Kahla and Secretary, Department of Family and Community Services [2003] AATA 54 (21 January 2003)

Last Updated: 30 January 2003

DECISION AND REASONS FOR DECISION [2003] AATA 54

ADMINISTRATIVE APPEALS TRIBUNAL )

) No N2001/1940

GENERAL ADMINISTRATIVE DIVISION	)
	Re	Mohamad Kahla

Applicant

And

Secretary, Department of Family and Community Services

Respondent

DECISION

Tribunal

Dr J D Campbell, Member

Date 21 January 2003

Place Sydney

Decision

The Tribunal determines that the decision under review be affirmed.

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

Dr J D Campbell Member

CATCHWORDS

SOCIAL SECURITY - Newstart Allowance - assessment of assets re home owner couple disqualifying limit - assessment of assets re non-home owner couple disqualifying limit - issue of borrowing from and loans to corporate vehicle

Social Security Act 1991 ss 1121, 1122, 1123, 1126

REASONS FOR DECISION

21 January 2003

Dr J D Campbell, Member

1. In this matter, Mr Mohamed Kahla ("the Applicant") seeks a review of a decision of the Social Security Appeals Tribunal ("SSAT") dated 27 November 2001 which affirmed the decisions of delegates of the Secretary, Department of Family and Community Services ("the Respondent") dated 2 February 2000 and 19 December 2000 not to grant the Applicant Newstart Allowance in response to his applications of 21 January 2000 and 19 December 2000. The latter decisions were reviewed by an authorised review officer and affirmed in a decision dated 23 July 2001.

2. A hearing was held before the Tribunal in Sydney on 31 October 2002 at which the self represented Applicant presented oral evidence. The Respondent was represented by Mr Kenny, an advocate from the Advocacy and Administrative Law Team at Centrelink.

3. The following documents were placed into evidence before the Tribunal:

Date	Description	Date
T1-T47 pp1-134	Documents prepared pursuant to section 37 of the Administrative Appeals Tribunal Act 1975
T48-T58 pp135-188	Additional documents prepared pursuant to section 37 of the Administrative Appeals Tribunal Act 1975
A1	Applicant's Statement of Facts and Contentions	31 October 2002
A2	Statement of Customer's Circumstances	29 October 2002
A3	Bundle of documents	14 November 2002
R1	Respondent's Statement of Facts and Contentions	30 October 2002

ISSUES

4. The relevant issues in this mater are:

* whether the Applicant had assets exceeding the homeowner couple disqualifying limit of $181,500.00 at the time of his Newstart claim dated 12 January 2000;

* whether the Applicant had assets exceeding the non-home owner couple disqualifying limit of $285,000.00 at the time of his Newstart claim made on 19 December 2000.

LEGISLATION

5. The relevant legislation in this matter is the Social Security Act ("the Act") and in particular 1121, 1122, 1123(1), 1126.

BACKGROUND

6. The Applicant applied for a Newstart Allowance on 21 January 2000 (T3). In this application the Applicant indicated that he and his wife owned their own home, were not involved in a business or a company, owned a Mitsubishi van valued at $29,000.00 and that the total value of personal effects and household contents was $35,000.00, and that he was not receiving any income from work, nor did he own or partly own any real estate other than his place of residence (T3).

7. In further documentation it is noted that the Applicant and his wife owned industrial premise in partnership at 1 Tuohy Place, Marrickville and that the estimated value was $250,000.00. It was also stated that the property was mortgaged to the Arab Bank, with the outstanding loan figure being $156,055.00. The Applicant also indicated that he and his wife were directors/shareholders in a private company, namely Nada Fashions Pty Ltd. It was stated that this company did not own any real estate, but did have outstanding loans not shown in the balance sheet. Further it was indicated that the company had ceased to operate, but was receiving $275.00 per week rent for the factory at 1 Tuohy Place. The loan to Nada Fashions Pty Ltd was confirmed to be $156,055.00 at 20 December 1999 by the Arab Bank loan statement (T17).

8. The profit and loss account for Nada Fashions Pty Ltd for the year ended 30 June 1999, indicated that the vehicle referred to as owned by the Applicant and his wife was included in the assets of the company and that the rent in relation to 1 Tuohy Place was an expense item in these accounts (T21, p73). It was also noted that there was an item of income termed employees' contribution - mv expenses.

9. The balance sheet for Nada Fashions Pty Ltd as at 30 June 1999 indicated receivables of $163,231.29, current borrowing of $167,967.90 and non-current borrowings of $236,061.00 (T21, p74).

10. The Applicant's claim for Newstart Allowance was rejected on 2 February 2000 (T12, p56), with the Applicant unaware of such on 16 February 2000, with an interview arranged by the Respondent for 23 February 2000 (T13).

11. On 23 February 2000 the Applicant signed a statement that he had loaned to his company, Nada Fashions Pty Ltd, a sum of about $150,000.00 which he had borrowed by way of a personal loan to himself from the Arab Bank (T14).

12. On 19 December 2000 the Applicant again applied for Newstart Allowance (T22), indicating that he was not involved in a private company, that he has not loaned any money to a company, and that he was not involved in any form of business, having sold his business on 5 December 1999. It would appear that his claim was rejected on 19 December 2000.

13. In a response to a letter from the Respondent on 24 January 2001 (T29) for more information to assist the Respondent in assessing the application , the Applicant provided the following material on 24 April 2001 (T30):

* the business was wound down in December 1999, with losses being carried forward in the company's accounts - the company being neither deregistered or sold to another party;

* the residence at 100 Petersham Road was sold and settled on 30 October 2000, with amount for disbursement being $456,515.90, and with the main disbursement to: Arab bank $419,958.24

M & N Kahla $35,114.00

* the property at 1 Tuohy Place was sold and settled on 30 October with amount for disbursement being $295,775.99, with the main disbursement being:

M & N Kahla $259,709.72

A C Frankland $34,949.47

* deposit amounts were paid to M & N Kahla totalling $ 68,156.00 by Century 21 Real Estate Agents after expenses and commission;

* a balance sheet for Nada Fashions Pty Ltd as at 30 June 2000, in which receivables were shown at $314,745.90 and non-current borrowing at $505,058.14;

* that the receivables of $314,745.90 represent a loan to the Applicant from the company;

* that in relation to the balance sheet for Nada Fashions Pty Ltd as at 30 June 1999, the current borrowing of $167,967.90 are a contra to the current receivables of $163,231.29 with the net result that he has no outstanding loan to the company;

* that payment to him in relation to the sales was $397,298.00 (including sum of $34,949.00 paid on his behalf to AC Frankland) and that he made the following disbursements.

* payment of debts to:

His brother Mihi - $50,000.00

His brother Taleb - $30,000.00

Abdula Feda - $26,000.00

Credit Card - $18,000.00

* loans to:

His son Haydar - $70,000.00

His son Bassam - $70,000.00

His brother Mihi - $50,000.00

His brother Akram - $50,000.00

* family expenditure: $25,000.00

* serviced loan (CBFC) $7,500.00

* (loan outstanding $45-50,000.00)

14. Following a further interview with the Applicant on 2 May 2001 issues were raised by the Respondent in relation to the disbursements made by the Applicant on receipt of the sale monies, and the need for documentation to be provided to verify such payments (T33).

15. Following the discussions with the Applicant on 2 May 2001, the Respondent, in a letter to the Applicant dated 10 May 2001 (T34), stated that contact had been made with his accountant on 9 May 2001 who advised the following:

* as at 30 June 1999 the Applicant's loan to the company Nada Fashions Pty had a balance of $118,000.00;

* as at 30 June 2000 the Applicant no longer has any loans outstanding to the company.

Further the Respondent advised the Applicant that his accountant had stated that the proceeds from the sale of the real estate had been used to repay your loan to the company and partially repay debts owed to the two banks, whereas the Applicant had stated that the disbursement of the money he had received from the sale of properties was as detailed in his response of 24 April 2001.

16. On 15 May 2001 Mr Lewis of Khoury Taxation Services wrote to the Applicant in the following terms (T38):

" I refer to the letter from Centrelink dated May 10, 2001, and in particular the first paragraph.

I recall the conversation with Mr Simms. The following more closely reflects the information that I gave him:

1. The Balance Sheet is part of a Special Purpose Report (for the benefit of the Directors and Shareholders), and cannot be used for other purposes without explanation;

2. The "loan" of approximately $118,000 referred to represents the credit balance in the ledger; which is offset by a debit balance of exactly the same amount; and

3. The end result is that the loan balance represented by the debits and credits referred to is zero.

Mr Simms seems to believe that there are separate loans which coincidentally equal each other. This is not the case. The original loan was a credit on the books of the company. The repayments were debited to a sub account for the purposes of audit control; and at the time the loan was totally repaid the total credits equalled total debits. Because we used sub-accounts for audit control purposes, the accounting software that we use reports the debits and credits as separate balance sheet items. The reality is of course that the loan has been repaid, and no longer exists."

17. On 28 May 2001 Mr Lewis in a further letter to the Applicant stated (T39)

* a deposit to Business cheque account 63-988-9314 of $50,233.60 on 13 April 1999, which included an amount of $50,000 from M Kahla;

* a direct deposit to your personal account 51-835-4794 of $30,000.00 on 12 May 2000 from Tkama Kahla.

18. A letter from Metledge and Thompson, Solicitors & Attorneys, dated 8 March 2000 (T44) indicates that the sale of the business (lease and equipment) concluded on 22 December 1999, with the Applicant receiving $40,000.00 for the total proceeds of sale.

19. On 23 July 2001 the Respondent advised the Applicant that his appeal to the authorised review officer was unsuccessful. Similarly the Applicant's further appeal to the SSAT was unsuccessful when in their decision dated 27 November 2001 they affirmed the decisions under review.

APPLICANT'S EVIDENCE

20. The Applicant informed the Tribunal that he and his wife commenced Nada Fashions Pty Ltd somewhere between 1973 and 1975 and it was wholly owned by them. Further they had carried on business for more than 20 years and had experienced trading difficulties over the last 10 years with the last profitable trading year being in 1996.

21. Initially, during the period in question the company had loans of some $300,000.00 from the National Australia Bank and Howard Financial Services with the loans being secured by way of personal guaranties. In August 1999 the Applicant stated that he secured a loan of $419,000.00 from the Arab Bank and used this to repay the existing loans and provide some working capital. The house and factory owned by him and his wife were provided as security (the home and factory being on separate land titles since 1987), with again personal guarantees being required by him and his wife.

22. At the time of his first application for Newstart in January 2000 the Applicant stated that he and his wife had the following assets:

* company Nada Fashions Pty Ltd - no commercial value, house, personal furniture ($15,000.00 - $35,000.00), money less than $1,000.00, no loans;

* factory - value at 15 June 1999; $195,000.00, estimated value at January 2000, $250,000.00, sale price at 30October 2000, $328,000.00.

Further the Applicant indicated that the amount of $314,745.90 listed as a receivable in the balance sheet at Nada Fashions Pty Ltd as at 30 June 2000 represents a loan to the Applicant from the company.

23. In relation to his second application in December 2000, the Applicant stated that he had sold his factory and house, and with the proceeds of sale paid out the loan to the Arab Bank $419,000.00), repaid $124,000.00 in loans to relatives/friends and advanced some $240,000.00 to relatives. He believed he and his wife had personal effects in the order of value of some $15,000.00.

24. To assist the Tribunal the Applicant had made available other documents, which the Tribunal has included as supplementary documents T48-T58. These documents contain the following information:

* confirm the valuation of the property at 1 Tuohy Place at $195,000.00 on 15 June 1999 (T48);

* confirm the loan by the Arab Bank of $419,000.00 in August 1999 to repay National Australia Bank ($243,000.00), Howard Financial Services ($117,000.00) and to provide business capital ($69,000.00). The borrower is confirmed as Nada Fashions Pty Ltd, registered mortgages are both the house and factory and personal guarantees by the Applicant and his wife (T49);

* statements from the Arab Bank Which demonstrate the loan of $262,000.00 being made on 18 October 1999 and repaid in full on 31 October 2000 (T50);

* statements from the Arab Bank showing the repayment of the second loan in full ($155,413.90) on 31 October 2000 (T51);

* statements from the National Australia Bank which show the company meeting monthly payments of $2,000.00 (approximately) to CBFC from July 2000 to February 2002 (T52);

* balance sheet as at 30 June 2001 indicating non-current liabilities include borrowing from CBFC Limited of $76,087.00 and company guarantors M & N Kahla $115,198.00 (T53);

* National Australia Bank statements for Mr & Mrs Kahla showing deposits in November and December 2001 totalling $60,000.00 which the Applicant has annotated as being made by Haydar (T54);

* a letter from the NRMA Insurance Limited of 31 October 2001 paying a claim to Nada Fashions Pty Ltd for loss of a vehicle in the amount of $23,000.00 approximately (T55);

* a balance sheet for Nada Fashions Pty Ltd as at 28 February 2002 which nominates liabilities as CBFC Limited ($64,476.00) and guarantors M & N Kahla ($97,428.00), as a consequence of receipt of insurance from motor vehicle claim (T56);

* that Kahla Craft warehouse was the business name for the gift shop operated by Nada Fashions Pty Ltd, and that this was the business which was sold in December 1999 (T58).

25. In further material provided after the hearing, the Applicant detailed the following further advice:

* the $35,000.00 which was paid to Mr Frankland from the settlement monies was paid as part of a loan to his son Haydar;

* the annotated Westpac statements indicate payments made from the property settlement to various relatives/friends, repayments of mastercard;

* the annotated Arab Bank statements indicate disbursements made by the Applicant to various relatives from the property settlement.

26. In a document dated 29 October 2002, the Applicant details his current financial circumstances in part, with $120,000.00 owed by Mihi Bassim, insignificant amounts with National Australia Bank and Westpac accounts and an amount of $48,714.00 with an identified account number and an annotation that "this is not saving".

SUBMISSIONS

APPLICANT

27. The Applicant submitted that throughout the processing his two applications, he has endeavoured to provide the Respondent with all the necessary information to permit them to understand his somewhat complex business arrangements. He indicated that he would like to tender the original loan agreement from the Arab Bank to Nada Fashions Pty Ltd, which on examination demonstrates that it was not a personal loan and that he must admit that he made a mistake when he signed the declaration on 23 February 2000.

28. The Applicant in indicating that he had some difficulty in fully understanding accounting practice, stated that he relied upon his accountant for such advice and hence had difficulty in understanding the Respondent's approach to his situation. This was particularly so when assessing the issues of assets he and his wife owned at the two relevant dates.

RESPONDENT

29. The Respondent contended that for Newstart Allowance to be payable, the combined assets, at the date of the first claim, namely 21 January 2000, needed not to exceed the homeowner disqualifying limit of $181,500.00.

30. At such time the Respondent contended that the Applicant and his wife had the following assets:

* shares in the company, Nada Fashions Pty Ltd, of no net worth;

* personal effects and household contents worth $35,000.00;

* an investment property at 1 Tuohy Place, valued at $195,000.00 on 15 June 1999 and at sale on 30 October 2000 sold for $328,000.00.

31. The Respondent in noting that a mortgage existed on 1 Tuohy Place contended that as the mortgage was given for the benefit of Nada Fashions Pty Ltd, pursuant to section 1121(1) of the Act, the value of 1 Tuohy Place cannot be reduced by the value of any encumbrance on it. As such it is submitted that by virtue of owning the property at 1 Tuohy Place, the Applicant and his wife's assets exceed the homeowner-disqualifying limit as at 21 January 2000.

32. In relation to the second claim on 19 December 2000 the Respondent contends that the non homeowner-qualifying limit is $285,000.00 in relation to the payment of Newstart Allowance.

33. Following the sale of the Applicant's properties the Respondent notes, that after servicing the costs of sale and the loan from the Arab Bank of $419,000.00 the Applicant had remaining monies of $397,928.00, which he stated was expended in the following fashion:

* $124,000.00 on payment of debts to Abdula Feda, his brothers Mihi and Talab and to credit card providers;

* $7,500.00 to service Nada Fashions' Pty Ltd CBFC Limited loan;

* $25,000.00 on family expenditure;

* $240,000.00 on loans to his sons Haydar and Assam and his brothers Mihi and Akram.

34. Further the Respondent notes that the Applicant made a loan to his company, Nada Fashions Pty Ltd, and the value of that loan as of 19 December 2000 should be included as an asset pursuant to section 1122 of the Act.

CONSIDERATION AND FINDINGS

35. The Tribunal was impressed by the sincerity and openness of the Applicant in his attempts to wrestle with a set of circumstances which highlighted the difficulties and intricacies associated with the separation of personal affairs and the business affairs of a private company. Inevitably, and in particular in times of financial stringency, the two aspects merge as the owners of the company are called upon to meet debt and/or to release assets given as security for loans to the company or alternatively to service personal guarantees given by individual directors.

36. In addressing the principal issues in this matter the Tribunal notes that in relation to the first application on 21 January 2000 the asset disqualifying limit for a homeowning couple was $181,500.00 and in relation to the second application on 19 December 2000 the asset disqualifying limit for a non-homeowning couple is $285,000.00. The Tribunal accepts these two asset disqualifying limits in this matter.

37. The Tribunal has been particular in detailing the circumstances of the couple's financial circumstances, the nature of their property holdings, the details of their business enterprise, the realisation of their property holdings and the disposal of the cash assets upon realisation. The Tribunal concludes that apart from one major issue, there is little argument between the parties as to the factual circumstances of this matter.

38. The outstanding issue in the Tribunal's view is the issue of whether or not the Applicant made a loan to the company, having secured funds to do so by obtaining a personal loan from the Arab Bank. The Tribunal notes that this is what the Applicant said in his statement on 23 February 2001 that he had loaned $150,000.00 to Nada Fashions Pty Ltd, which he had borrowed by way of a personal loan to himself from the Arab Bank. The Tribunal next observes the loan documentation for $419,000.00 to Nada Fashions Pty Ltd, which details the purpose of the loan and the security required as being registered first mortgages over both the couple's house and their industrial property as well as personal guarantees. The Tribunal notes that this documentation was dated 18 August 1999 and that draw down occurred on 18 October 1999. The Tribunal next notes the repayment of the loan of $419,000.00 on 30 October 2000 following the sale of both properties. The Tribunal also notes the balance sheet for Nada Fashions Pty Ltd and in particular the following:

* at 30 June 1998 current borrowings $117,967.90

* at 30 June 1999 current liability borrowings $167,967.90

* at 30 June 2000 no-current borrowings

* at 30 June 2001 non-current liabilities borrowings $505.058.00 non current liabilities company guarantors M & N Kahla $115,198.00

* at 28 February 2002 liabilities guarantors M & N Kahla $97,428.00

39. The Tribunal further notes the letter sent by the Respondent to the Applicant on 10 May 2001 in which the Respondent advised the Applicant that his accountant had advised that his loan to the company at 30 June 1999 was $118,000.00. The Applicant's accountant responded in his letter of 15 May 2001 detailing an accounting mechanism whereby the figure of $118,000.00 should indeed be zero. The Tribunal also notes a deposit of $50,000.00 by M Kahla to the business cheque account of Nada Fashions Pty Ltd on 13 April 1999, as advised by his accountant on 28 May 2001.

40. In furtherance of this issue, the Tribunal observes that the Applicant contends that he made a mistake when he completed the statement on 23 February 2001 and that it was not loan of $150,000.00 which he made to the company, having obtained a personal loan from the Arab Bank. In support of his position he tendered the original loan agreement from the Arab Bank of 1 August 1999.

41. The Tribunal in assessing all this evidence, concludes that the evidence suggest a loan was made by the Applicant to the company, Nada Fashions Pty Ltd at a point in time earlier than 30 June 1998 and that this loan continues although reduced over time as evidenced by the inclusions of borrowings in annual balance sheets, and more particularly in balance sheets at 30 June 2001, and 28 February 2002, where it is nominated as M & N Kahla company guarantors. The importance of the latter two entries is that such balance sheets were compiled after the company ceased to actively trade.

42. Further the Tribunal, while noting that the accountant does acknowledge that there was a loan to the company by the Applicant in existence prior to June 1999, does comment that the explanation given as to the accounting mechanics which resulted in the apparent disappearance of the debt requires further investigation and clarification particularly in the light of reappearance of a debt at 30 June 2001, when indeed the company was no longer trading. Further the Tribunal does not accept that there can be a notional trade off between receivables and liabilities in a company's account when they are stated to exist. There is in the Tribunal's view an appropriate mechanism for both debts to be written off to the satisfaction of the parties and in an appropriate accounting manner, where it is in the interest of the parties to so do.

43. In considering the value of the Applicant and his wife's assets as at 21 January 2000, it is clear to the Tribunal that the Applicant and his wife owned the property at 1 Tuohy Place, and that it was subject to a mortgage to the Arab Bank for and with the benefit flowing to Nada Fashions Pty Ltd, a separate person at law.

44. The Tribunal notes the following section 1121(1) and 1121(2) of the Act which provides:

"(1) If there is a charge or encumbrance over a particular asset of the person, the value of the asset, for the purposes of calculating the value of the person's assets for the purposes of calculating the value of the person's assets for the purposes of this Act, is to be reduced by the value of that charge or encumbrance.

Note: this section does not apply to an asset to which section 1121A (primary production assets) applies.

(2) Subsection (1) does not apply to a charge or encumbrance over an asset of a person to the extent that:

(a) the charge or encumbrance is a collateral security; or

(b) the charge or encumbrance was given for the benefit of a person other than the person or the person's partner."

45. As a consequence the Tribunal concludes that the charge by the Arab Bank over the property at 1 Tuohy Place cannot be used to reduce the value of the asset, namely 1 Tuohy Place, as the charge was given for the benefit of Nada Fashions Pty Ltd, this being another legal person

46. The valuation of 1 Tuohy Place was estimated at $195,000.00 as at 15 June 1999; estimated by the Applicant to be $250,000.00 at date of application for Newstart and sold for $328,000.00 on 30 October 2000. It is clear to the Tribunal that the value of this asset alone was sufficient to exceed the homeowner couple benefit asset limit of $181,500.00. Other assets which the Tribunal existed at that time include personal assets ($30,000.00) and a loan by the Applicant to Nada Fashions Pty Ltd (between $118,000.00 and $167,967.00).

47. In summary it is the Tribunal's finding that the value of assets of the homeowning Applicant and his wife exceeded $181,500.00 at 21 January 2000, and as such his application for Newstart was correctly rejected.

48. In addressing the issues of assets owned by the Applicant and his wife at 19 December 2000, being the date of his second application for Newstart, the Tribunal in noting and accepting the nature and purpose for each cash disbursement made by the Applicant from the residual monies made available by the sale of the home and investment property, concludes that the loans to Haydar and Bassam (sons) and Mihi and Akram (brothers) total $240,000.00. The Tribunal in noting the gifting provisions contained within section 1123 of the Act, and the loan provisions contained within section 1122 of the Act, concludes that a sum of $230,000.00 is to be included as an asset held by the Applicant and his wife at the date of his second application, namely 19 December 2000.

49. Further the Tribunal, while noting that the Applicant placed a decreased value of some $10,000.00 - $15,000.00 of retained and remaining personal assets, concludes that the value of the loan to the company by the Applicant continues to exist at that time, and in so doing places a value on that asset as somewhere in the order of $115,198.00 indicated as an amount owing to the guarantors by the company as declared in the balance sheet at 30 June 2001, the company having ceased to trade in any meaning full following the sale of the business activity in December 1999 and the sale of properties finalised in October 2000.

50. In assessing the Applicant's and his wife's assets as it has, the Tribunal again reflects on the difficulties that interrelated personal and company financial transactions and arrangements can produce, particularly where such arrangements are made to satisfy financial contingencies at a particular point in time, without foreseeing what problems they may create when applications are later made for social security benefits.

51. The Tribunal concludes that the value of assets as determined at 19 December 2000 held by the Applicant and his wife, being non-homeowners, exceeded the disqualifying limit of $285,000.00 and hence his claim for Newstart Allowance at that date was correctly denied.

DETERMINATION

52. The Tribunal determines that the decesion under review be affirmed.

I certify that the 52 preceding paragraphs are a true copy of the reasons for the decision herein of Dr J D Campbell, Member

Signed: Ms H Kavadias

Associate

Date/s of Hearing 31 October 2002

Date of Decision 21 January 2003

Solicitor for the Applicant self

Counsel for the Respondent John Kenny