Editors --- "Asset tests: effect of encumbrance on valu" [2005] SocSecRpr 8; (2005) 7 Social Security Reporter, Article 8

• HILL and Anor and SECRETARY TO THE DFaCS
• Background
• The legislation
• Discussion
• Formal decision

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Asset tests: effect of encumbrance on value

HILL and Anor and SECRETARY TO THE DFaCS

(2005/115)

Assets test: effect of encumbrance affecting two properties

HILL and Anor and SECRETARY TO THE DFaCS

(No. 2005/115)

Decided: 8 February 2005 by

P. McDermott.

Background

Hill and Johnston were members of a couple. They owned their own home. Johnston also owned two other properties: a block of land (the ‘Bond Court’ property) and a house (the ‘Wattle St’ property). A mortgage existed over the Wattle St property. Evidence before the AAT indicated that the mortgage was secured over both the Bond Court and the Wattle St properties.

At the hearing of this matter, the respondent Department conceded that the Bond Court property would be treated as an unrealisable asset under the hardship provisions provided bys.1132 of the Act. This left for consideration the value of the Wattle St property.

The legislation

The AAT’s discussion centred on the operation of s. 1121 of the Act. This section specifically deals with the value of an asset over which a charge or encumbrance exists:

1121(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, is to be reduced by the value of that charge or encumbrance.

Discussion

The AAT noted that the value of an asset, pursuant to s. 1121 of the Act, is reduced by the value of a charge of encumbrance secured over it. The Department submitted that the correct approach was to reduce the value of both assets secured by the mortgage in shares proportionate to their relative values. Such an approach would have meant that the amount owing on the mortgage could not be subtracted solely from the value of the Wattle St property.

The AAT quoted from the second reading speech on the Social Security and Repatriation (Budget Measures and Assets Test) Act 1984 (in the House of Representatives on 21 August 1984 (see Parliamentary Debates (Hansard) (House of Representatives), Vol 138 p.79):

The value of assets to be taken into account will be their net market value. This means the amount of money a person could reasonably expect to receive if the assets were to be sold, less any debts on that asset such as a registered mortgage or a hire purchase debt. (Reasons, para. 9)

The AAT noted that this approach was followed by the AAT in Smith and Secretary to the DFaCS [1999]AATA 267. The AAT therefore decided not to accept the Department’s submissions, as the intention expressed in the second reading speech was to look at the amount a person would actually receive, were the asset to be sold. The AAT concluded that the value of the Wattle St property would be its market value, reduced by the total amount of the money secured by the mortgage.

Formal decision

The AAT varied the decision under review by adding the direction that for the purposes of s. 1121 of the Act, the value of the encumbrance over the Wattle St property was the total amount of money that was secured by the mortgage.

[D.A.]