Secretary, Department of Family & Community Services v Draper

4 A preliminary to the calculation required under s 1076(3A) is a determination of the value of Mr Draper's financial assets. The term 'financial asset' is defined in s 9(1) of the Act as follows:

'financial asset means: (a) a financial investment; or (b) a deprived asset'.

The terms, 'financial investment' and 'deprived asset' are defined in s 9 and s 9(4) respectively: ' financial investment means: (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) a unlisted public security; or (g) gold, silver or platinum bullion; or (h) an asset-tested income stream (short term). … For the purposes of this Act, an asset is a deprived asset if: (a) a person has disposed of the asset; and (b) the value of the asset is included in the value of the person's assets by s 1124A, 1125, 1125A, 1126, 1126AA, 1126AB, 1126AC or 1126AD.' 5 Mr Draper's financial assets included some shares and managed fund investments. In relation to those investments the Tribunal said, at [29]: 'The Tribunal finds that Mr Draper used margin loans for the purchase of investments in shares and managed funds. At the relevant time, Mr Draper had a National Australia Bank margin loan facility of $16,179.43 and a Westpac margin loan of $18,122.28. Under the Terms of the National Australia Bank Margin Lending Facility … the customer agrees that the shares and managed funds purchased with the borrowed funds are held by the National Australia Bank as security for the margin lending facility. Clause 17.1 of the Terms provides that 'If a default event occurs', the National Australia Bank may exercise various powers under the agreement including selling "all or any of the secured property" '. 6 The Tribunal held (at [35]) that s 1121(1) was 'plainly applicable' to the determination of the value of Mr Draper's financial assets and that: '[T]he value of charges or encumbrances in respect of loans by National Australia Bank or Westpac, must be taken into account in determining the value of the shares or managed funds over which the loans are secured.'

Applicant's submissions 7 The applicant challenges this conclusion. It contends that s 1121(1), which is found in Pt 3.12 of the Act headed 'General provisions relating to the assets test', has nothing to do with the income test in Pt 3.10 of the Act in which s 1076 is to be found. Pt 3.10 is headed, 'General provisions relating to the ordinary income test'. It was submitted that the calculation of deemed income under s 1076 is concerned with 'financial assets' as defined in s 9(1) whereas s 1121(1) and the assets test apply to 'assets' as defined in s 11(1). In the applicant's submission the Tribunal's assumption that s 1121 applies to the calculation of the value of financial assets in the context of an income test is not justified. 8 The applicant relied on the decision in Re Anstis and Secretary, Department of Family and Community Services (1999) 30 AAR 122. The case concerned the rate of payment to which Mrs Anstis was entitled under her old age pension and, in this respect, the way in which the proceeds of the sale of her home should be treated. Section 1118(2) provides: 'If: (a) a person sells the person's principal home; and (b) the person is likely, within 12 months, to apply the whole or a part of the proceeds of the sale in acquiring another residence that is to be the person's principal home; so much of the proceeds of the sale as the person is likely to apply in acquiring the other residence is to be disregarded during that period for the purposes of this Act.'

9 Deputy President Forgie accepted that the proceeds from the sale of Mrs Anstis' principal home which she intended to apply in the following 12 months to the acquisition of another principal home were to be disregarded for the purpose of valuing her assets. The Deputy President held, however, that they were not to be disregarded for the purpose of determining the total value of her financial assets in the process of calculating her deemed income from financial assets in accordance with s 1076 of the Act. The Deputy President distinguished between 'assets' and 'financial assets' commenting at [40] that: 'the concept of financial assets does not arise in the context of an assets test under the Act but in the context of an income test'.

According to the Deputy President, at [42]: '[T]he concepts of "asset" and "financial asset" are two different matters. References to assets and the financial asset are not inter-changeable and it cannot be said that financial assets are simply one particular category of assets. The consequence of this is that the words "assets" and "financial assets" must be read as separate entities. Therefore, when s 1118(2) speaks of "assets" it is not referring to "financial assets". While the proceeds of the sale of a person's principal home is [sic] to be disregarded for the purposes of the Act in the calculation of the value of his or her assets in the circumstances set out in s 1118(2), it does not mean that they are to be disregarded when assessing a person's financial assets.' 10 On the basis of this analysis, which was followed in Re Radovanovic and Secretary, Department of Family and Community Services (2000) 61 ALD 530 at 534, the applicant submitted that s 1121 only applied to the valuation of assets and not to financial assets. In his written submissions, counsel for the applicant said: '[T]he Tribunal assumes that s 1121, despite dealing with "assets" in the context of the assets test in Part 3.12, will nevertheless also apply to s 1076 dealing with "financial assets" in the context of the income test in Part 3.10.'

11 In my opinion these submissions of the applicant and the reliance on Re Anstis are misconceived. Re Anstis is not concerned with the process of valuing assets. The financial assets in question were not subject to any charge or encumbrance. The value of the proceeds of sale, or indeed of any other of Mrs Anstis' financial assets, was not in contention. The issue was whether the proceeds of Mrs Anstis' sale should be included in the total value of her financial assets for the purpose of calculating her income. In calculating her income it was necessary to assess the total value of her assets which in turn required two previous determinations to have been made, namely: (a) which financial assets were to be taken into account in calculating the total, and (b) the value of each of those financial assets. 12 Section 1118(2) is concerned only with the first of those steps. For that reason the decision in Re Anstis is not relevant to the issue presently under consideration. 13 It is however, pertinent to comment on the profound distinction that the Deputy President in Re Anstis drew between 'assets' and 'financial assets'; in particular the rejection of financial assets as a subcategory of assets. This rejection appears to have been based on the definition of financial assets including deprived assets, which, by definition, no longer belong to the person whose assets are under consideration. The Deputy President took the view that, having been disposed of, a deprived asset cannot be an asset within the meaning of the definition of that term in s 11(1). 14 In my opinion that conclusion does not follow and I do not accept that the concepts are mutually exclusive. The definition of asset (see [2] above) is very wide. Relevantly it would include all of the eight subcategories of 'financial asset'; see [4] above. The reference to property and money in the definition does not involve the attribution of ownership by any particular person but rather the concept of anything that is capable of ownership. In my opinion financial assets form a subcategory of assets as defined in s 11(1). Moreover the submission that Pt 3.12 does not apply to financial assets is inconsistent with the provisions in ss 1118A and 1118B in respect of superannuation investments. As the definitions set out in [4] above show, financial assets include financial investments, financial investments include managed investments which, in turn, include an investment in a superannuation fund; s 9(1B)(d).

Valuation of assets 15 The Act does not contain any basic or general methodology for valuing assets or financial assets. The approach to valuation is limited to emphasising certain aspects of or prescribing variations to an assumed methodology. For example ss 11(2) and 11(3) provide that the value of an asset or of an encumbrance or charge is to be determined with respect to the relevant person's interest in the asset or the encumbrance or charge. 16 Section 1121 is contained in Pt 3.12 of the Act which is headed 'General provisions relating to the assets test'. Surprisingly the phrase 'assets test' is not defined in the Act although it is not difficult to glean its meaning from its context in Pt 3.12. The following headings to sections in Pt 3.12 (which may be read as part of the Act; see Acts Interpretation Act 1901 (Cth) s 13) give some indication of the scope and purpose of the assets test: '1118 Certain assets to be disregarded in calculating the value of a person's assets

1118A Value of certain superannuation investments to be disregarded

1118B Value of certain superannuation investments determined by Minister to be disregarded

1118AA Value of assets reduced by amounts received from Mark Fitzpatrick Trust

1119 Value of asset-tested income streams that are not defined benefit income streams

1120 Value of asset-tested income streams that are defined benefit income streams

1121 Effect of charge or encumbrance on value of assets

1121A Effect of certain liabilities on value of assets used in primary production

1122 Loans' 17 Ultimately however, the starting point for determining the application of s 1121(1) must be the words of the section itself which, for convenience, I will set out again: '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 that charge or encumbrance.' (emphasis added) 18 There are a number of exceptions and qualifications to the generality of subs (1) contained in the note to subs (1) and in subss (2), (3) and (4) but none of these exceptions is relevant to the instant case nor does any apply to the valuation of financial assets. Otherwise the section does not limit the assets to which it might apply and, similarly, the reference to the purposes of the Act is unqualified and not restricted to Pt 3.12 or to the application of the assets test. I can see nothing in the words of the section or in its location in Pt 3.12 to suggest other than that the 'purposes of the Act' in s 1121 are those purposes that require the valuation of any asset, financial or otherwise, that is subject to a charge or encumbrance. 19 In support of its construction the applicant laid some emphasis on the wording of ss 1072 and 1084A. Section 1072 states: 'A reference in this Act to a person's ordinary income for a period is a reference to the person's gross ordinary income from all sources for the period calculated without any reduction, other than a reduction under Division 2 or 3.' 20 It was submitted that the reference to the 'gross ordinary income' being 'calculated without any reduction' does not allow for any reduction for charges or encumbrances. This is, with respect, not pertinent to the question in issue. Section 1072 deals with the general meaning of ordinary income. It does not apply to the calculation of the value of an asset with a view to deeming a rate of 'ordinary income' and the question whether s 1121 is relevant to that calculation. 21 I am also persuaded that s 1084A is not inconsistent with the application of s 1121(1) to the valuation of financial assets. The section deals with the valuation and revaluation of certain financial investments that fluctuate with movements in the market. It requires that valuation of these assets be 'in accordance with' the guidelines laid down in the section. There is, however, nothing in the section that would exclude the plain words of s 1121(1) or prevent compliance with both sections in the valuation of such assets. 22 The applicant submitted that in holding that s 1121(1) 'was plainly applicable' the Tribunal did not offer any analysis or support for its interpretation. The difficulty I have with the applicant's submissions is that, apart from adopting the reasoning in Anstis, the submissions were light on analysis and relied heavily on the assertion of the contrary view to that which the Tribunal took on the basis that it was the obvious interpretation. 23 In my view however, a valuation that applied s 1121(1) would be more likely to reflect the true value of the person's interest than one that ignored the section. This appears to be consistent with an approach reflected in other parts of the Act; see for example the reference to ss 11(2) and 11(3) in [15] above. As counsel for the respondent observed in his written submissions: 'There is a close analogy in this respect with the policy indicated in s 1075(1), which allows a person's ordinary income from a business to be reduced by losses and outgoings that relate to the business, and in s 1075(3) which allows non-business income from rent to be reduced by the expenses relating to the property.' 24 The Act is notoriously complex and difficult to interpret; Blunn v Cleaver (1993) 47 FCR 111 at 127-8. In considering such legislation it is especially important to have regard to the 'ordinary grammatical sense of the words used except for the purpose of avoiding some obscurity or some inconsistency with other parts of the statute'; Broken Hill South Ltd v Commissioner of Taxation (NSW) (1937) 56 CLR 337 at 371 per Dixon J. While the context of a statutory provision, the consequences of such a construction and the purpose of the statute may sometimes point the other way (see Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 384) in this case all of these factors point the same way. 25 For these reasons I am of the view that the Tribunal was correct in concluding that s 1121(1) applied in the valuation of the respondent's financial assets. The application must be dismissed. As the applicant does not seek costs there will be no order as to costs. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.

Associate: Dated: 4 December 2003 Counsel for the applicant: T Reilly

Solicitor for the applicant: Australian Government Solicitor