Juric-Kacunic and Secretary, Department of Family and Community Services [2003] AATA 15 (10 January 2003)

Last Updated: 13 January 2003

DECISION AND REASONS FOR DECISION [2003] AATA 15

ADMINISTRATIVE APPEALS TRIBUNAL )

) No N2002/389

GENERAL ADMINISTRATIVE DIVISION )

Re SRECKO JURIC-KACUNIC

Applicant

And SECRETARY, DEPARTMENT OF FAMILY & COMMUNITY SERVICES

Respondent

DECISION

Tribunal Ms N Bell, Member

Date 10 January 2003

Place Orange

Decision The decision under review is affirmed.

[SGD] Ms N Bell

Member

CATCHWORDS

SOCIAL SECURITY- Disability support pension - Definition of asset, financial asset and financial investment - Whether loan considered to be assessable asset for purposes of pensions assets test - Whether loan can be treated as unrecoverable

Social Security Act 1991 - sections 11(1), 9(1), 1064, 1122

REASONS FOR DECISION

10 January 2003 Ms N Bell, Member

1. This is an application by Mr Srecko Juric-Kacunic ("the Applicant") for review of the decision of the Social Security Appeals Tribunal dated 18 October 2001 which affirmed a decision of a Centrelink delegate of the Secretary, Department of Family and Community Services ("the Respondent") dated 18 July 2001 to include a loan by the Applicant of $304,500 as an assessable asset for the purposes of the pensions assets test. The original decision had been affirmed by an authorised review officer of Centrelink on 5 September 2001.

2. The Applicant appeared on his own behalf and the Tribunal was assisted by an interpreter in the Croatian language. The Respondent was represented by Ms Susan Mantaring. The Applicant gave oral evidence to the Tribunal and the Tribunal had before it the documents lodged under section 37 of the Administrative Appeals Tribunal Act 1975 and the Respondent's Statement of Facts and Contentions and attachments.

BACKGROUND

3. It is not in dispute that the Applicant claimed the disability support pension on 18 July 2001 and on his claim form declared that in May 1999 he had loaned $304,500, that the borrower was "broke" and that he was not pursuing legal action. It is also not in dispute that the loan has not been repaid. It is further not in dispute that an undated loan agreement stated to be between the Applicant and his wife as lenders and Stan Vaupotic of Eglinton NSW as borrower recites that 16 payments of varying amounts on dates ranging from 18 November 1999 to 20 April 2000 were advanced by the Applicant and his wife to Stan Vaupotic.

ISSUES

4. The issue to be determined by the Tribunal is whether the loan made by the Applicant to Stan Vaupotic is an asset to be taken into account in calculating the Applicant's right of disability support pension. This, in turn, requires the Tribunal to consider whether the loan is an asset within the meaning of the Social Security Act 1991 ("the Act") and, if so, whether it can be disregarded or treated as unrecoverable.

LEGISLATION

5. Section 1064 of the Act sets out the method of calculation of a person's rate of disability support pension. In particular, Module G of that provision sets out an "assets test" to be applied in that calculation. The rate of a person's disability support pension may be reduced if the person's assets exceed the threshold, adjusted from time to time.

6. Section 11(1) of the Act defines "asset" as "property or money (including property or money outside Australia)".

Section 9(1) of the Act defines "financial assets" as:

" (a) a financial investment; or

(b) a deprived asset."

7. "Financial investment" in section 9(1) of the Act is defined as:

"(a) available money; or

(b) deposit money; or

(c) a managed investment; or

(d) a listed security; or

(e) a loan that has not been repaid in full; or

(f) an unlisted public security; or

(g) gold, silver or platinum bullion; or

(h) an asset-tested income stream (short term)."

8. Section 1122 of the Act provides as follows in relation to the value, as an asset, of an amount of loan:

"1122 Loans

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."

9. The Respondent also directed the Tribunal to its policy in relation to recoverable loans and "financial investments". That policy is discussed later in these reasons.

APPLICANT'S EVIDENCE

10. The Applicant told the Tribunal that he considered Mr Stan Vaupotic to be a crook and a liar. He then clarified that Stan Vaupotic senior had been a long time friend and that he had approached the Applicant for the loan to be paid by Stan Vaupotic senior to his son, also named Stan Vaupotic. He said that he has been to see a solicitor, a Mr Savage, about getting his money back and that the solicitor told him that if he went to court it would cost him $10,000. The Tribunal drew the Applicant's attention to document T6/62 which is a letter from Matthew Savage, solicitor to the Applicant and his wife advising that whilst the loans appeared to be recoverable there may be a number of difficulties with that recovery including the absence of a written loan agreement with Mr Vaupotic senior, that the money was provided to Mr Vaupotic senior, that the only loan agreement is with Mr Vaupotic junior, that the agreement is undated and Mr Vaupotic junior appears to have no assets. The letter went on to state the following:

"We are not advising that you do not have a viable claim, however, these issues require a further amount of investigating and are simple examples of the potential problems with this type of litigation.

We would recommend that an advice from a Barrister be obtained as to the viability of your claim against either father or son.

As advised to you, our hourly rate is $250.00 plus counsel's fees and disbursements are added and we estimate costs of preparing a brief to counsel, attending in conferences and obtaining an advice on liability to be $2,000.00 to $2,500.00. If the matter proceeded to a hearing, we would expect our costs and disbursements of acting on your behalf to exceed $10,000.00."

11. On this letter the Applicant commented that he could find $2,500 to pay a barrister if he was sure that he would win but that Mr Savage had told him that there was no guarantee of winning and so he has taken no further steps to investigate getting his money back.

12. The Applicant confirmed that Mr Vaupotic senior had told him about a Nigerian oil pipeline venture in which he could invest and which would provide substantial returns. He said that he knew that Mr Vaupotic's son was involved in the proposal and said that Mr Vaupotic senior was a very good friend who he trusted.

13. The Applicant confirmed that he had loaned the money to Mr Vaupotic before any loan agreement had been signed and said that it was because he had seen Mr Vaupotic senior, drunk, boasting about "nobody having anything in black and white", that he decided that he had to protect himself and so had the loan agreement drawn up. The Applicant said that he obtained the loan agreement from Longman Hill Solicitors and provided it to Mr Vaupotic senior. He said that the loan agreement was not signed in the presence of the solicitor and he thought that it was strange that Mr Vaupotic senior signed the agreement as a witness and not as a party to the agreement.

14. The Applicant confirmed that all of the payments made to Mr Vaupotic senior, as set out in the loan agreement, were made in cash at the request of Mr Vaupotic senior who had told the Applicant that the money would be sent to Nigeria via Western Union. The Applicant said that he does not now think there was a Nigerian pipeline venture and that he thinks the money went to Nigeria and was dissipated. He said that he can't believe that any money is still with either Mr Vaupotic senior or junior because Mr Vaupotic junior told him that he didn't have it but would find it and then six months later he disappeared from Bathurst where he was living. When the Applicant approached Mr Vaupotic senior he said that it had not been him who had signed the agreement and so the Applicant would have to deal with his son.

15. The Applicant said that when he was paying the monies to Mr Vaupotic senior he had told him that he had a property in Slovenia and that the Applicant would get his money back. He now does not see Mr Vaupotic senior any more and avoids him as much as possible.

16. The Applicant said that he did not ask Mr Vaupotic senior for security for the loan because he believed him as a friend, and later when payments were not being made he did not ask for security even though that was allowed as a term of the loan agreement, because he considered it was too late and he could not then trust him.

17. The Applicant confirmed that the money he loaned was the profits of the sale of his house and his savings. He said that he knows where Mr Vaupotic senior lives but does not know where his son is and said that the mobile phone number for Mr Vaupotic junior is never answered.

18. In cross-examination the Applicant agreed that he had decided that he could not afford to pay a solicitor $10,000 to pursue the loan monies. However, he also agreed that he had made a statement to Centrelink on 31 July 2001 to the effect that he had recently given the sum of $37,000 to his sister-in-law in Croatia so that she could purchase a vehicle to transport her mother to medical appointments.

19. The Applicant, in relation to the absence of a date on the loan agreement said that the absence of the date was not his fault and that the solicitor who drafted the agreement should have included one.

20. The Applicant said that he was aware of two other people who had been the victims of Mr Vaupotic senior, a man called Paul in Tasmania and a woman by the name of Marjeta Kancilija in Sydney. However, he had no details of the transactions those people had been involved in.

21. The Applicant said that he considered that the loan agreement had been signed in May 2000, a couple of weeks after the last payment had been made by him.

22. The Applicant also gave a confusing account of having provided sums of $56,000 and $31,000 to Ms Kancilija via Mr Vaupotic senior on the basis that she needed cash for the purchase of a block of land and would, in exchange for that cash, provide him with cheques in those amounts. The Applicant said he gave the cash to Mr Vaupotic senior and 2 weeks later received a cheque for $56,000 which was not honoured. He said that the same thing occurred in relation to the sum of $31,000. When asked how those sums related to the sums that were recited in the loan agreement, the Applicant maintained that they were included in the total amount of $304,500. He said that the Kancilijas' were friends of Mr Vaupotic senior.

23. The Applicant said that he now has only $1,000 left, having applied for his superannuation and received only $1,800.

24. Finally, the Applicant said that he had no additional paperwork or documentation to provide to the Tribunal because he has given all documentation to a barrister friend who is also a countryman and he was working on the matter for him. He said that the barrister is overseas at the moment and the Tribunal noted that the Applicant, while remembering that the barrister's first name was Marislav, could not recall his last name.

CONSIDERATION

25. By virtue of the application of the definitions of "asset", "financial asset" and "financial investment" in sections 9 and 11 of the Act, the loan by the Applicant to Mr Vaupotic is clearly an asset for the purposes of the operation of the assets test in Module G of section 1064 of the Act.

26. The Applicant maintains that the money that was loaned by him cannot be recovered.

27. However, the Tribunal, on the basis of the Applicant's own evidence, considers that he has taken no steps, beyond obtaining initial and conditional advice from a solicitor, to investigate the recoverability of the monies. At document T6/63, the letter from Mr Savage, solicitor advises that, for the sum of $2,500, the Applicant should obtain counsel's advice on the likelihood of success of an action to recover the monies against either Mr Vautopic senior or Mr Vautopic junior.

28. The Applicant told the Tribunal that without a guarantee of success, he could not afford to pay for further action to be taken. However, the Applicant also agreed that he had, in July 2001, given almost the remainder of his savings to his sister-in-law in Croatia. The Tribunal considers that the Applicant was not prevented from, at the very least, investigating his rights of recovery and that there is no material to suggest that his prospects of success would be poor.

29. That is not to say that recovery action would not be without some difficulties and obstacles, as was advised to the Applicant by Mr Savage in his letter. However, a further step to be taken, at relatively small expense, was set out by Mr Savage and the Applicant declined to take it.

30. The Act makes no provision in relation to loans, classed as assets, which are not recoverable. However, the "Guide to the Social Security Law", the policy document according to which the Respondent applies the Act, sets out certain policies in relation to loans that no longer exist and in relation to failed financial investments. At the time of the Respondent's original decision the Guide provided as follows:

"4.6.5.60 Assessing Loans & Guarantor Arrangements

...

Loans made by a customer

Money loaned by a customer is an assessable asset (1.1.A.290). The value is the amount owed to the customer (section 1122). It is policy that an outstanding loan made by the customer BEFORE 27 October 1986 is assesses in the same way as a loan made after this date. Loans are financial assets and are deemed.

Loans made by a partnership

A loan made by a BUSINESS partnership is assessed as an asset of the partnership. The customer's value is assessed in the same proportion as the value of their share in the partnership.

Failed loans and loans that no longer exist

There are two areas where the Act has special rules that may be able to assist a customer with a failed loan:

* the hardship rules allow the asset value of the loan to be disregarded (4.6.7), and

* the loan can be exempted from deeming (4.4.1.40).

When a loan has been repaid the loan no longer exists. In some circumstances a loan no longer exists even though it has not been repaid. When a loan no longer exists section 1122 NO LONGER APPLIES however there may be some other type of asset, for example a debt. Further information about failed financial investments is at (4.6.6.110).

Guarantor arrangements

A person does not dispose of assets merely by agreeing to be guarantor for a loan (1.1.G.75). However if the borrower defaults on the loan, the guarantor becomes liable to repay the loan.

The deprivation rules apply to the amount the customer (guarantor) has repaid, from the date the guarantor repaid the loan (or had an asset sold to repay the loan).

Exception: If the customer takes legal action against the borrower to recover the amount they repaid on the borrower's behalf, the deprivation rules do NOT apply. The amount the customer repaid is treated as a debt owing to the customer. This means it is assessed as an asset of the customer. The assessable value is the recoverable value. Deeming does not apply.

Explanation: Debts are not financial investments as defined in the Social Security Act 1991 (section 9(1) financial investment).

...

4.6.5.110 Assessing Failed Financial Investments-Loans

...

How to assess a failed loan

If a person lends money, the asset value of the loan is the balance outstanding. This applies whether or not the loan is performing to the terms of the loan agreement. The asset value does not include any interest payable on loan.

Loans may be secured against assets such as property. The value of the asset the loan is secured against does NOT affect the asset value of the loan.

There are 2 areas where the Act has special rules to help people who have a failed loan, where for social security purposes the loan still exists:

* the hardship rules allow the value of the loan to be disregarded, and

* the loan can be exempt from deeming.

There are special requirements to be met before these rules can be applied.

...

Special rules to assist people with failed loans

Whether a person can be assisted by a deeming exemption or by the hardship rules will depend on their particular circumstances.

Where the person has their rate of payment assessed under the income test they MAY be able to have the loan exempt from deeming. A loan exempted from deeming is NOT deemed to be receiving income. A deeming exemption does NOT change the asset value of the loan.

The hardship rules MAY be used to disregard the value of an unrealisable asset such as a non-performing loan where the person has their rate of payment assessed under the assets test. A loan being disregarded under the hardship rules is still deemed to earn income. A deeming exemption SHOULD be applied for if this deemed income affects the rate of payment.

For a loan to be considered an unrealisable asset under the hardship rules the lender MUST have started to take the necessary action to have interest paid and/or to get back their capital. A loan CAN be treated as unrealisable even if at some future date the lender may be able to get some or all of their capital back.

When a loan no longer exists

Legally, a loan ceases to exist at the time it is repaid, or when the debtor is formally released from the loan. A debtor is released from a loan contract under a bankruptcy or where the loan is forgiven.

For social security purposes, there are some other situations where a loan is also treated as no longer existing. Loans that no longer exist are sometimes referred to as irrecoverable loans. Although there is no longer a loan there may be another type of asset such as a debt.

A loan no longer exists for social security purposes when:

* it is repaid, OR

* the borrower is bankrupt, OR

* the borrower enters a debt agreement under Part 9 or 10 of the Bankruptcy Act 1966 (Cwlth), OR

* the lender forgives the loan usually via a deed or gift of release (see explanation 1), OR

* the lender takes a loan contract to court to have it enforced and obtains a court order to allow collection of the money (see explanation 2), OR

* the lender takes a loan contract to court to have it enforced and is unsuccessful in court (see explanation 3), OR

* the lender seizes the asset against which the loan is secured (see explanation 4), OR

* property against which the loan is secured is sold and the proceeds used to repay some or all of the loan, OR

* the company that borrowed the money is wound up (see exception), OR

* the period specified in the Statute of Limitations has elapsed since the date of the loan, or last repayment, or demand to repay (whichever is the later) so the loan is not legally able to be recovered. (see explanation 5), OR

Explanation 1: Deprivation rules apply where a loan is forgiven

Explanation 2: The debtor is required to pay because of the court order rather than the loan contract. The amount owing is now a debt.

Explanation 3: There is no longer an amount owing.

Explanation 4: The property is now an asset of the lender.

Exception: If the lender has a right to enforce the loan contract against the directors of the company on a personal basis the loan will still exist.

Explanation 5: The deprivation rules MAY apply if the lender could have taken action before the period specified in the Statute of Limitations but chose not to do so.

Where fraud is involved

A customer may consider they have made a particular sort of financial investment, including lending money to a company or individual for a specific purpose. In some instances where fraud is involved this arrangement may be a sham. The money may not have been invested but taken for personal use.

Example: A customer may think they are investing in a company. The documents may show they actually made a loan to an individual.

Some fraudulent arrangements are complex and involve forged documents or moving money through a number of companies. In the initial stages some fraudulent schemes pay interest to investors so it may be some time before the real nature of the scheme is identified.

Until legal processes have established that fraud has definitely occurred the customer may be able to be assisted by a deeming exemption or the hardship rules. Once it has been established that the money has been misappropriated and no investment exists, no asset value is maintained.

Some defrauded investors may be able to take action to for compensation for some or all of their loss of capital. The POSSIBILITY that they may qualify for this type of assistance is NOT an asset."

31. The Guide, although it has been amended, continues to provide in largely similar terms.

32. The Tribunal notes that, in relation to the guidelines set out above relating to loans that i no longer exist, none of the dot point items in that section of the Guide apply to the circumstances of the Applicant. In particular, the Applicant has not taken legal action to recover the debt or even obtained comprehensive legal advice in relation to his prospects of success were he to do so

33. In relation to that part of the policy material relating to failed financial investments and fraud, the Tribunal notes there is no clear evidence establishing that either fraud was involved or that the loan amounted to a financial investment which failed.

34. For the reasons set out above, the Tribunal considers that the Applicant's loan to Mr Vaupotic senior or junior is an asset that should be taken into account in the calculation of the rate of his disability support pension.

DECISION

35. The decision under review is affirmed.

I certify that the 35 preceding paragraphs are a true copy of the reasons for the decision herein of Ms N Bell, Member

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

Associate

Date of Hearing 4 December 2002

Date of Decision 10 January 2003

Representative for the Applicant Self

Interpreter for the Applicant Goranka Horvatic

Advocate for the Respondent Susan Mantaring