an overpayment has been made unwittingly for whatever reason, there is an expectation that it will be repaid, unless, it is solely attributable to the department and there is no way in the world the Applicants could have anticipated that the money they were getting was money that they were not actually entitled to.

6. The ARO and AAT1 clearly found that that was the case for one year, but not the second year, because the error had been pointed out, even though perhaps inexplicably, perhaps through some confusion in the department, Centrelink did not actually action that. It was perfectly understandable then, for Mr and Mrs Wills to believe that their representations in late June 2015 had actually been accepted, even though there was no notification that had occurred.

7. I think that is quite a reasonable expectation on the Applicants’ part but, unfortunately for them the Respondent’s notification of 17 June 2015 meant that the debt was solely attributable to Centrelink error. Had Centrelink formally responded to their submissions of 26 June 2015 in a way that could be construed as accepting their arguments, then it would be a different story. But Centrelink was silent on the issue.

8. Centrelink should have formally responded as its silence and continued payments, plus the increased payments from October 2015 as a result of the 31 July 2015 profit and loss statement, could logically lead (as it did) the Applicants into believing that somehow their representations had apparently been successful. However, it didn’t and for another year overpayments were made until Centrelink finally got its act together.

9. It may well have been prudent for the Applicants to chase up Centrelink for a formal response to their June submissions after a few weeks had passed without word – that would have settled the issue one way or the other then and there. That did not occur, but it is logical in my view as to why it did not occur because of the facts as stated above. 

10. Unfortunately for the Applicants the test is a very high one. Despite Centrelink by its omissions and actions after June 2015 largely and significantly contributing to the overpayments, its actions and omissions were not the sole cause.

11. Accordingly, I would agree with the reasoning given by the ARO and the AAT1 on this point.

12. I also agree with the reasoning of the ARO and the AAT1 in terms of the financial year 2014/2015. I think both the ARO and the AAT1 are quite correct in saying that that is a debt solely attributable to error by the department.

13. There is an inherent logic, I think, in the way the Applicants have gone about their arrangements.  Where they have come to grief is the fact that their daughter is not part of the business and she is on the title and it is a joint tenancy.  Had it been a tenancy in common, I think the situation may well be different.

14. The Tribunal notes that at the hearing on 22 January 2018 it was discussed and accepted that the rules in relation to income tax deductions, and deductions for Social Security purposes, are, not necessarily the same. It is quite possible that the ATO would allow certain deductions, sought by the Applicants whereas there would be a problem in relation to the Centrelink making those same deductions in relation to the aged pension and the Newstart Allowance.  Different rules for different Government agencies.

15. I also accept it is very difficult to actually say exactly what amount of time and what proportion of the building is spent in the day care service.  The map of the day care service, accepted into evidence by the Tribunal was a very good diagram of just what was used by the business.  It indicates between 80% to 90% of the building and adjoining area was used for day care when the children were there.  The main bedroom has been excluded but all the other areas of the house are basically open except for one adjoining area which was deemed to be a bit dangerous for young children.

16. As indicated earlier there was also evidence before the Tribunal indicating the amount of time the Applicants spend each week in running the business is anything from about 40 to 42 hours per week up to, potentially, 84 hours a week.

17. The above evidence tends to back up the Applicants argument that approximately 50% of their time is spent on the business and one can also say that effectively nearly all their house is used when they are running their business. I do not see any need for me to change anything in relation to those portions at this point in time.

18. I do not accept the Respondent’s contention that I should remit this to the department for further reconsideration There is not a whole lot of evidence to back up the Respondent’s view that as little as 17.5% instead of 50% should be allowed for home expenses.  On the available evidence at this stage, that is certainly something that I would not be satisfied on.  There is ample evidence to indicate that, effectively, most of the home is used in the day care business which can be said to take up 50% of the week (on the basis of what Mr Wills said).

19. This Tribunal would need a lot more information than it has before it to agree that this matter needs to be reconsidered by the department and I am not prepared to make any changes at this point in time. Accordingly, I am not prepared to remit anything for recalculation of the debt.

20. This Tribunal is satisfied that the correct decision, and certainly the preferable decision, is the one made by the AAT1 and the ARO. As a result, no further action needs to be undertaken by either party.

21. Finally the Tribunal notes that in the course of the hearing the Respondent’s representative made some helpful suggestions in how the Applicants can seek a deduction for the “rent/ interest payments they pay by doing a number of things that can effectively overcome some of the problems associated with the joint tenancy issue”.

22. The Tribunal commends these ideas to the parties for further exploration, discussion and action.

23. The formal decision of this tribunal is that the decision of the AAT1 is affirmed.

I certify that the preceding 59 (fifty nine) paragraphs are a true copy of the reasons for the decision herein of Bill Stefaniak AM RFD, Senior Member

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Associate

Dated: 6 March 2018

Dates of hearing:	22 January 2018;  6 February 2018
Applicant:	In person
Solicitor for the Respondent:	Dr S Thompson, Department of Human Services