ZJNQ and SECRETARY, DEPARTMENT OF FAMILIES, HOUSING, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS

[2011] AATA 362

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 362

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No   2010/5145

GENERAL ADMINISTRATIVE DIVISION		)
Re		ZJNQ

Applicant

And SECRETARY, DEPARTMENT OF FAMILIES, HOUSING, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS

Respondent

DECISION

Tribunal M J Carstairs, Senior Member

Date30 May 2011

PlaceBrisbane

Decision The Tribunal affirms the decision under review.

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

Senior Member 

SOCIAL SECURITY – age pension – disposal of assets – decision under review affirmed

Social Security Act 1991 (Cth), ss 1122, 1123, 1124

Re Boyd and Secretary Department of Social Security (1994) 36 ALD 331

Wings and Secretary, Department of Education, Employment and Workplace Relations [2009] AATA 322

REASONS FOR DECISION

30 May 2011 M J Carstairs, Senior Member

1.      ZJNQ is an aged pensioner who in 2001 made an arrangement with her son, under which she allowed him to use her share portfolio as security to operate a margin loan account, trading in shares in Centro Group.  In 2007, Centro shares plummeted and margin loans were called in by Leveraged Equities, through which the son was trading.  ZJNQ’s shares were sold. 

THE ISSUES

2.      The essential question to be addressed is what consequences follow under the Social Security Act 1991 (Cth) (“the Act”) in such circumstances? The applicant says that the value of the shares having been lost through no fault of her own, she should be entitled to resume her age pension. She says her son cannot repay her; he has a mortgage to service and a family to raise. The respondent says, on the other hand, that the Act contemplates that where people part with their assets, without receiving consideration, they cannot then simply turn to the public purse as if nothing had happened, at least not for a period of 5 years, during which assets lost are still held in the assessment of their rate of pension although at a progressively reducing rate over the 5 year period.

3. Sadly for the family, but correctly for the wider issues that underpin the outcome here, I am satisfied the respondent is right. Harsh as it may seem, when mother and son did not foresee the outcome that could follow, the outcome flows from what is provided for under the legislation, in particular at ss 1123 and 1124 of the Act.

THE LEGISLATION

4. Under the Act, a person's rate of pension is calculated taking into account the value of the person’s income and assets. The applicant’s assets prior to the disposal included the applicant’s share portfolio. When the applicant loaned the shares to her son, the Act nevertheless required that their value be taken into account. Loans under the Act are taken at their face value, and the Act provides that the value of a loan is the amount unpaid on it. The shares were valued at their then current value, which was ascertainable at the time of sale and not contested.

5.      For a 5 year period, but no longer, the value of assets, lost, destroyed or diminished will continue to be taken into account in assessing the rate of pension.  It is as if they continue in existence.   The applicant’s 5 year period ends in 2012.

6. The operation of these provisions is readily seen in the wording of ss 1123 and 1124 of the Act:

Section 1123:

For the purposes of this Act, a person disposes of assets of the person if:

(a) the person engages in a course of conduct that directly or indirectly:

(i) destroys all or some of the person's assets; or
(ii) disposes of all or some of the person's assets; or
(iii) diminishes the value of all or some of the person's assets; and

(b) one of the following subparagraphs is satisfied:

(i) the person receives no consideration in money or money's worth for the destruction, disposal or diminution …

Section 1124:

If a person disposes of assets the amount of the disposal or disposition is:

(a) if the person receives no consideration for the destruction, disposal or diminution–an amount equal to:

(i) the value of the assets that are destroyed; or
(ii) the value of the assets that are disposed of; or

(iii) the amount of the diminution in the value of the assets whose value is diminished….

7.      After the collapse of Centro, Centrelink treated the loan as ceasing to exist, from about December 2007.  The applicant was taken as having forgiven the loan because her son said he was not in a position to repay. 

8.      The son’s accountants in 2009 confirmed that the applicant’s shares had been used as collateral for the borrowings, but the accountant suggested that as there were no clear terms and conditions negotiated for this merely family agreement.  The legal status of the debt was not determinable.  Without a formal agreement, in the accountant’s submission, it was not clear that any legal relationship was intended.  According to “current accounting standards”, and in view of the son’s inability to repay, the whole loan had no asset value.[1] 

[1]        Document T17 at p104

9.      The son appeared at the hearing, assisting the applicant, and submitted that properly understood there was no loan, because the legal relationship had remained directly that between the applicant and Leveraged Equities, with the applicant being a guarantor but not a lender, with respect to him.   He submitted that as guarantor she had sustained a “commercial loss”. [2]

[2]        Exhibit A1

10.     Ms Michelle Brazier who appeared for the respondent ably set out the relevant law in her submissions at paragraphs 4.12 and 4.13:

4.12 The Secretary accepts that while the terms of the agreement between ZJNQ and her son were not in writing and generally, close family members do not intend to create legal relations (Jones v Padavatton [1969] 2 All ER 616 [sic]), ZJNQ has advised and the Secretary accepts that she became a guarantor for the loan.

4.13 Instruction 4.6.5.60 of the Guide provides that a person does not dispose of assets by becoming a guarantor. Further, if the guarantor becomes liable to repay a loan, deprivation rules apply to the amount repaid. The only exception to this is where a customer takes legal action against the borrower to recover the money, in which case the amount recoverable becomes a debt and therefore an asset as defined in the Act …

11. The point here is that whether what happened is characterised as a loan or as a guarantee, deprivation rules in ss 1123 and 1124 come into play. The Tribunal’s decision in Wings and Secretary, Department of Education, Employment and Workplace Relations [2009] AATA 322, is a case on point, not dissimilar to the facts here, although involving an advance of money rather than shares. In Wings, the parents loaned money to the son in his venture of opening a restaurant, which ran at a loss until it closed after 6 months, leaving a trail of unsecured creditors. The original understanding in the family, in the absence of any documentation, was that the parents would be repaid when the venture was up and running.

12.      Of these circumstances, Deputy President McDonald said (at para 11):

Although lacking the formality which may be expected in the case of an arm’s length transaction the advance is correctly characterised as a loan under the definition of ‘financial investment’. As at August 2007 there is no suggestion that the son would be unable to repay the amount … [I]t is not open to argue that as at August 2007 the sums advanced had transformed from a loan to an unrecoverable debt. It is no force to the applicants’ submissions that the advance cannot be regarded as a loan because there was no fixed term or because no interest was payable. A loan without a specific term being nominated is generally regarded as a loan payable on demand. As is made clear in Unicomb v Secretary, Department of Social Security s 1122 does not require a person to make a net advantage from the transaction for it to be classified as a loan …

The Deputy President observed however, that even if that was not the case, s 1123 of the Act applied.

13.     In the documents before me, Centrelink officers have observed that the son, working in Sydney, paying off a house in Sydney, schooling his children at private schools is not bankrupt and ought to repay the applicant.    Understandably, the applicant does not want to pursue the matter against her son.  Those family feelings are understandable, but cannot prevail over maintaining the integrity of the social security system.

14.     This is what determines where responsibility must lie.  The intention of the legislation is that pensioners and social security recipients generally must deploy their resources to support themselves.  If there were not these stringent rules, and there were no consequences for ill-thought out actions as occurred here, it is easy to conceive of an unsustainable burden on the use of public monies. 

15. There is provision in the Act for “financial hardship”. “Unrealisable assets” are given recognition under the Act in other circumstances, but not here. These forms of relief are not available where a person has disposed of assets. This is the effect of the decision in Re Boyd and Secretary Department of Social Security (1994) 36 ALD 331. There is no discretionary provision that relieves of the requirement to serve out the 5 year period imposed.

16.     I am satisfied that the legislation has been correctly applied in this case and accordingly, I affirm Centrelink’s decision.

I certify that the 16 preceding paragraphs are a true copy of the reasons for the decision herein of M J Carstairs, Senior Member.

Signed:         ....................................[sgd]............................................
  Dominique Mayo, Associate

Date of Hearing  10 May 2011
Date of Decision  30 May 2011
Solicitor for the Applicant          Self-represented
Solicitor for the Respondent     Ms M Brazier – Centrelink Advocacy Branch