MELBOURNE, 3 December 1997 (hearing), 18 December 1997 (decision)

Applicant's representative: Ms Charlotte West, Brookmount Pty Ltd

Solicitor for the Respondent: Mr R. Douglass, Department of Veterans' Affairs

1. The Tribunal considered an application from Mr William Murray Mackintosh for the review of decisions of delegates of the Repatriation Commission on 1 November 1996 and 14 February 1997 that Mr Mackintosh was not eligible for payment of a service pension on the basis that his income and assets were over the limits where any pension could be paid.

2. Ms Charlotte West an employee of Brookmount Pty Ltd, a provider of accounting and taxation services, represented the applicant. Mr Mackintosh did not appear or give any evidence at the hearing. The respondent was represented by Mr R. Douglass, a legal officer with the Advocacy Section of the Department of Veterans' Affairs.

3. The Tribunal received into evidence the documents (the "T documents") lodged pursuant to Section 37 of the Administrative Appeals Tribunal Act 1975,

4. On 13 December 1995, Mr Mackintosh lodged a claim for service pension and on 1 November 1996 the respondent advised him that he was not eligible for service pension. The following extract from the respondent's letter discusses the reasons for the determination:

On 1/11/96 a Delegate of the Repatriation Commission decided that you are not eligible for payment of a Service Pension, as the level of your income and assets has been calculated to be above the limit that would allow for payment.

You are not eligible for receipt of the Commonwealth Seniors Health Care Card as your income is above the limit.

CURRENT INCOME LIMITS For you to be eligible to receive payments of the Service Pension or the Commonwealth Seniors Health Care Card the level of your income must be below $801.60 per fortnight.

INCOME ASSESSMENT The total of your income is calculated to be $1141.52 per fortnight.

In calculating the level of your income the Department takes into account the gross amount of your income (that is prior to tax being deducted)

CURRENT ASSETS LIMIT For you to be eligible to receive payments of the Service Pension the value of your assets must be below $241500.

ASSET VALUATIONS The total value of your assets is calculated to be $384888.31.

In calculating the level of your assets the Department takes into account the market value of your assets. This means, what you would be likely to receive the asset if it was realised (for investments) or sold (for other assets) on the open market. Your principal place of residence is not considered to be an asset under the Assets Test.

Gifting Rules Sections 48E and 52J of the Veterans' Entitlement Act 1986 specify's [sic] that the disposal provisions should not be applied if the disposition took place more than 5 years before the person became eligible to receive Service Pension.

On 07/07/92 you gifted 417 P/L shares which will be maintained in your pension assessment for 5 years from that date. (The allowable gifting limit is $10000 in a pension year)

You may re-apply for the Service Pension from 01/07/97."

5. The application made by Mr Mackintosh to the Administrative Appeals Tribunal ("AAT") on 4 April 1997 was for the review of the decision made by a service pension officer of the Department on 14 February 1997, that affirmed the abovementioned 1 November 1996 determination. This application specified that the reason for wanting the decision reviewed as:

"We do not agree with the valuation of the gifted shares."

6. On 22 March 1997, Ms West of Brookmount Pty Ltd, wrote the following explanatory letter addressed to the AAT:

In reply to your letter dated 14 February 1997, we request a review of the determination made in relation to Mr Mackintosh.

Our main concern is still the calculation of deprived assets which was valued at $280,700.

The shares in 417 Pty Ltd are not and at the time of transfer were not worth $280,700. Mr Mackintosh previous accountant transferred the shares to Mr Mackintosh children the reason for this is unclear. The main asset of 417 Pty Ltd is an unsecured loan to Mr Mackintosh which he is unable to repay, the monies borrowed from the company by Mr Mackintosh was used to invest in Reef House Unit Trust which went into liquidation in 1993.

As can be seen by the financial statements of 417 Pty Ltd the company has not been operating for years and the only income it derives is a small amount of interest."

7. It is noted that Ms West's above letter dated 22 March 1997 does not raise any objection to the income assessment of $1141.52 per fortnight made by the delegate of the Repatriation Commission on 1 November 1996. Also, no submissions were made by Ms West to the Tribunal during the hearing concerning the delegate's income assessment.

8. Ms West reiterated at the hearing the applicant's objection to the respondent's assessment of the value of shares at $280,700, which were held by him in Four One Seven Proprietary Limited (417 Pty Ltd) until 7 July 1992. On 7 July 1992 the applicant executed a deed giving the following 14,000 shares owned by him in 417 Pty Ltd to his children Gillian Barbara Taylor, Andrew Murray Mackintosh and Judith Helen Pratt. Ms West said that she did not know or understand the reason for the applicant gifting the shares to his children on 7 July 1992:

* 7000 A class shares

* 5000 B class shares

* 2000 C class shares

14,000

9. The financial statements of 417 Pty Ltd for the year ended 30 June 1992 indicate that the applicant and his children, Mr A.M. Mackintosh, Ms G.B. Taylor and Ms J.H. Pratt were the directors of the company at that date and that the company's principal activity was investment. A statement by directors dated 15 September 1992 is signed by the applicant and expresses the following opinion of the directors concerning the financial statements of the company at 30 June 1992:

"FOUR ONE SEVEN PROPRIETARY LIMITED A.C.N. 004 756 389

STATEMENT BY DIRECTORS

In the opinion of the Directors of the Company:

1. a. The accompanying Profit & Loss Account is drawn up so as to give a true and fair view of the results of the Company for the financial year ended 30th June 1992.

b. The accompanying Balance Sheet is drawn up so as to give a true and fair view of the state of affairs of the Company as at the end of that financial year.

c. At the date of this statement, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they fall due.

2. The accompanying Accounts have been made out in accordance with Statements of Accounting Concepts and applicable Accounting Standards.

3. a. The Company has kept such accounting records as correctly record and explain the transactions and financial position of the Company.

b. The Company has kept its accounting records in such a manner as would enable true and fair accounts of the Company to be prepared from time to time.

c. The Company has kept its accounting records in such a manner as would enable the accounts of the Company to be conveniently and properly audited in accordance with the Corporations Law.

d. The accounts have been properly prepared by a competent person.

This statement is made in accordance with the resolution of the Board of Directors and is signed for and on behalf of the Directors by: ..."

10. The balance sheet of 417 Pty Ltd as at 30 June 1992 records net assets of $400,902 made up of a loan to the applicant of $238,503 and investments of $162,399. The investments are described in the notes to and forming part of the accounts as shares in subsidiary company. At 30 June 1992 WMM Pty Ltd, a subsidiary of 417 Pty Ltd had net assets of $180,385 being a loan to the applicant of the same amount. The balance sheet of 417 Pty Ltd also records that at 30 June 1992 the company had a share capital of $20,000 made up of the following issued fully paid shares:

* 10,000 ordinary A class shares of $1 each

* 5,000 ordinary B class shares of $1 each

* 5,000 ordinary C class shares of $1 each.

11. The Memorandum and Articles of Association of 417 Pty Ltd specify that the holders of A, B and C class shares are entitled to participate equally in the distribution of assets in the event of the winding up of the company. The respondent divided the net assets of the company of $400,902 at 30 June 1992 by the 20,000 issued shares, which translates into net asset backing per share of $20.05 at that date. The respondent contends that it is appropriate to multiply the net asset backing per share of $20.05 at 30 June 1992 by the 14,000 shares gifted by the applicant to his children on 7 July 1992 in order to determine the value of the 14,000 shares at the date of disposition of $280,700.

12. Ms West disagrees with the valuation method adopted by the respondent in respect of the applicant's disposition of 14,000 shares in 417 Pty Ltd on 7 July 1992, principally because the applicant is currently unable to repay the abovementioned total loans of $238,503 from 417 Pty Ltd at 30 June 1992, and which have since increased to $241,042 at 30 June 1997. Ms West could not inform the Tribunal whether or not the applicant had the financial capacity on 7 July 1992 to repay his loans of $238,503 from 417 Pty Ltd and $180,385 from W.W.M. Pty Ltd, recorded in the accounts of those companies at 30 June 1992.

13. Ms West said that Mr Mackintosh had informed her that between 1989 and 1993 he had invested $700,000 in Reef House. The T documents show that the applicant was the registered holder of 100,000 units in Reef House Unit Trust on 1 July 1986.

14. On 12 October 1993 the Australian Financial Review (AFR) published the following report concerning Reef House:

"BEACHFRONT BOUTIQUE HOTEL UP FOR SALE

Three months after the appointment of receivers, the luxury Reef House boutique hotel in Queensland's Palm Cove is being tendered for sale.

The beachfront complex, first built in the mid-1960s as a private dwelling, was upgraded to a boutique hotel in the early 1980s by the Jewel Group.

In 1986, the complex was bought by a syndicate of Melbourne-based private owners and expanded the following year.

The property has 43 rooms and suites, a restaurant, poolside cafe and cocktail bar. About a quarter of the accommodation is strata titled.

Agents JLW TransAct and Richard Ellis have been appointed by the receivers, Mr Phil Hennessy and Mr Ray Tuttle of KPMG Peat Marwick, to conduct the tender.

A JLW TransAct director, Mr Geordie Clark, expects the property to appeal particularly to Asian investors seeking an upmarket, high-profile Cairns resort. Interest is also expected from a strata-title developer.

Reef House occupancies have averaged 60 per cent a year. Mr Clark, said the resort was achieving the highest room rate in the region at $160-$170 a night.

The property comes on the market after other hotel sales in the region, including the Travelodge at Palm Cove (sold for $22 million) and the Reef Plaza hotel in Cairns, bought by Melbourne's Selpam Group for just under $10 million in August."

15. On 14 January 1994 the AFR reported that Reef House had been purchased by a Melbourne-based investment group, Pamacorp Pty Ltd, for between $5-6 million from the liquidator. On 30 June 1995 KPMG, chartered accountants, wrote to the directors of Reef House Pty Ltd in reference to the appointment of a partner of the firm as receivers and managers of The Reef House Pty Ltd on 16 June 1993. The letter advised that their receivership had been concluded and that they had resigned as receivers and managers on 30 June 1995. It was also advised that the secured creditor by whom they were appointed had incurred a shortfall on the sale and realisation of the company's assets and, accordingly, there were no surplus funds to be returned to the directors on behalf of the company.

16. The respondent advised that the composition of the total value of the applicant's assets assessed by the delegate on 1 November 1996 of $384,888,31 is made up as follows:

Assessed value of disposition of shares in

417 P/L at 7 July 1992 $280,700.00

Less allowable gifting limit 10,000.00

Net value after allowance $270,700.00

Assessed value of shares and property owned by applicant on 13 December 1995, being the date he applied for service pension:

* Loans to family trust $49,708.00

* 40,000 shares in Hub Travel Pty Ltd $45,000.00

* Oil Search shares $1,897.50

* Union Mining Shares $57.81

* Bank accounts and term deposits $6,725.00

* Boat and Trailer $800.00

* House contents $10,000.00

Total value of assets $384.888.31

17. Ms West said that she also disagreed with the assessment of $45,000 made by the delegate in respect of the value of the shares held by the applicant in Hub Travel Pty Ltd at 13 December 1995. Ms West contended that the assessment was incorrectly based upon 45,000 at $1 each, whereas the applicant owned only 40,000 shares. Also, the respondent had not considered the intangible assets of $31,398 recorded as an asset in the balance sheet of the company at 30 June 1995. The respondent accepted the applicant's submission and the parties agreed to an amended value of $13,200 at 13 December 1995 in respect of the shares held by the applicant in Hub Travel Pty Ltd at that date. The respondent accepted that this amendment reduces the above assessed total value of the applicant's assets from $384,888.31 by $31,800 (i.e. $45,000 less $13,200) to $353,088.31.

18. Ms West advised the Tribunal that with the exception of the valuation assessed by the respondent on the 417 Pty Ltd shares gifted by the applicant to his children on 7 July 1992, the applicant accepts all of the remaining values assessed by the respondent in the amended total of the applicant's assets of $353,088.31 as at 13 December 1995.

19. The following relevant legislation is provided by the Veterans' Entitlements Act 1986 ("the Act"):

"Subdivision B - Disposal of assets

Disposal of assets 52E.(1) For the purposes of this Act, a person disposes of assets of the person if the person engages in a course of conduct that diminishes, directly or indirectly, the value of the person's assets and:

(a) the person receives no consideration in money or money's worth for the diminution in the value of the person's assets; or

(b) the person receives inadequate consideration in money or money's worth for the diminution in the value of the person's assets; or

(c) the Commission is satisfied that the purpose, or the dominant purpose, of the person in engaging in that course of conduct was:

(i) to obtain or enable the person's partner to obtain a service pension, income support supplement or a social security pension or benefit; or

(ii) to obtain or enable the person's partner to obtain a service pension, income support supplement or a social security pension or benefit at a higher rate than that which would otherwise have been payable; or

(iii) to ensure that the person or the person's partner would be eligible for benefits under Division 12 of this Part of fringe benefits under the Social Security Act.

Amount of disposition 52F. Where a person disposes of assets, the amount of the disposition is:

(a) if the person receives no consideration for the diminution in the value of the assets - an amount equal to the amount of the diminution in the value of the assets; or

(b) if the person receives consideration for the diminution in the value of the assets - an amount equal to the amount of the diminution in the value of the assets less the amount of the consideration received by the person in respect of the diminution.

Disposal of assets in pre-pension year - not a member of a couple 52FA.(1)Subject to subsection (2), if:

(a) a person is not a member of a couple when the person claims a service pension or a social security pension; and

(b) the person disposes of an asset of the person during a pre-pension year of the person; and

(c) the amount of that disposition, or the sum of that amount and of the amounts (if any) of other dispositions of assets previously made by the person during that pre-pension year, exceeds the disposal limit;

then, for the purposes of determining whether the pension is payable to the person, there is to be included in the value of the person's assets for the period of 5 years that starts on the day on which the disposition took place:

the amount by which the sum of the amount of the first-mentioned disposition of assets and of the amounts (if any) of other dispositions of assets previously made by the person during that pre-pension year exceeds the disposal limit; or

(d) the amount of the first-mentioned disposition;

(e) whichever is the lesser amount.

Note 1: For 'disposes of assets' see section 52E

Note 2: For 'amount of disposition' see section 52F

Note 3 - For the effect of a transaction that constitutes both a disposal of an asset and a disposal of

ordinary income see section 48D

Note 4: If a pension is payable to the person, section 52G operates to determine the rate of payment

and section 52FA ceases to apply to the person.

(2) If:

(a) a person disposes of an asset before 1 March 1991; and

(b) an amount (the "relevant amount") is included in the value of the person's assets under subsection (1) because of the disposition;

the amount that is to be included in that value under that subsection is to be reduced, on each anniversary of the day on which the disposition took place, by an amount equal to 10% of the relevant amount.

Note 1: For 'disposal of assets' see section 52E

Note 2: For 'amount of disposition' see section 52F.

(3) In this section:

"disposal limit" means:

(a) in relation to assets disposed of on or after 1 March 1986 and before 1 March 1991 - $2,000; and

(b) in relation to assets disposed of on or after 1 March 1991 - $10,000."

20. The Tribunal acknowledges the fact that on 7 July 1992 the applicant gave 7000 A class shares, 5000 B class shares and 2000 C class shares that he owned in 417 Pty Ltd to his children. Accordingly, the Tribunal finds that he engaged in a course of conduct that diminished the value of his assets and he received no consideration in money or money's worth for the diminution.

21. The amount of the disposition is defined by s.52F of the Act as an amount equal to the diminution in the value of the assets where a person receives no consideration. In this case, the respondent has assessed the value of the shares in 417 Pty Ltd which were given without consideration by the applicant to his children on 7 July 1992, as $280,700, based upon the net asset backing per share formula described in these Reasons for Decision. The net asset backing of $20.05 per share was determined in cognisance of the total net assets divided by the total number of issued shares disclosed in the balance sheet of the company as at 30 June 1992, and this balance sheet is supported by the statement by directors signed by the applicant as a director of the company, certifying that it is drawn up to give a true and fair view of the state of affairs of the company as at the end of that financial year.

22. This certification by the directors of the balance sheet of 417 Pty Ltd at 30 June 1992 is relevant, bearing in mind that this company's assets are principally made up of loans made directly to the applicant plus an investment in W.M.M. Pty Ltd and that the net assets of W.M.M. Pty Ltd are also made up of loans to the applicant. It is also noted that neither 417 Pty Ltd nor W.M.M. Pty Ltd have provided in their accounts for any provision for loss or contingent loss in respect of the amounts loaned by them to the applicant.

23. The Tribunal has considered the qualified submissions made by Ms West concerning the applicant's capacity to repay loans from 417 Pty Ltd and W.M.M. Pty Ltd in 1992, due to her limited direct knowledge of the applicant's financial position during the critical 1992-1993 period. The Tribunal is also mindful that Ms West did not provide or recommend an alternative basis for the assessment of the value of the shares issued by 417 Pty Ltd at 7 July 1992, to the net asset backing per share formula at 30 June 1992 adopted by the respondent.

24. Accordingly, the Tribunal accepts that the amended total value of assets of the applicant of $353,088.31 at 13 December 1995 is greater than the $241,500 threshold value of assets beyond which service pension would not be payable.

25. The gifting of shares in 417 Pty Ltd by the applicant on 7 July 1992 requires the inclusion of the amount of the disposition, less the disposal limit, in the value of the applicant's assets for a period of five years from the date on which the disposition took place pursuant to Section 52FA of the Act. The assessed value of $280,700 for these gifted shares shall therefore continue to be regarded as the amount of the disposition in any asset test assessment until 7 July 1997, which is a date that precedes the date of this decision.