Editors --- "Assets test: loans to company as asset, valuation of loans prior to October 1986" [2006] SocSecRpr 27; (2006) 8(3) Social Security Reporter, Article 4

• FOSCHI and SECRETARY TO THE DFaCSIA
• Background
• Issues
• The law
• Discussion
• Formal decision

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Assets test: loans to company as asset, valuation of loans prior to October 1986

FOSCHI and SECRETARY TO THE DFaCSIA

Decided: 26th May 2006 by M.J. Carstairs

Background

Foschi had commenced receiving age pension in 1993. A debt was subsequently raised against him on the basis that loans to his mining company, Foschi Enterprises, had not been taken into account in assessing the rate of pension payable. These loans came to the attention of Centrelink in 2001 because of the forthcoming changes to assessment procedures for assets and income deriving from private trusts and companies. At the end of 2001, after his and his wife’s pensions were cancelled, Foschi forgave all debts owed to Foschi Enterprises. Following the forgiving of the loans, Foschi and his wife’s age pensions were restored. On appeal the SSAT had waived a part of the debt relating to a period in 2001 on the basis of Centrelink’s administrative errors at that time. The AAT noted that the debt was now $35,856.03.

Foschi Enterprises and Foschi’s loans

After migrating to Australia, Foschi had been involved in mining in Mt Isa that included buying and selling mining leases and had set up his own companies, the last of them being Foschi Enterprises. However, the company’s fortunes were adversely affected in the 1990’s by Mt Isa Mines’ decision not to continue to buy from small lease holders and the introduction of Environmental Protection legislation in Queensland. The leases dropped in value and Foschi faced higher payments on the leases, which had ceased to generate income but which he was unable to sell. There was little evidence before the AAT as to when Foschi first lent money to the company. The financial statements showed that at June 1984 the loan balance was $184,322, at 1985 it was $198,572 and as at 30 June 1986 it was $193,820.

Issues

The AAT identified 2 issues for consideration:

1. Was there a recoverable debt of age pension based upon understated assets? This issue in part relates to the valuation of the loans to Foschi Enterprises.

2. If there was a debt, should any part of it be waived on the basis of special circumstances?

Foschi’s submissions

Foschi argued that the loans should not have been assessed for his age pension because Foschi Enterprises was never in a position to repay him. He said that his accountants should have advised him earlier to forgive the debt and he would not now have this problem with Centrelink.

The law

Asset valuation of loans is dealt with in section 1122 of the Act in the following terms:

1122. If a person lends an amount after 27 October 1986, the value of the assets of the person for the purposes of this Act includes so much of that amount as remains unpaid but does not include any amount payable by way of interest under the loan.

Discussion

The AAT examined the legislative history to this provision and found that loans made after 27 October 1986 were to be assessed at their ‘face value’ relying on the decisions of Boyd and Secretary, Department of Social Security (1994) 36 ALD 221 and O’Brien and Secretary, Department of Family and Community Services (2002) 70 ALD 552.

In respect of loans made prior to 27 October 1986, the AAT found that historically they had been assessed on the basis of their ‘real’ rather than their ‘face value’ (O’Brien).

The AAT noted that in Hughes and Secretary, Department of Social Security [1992] AATA 52; (1992) 25 ALD 754, the Tribunal had dealt with pre and post 1986 loans to a family trust and had followedKing and Repatriation Commission [1990] AATA 273; (1990) 12 AAR 375 in deciding that the assessment of loans before 27 October 1986 should be done by reference to the net worth of the assets. The AAT also noted that the decisions of Wright and Secretary, Department of Social Security [1994] AATA 252; (1994) 82 SSR 1196 and Unicomb and Secretary, Department of Social Security (1996) AATA 10915 provided some guidance on the nature of the valuation exercise entailed. The AAT observed that ‘the task of working out the real value, rather than the face value, can be a difficult one. Nevertheless this is what the Act requires’ (Reasons, para. 29).

The AAT concluded that the debt in this case had been incorrectly calculated due to Centrelink’s failure to separate the pre October 1986 component of the loans from the post 1986 component in order to determine the overall value of the loans by Foschi to Foschi Enterprises. In respect of the financial records, the AAT commented that because the financial statements were available for the tax years ended June 1984, June 1985 and June 1987, it was possible, however difficult, to ascribe a real value to Foschi’s pre-27 October 1986 loans.

In respect of the issue of debt waiver, the AAT concluded that it would be premature to consider this question. The AAT noted that whilst it had decided in a separate decision to waive Foschi’s wife’s debt, it had only done so after taking into account her particular circumstances which it saw quite differently from those of Foschi. The AAT found that it was appropriate to delay consideration of waiver until after the debt amount was ascertained.

Formal decision

The AAT set aside the decision and remitted the matter to the Secretary to recalculate the value of Foschi’s loans to Foschi Enterprises in accordance with the direction that the Secretary revalue the loans advanced before 27 October 1986 according to the net worth of the assets of Foschi Enterprises. In calculating the pre-27 October 1986 component of the loans the Secretary was to take into account the company’s financial statements for the tax years up to and including the year ended 30 June 1987.

[G.B.]