Thode v Chief Executive of the Ministry of Social Development
[2015] NZHC 521
•19 March 2015
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV 2014-485-11150 [2015] NZHC 521
BETWEEN ROBERT THODE
Appellant
AND
THE CHIEF EXECUTIVE OF THE MINISTRY OF SOCIAL DEVELOPMENT
Respondent
Hearing: 25 February 2015 Counsel:
C J Griggs for Appellant
N E Bailey for RespondentJudgment:
19 March 2015
JUDGMENT OF BROWN J
[1] The appellant is a kiwifruit orchardist who works on an orchard owned by the Robert Thode Family Trust (the Trust) at Papamoa. That orchard was affected by the bacterial disease PSA in or about early 2011. Subsequently in 2012 to 2013 the orchard was hit by a severe drought.
[2] In November 2012 the Trust’s banker, ANZ Bank, agreed to extend the Trust’s overdraft by $200,000 which is roughly half the accommodation the Trust had sought. The Trust found itself in a perilous financial situation since the amount advanced was not sufficient to cover living expenses and the sound operation of the orchard.
[3] On 5 December 2012 the Minister for Social Development declared an adverse event as a result of which kiwifruit farmers in the North Island became
eligible to make an application under cl 18 of the Special Needs Grants Programme
THODE v THE MINISTRY OF SOCIAL DEVELOPMENT [2015] NZHC 521 [19 March 2015]
(the Programme). The appellant’s first application for a grant was successful. However his second application on 11 January 2013 was declined.
[4] The grounds advanced for declining his application were that he had not demonstrated to the satisfaction of the Ministry that the orchard was not producing sufficient income to meet essential living expenses. The Ministry’s financial analyst had estimated the appellant’s annual income including salary from the Trust, Family Tax Credit, Child Support, drawings from the Trust and payment of certain private expenses by the Trust to be $50,372.
[5] On the appellant’s application for a review of that decision the Ministry’s decision was upheld by the Benefits Review Committee. The appellant then appealed to the Social Security Appeal Authority (the Authority).
[6] In its decision dated 30 April 2014 the Authority concluded that drawings from a mainline credit facility provided by a registered bank and secured against a capital asset constitute income for the purposes of determining the financial criteria for a grant.
[7] The Authority filed a case stated pursuant to s 12Q of the Social Security Act 1964 (the Act) posing three questions of law for the opinion of this Court, namely:
(a) Did the Authority err in law in finding that the appellant’s drawings from the Trust were income for the purposes of the Programme in circumstances where the drawings were derived from money borrowed by the Trust?
(b)Did the Authority err in law in directing the Chief Executive to include the appellant’s Child Support payments in calculating the appellant’s income?
(c) Did the Authority err in law in directing the Chief Executive to
include the Family Tax Credits in calculating the appellant’s income?
[8] So far as the second question is concerned, the appellant accepts that any Child Support payments which he received were not paid to him under s 142 of the Child Support Act 1991. It follows that such payments cannot benefit from the relevant exemptions provided for in the definition of income in s 3(1) of the Act. Consequently the appellant concedes that the Authority did not err in law in directing the respondent to include the appellant’s Child Support payments in calculating his income.
[9] With reference to the third question of law, the respondent accepts that the Authority erred in law in directing the chief executive to include the Family Tax Credits in the appellant’s income. The definition of income at s 3(1) of the Act explicitly lists at para (f) payments that are excluded from “income”: this includes Family Tax Credits at s 3(1)(f)(xviii).
[10] I agree that the parties’ concessions on the second and third questions are appropriately made. Consequently question one is the sole issue remaining for determination.
The Authority’s decision
[11] The Authority commenced its consideration of this question by defining the issue to be “whether drawings from borrowed money should be treated as income”. After referring to the definitions of “income” and “income-related purpose” in s 3 of the Act the Authority reasoned as follows:
[30] Drawings from a business such as a “Primary Industry” may be funded by actual cash surpluses but they are also commonly sourced from overdraft facilities operated by the business to ensure an even cash flow. Whether the drawings are funded from credit in the business accounts at the time the drawings are made or from an overdraft facility secured against the capital will usually be irrelevant. The drawings will constitute income in the hands of the recipient for the purposes of the Social Security Act 1964.
[31] The Authority has also previously found that the drawings may be seen as drawing down on unrealised capital. When such drawings are then used for income related purposes they constituted income for the purposes of the Social Security Act 1964. The definition of income in s 3 specifically includes periodic payments of capital.
[32] In this case the appellant was able to continue to draw money for food, power, vehicle expenses and other living costs from the overdraft
facilities provided to the Trust by its bank. Such drawings will generally constitute income for the purposes of assessing entitlement to a Special Needs Grant or other benefits payable pursuant to the social security legislation. The question that arises is to what extent a farmer or orchardist whose financial resources are already stretched by an adverse event should be expected to draw down on credit facilities before becoming eligible for a Special Needs Grant.
[33] The programme itself provides little direct guidance on this issue. The question to be asked is whether by making provision for farmers in the Special Needs Grant Programme is the Government’s objective to assist the Primary Industries affected by an adverse event to remain viable or is it simply to ensure that the orchardists or those engaged in the Primary Industries are able to meet their basic living costs in relation to food, housing, power and telephone.
[34] There is no doubt that there are differences between Part 6 of the programme and other parts of the programme which are more likely to be utilised by beneficiaries and person on low incomes with little or no assets. Nevertheless it is unlikely that it is intended that a farmer could for example draw $40,000 or $50,000 per annum from overdraft facilities secured against the Primary Industry for living costs and still be eligible for a non-recoverable Special Needs Grant of the type provided for in Clause 18 of the programme.
[35] The Authority has always considered that drawings whether from cash reserves or overdraft facilities constitute income. It would be inconsistent for the Authority to find that drawings from secured overdraft facilities constitute income in some circumstances and not in others.
[36] In this particular case the Trust was able to raise a further overdraft facility of $200,000 from its usual bank in November 2012. This suggests that the bank was satisfied that the business could produce sufficient income to meet the ongoing cost of the facility, and that there was sufficient equity in the Primary Industry to secure the loan.
[37] We consider that the owner of a Primary Industry or a person whose income is derived from it, which is not producing sufficient income to meet essential living expenses, would have exhausted their ability to raise funds from their usual bankers and therefore would have no ability to meet their living expenses from drawings. We agree with the submission made on behalf of the Chief Executive that there would be no expectation that a farmer or orchardist borrow from credit cards or finance companies to meet their living expenses. But if the person is able to draw on money borrowed from the Primary Industry’s usual bank or a similar bank, then that is a financial resource which needs to be taken into account in assessing entitlement to benefit. In summary we are satisfied that drawings from a mainline credit facility provided by a registered bank and secured against a capital asset, including the Primary Industry constitute income for the purposes of determining the financial criteria for a grant, or the amount of a grant.
The parties’ contentions
[12] Both parties contend that the Authority erred in its conclusion but the bases of their objections are quite different. The appellant contends that the Authority should have found that the payments received by the appellant were in the nature of a loan and hence not income. The respondent argues that the Authority conflated the Trust and the appellant and hence failed to consider the nature of the payments made by the Trust to the appellant.
Appellant’s case
[13] Mr Griggs submitted that the issue turns on the interpretation of the definition of “income” in s 3(1) of the Act and in the Programme itself. The section was to be interpreted in a purposive manner pursuant to s 5 of the Interpretation Act 1999 as explained by the Supreme Court in Commerce Commission v Fonterra Co-Operative Group Ltd.1
[14] Noting that cl 18.6 of the Programme states that the object of Part 6 is “to provide financial assistance for farmers”, he submitted that the Authority had failed to answer directly the important question which it framed in para 33 of its decision. Arguing that the Authority had implicitly adopted the view that the financial assistance provided by the Programme was simply to enable basic living costs to be met, the appellant submitted that the Court should adopt the interpretation which is best calculated to achieve the object of the Programme, namely to allow farmers to meet their living costs while remaining viable as businesses. It was said that requiring the appellant to dissipate his equity in the orchard business by taking on unsustainable levels of debt to finance day-to-day living costs was scarcely
consistent with that purpose.
1 Commerce Commission v Fonterra Co-Operative Group Ltd [2007] NZSC 36, [2007] 3
NZLR 767 at 776.
[15] At the hearing the appellant abandoned the first limb of his argument, namely that the appellant and the Trust could be viewed as the one entity in reliance on s 74(1)(d) of the Act. However he pressed the alternative argument that, in looking at the transfer as two separate transactions, the key transaction was the second (downstream) payment. On that issue it was submitted that the case was on all fours
with Director-General of Social Security v K & M.2
[16] That case concerned a married couple with three dependent children who were granted a disability allowance. Subsequently the wife commenced a full time course of study at the local university and received both a student allowance and a student loan, the latter comprising an amount for living costs. The disability allowances were cancelled on account of what was said to be the increase to the couple’s income in the form of the student allowance and the student loan. In dismissing an appeal against the Authority’s decision holding that the disability allowances should not have been cancelled, Heron J distinguished McElroy v Director-General of Social Welfare where the Family Court held that money, credit and services advanced to a farmer by the farmer’s bank and stock agents amount to
income under s 3(1).3
[17] In Heron J’s view the critical feature of McElroy’s case was the use of capital in a manner that is generally served by income. He said:4
That fact situation is distinguishable from the present. Here no recourse to her own capital is being made by the respondent. She is simply receiving an advance to be repaid. There is no question of capital being dissipated or reduced in return for advances made. Furthermore the current account run by the farmer with the bank or stock and station agent was being periodically affected by proceeds of farming including the sale of capital assets. In a sense the funds made available in that case may be truly seen as liquidation of capital items by virtue of and against the security held. The moneys advanced, if not otherwise repaid, would be recouped out of the individual’s existing assets. In effect a receipt of capital albeit used for living expenses.
2 Director-General of Social Security v K & M HC Wellington AP 255/95, 7 February 1997.
3 McElroy v Director-General of Social Welfare [1992] 9 FRNZ 366 (FC).
4 Director-General of Social Security v K & M, above n 2, at 6.
[18] Similarly Mr Griggs contended that the monies advanced to the appellant by the Trust did not add to his resources because he incurred a debt to the Trust in respect of them. The Trust had an obligation to repay the funds to the ANZ Bank. In the absence of evidence to the contrary, it was said that there was a presumption in law that the payments to the appellant by the Trust, sourced from the loan to the Trust from the ANZ Bank, were also in the nature of a loan, citing Murphy v
Brophy.5
Respondent’s case
[19] Noting first the way in which the Authority had framed the issue (namely, whether drawings from borrowed money should be treated as income6), the respondent submitted that the Authority had erroneously focused its analysis on the nature of the money in the Trust (namely, the overdraft) rather than on the nature of the payments made by the Trust to the appellant. It drew attention to several instances in the paragraphs quoted above where the Authority had mischaracterised the true nature of the payments received by the appellant.
[20] Ms Bailey argued that the Authority’s conflation of the Trust and the appellant resulted in the Authority failing properly to address the nature of the payments from the Trust to the appellant when considering whether the funds obtained by the appellant constituted “income” as defined in s 3(1). As a consequence the Authority had failed to make factual findings with reference to the sums received by the appellant.
[21] The respondent did not concede that the Authority’s ultimate decision was wrong. Rather it contended that the nature of the payments to the appellant (whether a loan, a capital payment, a gift or an income distribution) must be known before it can be determined whether the payments constitute “income”. Ms Bailey challenged the appellant’s submission that it was appropriate to address the issue merely on the
basis of a presumption of law.
5 Murphy v Brophy (1908) 27 NZLR 777 (SC) at 781.
6 At [11] above.
[22] Hence the only appropriate avenue was to remit the case stated to the Authority for it to hear evidence concerning the nature of the payments from the Trust to the appellant and on the basis of such evidence to reach a conclusion whether or not the payments were income.
Decision
[23] Although the issue as initially defined by the Authority is rephrased in a number of ways in the course of the quoted paragraphs, I consider that it is evident that in its analysis the Authority has conflated the Trust and the appellant and in so doing has failed to focus on the nature of the payments from the Trust to the appellant. The following extracts from the final sentences of paras 35 and 37 illustrate the point:
(a) “drawings from secured overdraft facilities”;
(b)“drawings from a mainline credit facility provided by a registered bank and secured against a capital asset”.
[24] It is necessary, as the appellant’s submission recognised, to differentiate between the Trust and the appellant and to ascertain the nature of the transfer of funds between them. I do not consider that it is appropriate to proceed on the basis of a presumption of law that, because the advance from the ANZ Bank to the Trust was a loan, then the payment from the Trust to the appellant was likewise a loan. As the appellant’s submission stated, such a presumption would lie “in the absence of evidence”.
[25] If the High Court is to answer a question of law and thereby to provide guidance in subsequent cases, it is only appropriate that the question of law should have a foundation of relevant fact rather than rest upon a legal presumption that applies in a factual vacuum.
[26] Consequently I accept the respondent’s submission that a factual determination as to the nature of the payments from the Trust to the appellant is a prerequisite to the Court ruling on a question of law whether or not the payments constitute “income”.
Disposition
[27] The answer to the second and third questions of law are:
(b) No
(c) Yes.
[28] So far as the first question of law is concerned, the case stated is remitted to the Authority to consider the evidence and make a determination as to the nature of
the payments from the Trust to the appellant.
Brown J
Solicitors:
Crown Law, Wellington
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