Administrative Appeals Tribunal Act 1975 s.37

The Commissioner of Stamp Duties NSW v Bone and Ors [1976] UKPCHCA 1; (1976) 135 CLR 223

Fadden v DFCT [1945] HCA 8; (1945) 70 CLR 555

Re Lenthall and Secretary, Department of Social Security (1987) 14 ALD 275

2. The matter is remitted to the respondent to recalculate the value of the amount owed to the applicant by the Hughes Family Trust in the relevant period in accordance with the following principles:

balance immediately prior to the

27 October 1986 shall be valued by reference to

the net worth of the Hughes Family Trust assets

which should include provision for diminution

in the value of the Hughes Family Trust's

investment in the Fertal Unit Trust.

(b) For the purpose of this calculation the

respondent shall accept the estimate of

33.81 per cent of $7,534, made by Mr O'Brien in

the additional statement received at the

Tribunal's request from Mr O'Brien on

28 October 1991.

(c) The remaining part of the loan, that is $77,347

less $7,354 being $69,813, which refers to the

net amounts lent after 27 October 1986 shall be

valued at its face value in terms of subsection

4(11).

(d) In assessing the value of the property of the

applicant it shall be reduced by the amount

included under the heading of "Deprivation" in

relation to the transfer by the applicant to

the Family Trust of $26,000 of AGC Income

Bonds.

(e) Each party is granted liberty to apply for

further direction in relation to these

calculations.

This is an application to review a decision of a delegate of the Secretary to value a debt owed to the applicant from a Family Trust at $73,267. This debt was treated as an asset of the applicant for the purposes of calculating his entitlement to an age pension.

2. The Tribunal heard oral evidence from the applicant and from his accountant John Michael O'Brien. The documents prepared in accordance with s.37 of the Administrative Appeals Tribunal Act 1975 were accepted in evidence together with various balance sheets and financial documents of the Hughes Family Trust. Liberty was granted at the hearing for the applicant to tender further details of his Loan Account with the Hughes Family Trust and a single page document received on 28 October 1991 was consequently also considered by the Tribunal.

3. The applicant was made joint trustee (with his wife Beryl Hughes) of the Hughes Family Trust by Deed of Settlement dated 31 March 1983.

4. The beneficiaries of the settlement were the applicant and his spouse, and the children of their marriage.

5. On or about 31 May 1983 Mr Hughes transferred to the Hughes Family Trust the beneficial ownership in 51,944 units in a deed of settlement known as the The Fertal Unit Trust, the trustee being Fertal Holdings Pty Ltd (T4). This holding represented approximately four per cent of the allotted units. Each of these units had a face value of $1 and the applicant had subscribed $51,944 to the trustee to secure these units some time in 1979. It is relevant to mention that at the same time Mrs Beryl Hughes also subscribed for and was allotted the same number of units. These were retained at all material times by Mrs Hughes.

6. The transfer of the units was for a consideration of $51,944, which was not paid by the trustees and remained a debt owing by the trustees to the applicant at all material times. These facts were not in dispute.

7. The Fertal Unit Trust carried on business of manifacturing an offal based fertiliser and the business was quite successful initially, making cash distributions to the unit holders in each of the years of income from 1983-84 to 1988-89. The business has not been profitable thereafter and due to environmental difficulties it may soon close. The evidence to this effect was supported by the Unit Trust's accounts produced in May 1990 (T17). Those accounts show an accumulated loss of $405,705.87. The Unit Trust's accountant Mr Thomas Eyres, a chartered accountant, advised the Department of Social Security ("DSS") on 2 July 1990 that:

"it is my view that distributions will probably not

be made to unit holders for some years." (T21)

8. On 11 January 1991 Mr Eyres again wrote to the DSS and after pointing out the extent of trading losses and some of the difficulties being faced by the Unit Trust at that time continued with:

"at the present time there is no market for the

units in the Fertal Unit Trust and it seems very

unlikely that unit holders will receive any

distributions for a number of years, if at all."

(T46)

9. Counsel for the respondent did not challenge this evidence and the Tribunal accepts that the unit trust was in impecunious circumstances at the time the decision under review was made. The unit trust deed does not provide for a redemption of units and even if it did it is not apparent how it might have funded a repurchase should the applicant have applied. Further as the units were not listed on a stock exchange the only avenue open to the applicant to divest himself of them was by treaty sale. He testified that he had enquired of the Unit Trust's accountant whether it would be possible to sell his units and was told that there was no known buyer. The applicant is virtually locked into the investment.

10. A recent balance sheet and asset valuation of the Family Trust, as at 30 June 1991, was accepted in evidence. It was prepared by the accountant, Mr John O'Brien, a Certified Practising Accountant, which showed the units in the Trust to be valued at $5,194, after providing for a diminution in value of 90 per cent. Mr O'Brien said in evidence that he valued the units in this way after discussions with the Unit Trust's accountant, Mr Eyres, and the applicant. This revaluation was not challenged by counsel for the respondent. Whilst recognising that the revaluation is based only on one man's professional opinion there is no reason to doubt the evidence of Mr O'Brien in this regard. The Tribunal finds that the revaluation is reasonable although not necessarily as scientific as one might expect.

11. The Hughes Family Trust's debt to the applicant, stood at $77,347 as at 30 June 1990 but was accepted as being $73,267, as at that date, by the SSAT in its decision of March 1991. It resulted from several transactions affecting the Family Trust which were undertaken by the applicant on behalf of the Family Trust. Evidence was given that the Family Trust had no bank account and all cash transactions were processed through the personal bank account of the applicant. Whilst this would seem to be strange behaviour for a trustee it was accepted as fact. The accountant for the Family Trust was left to speculate to some extent on transactions which were on behalf of the Family Trust and to draw up the annual accounts after making what seemed logical decisions on the basis of the inadequate accounting information provided. The accountant had to sieve through the records of the applicant and glean from them the transactions on behalf of the Family Trust. The balance of the loan account resulted from book entries to reflect these transactions. Typically, the loan account was credited with amounts which the applicant invested in deposits and shares on behalf of the Family Trust, amounts paid by the applicant on behalf of the Family Trust for the minor beneficiaries' school fees and other beneficiaries' expenses, amounts paid for the Family Trust's accountancy fees and distributions of net income of the Family Trust to the applicant as a beneficiary. Typically, the loan account was debited with amounts which the applicant received from the Unit Trust as distributions of profit, interest received which belonged to the Family Trust, and amounts withdrawn from Family Trust deposits. Also, in the 1984-85 year there was curious debit of $14,651 labeled "tax payment G and B Hughes". This is difficult to understand because the Family Trust had no bank account nonetheless no questions were raised in relation to this entry. Mr O'Brien proved to be a credible witness and did not appear evasive or devious. The Tribunal accepts that the balances from year to year as set out in the exhibits represent a reasonable record of the summarised movements in the applicant's loan account with the Family Trust and that as at 30 June 1990 the balance was not more than $77,347.

12. Whilst not a matter under review by the SSAT, the applicant challenged the apparent inclusion of part of a sum of $30,000 relating to the transfer by him of $30,000 of AGC Income Bonds in 1989-90, the loan account of the applicant with the Family Trust records, in the year ended 30 june 1990, a credit of $30,000 being the consideration payable to the applicant for the transfer of these bonds. That amount forms part of the balance of $77,348 owed to the applicant at 30 June 1990. The DSS, in assessing the value of property of the applicant treated this $30,000 as an amount which the applicant had given to the Family Trust. (T33) The amount is also included within the balance of the loan account owed to the applicant. It is not difficult understand why the DSS might have been confused over this. The applicant himself was confused about whether he made gifts to the Family Trust or sold assets to it. In evidence he used the term "gifted" (sic) when he obviously meant "sold", particularly in relation to the AGC Income Bonds and the units in the unit trust. No doubt he did the same when being interviewed by the officer of the DSS. An example of this confusion is provided at T14 where the DSS file note of a conversation with Mr O'Brien states:

"Several months ago Mr Hughes gave $30,000 to the

Family Trust..."

13. The officer of the DSS later adds, in parenthesis,:

"This has not been determined whether it is a loan

or a gift."

14. As there was no challenge to the fact that there was only one lot of AGC Income Bonds transferred to the Family Trust and they had a value of $30,000 and the Family Trust recorded a credit in the applicant's loan account in respect of its acquisition of this asset, then the amount is included twice in the asset statement of the applicant. In fact at T35, which is a copy of the DSS Pensions Full Assessment form, a total of $26,000 is included under Deprivation, being the statutorily reduced gift amount of $30,000 (T33) split between the applicant and his spouse. So to that extent, $26,000, not $30,000, has been included twice because that form also includes against "other assets" the sum of $103,697 which was the original balance of the applicant's loan account with the Family Trust, later reduced to $73,267 by deducting an amount of $30,430 which was stated as the amount which the applicant's spouse owed to the Family Trust. (It should be noted that the explanation of the difference between that sum, $73,267 as assessed and the more recent balance calculated by Mr O'Brien of $77,347, being $4,080, is found in the amount which the applicant's spouse was purported to owe the Family Trust but which was later transferred to the applicant, that is $26,350 rather than $30,430). Confusing as this is, the preferred balance seems to be the higher figure of $77,347 although the lower figure was included in the applicant's property value assessment.

15. Apart from the error of including $26,000 under Deprivation as mentioned above, the issue which the Tribunal was called upon to consider was whether the full amount of the unpaid loan with the Family Trust, assessed as $73,267, should be included in the value of the applicant's property, or some lesser sum having regard to the loan's estimated commercially recoverable value.

16. The relevant provision of the Social Security Act 1947 ("the Act") is s.4. That provides inter alia:

"Section 4(1) In calculating the value of the

property of a person for the purposes of this Act -

(not here relevant)

4(11) Where a person lends an amount after the

commencement of this subsection, the value of the

property of the person for the purposes of this Act

shall include so much of that amount as remains

unpaid but shall not include any amount payable by

way of interest under a loan."

17. The applicant argued that for the purpose of s.4 the whole of the loan should be valued having regard to its likely or estimated recoverability, notwithstanding the provisions of subsection 4(11).

18. The respondent argued that subsection 4(11) was prescriptive and all loans made since commencement of that provision must be valued at the amount lent regardless of any reasonable estimate of its commercial recoverability. The respondent also argued, however, that even the part of the loan that was made before the commencment of the subsection should also be valued on the same basis.

19. The Tribunal is in no doubt that the respondent should succeed in its contention in relation to the valuation of loans made to the Family Trust since the commencement of the subsection to the extent that those amounts remain unpaid. In passing, the Tribunal also noted the possible anomalous result this provision could cause. For example, take a situation where an applicant for a pension had made deposits with an institution which has been since put into liquidation and the best estimate of the liquidator was that no dividend would be paid to depositors. In this event even though the deposit had no commercial value it would be shown at its face value for s.4 purposes because it has not yet been extinguished and remains as a right, albeit worthless. It is doubtful that the legislature intended that result, but the words are plain, their literal meaning is clear and whilst they may produce an unfair result, they do not give rise to an ambiguity.

20. In support of the submission by the respondent that any loan made prior to the 27 October 1986 should be valued at its face value, reference was made to the Privy Council decision in The Commissioner of Stamp Duties NSW v Bone and Ors [1976] UKPCHCA 1; (1976) 135 CLR 223, the High Court decision in Fadden v DFCT [1945] HCA 8; (1945) 70 CLR 555 and this Tribunal's decision in Re Lenthall and Secretary, Department of Social Security (1987) 14 ALD 275.

21. In Bone the relevant question for decision was whether death duty was chargeable on the face value of a loan or on the basis of the actuarial value of the annual instalment obligations, that is, its discounted present value having regard to the amount of each annual instalment due. Their Lordships decided that notwithstanding the terms of the loan agreement, that the debt was to be repaid by relatively small annual instalments unless the lender gave 90 days notice that the full amount outstanding was due and payable, the loan should be valued for death duty purposes at its face value, being the amount unpaid at death.

22. The issue in Fadden, a decision of the Full High Court (Latham C.J., Rich and Dixon JJ.), was whether loans to the children arising as a result of selling them shares in a family company and for which no repayments had been made for three years, constituted a gift and was therefore assessable to gift duty. The court found that there was valuable consideration for the transfer of the shares even though no repayments had been made for several years. No gift duty arose as no gift or release had taken effect so long as the debt remained unpaid.

23. In Lenthall, this Tribunal determined that it was appropriate to value a pre s.4(11) debt, which had been re-scheduled since the commencement of that subsection, at its actuarial value having regard to the anticipated periodic repayments. These rescheduled repayments were based on produce to be sold by the debtor from working the farming property which had been purchased by the debtor from the applicant and in respect of which the consideration remained outstanding, establishing the loan in question.

24. None of those decisions are to the point under review in the case. They do not address the question of whether in valuing a loan (made before 27 October 1986) one may take into account the unlikelihood of the debtor repaying the debt in whole or in part, that is, the commercially realistic estimate of what the loan is worth. Such a matter was considered by this Tribunal, however, in Re King and Repatriation Commission [1990] AATA 273; (1990) 12 AAR 375 (Senior Member Watterson). The applicant had sought review of the cancellation of his service pension pursuant to the asset test in s.54 of the Veterans' Entitlements Act 1986. He had loaned an inheritance to a family trust administered by a company established by him for this purpose, and most of the money was later lost in share trading. At 30 June 1989, the loan balance was $225,000 but the trust assets were worth only $67,000. The Tribunal decided that in the circumstances the value of the applicant's loan was not its face value but rather an amount arrived at having regard to the asset backing of the trust estate and the trustee's capacity to repay the loan. In reaching this decision the Tribunal agreed with a passage from D.G. Hill, Stamp Duties, 1979 at 125/34:

"A debt repayable on demand will normally be valued

at its face value and regard will not be had to the

financial incapacity of the creditor to meet the

debt. See Fadden. It is however considered that

where the creditor is clearly insolvent the

insolvency will be taken into account in valuing the

debt..."

The Veterans' Entitlements Act 1986 had no equivalent of the provision in s.4(11).

25. In considering this matter the Tribunal took into account the following statement received from Mr O'Brien on the 28 October 1991:

HUGHES FAMILY TRUST

LOAN - G. HUGHES

Balance 1/7/86 8,540

Add Expenditure on behalf of beneficiaries

by G Hughes 1/7/86 - 26/10/86 332

BALANCE - 26/10/86 8,872

Less Net other transactions 27/10/86 - 30/6/87 (1,338)

BALANCE 30/6/87 $7,534

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26. After considering all the materials and submissions the Tribunal is of the opinion that the loan account balance, for s.4 valuation purposes, should be divided between that amount which remained unpaid as at 27 October 1986, the commencement of subsection (11), and that which relates to the subsequent period. The pre 27 October 1986 amount should be revalued by reference to the net worth of the Family Trust assets which should include the provision for diminution in the value of that trust's investment in the Unit Trust. For the purpose of this calculation the Tribunal accepts the estimates made by Mr O'Brien in the revised accounts and valuations for the year ended 30 June 1991 which were accepted in evidence, as supplemented by the additional statement received on 28 October 1991.

27. The remaining part of the loan involves amounts which have been lent from 27 October 1986 and the value of the amount which remained unpaid at the relevant date must be included in the value of the applicant's property in accordance with the terms of subsection 4(11).

28. The Tribunal further considers that in assessing the value of the property of the applicant it should be reduced by the amount included under the heading of "Deprivation" in relation to the transfer by the applicant to the Family Trust of $26,000 of AGC Income Bonds, as to include such an amount in the value of his property would involve double counting.