Editors --- "Age pension assets test: valuation of real property: whether informal family agreement is a 'charge or encumbrance'" [2006] SocSecRpr 15; (2006) 8(2) Social Security Reporter, Article 4

• KAPUST and SECRETARY TO THE DFCaSIA
• Background
• Legislation
• The issues
• Discussion
• Formal decision

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Age pension assets test: valuation of real property: whether informal family agreement is a 'charge or encumbrance'

KAPUST and SECRETARY TO THE DFCaSIA

Decided: 9th February 2006 by R. Perton

Background

In March 2004, Centrelink decided to reduce the rate of age pension payable to Kapust on the basis of the level of his assets. Kapust’s major asset, apart from his own home, was a rental flat in Murrumbeena.

Legislation

The relevant provisions are contained in the Social Security Act 1991 (‘the Act’). Of particular relevance are the following sections:

Assets test definitions

11.(1) In this Act, unless the contrary intention appears: ...

‘asset’ means property or money (including property or money outside Australia);

Effect of charge or encumbrance on value of assets

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 (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 section1121A (primary production assets) applies.

1121.(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; or

(b) the charge or encumbrance was given for the benefit of a person other than the person or the person’s partner.

The issues

The issues before the Tribunal were the value of the property and whether an unregistered mortgage over the property could reduce its value for social security purposes.

Discussion

The AAT confirmed that the appropriate approach to valuing a property is to adopt a net market value approach based on comparable sales and the ‘best use’ to which the asset could be put.

In this case, the Department relied on a valuation by the AVO. Kapust had provided a valuation from a qualified valuer. Both valuers had adopted the same methodology in valuing the property and, in the circumstances, the AAT considered the appropriate approach was to ascribe a value that was a midpoint between the two valuations.

Kapust stated that he and his two children entered into an agreement that they would advance him much needed money for a new car and other necessary expenses. Kapust planned to leave the property to his children when he died. Kapust and his two children prepared and signed a document on 16 March 1999, termed a ‘Deed of Mortgage’, which stated that Kapust gave ‘in mortgage’ his Murrumbeena property to his children, as collateral security for a loan of $100,000. The loan was expressed as ‘a Mortgage Deed of Periodic Payments during my lifetime, and by mutual agreement. Conditions of my Will and Testament dated 26 of August 1993 apply.’ The second page of the document signed by all three indicated $47,000 had been advanced to Kapust under the agreement.

The AAT considered the question of whether the unregistered mortgage could be viewed as a ‘charge or encumbrance’ which could affect the value of the property under section 1121 of the Act. The AAT decided that the Departmental policy in the Guide to Social Security Law (at 1.1.E.105) appropriately amplified the provisions of section1121. That policy refers to registered mortgages as being encumbrances. In relation to unregistered mortgages the policy states:

If a customer has an unsecured loan AND provides evidence that the loan was specifically obtained to purchase the asset, the outstanding amount of the loan IS deducted from the value of the asset.

On the basis of that policy, the AAT was satisfied that the family agreement did not constitute an encumbrance for the purposes of the assets test.

Formal decision

The AAT set aside the decision under review and remitted the matter to the Department with a direction that the value of the applicant’s property in October 2004 was $226,250. The matter was remitted to the Department for recalculation of Kapust’s age pension entitlement.

[S.O.]