Gillett and Secretary, Department of Families, Housing, Community Services and Indigenous Affairs [2011] AATA 95 (14 February 2011)

Last Updated: 15 February 2011

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 95

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2010/3666

GENERAL ADMINISTRATIVE DIVISION		)
	Re		FREDERICK AND LYNETTE GILLETT

Applicant

And

SECRETARY, DEPARTMENT OF FAMILIES, HOUSING, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS

Respondent

DECISION

Tribunal

Senior Member K S Levy, RFD

Date 14 February 2011

Place Brisbane

Decision

The Tribunal affirms the decision under review.

................[Sgd]..............................
Senior Member

CATCHWORDS

SOCIAL SECURITY – Benefits and entitlements – Age pension – Applicant took out loan secured by assets of family discretionary trust – Whether loan collateral security -– Whether encumbrance can be offset against the total value of assets if it is security for a loan – Loan must be exclusively related to the asset charged – Applicant received loan in personal capacity and not as trustee – Loan is asset of applicant for purposes of age pension rate – Decision under review affirmed

Social Security Act 1991 (Cth) ss 1207A,1207V, 1207X, 1208G

Re Lawrence Fitzgerald and Secretary, Department of Social Security [1992] AATA 349; (1992) 16 AAR 450

Fortune and Secretary Department of Education, Employment and Workplace Relations [2010] AATA 950

Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298

REASONS FOR DECISION

14 February 2011

Senior Member K S Levy, RFD

INTRODUCTION

1. The applicants are approved recipients of the age pension. A review in March 2010 taking account of the value of their trust assets resulted in a reduction of entitlement in the amount of age pension.
2. The applicants have sought review of the original Centrelink decision dated 11 March 2010. An Authorised Review Officer (ARO) rejected the applicants’ submissions on 1 June 2010. The Social Security Appeals Tribunal (SSAT) on 2 August 2010 similarly rejected the applicants’ submissions. They now appeal to this Tribunal.

ISSUES

3. The fundamental question raised by the applicants is whether the reduced rate of age pension applicable to them was correctly determined. Specifically, to answer that question, the issue for the Tribunal is:
   

Can the value of the assets of the applicants be reduced by the loan to Mr Gillett (which is secured to an asset of the Gillett Family Trust), in assessing the applicants’ age pension?

EVIDENCE

4. The critical fact which has raised the issue of a reduction in the amount of age pension payable to the applicants is that a loan for $300,000 from the National Australia Bank (NAB) was received by Mr Gillett in 2007. This loan was for the purpose of purchasing shares and also for some personal expenditure. Mr Gillett told the Tribunal that it had always been intended that the loan was to be through the GFT. However, all of the loan documentation points to the loan being in the name of Mr Gillett personally and not in the name of the trust, of which he is the sole trustee. Mr Gillett says the statutory provisions upon which Centrelink and the SSAT have relied are ambiguous and the matter should be determined in his favour. He says, in any event, even if that submission is not acceptable, he has “reluctantly put forward an alternative proposal ... which sets out the percentage of funds utilised for share purchases (74%) and private use (26%) on the basis that at least 74% of the mortgage be offset against the combined assets.” That submission was made “only in the event that the primary appeal request is declined”.

CONSIDERATION

5. There was considerable documentary evidence available to the Tribunal. In addition, Mr Gillett gave evidence at the Tribunal and was cross-examined. The respondent also had an officer of Centrelink available to give evidence. I have considered all of the material available (both documentary and viva voce evidence) in determining this matter.
6. The relevant law which governs the issue in dispute is contained in Part 3.18 of the Social Security Act 1991 (Cth) (the Act). Relevantly, the provisions are:

SECTION 1207A
Definitions
In this Part, unless the contrary intention appears:
...
"entity" means any of the following:
(a) an individual;
(b)  a company;
(c)  a trust;
(d)  a business partnership;
(e)  a corporation sole;
(f)  a body politic.
...

SECTION 1207V
Controlled private trusts
...
(2) For the purposes of this section, the individual passes the control test in relation to a trust if:
(a) the individual, or an associate of the individual (other than an associate covered by paragraph 1207C(1)(j)), is the trustee, or any of the trustees, of the trust; or
...

SECTION 1207X
Attributable stakeholder, asset attribution percentage and income attribution percentage
(1) ...
Trust
(2) For the purposes of this Part, if:
(a) a trust is a controlled private trust in relation to an individual; and
(b) the trust is not a concessional primary production trust in relation to the individual (see section 1208U);
then:
(c) the individual is an attributable stakeholder of the trust unless the Secretary otherwise determines; and
(d) if the individual is an attributable stakeholder of the trust--the individual's asset attribution percentage in relation to the trust is:
(i) 100%; or
(ii) if the Secretary determines a lower percentage in relation to the individual and the trust--that lower percentage; and
...

SECTION 1208G
Effect of charge or encumbrance on value of assets
Charge or encumbrance relating to a single asset
(1) For the purposes of the application of this Division (other than this section) to a particular individual and a particular company or trust, if:
(a) there is a charge or encumbrance over a particular asset of the company or trust; and
(b) the charge or encumbrance relates exclusively to that asset;
the value of the asset is to be reduced by the value of the charge or encumbrance.
(2) Subsection (1) does not apply to a charge or encumbrance over an asset of a company or trust 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 an entity other than the company or trust; or
(c) the value of the charge or encumbrance is excluded under subsection (6).

7. Mr Gillett, on behalf of both himself and his wife, made six submissions (exhibit 3). These submissions and their determination are set out below. In these submissions, extracts of which are included below, abbreviations were used by the applicant. For clarity of abbreviations used in extracts, Mr Gillett has used “FCG” as a reference to himself and “GFT” as a reference to the Gillett Family Trust, of which he is Trustee.
8. The first submission was that s 1208G(2)(b) of the Act does not apply in his case, as the trust mortgage supports the NAB debt arising from one transaction. In addition, he said the security is not a collateral security as he is “jointly and severally liable both personally and as the sole trustee of the GFT”. He emphasised “that the original purpose of the loan was to acquire assets for the benefit of a multiple entity structure for the Gillett family” ie. Frederick Charles Gillett as trustee for the Gillett Family Trust. He also said that the provision in subsection (2)(b) “is ambiguous to say the least but in any event is capable of an interpretation that favours FCG and/or the GFT to claim a reduction in value by reason of the mortgage given by the Trust”.
9. Some aspects of this submission overlap with some of the other submissions, which I will deal with shortly under some of the other claims. Suffice it to say in relation to this submission, putting aside for the time being the issue of whether the mortgage is a collateral security, the original purpose of the loan was undoubtedly to acquire a benefit for Mr Gillett and his family. It appears as though prior to the hearing he did not see any legal differentiation between himself and his family on the one hand and the GFT on the other hand.
10. The second submission made by the applicants, which overlaps with the first submission, is that the SSAT wrongly categorised the mortgage security as a collateral security[1]. The applicants submit “it is the principal, sole security for the loan. It is not a secondary security or one given ‘in addition’ to the principal security”. The issue of a collateral security was canvassed by the SSAT. The members of that Tribunal referred to a decision of the Administrative Appeals Tribunal in Re Lawrence Fitzgerald and Secretary, Department of Social Security (1992) 16 AAR 450. The Tribunal said that a collateral mortgage can be either:
    • (1) a mortgage that is given in addition to a principal security; or
    • (2) a security given by a third party to support another party’s debt.
      
11. That Tribunal also said:

In the Tribunal’s view, the purpose of defining a charge as an ‘excluded security’ is to prevent a person who is applying for a benefit from claiming a reduction in value of his/her assets by reason of a mortgage given to support that person’s guarantee of some other party’s debt i.e. the second type of collateral security.[2]

12. That decision[3] also referred to a definition contained in Fisher and Lightwood’s Law of Mortgage 10th Edition at page 16:

Collateral security. Collateral or additional security may be given by the principal mortgagor himself or by a third party... Examples of the second type of collateral security are a guarantee by a third party for the repayment of the principal mortgage debt and a mortgage of land or other property by a third party to secure either a principal debt or his liability under a guarantee.

13. In Fortune and Secretary Department of Education, Employment and Workplace Relations [2010] AATA 950, that Tribunal said that the expression “collateral security ... is commonly understood in financial terms to mean security given over one asset for a loan in respect of the purchase of another asset”.[4]
14. The present situation of Mr Gillett is that he is the sole trustee of the family trust and has also received a loan which appears to be in his name personally. It might be regarded in similar terms to a guarantee where a guarantor has an indemnity to claim from the principal debtor once there is default and the guarantor has paid the creditor. But here, it would be somewhat fictional in practical terms, as the trustee for the GFT is also the same person who applied for the loan in a personal capacity. Undoubtedly, the bank would be prepared to accept a mortgage given by a third party (the GFT) where the trustee of that trust (Mr Gillett) can legally mortgage assets of the trust as security for a loan in his name. However, the legal position is that the GFT is a separate legal entity to Mr Gillett himself.
15. The GFT is clearly a “controlled private trust” as provided for in s 1207V of the Act as Mr Gillett is the trustee of the trust (s 1207V(2)(a)).
16. The respondent argues that the mortgage security is a collateral security. The SSAT also found that it is a collateral security. The mortgage security in this case is not a collateral security in the sense that it is additional to some other mortgage or security in order to secure a debt by the principal mortgage. As Mr Gillett said, it is the principal and only mortgage. Nor is it strictly like the definition of the second type of collateral security described in Fisher and Lightwood’s Law of Mortgage. That refers to a guarantee by a third party as an additional security, but the example given of the collateral security of the second type does strictly cover the situation which is dealt with by the facts in the present case. It is also a collateral contract in the sense that it is the primary mortgage and is consistent with the main contract for loan between Mr Gillett and the NAB. The fact that the mortgage is a security which acts as a guarantee by a third party (the GFT) and the debtor (Mr Gillett), does fall within the description of a collateral security. In my view, the broad nature of definitions and applications in the commercial world to the term of collateral security means that the security in this case is a collateral security. Submission two therefore cannot be upheld.
17. The third submission made by Mr Gillett was that the SSAT incorrectly classified the loan as a personal loan to Mr Gillett[5]. He said that “the loan was initiated as a ‘business loan’ for investment purposes in 2007 and cannot under any circumstances be construed as a ‘personal loan’”..
18. The respondent disputes that claim. Considering the evidence, folio 172 (which is a letter from “NAB Business”) merely states that the loan is for “investment use”. It does not specify that it was for the GFT. Indeed, it implies it is for Mr Gillett personally as all reference is made to him as an individual. I accept as a fact that the loan was made for business purposes as one could readily accept that “NAB Business” indicates it is the business arm of the bank.
19. Mr Gillett made a submission to the SSAT that it was a business loan originated in the name of Mr Gillett. He said “at that time the bank were not aware the unit property was purchased by FCG as trustee for the GFT. As FCG and FCG a/t/f the GFT are one and the same person, it was decided to let the loan stand as documented by the bank. In any event, I do not believe it can be argued that the loan ‘was given for the benefit of another entity’ eg. a third party or company etc”.[6]
20. As the bank accepted the security from another entity, it would be surprising to think that they did not protect their interests and clarify quite specifically the fundamental issue of who were the relevant parties to the transaction and that its security was well founded. Given that this is a specialised area of business engaged in by the major banks, a high degree of due diligence by a bank in these circumstances seems intuitively obvious. Indeed, on the face of all of the records dealing with the bank, it is clear that it was intended to be a transaction with Mr Gillett personally. Despite Mr Gillett’s claims, there was no written evidence, nor indeed was there any evidence brought by an officer of the bank to explain their practices or to corroborate in some way the claims made by Mr Gillett. Mr Gillett’s submission in this regard must therefore by of reduced weight.[7]
21. Mr Gillett also told this Tribunal that he had been given legal advice that he could sign the loan documentation with it being in his own name rather than it being in the name of the GFT. He neither referred to who gave that advice nor did he support it in any way by bringing corroborative evidence. That assertion must be given very little weight. I therefore find that at the time of taking out that loan that, despite it being for a business purpose, it was a contract between the NAB and Mr Gillett in his own personal capacity.
22. Mr Hamilton, for the respondent, also put to Mr Gillett in cross-examination that subsequent to taking out the loan, he sought review by an ARO. Mr Gillett was referred to folio 145 of the T-documents and the information given to the ARO in June 2010. Even at that stage, it appears that there was no reference or suggestion by Mr Gillett that the debt was intended to be in the name of the GFT Mr Hamilton further put to Mr Gillett that from the SSAT decision, it would seem to indicate that the loan was intended to be a business loan. Mr Gillett responded by referring to folio 11, paragraph 3 where Mr Gillett responded that the first dot point of that paragraph indicated it was a business loan. I do not glean any wording that specifically says it was a business loan from that paragraph. Nevertheless, as I have already found as a finding of fact that the loan was for business purposes I find also that it was a loan to Mr Gillett, a separate legal entity from the GFT. The third submission cannot succeed based on the factual findings and the legal position of the two separate entities involved.
23. The fourth submission made by Mr Gillett was that “the SSAT did not give proper consideration to the ‘special circumstances’ of the NAB loan which was inadvertently documented by the bank in the name of the FCG only, whereas the original intent was that the borrower was to be the GFT, as the legal owner of the property”[8].
24. The references provided in that submission only seem to refer to statutory provisions which do not provide or point to evidence to support the submission. However, I note Mr Gillett also states that it was an oversight by the bank and that it incorrectly assumed that the property was owned by him. This has already been dealt with in considering the second submission above but I consider it further here.
25. The Trust Deed was not provided to the Tribunal at hearing. Mr Gillett said it had been misplaced and thought it may be with his solicitor. Mr Gillett later found a copy and provided it to the Tribunal on 8 February 2011. The Trust gives the usual wide-ranging powers of such a Family Discretionary Trust. The Trust Deed shows Mr Gillett as a Trustee and a beneficiary together with his wife and children. The child or children of any of those beneficiaries, that is, whether or not they are specified as beneficiaries, may benefit from the net income of the trust fund in any year (paragraph 2(i)) and any determinations as to net income for that year will not form part of the Trust Fund. The Trustee may also determine a share of the capital to be appropriated to a beneficiary in certain circumstances, including where a beneficiary is to have that amount put to another trust of which he or she is also a beneficiary of that other Trust (paragraph 8). However, that provision excludes any part of the corpus of the trust fund being appropriated to the settlor or a person who is or was a trustee of the Fund and is a beneficiary. I do not accept that Mr Gillett satisfies any provision of the Trust that assists the question in dispute here. In any event, paragraph 7 of the Trust requires that any resolution to use any amount of the Trust Fund which can lawfully be appropriated must be recorded in a written minute and such minutes shall be signed by the Trustee (or Directors if a corporate trustee).
26. As was noted in cross-examination at the hearing, the loan was intended to be used as Mr Gillett saw fit for purchase of shares. He agreed with Mr Hamilton that the loan was intended also for the purpose of some personal expenditure. It was clearly not all for the purpose of the Trust. In any event, the evidence, apart from the proportion of money spent on the purchase of shares for business investment or for personal expenditure, indicates the legal transaction which initiated the loan and was executed as a loan and a mortgage, was set up in the name of Mr Gillett with a security being provided by the Trust of which Mr Gillett is Trustee. Mr Gillett has not provided any evidence to negate the respondent’s assertion that there has been no indication at any earlier stage of this process that it was intended to be otherwise. No evidence has been provided by the Bank. No determination by the Trustee at the time of the transaction, supported by a minute, recording an intention at that time (as required by clause 7 of the Trust Deed) was available to support this submission. The fourth submission must also fail.
27. The fifth submission of the applicant is that an incorrect conclusion has been drawn that the mortgage debt is not recorded in the Trust financial accounts[9]. He said that “the conclusion is wrong as is the statement that the loan as a ‘contingent liability’, has no bearing on the accounts of the trust”.
28. The Tribunal was referred to the financial statements of the Trust. For the year 2007, there is no reference in those financial statements to the loan. In relation to the 2008 and 2009 financial statements, the liability of the GFT is shown to be a “contingent” liability and is described as “guarantees given over property in respect to bank loan for Fred Gillett’s Share Trading”. This reference is shown as “Note 2” to the accounts. The usual practice, and an accounting convention, is that a “contingent liability” is one which is not a crystallised liability and therefore is not a legal liability of the Trust or the entity concerned. It would only become so if the principal debtor defaulted. Here, Mr Gillett’s accountants have regarded it as a contingent liability and referred to it as a “guarantee” in the accounts. While Mr Gillett provided no further information about it, one can only deduce that the accountants were so instructed and from their own professional knowledge and experience to regard it as the proper way of defining and recording the loan.
29. The record would only have a bearing on the accounts if there was default on the loan and the Trust then would become legally liable for the loan or outstanding balance at the time of default. I therefore conclude that the conclusion by the SSAT is correct – the mortgage debt is not included in the figures to the accounts, that is, the accounts proper, as it is shown as a “Note” to the accounts and as a “contingent” liability. The fifth submission is without substance and must also fail.
30. The sixth submission made by the applicants is that inadequate consideration was given by the SSAT to their alternative proposal to offset 74% of the mortgage debt against either the Trust assets or the combined assets of the Gillett family[10].
31. Mr Gillett has accepted the Australian Valuation Office valuation of the Trust property of Mermaid Beach as being $690,000. The issue of relevance is whether the loan of $300,000 can be offset against the combined assets of Mr and Mrs Gillett. Mr Gillett accepts now, which he had admitted in evidence that he had not previously accepted, that he and the Trust are different entities. When asked in cross-examination whether he accepted that the Trust had given the mortgage for the benefit of Mr Gillett personally, he accepted that the security was to purchase shares for the Gillett family and for Mr Gillett to meet certain personal expenditure. The complex assessment officer set out the decision of Centrelink based on the requirements of s 1208G of the Act. That decision took account also of the meaning of s 1208G in the Guide to Social Security Law paragraph 4.6.6.30. The conclusion reached there is that under that section of the Act, a liability owed by Mr Gillett personally, and for which a security is offered over the assets of another entity of which the person who is liable for a loan as a full or part controller by Trust, is not available to reduce the value of the entity assets. Nevertheless, Mr Gillett relies on calculations done by his accountants, Pluta Accountants, which show the proportion of the loan fund which was spent on share purchases in comparison to personal expenses[11]. The accountants have confirmed the percentages referred to by Mr Gillett but have stated that the provision of the figures are to “... confirm that the loan was predominately used for your share acquisitions”.
32. There is no dispute that the amount of the loan was $300,000 or that the proportion of the loan was spent on shares or personal expenses as claimed. Nor is there any dispute that the share investments were for business purposes. The critical issue is whose business was the loan given to and whose business the investment of shares were made for. The evidence is clearly that Mr Gillett in his personal capacity applied for the loan and received the loan. The evidence is therefore that the loan monies were invested in shares for Mr Gillett, not Mr Gillett as Trustee for the GFT.
33. I do not consider that the SSAT gave inadequate consideration to this issue. The fundamental and important issue to be determined was firstly which legal entity the loan was made to. This has been answered above and findings of fact made that the evidence all pointed to the application being made by Mr Gillett and the loan being granted to Mr Gillett. The money was therefore given to him in his personal capacity to invest or use for personal expenses, not to be used by him as the sole Trustee for the GFT. While Mr Gillett and the GFT are both an “entity” as defined by s 1207A, the value of the asset of an entity can only be reduced by the value of the charge where the charge is exclusively related to the assets (s 1208G(1). It is to be noted that subsection (1) refers to a charge or encumbrance which must be an asset of the trust itself. The facts in this case do not satisfy that definition. In addition, subsection (2) of that section specifies situations where subsection (1) does not apply. Included in those situations are firstly, where the charge or encumbrance is a collateral security; and even if it were to be accepted that the charge was not a collateral security, the second situation must be considered which is “the charge or encumbrance was given for the benefit of an entity other than the company or trust”. That provision specifically covers the factual situation here. The charge over the property at Mermaid Beach which is the property of the trust was given for another entity, which is Mr Gillett as an individual, a separate legal entity to the trust, despite the fact that he is centrally involved with that trust.
34. The proposal by Mr Gillett to offset 74% of the loan against the Trust assets is not relevant as the loan is not to the Trust but to Mr Gillett personally. The proposal by Mr Gillett to offset 74% of the loan against the combined assets of he and his wife also cannot be accepted either as it is unlawful by virtue of s 1208G. This submission fails also.

CONCLUSION

35. The applicants’ submission that the legislation is ambiguous is not sustained. Mr Gillett claimed that the decision had a “strong element of injustice”. I do not suggest that there was any improper motive in Mr Gillett in taking out the loan, but in examining the legislative tests I find that the reduced rate of age pension was correctly assessed. The decision under review must therefore be affirmed.
    

I certify that the 35 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member K S Levy, RFD

Signed: ................[Sgd].............................................................

Associate

Date/s of Hearing 8 December 2010

Date of Decision 14 February 2011

Applicants were represented by Mr Gillett

Solicitor for the Respondent Mr Robert Hamilton, Departmental Advocate

---

[1] T-Document 2, Folio 13.
[2] Re Lawrence Fitzgerald and Secretary, Department of Social Security [1992] AATA 349; (1992) 16 AAR 450 at [9].
[3] Re Lawrence Fitzgerald and Secretary, Department of Social Security [1992] AATA 349; (1992) 16 AAR 450 at [8].
[4] Fortune and Secretary Department of Education, Employment and Workplace Relations [2010] AATA 950 at [35].
[5] T-Document 2, Folio 13.
[6] T-Document 16, Folios 176 – 177.
[7] Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 at [330] – [331].
[8] T-Document 2, Folios 11 – 12 (paragraph 7).
[9] T-Document 2, Folios 13 – 14 (paragraph 14).
[10] T-Document 2, Folio 12.
[11] T-Document 15, Folios 169 – 171.