McDicken and Department of Family and Community Services [1999] AATA 169 (19 March 1999)

Last Updated: 24 March 1999

DECISION AND REASONS FOR DECISION [1999] AATA 169

ADMINISTRATIVE APPEALS TRIBUNAL )

) No N98/848

GENERAL ADMINISTRATIVE DIVISION )

Re KATHLEEN McDICKEN

Applicant

And SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES

Respondent

DECISION

Tribunal R P Handley, Senior Member

Date 19 March 1999

Place Sydney

Decision The Tribunal sets aside the decision under review and remits the matter to the Respondent with the direction that the loan agreement entered into by the Applicant with Advance Investment Finance on 7 November 1997, was not an "home equity conversion agreement" as defined in s 8(1) of the Social Security Act 1991.

(Sgd) R P Handley

..............................................

SENIOR MEMBER

CATCHWORDS

SOCIAL SECURITY - assessment of age pension - income - treatment of Applicant's loan agreement - definition of home equity conversion agreement - whether Applicant's loan was a home equity conversion agreement

Social Security Act 1991 - ss 8, 1073

Social Security Act 1947 - s 3(1)(ab)

Social Security and Veterans' Affairs Legislation Amendment Act (No.4) 1989 - s 21(a)

Acts Interpretation Act 1901 - ss 15AA, 15AB

Re Secretary, Department of Social Security and McLaughlin (AAT 11475, 13 December 1996).

Secretary, Department of Social Security v McLaughlin (1997) 48 ALD 536

Read v Commonwealth (1989) 167 CLR 57

Re Hill and Repatriation Commission (1996) 45 ALD 347

Re Gordon and Department of Social Security (1992) 16 AAR 100

Hall v Jones (1942) 42 SR (NSW) 203

REASONS FOR DECISION

19 March 1999 R P Handley, Senior Member

1. This is an application by Kathleen McDicken ("the Applicant") for a review of a decision of the Social Security Appeals Tribunal ("the SSAT") dated 9 June 1998 affirming a decision of a delegate of the Secretary of the Department of Family and Community Services ("the Respondent") and an authorised review officer to cancel payment of age pension to the Applicant.

2. At the hearing, the Applicant was represented by Meena Sripathy of the Welfare Rights Centre and the Respondent was represented by John Kenny of Centrelink. The Tribunal had before it the documents provided pursuant to s 37 of the Administrative Appeals Tribunal Act 1975. The following documents were admitted in evidence:

Exhibit A1 Social Security and Veterans' Affairs Legislation Amendment Bill 1989 - Explanatory Memorandum

Exhibit A2 Document (Mortgage Vision) dated 12 December 1998

Exhibit A3 ASGARD Client Review Report dated 10 February 1999

Exhibit A4 Colonial State Bank re-finance home loan contract dated December 1998

Exhibit A5 Australian Housing Research Council - Home Equity Conversion in Australia

The Applicant gave oral evidence at the hearing.

Background

3. The material facts are not in dispute. The Applicant, who was born on 26 February 1936, has been receiving an age pension since 19 September 1996. On 2 December 1997, she borrowed $91,000 from Advance Investment Finance secured by a mortgage on her home. The term of the loan was twelve months, expiring on 1 December 1998. During that term, an interest only monthly payment of $644.58 was payable.

4. The purpose of the loan was to enable the Applicant to pay off certain debts attracting high interest charges, to buy a new hot water system for her house, and to invest $61,000 in an ASGARD Investment Account which permitted the distribution of that investment among a number of managed investments. The monthly interest payments on her loan were paid directly from the investment income generated by this account topped up by $200 per month paid into the account by the Applicant.

5. The Respondent regarded the loan of $91,000 as a home equity conversion ("HEC") loan, and treated $51,000 of that amount as income ($1019.60 per week in respect of the ensuing twelve months). On 20 February 1998, the Respondent notified the Applicant that her pension had been cancelled because her income exceeded the income threshold for the payment of pension (T14). That decision was affirmed by an authorised review officer on 8 April 1998 (T33) and by the SSAT on 9 June 1998 (T2). On 6 July 1998, the Applicant lodged an application for review by the Tribunal.

Application of the Law

6. The issue in dispute is whether the Respondent was correct in treating $51,000 of the loan as "income" for the purpose of assessing the rate of age pension payable to the Applicant.

7. Section 8 of the Social Security Act 1991 ("the 1991 Act") contains definitions relevant to the application of the income test in the Applicant's case:

8 (1) In this Act, unless the contrary intention appears:

...

"home equity conversion agreement", in relation to a person, means an agreement under which the repayment of an amount paid to or on behalf of the person, or the person's partner, is secured by a mortgage of the principal home of the person or the person's partner;

"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), (7A) or (8);

"income amount" means:

(a) valuable consideration; or

(b) personal earnings; or

(c) moneys; or

(d) profits;

(whether of a capital nature or not);

...

(2) A reference in this Act to an income amount earned, derived or received is a reference to:

(a) an income amount earned, derived or received by any means; and

(b) an income amount earned, derived or received from any source (whether within or outside Australia).

...

(4) If a person is not a member of a couple, an amount paid to or on behalf of the person under a home equity conversion agreement is an excluded amount for the person to the extent that the total amount owed by the person from time to time under home equity conversion agreements does not exceed $40,000.

...

(6) For the purposes of this Act, the amount owed by a person under a home equity conversion agreement is the principal amount secured by the mortgage concerned and does not include:

(a) any amount representing mortgage fees; or

(b) any amount representing interest; or

(c) any similar liability whose repayment is also secured by the mortgage."

8. Section 1073 provides for a person who receives such a lump sum to be:

taken to receive one fifty-second of that amount as ordinary income of the person during each week in the 12 months commencing on the day on which the person becomes entitled to receive that amount.

Applicant's Evidence

9. The Applicant said that on the expiry of the original twelve month term of the loan in December 1998, the loan was re-financed by the Colonial State Bank (A4). Because the Applicant had additional expenses during the course of the twelve months - as a result of unforseen costs associated with the loan, the loss of her pension, car problems, the need to replace a dishwasher and the front and rear doors of her house - she sought an increased loan of $109,000.

10. The Applicant continues to pay $200 per month into her ASGARD Investment Account, from which $644.58 is paid directly to the Colonial State Bank. The Applicant also pays a further $300 per month direct to the bank. In December 1998, it was projected that on this basis the loan, which is for a term of 30 years, would be paid off at the end of 13 years (A20). When the Applicant originally borrowed the $91,000 from Advance Investment Finance, it was projected that the loan would be paid off at the end of eight years. However, the Applicant said that, as a result of the Asian economic crisis, the value of her investments has decreased.

The Applicant's Submissions

11. Ms Sripathy, for the Applicant, said the main issue is the characterisation of the loan transaction entered into by the Applicant in December 1997 and its treatment under the provisions of the 1991 Act. Ms Sripathy submitted the transaction was not a "home equity conversion agreement" as defined in s 8(1) of the 1991 Act. Rather it was a loan agreement and, therefore, the money loaned should not be considered "income".

12. Ms Sripathy referred the Tribunal to an Australian Housing Research Council Report, Home Equity Conversion in Australia (Canberra: AGPS, 1990). The Report (at p 1) states:

Home equity conversion (H.E.C.) is a financial mechanism designed for older home owners who need money and want to stay in their homes. People can participate through sale plans or loan plans

13. The Report goes on to describe sale and loan plans:

Under a sale plan, older people sell their homes to an investor in return for a 'life or long term tenancy' agreement.

...

Under a loan plan, older people mortgage their home to an investor or financial institution and retain ownership of the home.

...

The repayment of the loan and interest is not made until the end of a specified period or the older owner moves out or dies.

14. Ms Sripathy submitted the word "conversion" was critical in the term "home equity conversion", referring to how equity in a person's home is "converted" into funds for the person's use. An HEC arrangement is different to a home equity loan, where the equity in the home is merely used as security to obtain a loan. Home equity loans provide for periodic repayments to enable repayment of the loan in full. Such loans do not anticipate that the home will be sold to allow repayment.

15. Ms Sripathy referred to the relevant definitions in s 8 of the 1991 Act. The provisions relating to HEC agreements first appeared in the Social Security Act 1947 ("the 1947 Act") by s 21(a) of the Social Security and Veterans' Affairs Legislation Amendment Act (No. 4) 1989. In particular, the new s 3(1)(ab) of the 1947 Act was so widely drafted as to cover any home loan. Ms Sripathy submitted this was an absurd result and, given the ambiguity, regard should be had to Parliament's intention in inserting this provision.

16. Ms Sripathy referred the Tribunal to the Explanatory Memorandum for the amending legislation (A1, at p 18-19) with particular reference to clause 21. This makes it clear that the clause 21(a) amendment was not intended to apply to ordinary home loans. Thus, Ms Sripathy submitted that the definition of HEC agreement in s 8(1) of the 1991 Act should be read down to apply only to those arrangements which are in fact "home equity conversions". As the Applicant's transaction was not an HEC arrangement, the decision by the Respondent to treat $51,000 of the amount borrowed by the Applicant as income was incorrect.

17. Ms Sripathy submitted the Applicant's transaction was a bona fide loan and should not be treated as "income" within the s 8(1) definitions. She referred to Re Gordon and Secretary, Department of Social Security (1992) 16 AAR 100, Re Secretary, Department of Social Security and McLaughlin (AAT 11475, 13 December 1996), Secretary, Department of Social Security v McLaughlin (1997) 48 ALD 536 and Read v Commonwealth (1989) 167 CLR 57 in support of that contention.

18. In particular, Ms Sripathy quoted French J in Secretary, Department of Social Security v McLaughlin (supra) at 542 where he says:

However wide the scope of the term "income", in my opinion it would not extend to a bona fide loan.

The Respondent's Submissions

19. Mr Kenny, for the Respondent, submitted that, in accordance with the definition of an HEC agreement in s 8(1) of the 1991 Act, clearly the Applicant had "converted" part of the equity in her home in order to finance her investment in the ASGARD Investment Account. He acknowledged the definition of an HEC agreement is a broad one. However, s 8(4) of the 1991 Act excludes from treatment as income the first $40,000 received under an HEC agreement. The purpose of this limit is to discourage older people from converting too large a proportion of the equity in their home.

20. Mr Kenny submitted that the definition of an HEC agreement is clear and unambiguous, and there is no need to refer to extrinsic material to clarify its meaning. If such a definition gives rise to unintended consequences, then this is a matter for Parliament to address by amending the Act.

Consideration of Law and Findings

21. As stated above, the material facts in this case are not in dispute. The Applicant borrowed $91,000 for a term of twelve months secured by a mortgage on her home. During that twelve months, interest on the loan was payable monthly. At the end of the twelve month term, the Applicant re-financed the loan with another lender. The Applicant invested $61,000 of the original sum borrowed in an investment account.

22. HEC plans originated in France and became popular in the USA in the 1970s. In Australia, they began to be more widely used in the late 1980s. In 1989, the 1947 Act was amended (by the Social Security and Veterans' Affairs Legislation Amendment Act (No. 4) 1989, s 21) to include new definitions in s 3(1), which, while not mentioning the term HEC agreement, were clearly referrable to such agreements. The Explanatory Memorandum for the Amendment Bill states (at p 19):

An arrangement of the type covered in Clause 21(a) is commonly referred to as a home equity conversion. The Government hopes to enable pensioners, especially age pensioners, to access opportunities now available in the market place to use money tied up in home equity to enjoy a more comfortable lifestyle without loss of pension.

23. Referring to the limit of $40,000 which is exempted from treatment as income, the Explanatory Memorandum states (at p 19):

It is not intended that this provision would apply where a pensioner who lives in and owns a house sells that house and finances a new house by means of a mortgage.

24. In 1990, the Australian Housing Research Council Report, Home Equity Conversion in Australia was published (A5). The Report includes the descriptions of HEC plans quoted in the Applicant's submissions, above. The purpose of these HEC plans is clear - to enable older people to use money which would otherwise be tied up in their home.

25. The 1947 Act was replaced by the 1991 Act which took effect on 1 July 1991. The 1991 Act includes similar provisions relating to HEC agreements to those contained in the 1947 Act, except that the term HEC agreement is specifically included among the s 8(1) definitions:

"home equity conversion agreement", in relation to a person, means an agreement under which the repayment of an amount paid to or on behalf of the person, or the person's partner, is secured by a mortgage of the principal home of the person or the person's partner;

26. The definition is in broad terms. The Applicant submitted that the literal interpretation of this definition produces an absurd result - that it could potentially cover any "home loan". In the Tribunal's view, the definition is sufficiently wide to cover any loan agreement under which the repayment of the loan is secured by a mortgage on the principal home of a person or the person's partner. This could, for example, include a business loan, although it should be remembered that these provisions of the 1991 Act are referrable to Social Security pensions and have no relevance to assessing taxable income.

27. Because, in the Tribunal's view, the literal meaning of the definition requires clarification, in accordance with s 15AA of the Acts Interpretation Act 1901, regard should be had to the purpose or object of the provision so that a construction is adopted which promotes that purpose or object. In so doing, pursuant to s 15AB of the 1901 Act, reference may be made to extrinsic material, including the Explanatory Memorandum furnished to either House of Parliament before the time when the provision was enacted. The relevant Explanatory Memorandum has been quoted above. It seems clear that the Government intended the relevant provisions of the legislation to refer to what are commonly referred to as HEC plans.

28. Although the Australian Housing Research Council Report postdates the inclusion of these provisions in the 1947 Act, in the Tribunal's view, its description of HEC plans appears to be a comprehensive one upon which reliance can be placed. With respect to HEC loan plans, the Report states (at p 1) that:

repayment of the loan and interest is not made until the end of a specified period or the older owner moves out or dies.

29. The Applicant's loan was not one of this kind. Certainly, approximately two thirds of the money borrowed ($61,000) was invested. However, the principal purpose of the financial arrangement was to enable the Applicant to consolidate and service debts of approximately $30,000. Moreover, interest was payable during the term of the loan which was of a short duration (twelve months).

30. In the Tribunal's view, the definition of HEC agreement in s 8(1) of the 1991 Act must be read down in line with the ordinary meaning of the term "home equity conversion" used in the definition. To not do so, produces an absurd result which fails to promote the purpose or object expressed in the Explanatory Memorandum when the relevant provisions were originally introduced. Thus, the definition of an HEC agreement should be interpreted as excluding agreements such as that entered into by the Applicant which are ordinary loan agreements, requiring ongoing periodic interest payments, secured by a mortgage on the Applicant's principal home.

31. The result of this approach in the Applicant's case is that her loan agreement was not an HEC agreement within the meaning of the Act, and $51,000 of the $91,000 advanced to her should not have been treated as "income" for the purposes of the 1991 Act.

32. The 1991 Act does, of course, make provision for assessing the income on investments, so that, in the Applicant's case, the income from her ASGARD Investment Account will be assessed in calculating the rate of age pension payable. For the Respondent to assess both $51,000 of the loan as income, as well the income from the Applicant's investments procured through the loan would be "double dipping", to use a term often applied by the Respondent to would-be Social Security recipients.

33. The Tribunal notes that support for its approach is afforded by French J's statement in Secretary, Department of Social Security v McLaughlin, quoted above, that the scope of the term "income" does not extend to a bone fide loan. Discussion of the meaning of the word "income" in Read v Commonwealth (supra at 69) and Re Hill and Repatriation Commission (1996) 45 ALD 347 at 368-369, and of the word "loan" in Re Gordon and Department of Social Security (supra at 103 ff), is also supportive.

I certify that this and the 10 preceding pages are a true copy of the decision and reasons for decision herein of Senior Member R P Handley.

Signed: .....................................................................................

Associate

Date of Hearing 17 February 1999

Date of Decision 19 March 1999

Solicitor for the Applicant Meena Sripathy, Welfare Rights Centre

Advocate for the Respondent John Kenny, Centrelink