SOCIAL SECURITY - age pension - assets disregarded as unrealisable assets - whether financial assets - annual rate of ordinary income - whether deemed income under section 1077

Social Security Act 1991 ss. 1077, 1129, 1130

Re Boyd and Secretary, Department of Social Security (1994) 36 ALD 331

1. These are applications to review a decision of the Social Security Appeals Tribunal ("the SSAT") of 14 May 1999 which set aside a decision of the applicant and directed that the respondents were entitled to be paid age pension at the maximum rate minus $1,092 per annum. Pursuant to section 34B of the Administrative Appeals Tribunal Act 1975 the parties consented to the review being determined without a hearing as the decision to be reviewed could be adequately determined in the absence of the parties and by consideration of the documents lodged with the Tribunal.

2. This matter has a reasonably long history which was set out in the decision of the SSAT as follows:

"1. Mr and Mrs Self lodged claims for age pension on 10 December 1996. On 19 March 1997 an officer of the Department of Social Security (the Department), acting as a delegate of the Secretary to the Department, made a decision to reject those claims.

2. Mr Self lodged an application with the Department requesting that loans from Mr and Mrs Self to the L. H. Self Trust No. 1 be disregarded under the 'hardship provisions' of the Social Security Act 1991 ("the Act"). This application was made on 10 May 1997. On 21 May 1997, an officer of the Department made a decision not to disregard those assets. This decision was affirmed by an authorised review officer on 5 August 1997.

3. The matter was then reviewed by the Social Security Appeals Tribunal and on 12 January 1998 the Tribunal decided to affirm the decision to reject Mrs Self's pension but to set aside the decision to reject Mr Self's pension and to send the matter back to the Chief Executive Officer of Centrelink for reconsideration in accordance with the direction that the value of a loan from Mr Self to the L. H. Self Trust No. 1, amounting to $740,607, should be disregarded from the date Mr Self first claimed age pension.

4. Subsequently Mrs Self was invited to again claim age pension and to make a claim for consideration under the 'hardship provisions'. As a result Mr and Mrs Self were both paid maximum age pension following the decision of the Social Security Appeals Tribunal.

5. However, the matter was referred to a complex assessment officer and on 18 February 1999 that officer determined that Mr and Mrs Self were not entitled to age pension as a result of the application of the income test and determined that their age pensions should be cancelled. This decision was affirmed by an authorised review officer on 1 April 1999. Mr and Mrs Self lodged appeals in respect of this decision on 12 April 1999 with this Tribunal."

3. The SSAT noted the there was no dispute as to the facts of the case which it found to be:

* Mr Self is owed the sum of $749,425 by the L. H. Self Trust No. 1 and Mrs Self is owed a sum of $15,140 by the same Trust.

* On 12 January 1998 the SSAT determined that the value of the loan from Mr Self to the L. H. Self Trust No. 1 was an unrealisable asset.

* Mr and Mrs Self's other assets include a bank account of $96, home and contents of $10,000, a caravan valued at $13,000 and a car valued at $3,000.

4. The applicant does not dispute the history and findings of fact set out in the SSAT decision. The dispute is solely concerned with the interpretation of section 1130 of the Social Security Act 1991 ("the Act"). The SSAT found that this provision did not produce an annual rate of income on the loan of $749,425 to the Trust. The applicants' view is that section 1130(3) has the effect of attributing an income calculated pursuant to section 1077(3A) or $36,459 resulting in a nil rate of pension payable to the respondents.

5. The loan of $749,425 to the Trust is unsecured and the sole assets of the Trust are a commercial freehold property formerly used in a boat storage business and a residential property occupied by Mr and Mrs Self. The SSAT accepted the evidence of the respondents that they have attempted to sell the commercial property at Paynesville since mid 1971 without success and there was no basis upon which the debt could be repaid or be subject to payment of interest. Given the circumstances of Mr and Mrs Self, there is no dispute that the financial hardship provisions of section 1129 apply. It is clear, also, that the loan to the Trust was not created for the purpose of producing hardship to enable Mr and Mrs Self to qualify for age pension.

6. Given that there is no dispute that section 1129 applies and that the debt of $749,425 due to Mr Self is an unrealisable asset, the question of interpretation of section 1130 is the sole matter in dispute. This section (as far as it is applicable to this matter) provides:

"1130(1) If section 1129 applies to a person, the value of:

(b) any unrealisable asset of the person's partner;

is to be disregarded in working out the person's social security pension rate.

1130(2) If section 1129 applies to a person, there is to be deducted from the person's social security pension maximum payment rate an amount equal to the person's adjusted annual rate of ordinary income.

1130(3) A person's adjusted annual rate of ordinary income is an amount per year equal to the sum of:

(a) the person's annual rate of ordinary income (other than income from assets); and

(b) the person's annual rate of ordinary income from assets that are not assets tested; and

(i) the person's annual rate of ordinary income from unrealisable assets; or

(ii) the person's notional annual rate of ordinary income from unrealisable assets;

(d) an amount per year equal to $19.50 for each $250 of the value of the person's assets (other than disregarded assets).

1130(4) For the purposes of subsection (3), an asset is not assets tested if the value of the asset is to be disregarded under subsection 1118(1).

1130(5) A person's notional annual rate of ordinary income from unrealisable assets is:

(a) the amount per year equal to 2.5% of the value of the person's and the person's partner's unrealisable assets; or

(b) the amount per year that could reasonably be expected to be obtained from a purely commercial application of the person's and the person's partner's unrealisable assets;

7. The approach of the SSAT in its interpretation of the section is that subsection (1) excludes the value of any unrealisable asset in working out the rate of pension but that subsection (2) requires the adjusted annual rate of ordinary income to be deducted from the maximum rate. Pursuant to subsection (3) that adjusted annual rate of ordinary income can include income from unrealisable assets. This Tribunal has no difficulty with that approach. However, where the SSAT and the respondents differ with the applicant is how the income from unrealisable assets is calculated.

8. The applicant argues that the unrealisable asset in question here is a "financial asset" as defined in section 9 of the Act and, as such, the annual rate of ordinary income referred to in section 1130(3)(c)(i) is required to be calculated pursuant to section 1077 of the Act. This sections deems the amount of ordinary income to have been received on such assets as the amount calculated according to provisions of that section. The applicant has so calculated such deemed income as $36,459 being 3% of $50,600 (the asset threshold) and 5% on the balance of the debt $698,825.

9. In the view of the SSAT, the particular loan should not be included in the value of financial assets. As paragraph 18 of its decision it said:

"...This is because section 1130(1) requires that the 'value' of any unrealisable asset to which section 1129 applies, is to be disregarded in working out the person's social security pension rate. In applying the deeming provisions, this is exactly what a decision maker is doing, that is, working out the person's social security pension rate. Section 1130(1) must therefore have the effect of excluding from the deeming provisions the value of any unrealisable asset to which section 1129 applies. In the Tribunal's view this must mean that 'the person's annual rate of ordinary income from unrealisable assets' refers to actual income, not deemed income. (In fact, the deeming provisions would appear to have no application under the hardship provisions, as other financial assets to which they might apply are dealt with under subsection 1130(3)(d) as discussed below). As Mr and Mrs Self receive no income from Mr Self's loan to the Trust, their annual rate of ordinary income from unrealisable assets is nil."

10. The interpretation sought by the applicant would appear to negate to a significant degree the beneficial nature of the legislation where a person would suffer severe financial hardship because of the inclusion of an unrealisable asset in the calculation of the rate of pension. It appears anomalous to accept that the value of an unrealisable asset, such as the loan by Mr Self, which is not capable of realisation and not capable of earning income, is to be disregarded for the purpose of the assets test but included as a financial asset at face value for the purpose of calculating a deemed income. In my view, the SSAT approach produces a more logical and appropriate interpretation of the relevant provisions. Subsection (1) of section 1130 clearly and unequivocally requires the "value of any unrealisable asset... to be disregarded in working out the person's social security pension rate". The applicant's approach requires the "value" of such asset to be regarded as a normal financial asset and taken into account for the purpose of subsection (3)(c)(i) by calculating the deemed annual rate of ordinary income pursuant to section 1077. This, in my view, is not what is intended by section 1130. This view would appear to be supported by other deemed income provisions, quite different to those in section 1077, in subsections (3)(d) and 5(a) of section 1130.

11. Given the clear intention of section 1130, it is appropriate to calculate either actual income or a reasonable commercial return on a unrealisable asset to be deducted from a pension rate calculated on an assets test which excludes unrealisable assets. A person may well have an asset which is unrealisable but from which income is or can be derived. Here it is clear that no income is or can be derived from the loan to the Trust. To deem the bulk of it to earn 5% so reducing the pension rate to nil is unrealistic and, in my view, contrary to the intent and meaning of the section. Section 1130 has its own deemed income provision for unrealisable assets in subsection (5). Consequently, the correct approach is to deduct from the maximum pension rate under the assets test, after excluding unrealisable assets, the greater of the actual ordinary income derived from unrealisable assets or the notional or deemed rate of income under subsection (5). This latter amount is the lesser of 2.5% of the value of the unrealisable asset or the amount that could reasonably be expected to be obtained from a purely commercial application of those assets. In this case, no amount could be expected to be obtained from a commercial application of the loan to the Trust. It is incapable of being repaid, not transferable for value and the Trust is incapable of paying interest on the loan. The notional rate of ordinary income is, therefore, nil and the ordinary income is nil.

12. The applicant relied on an earlier decision in Re Boyd and Secretary, Department of Social Security (1994) 36 ALD 331. In that case the Tribunal was required to determine whether the provisions of section 1129 should apply to the applicant and the resulting treatment of a debt to a family company which had been forgiven. The Tribunal found that the loan remained an asset of the applicant but was to be disregarded as an unrealisable asset. In paragraphs 79 and 80 of the decision, the Tribunal said:

"79. In the Tribunal's opinion it would be contrary to the intention of the hardship provision to find that the chose in action was assessable on its face value, when it has been recognised that the loan was forgiven because of its limited prospects of recovery. Therefore, for the purposes of section 1130, the loan to the company is to be disregarded.

80. Pursuant to section 1130(2), the applicant's rate of pension is to be calculated by deducting from the maximum rate, an amount equal to her adjusted rate of ordinary income. Adjusted annual ordinary rate of income is determined pursuant to section 1130(3). In regard to that section, the Tribunal notes that the applicant derives no income from those sources listed in subsections 1130(3)(a) and (b), nor does have an annual rate of ordinary income form [sic] unrealisable assets. The applicant's adjusted rate of income is calculated therefore with reference to subsection 1130(3)(c) and 1130(3)(d)."

While the Tribunal did not go on to discuss how the income is to calculated under section 1130(3)(c), it is relevant that it found that the applicant "...does not have an annual rate of ordinary income form [sic] unrealisable assets". At that time section 1077 had not been inserted in the Act, so whether the Tribunal would have found favour with the applicant's interpretation of the application of subsection (3)(c)(i) is unknown. Suffice it to say that I am unable to be satisfied that such interpretation fits with the intention and meaning of sections 1129 and 1130. I am unable to accept that having found that a loan in these circumstances is unrealisable and to be disregarded, it is then necessary to calculate the rate of pension as if such asset was a normal commercial loan earning full interest. The section, taken as a whole, does not lead to this conclusion. If it did, it would negate the whole purpose of the provision where, by chance, the unrealisable asset is a financial asset rather than a non-financial asset.

13. There being no dispute that the balance of the SSAT decision relating to the deductions under section 1130(3) is correct, it follows that the decision should be affirmed.

I certify that the thirteen (13) preceding paragraphs are a true copy of the reasons for the decision herein of

Signed: .....................................................................................

Solicitor for the Respondent Mr D. Watson, Authorised Representative