Menkens and Department of Family and Community Services [2000] AATA 22 (21 January 2000)

Last Updated: 25 January 2000

DECISION AND REASONS FOR DECISION [2000] AATA 22

ADMINISTRATIVE APPEALS TRIBUNAL )

) Nos W1998/40 & 41 and W1999/125 & 126

General DIVISION )

Re Neil & Margaret Menkens

Applicant

And Secretary, Department of Family & Community Services

Respondent

DECISION

Tribunal Mr R D Fayle, Senior Member

Date 21 January 2000

Place Perth

Decision The decisions under review, so far as they relate to section 1129 of the Social Security Act 1992 (relating to severe financial hardship) are varied inasmuch as the matter be remitted to the respondent to determine an appropriate date not later than 4 October 1999 from when the section should apply to the applicants.

...........(sgd R D Fayle)............

Senior Member

CATCHWORDS

SOCIAL SECURITY - Age pension - assets test - valuation of amount owing by family trust - whether valued at face value - whether valued by reference to the trust's assets - whether applicants deprived themselves of an asset - whether beneficiaries' loan accounts unrealisable assets - whether severe financial hardship.

Social Security Act 1991, ss 11(12), 11(13), 1122, 1123, 1124, 1129

Re: Riches and Secretary, Department of Social Security AAT 10590, 8 December 1995

Re: Hughes and Secretary, Department of Social Security (1992) 24 ALD 754

Re: Wright and Secretary, Department of Social Security (1994) AAT 9736, 82 SSR 1196

REASONS FOR DECISION

21 January 2000 Mr R D Fayle, Senior Member

1. This is an application for review of two decisions of the Social Security Appeals Tribunal ("SSAT"). The matters were taken together because the issues are essentially the same. In its first decision, dated 23 January 1998, the SSAT decided that the value of the loan owed to the applicants by a family trust should be taken at its face value and a subsequent write-down of that value by the Trustee was a deprivation of an asset. In its second decision the SSAT decided that the applicants were not suffering severe financial hardship because they had readily available funds in excess of $10,000. It is those decisions, affirming the decisions of the respondent's Authorised Review Officers, which are under review by this Tribunal.

2. In essence, the issue to be determined is the correct value of the loan accounts owed by the family trust to the applicants.

3. At the hearing the applicants were represented by Mr K Law, a Chartered Accountant and the respondent by Mr Alan Jones, a departmental advocate. The Tribunal had before it two sets of documents filed pursuant to s37 of the Administrative Appeals Tribunal Act 1975 ("the T documents"); a letter of 6 October 1999 with attachments, from Mack & Co, setting out a valuation of the trust (exhibit A1); an extract from the register of directors and secretaries of Rymer Pty Ltd (the corporate trustee), (exhibit A2); and a letter of 4 October 1999 from Mr Menkens to the Tribunal setting out a statement of net worth (exhibit A3). Both Mr Menkens and Mr Law gave evidence.

4. Each of the applicants applied for an age pension on 26 September 1997. They were each unit holders in the Acme Unit Trust, the trustee of which was Rymer Pty Ltd. The balance sheet of the Acme Unit Trust ("the Unit Trust"), as at 30 June 1997, showed beneficiary loan accounts due to Mr and Mrs Menkens respectively of $399,272 and $95,560. They also had other jointly owned assets, being bank deposits, cars and personal effects valued at $53,477 altogether. Subsequently, on 16 October 1997, Mr Menkens provided a more recent balance sheet for the Unit Trust which disclosed Mr Menken's beneficiary loan account as $59,273. This resulted from a write-down by the trustee of the goodwill from $350,000 to $10,000. The respondent treated this write-down as a deprivation of an asset for the purposes of calculating the applicants' entitlement to an age pension. Since the value of their combined assets exceeded the allowable limit then no pension was granted. Similarly, on 5 March 1998 the respondent rejected the applicants' claim for severe financial hardship relief on the grounds that they had between them $74,332 in the bank ($30,000 of which was secured by the bank against debts owed by the Unit Trust) and debts of around $15,000. On that basis the claim for relief under the severe hardship provision was rejected.

5. Mr Menkens gave evidence relating to the history of the Unit Trust and how the beneficiaries' loan accounts arose. The Tribunal observes that Mr Menkens did the best he could to recall events of many years ago and no documentation was available in support. Also, whilst Mr Law is the present accountant his appointment is relatively recent. The Tribunal found Mr Menkens to be an honest witness and notes that he was not challenged on any of his recollections in this regard.

6. Mr Menkens told the Tribunal that in about 1974 with his brother and an unrelated person, he formed a partnership to commence to carry on a business hiring television sets. The business was registered as Acme TV Services. Its business increased mainly as a result of one client who leased out a considerable number of furnished flats or units, each including a television set, the latter provided on lease by Acme TV Services. In 1980 the Unit Trust was established, with its corporate trustee, the directors of which were the former partners of Acme TV Services which business was sold to the trustee. It was upon this transfer of the business that the goodwill of $350,000 was established. There is no reliable evidence as to how that amount was split, but Mr Menkens told the Tribunal that when the partnership business was transferred to the trustee the partners were issued equal units. So it seems open to the Tribunal, in the circumstances, to assume that the loan accounts of the unit holders, the beneficiaries' loans, were credited with one-third of the goodwill. That would result in a credit for Mr Menkens of $115,667. In addition, it would follow that each partner was credited with a proportion of the net value of the tangible assets, including the hire television sets. However, there is no evidence before the Tribunal as to what that amount might have been.

7. In 1986 the brother's units in the Unit Trust were sold to the other unit holders and in 1989 the unrelated unit holder sold her units to the applicants, at which time the applicants also became the sole directors of the trustee company.

8. Mr Menkens said that the business was profitable until about 1992. Profits were credited to beneficiary loan accounts and drawings debited to those accounts. In 1992 the principal client changed his policy of providing a television set to his tenants and the business of the Unit Trust was adversely affected.

9. The only trading result figures available to the Tribunal are those for the financial years ended 30 June 1992 to 1997 inclusively. The Unit Trust derived profits of $17,884 (1992), $22,280 (1994) and $44,278 (1995) and losses of $83,865 (1993), $2,381 (1996) and $7,239 (1997). As at 30 June 1997, the latest available balance sheet, tangible assets (that is, assets excluding goodwill), totalled $223,172 whilst liabilities excluding beneficiaries loan accounts, totalled $87,333. Beneficiaries' and family member loan accounts totalled $166,706. Of the latter amount, $154,833 was shown as owed to the applicants, however, that is after the write-off of the value of goodwill which was debited to their loan accounts, detailed in the next paragraph.

10. In a valuation of the Unit Trust as at 30 June 1997, Mr Law expressed the opinion that the historical depreciated value of assets was overstated and took the view that its realisable value was likely to be considerably less, reducing its value from $197,907 to $19,265. Mr Jones, for the respondent, did not address this contention, probably because in terms of the final outcome of this review, it makes no difference.

11. A schedule provided by the applicants subsequent to the hearing and as part of the applicant's written submissions shows the detailed movements in their respective Unit Trust beneficiary loan accounts from 30 June 1992 to 20 September 1999. That schedule shows a write-off of $331,312 of the value of goodwill in June 1997, debited to the loan accounts of Mr and Mrs Menkens of $267,192 and $64,120 respectively.

12. Mr Menkens told the tribunal that in 1998 he tried to diversify the business in an attempt to make it profitable. He commenced leasing out white goods supplied under a bailment plan which cost about $5,300 per month. However, that was not successful and it had accumulated debts totalling around $55,000 by the time he transferred the business to his son-in-law. His son-in-law took on the business and settled the bailment and bank debt leaving the applicants owing about $25,000 which was paid from Mr Menkens' superannuation entitlement. The Tribunal understands that this left the Unit Trust with no business assets or cash and no liabilities other than amounts owed to the applicants pursuant to their beneficiary loan accounts.

13. Section 1122 of the Social Security Act 1991 ("the Act") provides:

1122 If a person lends an amount after 27 October 1986, the value of the assets of the person for the purposes of this Act includes so much of that amount as remains unpaid but does not include any amount payable by way of interest under the loan.

14. It seems established unequivocally that the value of any loan arising after 27 October 1986 is its face value (Re: Riches and Secretary, Department of Social Security AAT 10590, 8 December 1995; Re: Hughes and Secretary, Department of Social Security (1992) 25 ALD 754; Re: Wright and Secretary, Department of Social Security (1994) AAT 9736, 82 SSR 1196). And, on the same authorities, the amount of the loan asset as at 27 October 1986, for the asset test calculation is determined by its realisable value having regard to the ability of the debtor to repay at the time of the valuation.

15. As mentioned, there is no reliable evidence of the amount of the applicants' beneficiary loans as at 27 October 1986. The Tribunal is not in a position to estimate what that balance may have been for each of Mr and Mrs Menkens. However, the Tribunal notes that the schedule of movements in the beneficiaries' loan accounts for the period 1 July 1992 to 20 September 1999 indicate that Mr Menkens had drawings in excess of $250,000 in the period. On the basis (and in the absence of any agreement to the contrary), that repayments are made against loans made in a chronological order, there is unlikely to be any amount remaining owed in relation to the loan arising from the transfer of the business to the Unit Trust in 1980. Even ignoring the write-off of goodwill in the books in June 1997, the loan account of Mr Menkens reduced from $544,109 in July 1992 to $399,273 on 30 June 1997. Throughout that period there is a regular infusion of funds by Mr Menkens totalling over $150,000, which he told the Tribunal was to for the purpose of providing necessary working capital or to fund business debts.

16. For the above reasons there is no basis on which the Tribunal can reduce the value of the Mr Menkens' beneficiary loan account owed by the Unit Trust, by application of the provisions of s1122 of the Act. Similarly, in the absence of any evidence about the amount of Mrs Menkens' beneficiary loan account, if any, owed by the Unit Trust on 27 October 1986, no reduction of its value can arise from the application of that section.

17. The next issue is whether the write-off in the Unit Trust books of the value of goodwill against the beneficiary loan accounts of the applicants, should for the purposes of the assets test, be treated as a deprivation of an asset.

18. 1123 Disposal of assets

1123 (1) 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;

(ii) the person receives inadequate consideration in money or money's worth for the destruction, disposal or diminution;

(iii) the Secretary is satisfied that the person's purpose, or the dominant purpose, in engaging in that course of conduct was to obtain a social security advantage.

1123 (2) For the purposes of subsection (1), a person has a purpose of obtaining a social security advantage if the person has a purpose of:

(a) obtaining a social security pension, a social security benefit, a parenting allowance or a service pension or enabling the person's partner to obtain such a pension or benefit or a youth training allowance; or

(b) obtaining a social security pension, a social security benefit, a parenting allowance or a service pension, or enabling the person's partner to obtain such a pension or benefit or a youth training allowance, at a higher rate than would otherwise have been payable; or

(c) ensuring that the person or the person's partner would be qualified for fringe benefits for the purposes of this Act or the Veterans' Entitlements Act.

19. Given that for the present purposes the book value of the beneficiary loan accounts are to be taken as their value, the write-off by the trustees may constitute a disposal of assets as defined in s1123 of the Act. At the time of the write-off the sole directors of the trustee company were the applicants. It was therefore on their motion that the write-off occurred. Notwithstanding the separate legal persona of the trustee company and the beneficiaries of the trust estate, the substance is that the controlling mind of the trustee was that of the applicants whose loan accounts were reduced on their own motion. Therefore, the diminution in the value of the applicants' loan account resulted directly from their conduct. T 34 (W1998/40 & 41) is a copy of the Unit Trust's balance sheet as at 31 December 1997 prepared as a special purpose financial report by Mack & Co. The evidence is that these accounts were prepared in response to a request by the applicants to reflect what they considered to be the then realisable value of the business. It has never been suggested that what was done was improper. However, the mere fact that these accounts reflect the write-off of the value of the goodwill from $350,000 to $10,000 is sufficient to satisfy the Tribunal that it was done for the dominant purpose of obtaining a social security advantage for the applicants, namely the age pension. By operation of s1124 of the Act, the amount of the disposition for each applicant should be taken to be the amounts previously referred to, $267,192 and $64,120 for Mr and Mrs Menkens respectively.

20. The next issue to consider is whether the applicants have, in the beneficiary loans owed to them, an unrealisable asset.

21. The relevant provisions of the Act are contained in subsections 11 (12) and (13) below:

Unrealisable asset

11 (12) An asset of a person is an unrealisable asset if:

(a) the person cannot sell or realise the asset; and

(b) the person cannot use the asset as a security for borrowing.

11 (13) For the purposes of the application of this Act to a social security pension, an asset of a person is also an unrealisable asset if:

(a) the person could not reasonably be expected to sell or realise the asset; and

(b) the person could not reasonably be expected to use the asset as a security for borrowing.

22. The evidence at the time of the respondent's decision is that the Unit Trust was continuing to trade and had attempted to expand into the leasing of white goods. Mr Menkens said in evidence that he had never given any serious thought to selling the business or winding it up as he always hoped that it would turn around and become profitable. When questioned, he admitted that his former accountant had advised him on more than one occasion to close down the business and cut his losses. Despite this, and probably as forlorn a hope this may seem with hindsight, at the time Mr Menkens may have been justified for thinking that way. He had not given up hope and he continued to inject capital into the business up to the time it was transferred to his son-in-law. The result of that transfer is reflected in paragraph 12 above. Clearly, if the Unit Trust had no assets after the business was transferred and the debts settled then the beneficiaries' loan accounts would be worthless and simply represented the accumulation of net business losses funded by the applicants for the duration of the business. On that basis and in terms of subsections 11(12) and (13) of the Act, the applicants' beneficiary loan accounts are unrealisable. If any support is necessary for that conclusion then reference is made to the valuation of the Unit Trust made by Mack & Co in October 1999 (Exhibit A1) for the purposes of these proceedings. That valuation is based on profit and loss accounts for the five years ended 30 June 1997 and the balance sheet as at 30 June 1997. Mack & Co express a view that there was then no valuable goodwill and that the amount available to repay beneficiary loan accounts (treated as equity for the exercise) would be whatever was left over from the realisation of depreciated assets once the outside liabilities of $79,941 were paid. They express the opinion that it is highly unlikely that the depreciated assets would realise anywhere near their historical balance sheet value of $197,907. As it turned out, when the business was finally transferred to the applicant's son-in-law the consideration paid was considerably less (refer paragraph 12 above) and instead of the applicants receiving a distribution from the Unit Trust, Mr Menkens was required to pay in $25,000 to acquit the Unit Trust's debts.

Severe Financial Hardship

23. The applicants made a claim for financial hardship pursuant to s1129 of the Act on 17 February 1998. The application was refused, which decision was subsequently affirmed by an Authorised Review Officer and on appeal to the SSAT, upheld. The underlying reason for rejecting the applicants' claims for severe financial hardship pursuant to s1129 of the Act was that they had liquid assets in excess of $10,000 and the business of the Unit Trust continued. Section 1129 states:

1129 Access to financial hardship rules - pensions

1129 (1) If:

(a) either:

(i) a social security pension is not payable to a person because of the application of an assets test; or

(ii) a person's social security pension rate is determined by the application of an assets test; and

(b) either:

(i) sections 1108 and 1109 (disposal of income) and 1124A, 1125, 1125A and 1126 (disposal of assets) do not apply to the person; or

(ii) the Secretary determines that the application of those sections to the person should, for the purposes of this section, be disregarded; and

(c) the person, or the person's partner, has an unrealisable asset; and

(d) the person lodges with the Department, in a form approved by the Secretary, a request that this section apply to the person; and

(e) the Secretary is satisfied that the person would suffer severe financial hardship if this section did not apply to the person;

the Secretary must determine that this section applies to the person.

1129 (2) A decision under subsection (1) takes effect:

(a) on the day on which the request under paragraph (1) (d) was lodged with the Department; or

(b) if the Secretary so decides in the special circumstances of the case - on a day not more than 6 months before the day referred to in paragraph (a).

24. No doubt the decisions under review were, at the time and having regard to the evidence before the decision makers and the SSAT, correct or preferred. However, the evidence before this Tribunal, consisting of that already discussed, Exhibit A3, being a letter from Mr Menkens to the Tribunal of 4 October 1999 and his oral evidence, points to a different conclusion. Exhibit A3 shows that the applicants' then bank balances were $6,726, a car valued at $7,000 and household property valued at $10,000 (insured amount, $8,000), with credit card debts totalling $18,632. This gave a net worth position of $5,094. Mr Menkens explained that they had used the credit cards to fund necessary dental work and for day to day living and household expenditure. No holidays or trips have been taken and no unnecessary expenditure has been incurred. They have been living frugally because almost all their resources have been expended in winding up the business as explained. In the opinion of the Tribunal, the applicants' circumstances dictate that they are in severe financial hardship. Their cash reserves are insufficient to meet their pressing credit card debts and even if they were to sell their car and use those proceeds against the credit card debts remaining, they would still be in debt. It is unreasonable in this society to expect them to sell off their household effects of which Mr Menkens said "there was nothing of value".

Decision

25. In the opinion of the Tribunal the applicants satisfy the provisions of s1129 (1) of the Act. In the opinion of the Tribunal the applicants have been in circumstances of severe financial hardship from a time prior to 4 October 1999. Therefore, the decisions under review, so far as they relate to section 1129 of the Social Security Act 1992 (relating to severe financial hardship) are varied inasmuch as the matter be remitted to the respondent to determine an appropriate date not later than 4 October 1999 from when the section should apply to the applicants.

I certify that the 25 preceding paragraphs are a true copy of the reasons for the decision herein of Mr R D Fayle, Senior Member

Signed: Shannon Railton

............(sgd S Railton)............................................

Associate

Date/s of Hearing 2 November 1999

Date of Decision 21 January 2000

Appearing for the Applicant Mr Ken Law, Mack & Co

Appearing for the Respondent Mr Alan Jones