Collins v Repatriation Commission [1980] FCA 105; (1980) 32 ALR 581

The Tribunal, pursuant to s.43(1)(a) of the Administrative Appeals Tribunal Act 1975, affirms the decision under review.

J.A. KIOSOGLOUS, B.C. LOCK AND D.J. TROWSE This is an application for review of a decision of the Social Security Appeals Tribunal dated 16 February 1995 (T2/2), which affirmed a decision of a delegate of the respondent dated 7 October 1994 (T14/101) (as affirmed by an Authorised Review Officer ('ARO') of the Department of Social Security ('the Department') on 21 December 1994 (T23/130)) to reject a claim for age pension and wife's pension due to the value of assets held by the applicants in excess of prescribed amounts.

2. The Tribunal received in evidence the documents lodged pursuant to s.37 of the Administrative Appeals Tribunal Act 1975 (T1-T29), with two additions made at the hearing, T30 and T31. The Tribunal also received five exhibits, three tendered by the applicants (Exhibits A1-A3) and two by the respondent (Exhibits R1-R2). The applicants were represented by Mr R.L.S. Mann, their accountant. The respondent was represented by Mr R. Kilderry, a Departmental advocate. No witnesses were called by either party.

3. The relevant legislation at issue in these proceedings was ss. 1118 and 1121 of the Social Security Act 1991 ('the Act'), which provides as follows:

'1118.(1) In calculating the value of a person's assets for the

purposes of this Act (other than subparagraph 263(1)(d)(iv) and

sections 1125 and 1126), disregard the following:

(a) ...

(b) if the person is a member of a couple - the value of any right

or interest of the person in one residence that is the principal

home of the person, of the person's partner or of both of them that:

(i) is a right or interest that gives the person or the person's

partner reasonable security of tenure in the home;'

'1121.(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

this Act, is to be reduced by the value of that charge or

encumbrance.

...

1121.(3) Subsection (1) does not apply to a charge or encumbrance

over assets that are to be disregarded under section 1118.'

4. The principal issue concerning this Tribunal was whether the applicants hold combined assets the total of which exceeds the prescribed level at which some quantum of age pension is payable. Central to the consideration of this issue is an interpretation of the meaning and effect of ss.1121(1) and 1121(3) of the Act in relation to the setting off of secured encumbrances on assets in the possession of applicants for an age pension.

5. The Tribunal received in evidence the document marked Exhibit A3 which was a Statement of Agreed Facts. The Tribunal found this to be an accurate reflection of the facts of the matter and deems it appropriate to reproduce it in full.

'(1) (The applicant) was born on 11 May 1927. (His wife) was

born on 29 June 1936.

(2) (The applicant and his wife) applied for age and wifes (sic)

pensions respectively on 22 August 1994 (T9).

(3) (The applicant and his wife) reside at 3 Hague Ave, Hyde Park.

(It was agreed by both parties in evidence that the applicant and

his wife own this home.)

(4) (The applicants) took out a loan for $250,000 on 2 August 1993

from Citibank (T17, page 105.)

(5) This loan was secured by the principle (sic) home at Hague Ave,

Hyde Park, this was despite (the applicants') wishes to have the

loan secured against another property at Narnu Bay, Hindmarsh Island

(T17, page 105)

(6) The property at Narnu Bay, Hindmarsh Island was not acceptable

as security, to Citibank who provided the loan (T17, page 105.)

(7) On 6 October 1994 a delegate of the Secretary applied section 43

of the Social Security Act 1991 as amended and rejected the claims

for pension on the basis that (the applicants') assets exceeded the

allowance limit (T14.)

(8) The delegate held that (the applicants') assets amounted to

$540,248 and exceeded the limit of $344,500 which meant no

entitlement to pension.

(9) The amount of $540,248 did not allow for any reduction by way of

the $250,000 encumbrance being the debt to Citibank. This was

because the encumbrance was held against the principle (sic) home,

an exempt asset.

(10) The delegate was not prepared to allow the encumbrance to be

off set against assessable assets.

(11) This decision was reviewed. (The applicant) was advised of the

result of this review on 3 November 1994 (T18.)

(12) Mr Mann (the applicants') accountant, contacted the department

on 10 November 1994 and requested a further review (T19.)

(13) The matter was referred to the Authorised Review Officer (ARO)

on 14/11/94 (T20.)

(14) The ARO affirmed the decision of the delegate (T23) and (the

applicants) were advised accordingly on 21 December 1994 (T24,T25.)

(15) Appeals against the rejection of (the applicants') pensions

were lodged with the SSAT 13 January 1995 (T28) by Mr Mann. (The

applicant) and Mr Mann attended the SSAT hearing.

(16) The SSAT affirmed the original decision on 16 February 1995

(T2.)'

6. The basis for the decision of the Department that the value of the applicants' assets were in excess of the allowable limit was the fact that the Department had not made a deduction of the outstanding $250,000 loan from Citibank ('the loan') from the total value of the applicants' assets. The reason this was not taken into account was the Department's interpretation of the operation of ss.1118 and 1121 of the Act. The Department had found that the value of the applicants' interest in the principal home at Hyde Park was to be disregarded, pursuant to s.1118(1)(b) of the Act, when calculating the value of their assets. As the loan in question was secured by a mortgage over the Hyde Park property, the Department then turned to s.1121 which regulates the effect that a charge or encumbrance can have on the value of assets. Sub-section 1121(1) states that the value of any particular asset is to be reduced by the value of any charge or encumbrance which may exist over it. However sub-s.1121(3) states that sub-s.(1) does not apply to a charge or encumbrance over assets that are to be disregarded under s.1118. The Departmental interpretation of this section was that as the $250,000 debt was secured by way of an encumbrance over the principal home, a disregarded asset, then the value of that encumbrance, could not be off-set against any other assets taken into account in calculating the value of the applicants' assets.

7. The primary submission made on behalf of the applicants was that it was incorrect for the total value of their assets to be calculated without taking into account the fact that they had an outstanding debt of $250,000 upon which they were paying substantial interest. The reasons for this assertion were:

. the $250,000 loan, secured by way of an encumbrance over the Hyde

Park property, was not borrowed for the purpose of the purchase of

that house;

. the funds were not in any way used for the house, but were

borrowed for the purpose of on-lending to a business under the

control of the applicants and being conducted for their benefit. In

that regard it should be noted that the on-lending had created

amounts due to the applicants by that business entity and those

amounts had been included as assets in the calculations made by the

respondent. The applicants therefore submitted that the purpose for

which the money was borrowed should be taken into account in

determining whether the value of the encumbrance could be used to

off-set the value of the applicants' assets which are not deemed to

be disregarded by s.1118 of the Act;

. the lender of the money would only accept the house at Hyde Park

as security for the loan despite the applicants' wish to use their

Narnu Bay property as security;

. in relation to the question of the effect of the legislation Mr

Mann suggested that on his interpretation the effect of s.1121(3) of

the Act was that a charge or encumbrance could not be off-set

against the value of a disregarded asset; however, he submitted

that in such a situation the liability still exists and remains

available to be off-set against the total value of the other assets.

On this interpretation Mr Mann submitted that the $250,000 debt

should be off-set against the total value of the applicants' assets

which were taken into account in determining their entitlement to

age pension and wife's pension.

Mr Mann also submitted that the Department had a policy of off-setting debts against assets in order to reduce the total value of assets and he did not see why that policy should not be implemented in the circumstances of the applicants.

8. Mr Kilderry submitted, and Mr Mann agreed, that the calculations the Department had made in determining the gross value of the applicants' assets were not in dispute. In relation to the operation of s.1121 of the Act, Mr Kilderry submitted that the effect of sub-s.(3) was that sub-s.(1) could not apply to allow a charge or an encumbrance secured against a disregarded asset to be off-set against the value of that disregarded asset. He submitted further that the effect of s.1121(3) was to completely exclude any charge or encumbrance from the operation of s.1121(1) and therefore any debt secured by a disregarded asset could not be taken into account in determining the net value of an applicant's assets.

9. Mr Kilderry stated that the provisions of the legislation were clear in this case and the Tribunal was bound to follow them, notwithstanding any apparent unfairness to the applicant. In support of this assertion he cited a statement made by Fisher J in the case of Collins v Repatriation Commission [1980] FCA 105; (1980) 32 ALR 581 (at 593):

'In my opinion the Tribunal has no charter to act in making its

decision in accordance with equity and good conscience, but is

obliged to comply with the provisions of the legislation.'

Further, in response to Mr Mann's submissions that the Department has a policy of off-setting debts against assets, Mr Kilderry stated this was only done where the debt was unsecured and where it could be shown that the debt was directly related to the asset against which it was sought to be off-set. He submitted that in this situation, as the debt was secured, the Departmental policy could have no effect as the Department was bound to follow the provisions of the legislation.

10. In the Tribunal's view, the terms of ss.1121(1) and (3) of the Act, whilst simply expressed, appear at first instance to be somewhat circulatory in the treatment of disregarded assets. Sub-section 1121(1) contemplates the valuing of assets not disregarded that are subject to charges and encumbrances and clearly provides that the value of any such asset is to be reduced by the value of that charge or encumbrance. One could be forgiven for thinking that the asset disregarded by s.1118 of the Act would in that event be excluded from the type of calculation envisaged under s.1121(1). If that view was to prevail then the provisions contained in s.1121(3) would appear to be otiose. At the end of the day, the Tribunal has concluded that the valuation function commences with a listing of all assets together with any charges or encumbrances attached to any of those particular assets. In the case of non disregarded assets, their value is reduced by the amounts of debts outstanding in terms of any attaching charge or encumbrance. This off-set process arrangement does not extend to disregarded assets (see sub-s.1121(3)). The Tribunal finds that the only realistic and workable interpretation that it can give to s.1121(3) is that its effect is to ensure that, once the disregarded asset is removed from the asset listing, any charge or encumbrance on such an asset is not available for off-set against the value of non disregarded assets.

11. In reaching this conclusion the Tribunal has found that the legislation makes no allowance for the situation where a disregarded asset provides the security for a loan of money which is used for a purpose which has absolutely no connection with that disregarded asset. In those circumstances the provisions of the legislation stating that the encumbrance can be related only to the disregarded asset makes little sense because whilst the value of the asset, and necessarily the debt, is disregarded, in reality the applicant for pension is still indebted to a large extent. Consequently, in such circumstances, the method of calculation of the value of assets advocated by the legislation does not accurately reflect an applicant's true financial position.

12. In the applicants' circumstances, the result is patently unfair. The loan of $250,000 was obtained to readjust the financial position of a related business entity. It was used to discharge existing debts of the business, the applicants' indebtedness to that business and the balance as working capital for that business. The Department has taken into account the sum of $129,000, which is the amount of the loan owed to the applicants following their on-lending, as an asset of the applicants but has completely ignored the liability of $250,000 because, at the bank's insistence, that loan was secured on an asset disregarded under s.1118. Generally one would imagine that the amount of money represented by the encumbrance associated with a disregarded asset has been spent on that asset and therefore when the asset disappears from the equation so must the liability. In this case however, the disregarded asset was not the asset purchased with the borrowings. We therefore are left with the borrowed money as an asset in the hands of the applicants but the corresponding liability ignored because of it being secured against a disregarded asset. The Tribunal believes this is grossly unfair and suggests that this inequity be addressed by those entrusted with the power of amendment.

13. The Tribunal finds that although it has sympathy for the applicants' position, it must find that the Department has made the correct decision. It appears to the Tribunal that the terms of the legislation are clear in that s.1121(1) of the Act states that the value of an encumbrance on any asset can be off-set against the value of that asset in calculating its value. Further, the Tribunal finds that the only workable interpretation it can place on s.1121(3) is to find that in relation to a charge or encumbrance over a disregarded asset, sub-s.(3) renders sub-s.(1) inapplicable and such a charge or encumbrance cannot be used to off-set the value of any non-disregarded assets.

14. The Tribunal, having considered the legislation and the evidence as a whole, now makes the finding that the respondent has, in accord with s.1121(3), properly disregarded the encumbrance of $250,000 over the applicant's principal home in calculating the total value of the applicants' assets in order to determine their entitlement to age pension.

15. Accordingly, for the reasons outlined above, pursuant to s.43(1)(a) of the Administrative Appeals Tribunal Act 1975, the Tribunal finds itself bound to affirm the decision under review.