Secretary, Department of Social Security v Carapeta

Legislative context 5 Section 55(a) of the Act provides: A person's age pension rate is worked out: (a) if the person is not permanently blind--using Pension Rate Calculator A at the end of section 1064 (see Part 3.2) 6 Module G in s 1064 of the Act deals with the application of the "assets test". It sets out a method of working out the effect of a person's assets on the person's maximum rate of pension. Step 1 of the method requires working out the value of a person's assets. "Asset" is defined in s 11 of the Act to mean "property or money (including property or money outside Australia)". 7 Under s 1118 of the Act, some assets are to be disregarded in calculating the value of a person's assets. Loans are not found in the list of assets referred to in s 1118. 8 Section 1121 of the Act provides in sub-ss (1) to (3) thereof as follows: (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 (other than Division 1B of Part 3.10), 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: (b) The charge or encumbrance was given for the benefit of a person other than the person or the person's partner. (3) Subsection (1) does not apply to a charge or encumbrance over assets that are to be disregarded under s 1118. 9 Section 1122 states that: If a person lends an amount after 27 October 1986, the value of the assets of the person for the purposes of this Act includes so much of that amount as remains unpaid but does not include any amount payable by way of interest under the loan [emphasis in the original].

The reasoning of the AAT 10 The AAT held that where, such as in the present matter, the source of a loan is a bank, rather than funds held or owned by the person lending the money, s 1121 of the Act provides for an adjustment of the value of the asset by including the value of the encumbrance on it. 11 It was also noted by the AAT that reading s 1122 in conjunction with s 1118, the amount of an unpaid loan should be included in the value of assets for the purposes of a pension. However, the AAT considered that the fact that the loan moneys were borrowed as personal loans by the Carapetas from their bank, the sum of the loan was never an asset in their hands. 12 In its conclusions at [29] to [31], the AAT said as follows: A loan is not included in the list of disregarded assets in section 1118 and in accordance with the provisions of section 1122, the amount that remains unpaid should be included in the value of assets. It is clear that as Mr and Mrs Carapeta are the sole controllers of the company, the 436,225.70 Euro identified as a shareholder loan should be attributed to them and included as an asset in their hands. The Tribunal is satisfied on the basis of the further documentary evidence provided by the applicants, that the "financing obtained" by the company in the sum of 436,220.70 Euro is subject to "charges" in the hands of the applicants as that term has been defined. It constitutes monies borrowed by the applicants from the banks identified in the documents and the other parties to whom personal loans remain outstanding and the monies are repayable to those banks and those other parties. The further documentary evidence indicates that the total monies currently outstanding by way of bank loans, fees and personal loans exceeds the 436,225 Euro that appeared in the company balance sheet as at 31 December 2010. Whilst the Tribunal agrees that this non-current liability identified as "financing obtained" was correctly attributed to the applicants as an asset in their hands in accordance with the provisions of section 1122, on the basis of the further evidence provided by the applicants in support of their contention that this sum was never an asset in their hands but comprised monies borrowed by them from the banks and other sources and loaned to the company, the Tribunal determines that the value of the parties' assets should be reduced by the full amount of 436,225.70 Euro in accordance with the provisions of section 1121 of the Act. Further support for a reduction in the value of assets attributed to persons of controlled private companies is found in the provisions of section 1208G.

The competing contentions 13 Counsel for the Secretary submits that s 1121 applies where there is an encumbrance over a particular asset and that only in those circumstances will the value of the person's assets be reduced for the purposes of the Act. Section 1122 of the Act, counsel contends, is specifically concerned with the treatment of loans made by a person. Its effect is to make the value of the assets of the person include so much of the loan as is unpaid. No distinction is drawn in s 1122 as to the source of the funds for the loan. While s 1122 is a specific provision relating to loans, s 1121 is a general provision dealing with whether there is a charge or encumbrance over an asset. The effect of the section is to reduce a person's equity in the asset by the value of the charge or encumbrance. Counsel for the Secretary submits that s 1121 and 1122 should be read together. 14 Counsel further contends that the AAT did not state with precision what it considered to be the relevant charge for the purposes of s 1121 of the Act. Counsel submits that there was no evidence that the loan to the company was secured and thereby subject to any charge or encumbrance. In effect, counsel submits that there is no evidence of an obligation of the company to repay the loan. 15 Counsel for the Carapetas places particular emphasis on the contention that the AAT correctly applied ss 1121 and 1122 of the Act. Counsel contends that if the AAT erred, it only erred as to fact and not as to law. Counsel submits that the findings of fact made by the AAT were open to it on the evidence before it and that the result contended for by the Secretary is absurd or irrational. 16 The second legal issue raised by the proceeding is the allegation that the Secretary was denied procedural fairness by the AAT. As is apparent from the view the Court has reached on the first legal issue, it is unnecessary to deal with this matter.

Consideration 17 The appeal must be upheld for the following brief reasons. There was no evidence before the AAT which showed that the sum loaned to the company was obtained by the Carapetas via secured loans advanced to them from creditors of the Carapetas. Therefore, there is no basis for the contention that s 1121 of the Act applied, as there was no evidence that a charge or encumbrance existed over the particular asset. In any event, s 1122, when read in conjunction with s 1121, applies to make so much of the loan advanced to the company as remains unpaid to the Carapetas, an asset of the Carapetas. 18 There is no basis for the submission that the result of the current application is absurd or irrational. The Carapetas lent money to a corporation which is their alter ego. In effect, they lent it to themselves. There is nothing absurd or irrational about that loan being treated as their asset.

Relief 19 Counsel for the Secretary submits that the Court should order that the decision of the AAT be set aside and the decision of the SSAT affirmed. The usual order where the decision of the AAT is set aside is to remit the matter for determination by the AAT according to law. An order of that sort was made in a proceeding where, like this, the Court found that no evidence existed to support a finding of fact relied on by the AAT; see Australian Postal Corporation v Kember [2003] FCA 800 per Finn J. 20 The Court will therefore make an order setting aside the decision of the AAT and remitting the matter back to it to be heard in accordance with law. At the new hearing, it is crucial the parties provide the AAT with as much information as possible for it to deal as comprehensively as it can with the specific circumstances of the Carapetas and their loan to their company. The Court makes no order as to costs, given that no such order was sought by the Secretary. That was an appropriate approach for the Secretary to take, given its status as a model litigant. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Marshall.