Watson and Secretary, Department of Family and Community Services [2003] AATA 68 (23 January 2003)

Last Updated: 24 January 2003

DECISION AND REASONS FOR DECISION [2003] AATA 68

ADMINISTRATIVE APPEALS TRIBUNAL )

) Nos S2002/20, 21, 165 and 166

)

GENERAL ADMINISTRATIVE DIVISION )

Re Craig Lindsay Watson and Jan Rita Watson

Applicants

And Secretary, Department of Family and Community Services

Respondent

DECISION

Tribunal Senior Member JA Kiosoglous MBE Mr DJ Trowse (Member)

Date 23 January 2003

Place Adelaide

Decision The Tribunal affirms the decision under review

(signed)

JA KIOSOGLOUS

(Senior Member)

CATCHWORDS

SOCIAL SECURITY - determination of income - offset of business losses against benefits received under income protection policy - decisions affirmed

Social Security Act 1991 s1075

A Guide to Social Security Law; Part 4.7.1.40

BHP Petroleum (Timor Sea) Pty Ltd & Ors v Minister for Resources (1994) 121 ALR 280

REASONS FOR DECISION

23 January 2003 Senior Member J.A. Kiosoglous MBE Mr D.J. Trowse (Member)

1. These references bring into question the capacity to offset for social security purposes losses incurred by Mr Craig Watson in his financial planning business against income received by him in terms of an income protection policy. In the absence of such an offset, the combined income of Mr Watson and his wife, Mrs Jan Watson is of a quantum whereby - neither qualify for low income health cards - Mrs Watson's entitlement to an Austudy allowance is further abated - and, in similar vein, Mr Watson's entitlement to a disability support pension is at a reduced rate. It is the decisions of the Social Security Appeals Tribunal dated 19 December 2001 and 13 May 2002, and which confirmed decisions made by an officer of Centrelink on 26 July 2001 and 12 December 2001 respectively, that are before this Tribunal.

2. The Tribunal received into evidence the documents lodged pursuant to Section 37 of the Administrative Appeals Tribunal Act 1975, together with ten exhibits. Additionally, the Tribunal heard evidence from Mr Watson and Mr Mark Stevenson, the underwriting manager at AXA Australia. The applicants were represented by Mr M. Magarey of counsel and the respondent was represented by Mr J. Underwood, an advocate on its behalf.

3. Central to the determination of this matter are the provisions comprised in section 1075 of the Social Security Act 1991 (the Act) which read -

"Permissible reductions of business income

1075(1) Subject to subsection (2), if a person carries on a business, the person's ordinary income from the business is to be reduced by:

(a) losses and outgoings that relate to the business and are allowable deductions for the purposes of section 51 of the Income Tax Assessment Act 1936 or section 8-1 of the Income Tax Assessment Act 1997, as appropriate; and

(b) depreciation that relates to the business and is an allowable deduction for the purposes of subsection 54(1) of the Income Tax Assessment Act 1936 or Division 42 of the Income Tax Assessment Act 1997; and

(c) amounts that relate to the business and are allowable deductions under subsection 82 AAC (1) of the Income Tax Assessment Act 1936.

1075(2) If, under Division 1B, a person is taken to receive ordinary income on a financial investment, that ordinary income is not to be reduced by the amount of any expenses incurred by the person because of that investment."

4. As between the parties, there is no dispute that the payments being received by Mr Watson in terms of the income protection policy come within the definition of ordinary income as that term is described in section 8 of the Act. Furthermore, there is an acceptance that the losses and outgoings incurred by Mr Watson in the conduct of his financial planning business qualify as allowable deductions under the provisions of the income tax legislation referred to in subsection 1075 (1). The only question requiring the Tribunal's attention is whether the receipts from the insurance policy constitute ordinary income from the financial planning business. If they do, then the offset sought is authorised by the statute.

5. Until about 1996, Mr Watson was engaged, first, as a life assurance agent and, later, as a financial planner with National Mutual Life. Since 1996, he has been engaged as a financial planner with AXA Australia. The financial planning business was and is carried on by Mr Watson as a sole proprietor and, with the paid assistance of his wife, operates from the family home. In return for the services rendered to his clientele, Mr Watson receives fees and commissions.

6. On 3 January 1996, Mr Watson entered into an agreement with National Mutual whereby the insurance company agreed to provide him with professional income protection insurance cover in exchange for the payment of a stated premium. In terms of the policy document, the insurer undertook to pay to Mr Watson a weekly benefit if he suffered either a total disability through injury or sickness or a specified serious injury or sickness. Although the weekly benefit amount nominated in the policy was $410, this entitlement with the advantage of indexation currently stands at $454.30.

7. The cover offered under the policy is extended to provide income relief in the situation of Mr Watson being partially disabled after being totally disabled and where he is performing some work. In those circumstances, the benefit amount is to be calculated in terms of the following formula -

A - B x C

A

Where

A equals the person insured's pre-disability income

B is the person insured's average weekly income during the period in which he or she is partially disabled

C is the benefit amount of $410 or as that amount may be varied in any way.

The word income as used in B is defined to mean -

"If the person insured owns part, or all, of a business or practice, income is money generated by the business due to the person insured's own activity, after all expenses in earning that income have been deducted."

8. Other notable features of the policy include the following:

* benefit period for injury and sickness is until insured person attains 65 years of age;

* a waiting period of two weeks;

* in the event of the insured person suffering an injury or sickness of the kind set out in a table forming part of the policy, the insurer undertakes to pay the weekly benefit amount for a stated period irrespective of whether the condition is total or partial;

* where the partially disabled insured person permanently retires from the workforce or, subject to various concessions, becomes unemployed in paid work for more than three months, the insurer is empowered to terminate the policy; and

* the requirement that the partially disabled person be employed for the purpose of being entitled to receive the weekly benefit is unrestricted, that is, it is not limited to his or her prior occupation.

9. Evidence before the Tribunal established that the benefit amount stated in the policy has its origin in an averaging of the amounts of net income derived by the insured person prior to the suffering of an injury or sickness. Once such a figure has been determined to the satisfaction of the insurer, the person to be insured has the option of selecting a benefit amount of up to 75% of that figure.

10. Additionally, Mr Watson presented various charts to demonstrate the methodology applied by the insurer in calculating the amount of benefit payable to a partially disabled insured. The system outlined was confirmed by Mr Stevenson. The Tribunal is satisfied that in such a case, the insurer must, inter alia, have regard to both the insured's gross earnings derived while disabled and the business expenses relevant thereto. This testimony does no more than support the application of 'B' as contained in the formula quoted in the policy document and which is to be used in circumstances of the kind envisaged in the examples given by Mr Watson in his chart presentation.

11. In November 1996, Mr Watson was operated on for the removal of a cancerous brain tumour. Despite suffering some loss of short term memory and a reduction in the rate of his work output, Mr Watson soon resumed the conduct of his financial advisory business albeit at a loss. The following figures extracted from schedules prepared in conjunction with Mr Watson's 2001 tax return reveal that those losses are ongoing -

Gross fees and commissions received 22,513

less

Related business expenditure 28,166

Net Loss $5,653

12. According to the evidence, Mr Watson has no plans to terminate this activity. Plainly, he gains personal satisfaction from the giving of financial advice to his clients and is possessed with the ambition to grow the annual gross income of the business to $100,000.

13. The medical sickness suffered by Mr Watson came within those specified in the policy table and, as such, he became entitled to receive the weekly benefit amount for the nominated term of 26 weeks less the waiting period of 2 weeks. At the end of that time, Mr Watson was adjudged not able to perform all of the income producing duties of a financial adviser and, thus, the right to receive the benefit amount as a partially disabled person was created. Reference was made to the policy formula with the insurer making inquiries into Mr Watson's average weekly income during the period of his partial disablement. Having been satisfied that Mr Watson was in fact incurring business losses, the insurer, in applying the formula, maintained the income protection payments at the rate specified in the policy. In the 2001 financial year, those payments were at the weekly rate of $454.30 and totalled $23,274.

14. For the applicants, it was contended that there is a relationship between the business and the monies being received from the insurer. Because of that relationship, it was said that, in the determination of Mr Watson's income for social security purposes, the net losses of the business should be offset against the insurance proceeds. Matters identified as establishing the connection were -

* the method used in arriving at the benefit amount recited in the policy suggests that the insurance monies received should be perceived as a replacement of the business income lost because of the disability suffered by Mr Watson;

* the requirement that the insured must undertake some work in order to qualify for the weekly benefit amount; and

* finally, in the determination of the amount payable in terms of the policy, the need to consider the net income earned from the business during the period of partial disablement.

15. Seemingly, the above proposition is grounded on information contained in a publication issued by the respondent and which is titled 'A Guide to Social Security Law'. More particularly, reference was made to Part 4.7.1.40 which is headed Assessment of Business Losses for Sole Traders and Partnerships and contains the following statements -

'Assessment of business losses

If a business runs at a loss, a nil amount is included in the income (section 8(1) - ('Income') test.

Business losses from the current year, OR from previous years, are generally NOT allowed as deductions from other profits (1.1 p. 428) or income derived from unrelated sources, such as:

* Earnings,

* Superannuation,

* Profits from investments, or

* Profits from unrelated businesses.

Losses which can be offset

Losses within a sole trader business or partnership can be offset against the profits of other necessarily related activities if a customer is involved in:

* a business or partnership which operates in more than one field,

OR

* 2 businesses, each operating under a different business structure.'

16. The Tribunal pauses to consider the proposal that the financial planning activity is 'necessarily related' to the receipt of the benefits payable in terms of the income protection policy. First, it is paramount to recognise that the Guide issued by the respondent is not to be regarded as the relevant legislation. Secondly, that it should be observed that the section addressing the offset of losses speaks of activities and the offsetting of losses against profits. In the Tribunal's view it is incorrect to classify the receipt of monies payable under the insurance policy as an activity. Likewise, it is not feasible to reconcile the term profit with those same insurance proceeds. Finally, the examples cited in the Guide are clearly distinguishable from those currently under consideration. For these reasons, the Tribunal concludes that the information contained within the Guide is of no assistance to the applicants.

17. In recognition of the methods applied in determining - the benefit amount stated in the policy - and the amount payable where an insured person is classified as being partially disabled and does some work, the Tribunal is satisfied that, in these circumstances, there is a link between the operations of the financial planning business and the amounts payable under the policy. However, this acceptance falls far short of answering the crucial question as to whether the insurance payments received by Mr Watson come within the category of being ordinary income derived from the financial planning business.

18. In the opinion of the Tribunal, the word 'from' as used in subsection 1075(1) of the Act should be given its dictionary meaning. On this point, the thoughts expressed by Beaumont J in BHP Petroleum (Timor Sea) Pty Ltd & Ors v Minister for Resources (1994) 121 ALR 280 when confronted with the task of defining the word 'from' as used in s20(4) of the Petroleum Resources Rent Assessment Act 1987 are apposite -

"In its relevant Macquarie Dictionary definition, 'from' is described as a participle specifying a starting point, and hence is used to express, inter alia, a 'source or origin'. In the Shorter Oxford Dictionary, 'from' is again defined as 'denoting departure or moving away: indicating a starting point'.

...

In my opinion, where used in s20(4), 'from' is intended to have its dictionary meaning, that is to say, to indicate the starting point, source or origin, of an application or request."

In like manner, the Tribunal takes the view that the word 'from' as it appears in subsection 1075(1) of the Act indicates the starting point, source or origin of the income derived by the financial planning business conducted by Mr Watson.

19. After a consideration of all of the relevant facts, the Tribunal concludes that the monies received by Mr Watson in terms of the income protection policy were neither sourced or originated from the financial planning business. Rather they came to Mr Watson as a result of the contract he had personally entered into with the insurance company. In terms of that contract, the payments were dependent upon the disability suffered by Mr Watson and his decision to perform some work. The reality is that the business per se performed no services whatsoever in the derivation of the benefit payable under the policy. In this circumstance, it cannot be said that the receipt of the insurance monies was an incident of activities undertaken by the financial planning business.

20. The Tribunal finds that the monies paid to Mr Watson by National Mutual do not represent income from the financial planning business. Thus, for the purpose of calculating his income under the social security legislation, those receipts are not capable of being reduced by losses incurred by the financial planning business.

21. For the reasons stated, the Tribunal affirms the decisions under review.

I certify that the 21 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member JA Kiosoglous MBE and Mr DJ Trowse (Member).

Signed: (signed)

John Howell, Associate

Date/s of Hearing 3, 20 June & 14 November 2002

Date of Decision 23 January 2003

Counsel for the Applicant Mr M. Magarey

Solicitor for the Applicant Bourne Lawyers

Counsel for the Respondent Mr J. Underwood

Solicitor for the Respondent Advocacy and Administrative Law Team, Centrelink