Editors --- "Assets test: effect of statute of limitations on loans; effect of endorsement of promissory note" [2006] SocSecRpr 4; (2006) 8(1) Social Security Reporter, Article 4

• HAWKINS and SECRETARY TO THE DFaCS
• Background
• The issues
• Discussion
• Formal decision

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Assets test: effect of statute of limitations on loans; effect of endorsement of promissory note

HAWKINS and SECRETARY TO THE DFaCS

(2005/1219)

Decided: 12th December 2005 by M. J. Carstairs

Background

Hawkins lodged a claim for disability support pension in April 2003. The claim was rejected on the grounds that his assets exceeded the allowable limit for a homeowner.

For many years, Hawkins directed his money in the form of loans to the Jindalee Trust (‘the trust’) and to its trustee company, Doric Holdings Pty Ltd (‘the company’). Hawkins was a beneficiary of the trust and a director of the company with a 51% shareholding. The company purchased a46 acre property at Boreen Point on which a house was later built. Hawkins was granted a35 year lease of the house and was considered a ‘homeowner’ for the purposes of the social security assets test.

Hawkins argued that the loans he had made to the trust and company were no longer recoverable due to the operation of the Limitation of Actions Act (QLD) 1974. He argued that as such, they were no longer his ‘assets’ for social security purposes.

In October 2004 Hawkins signed a document in which he ‘unconditionally’ forgave all loans to the trust and company. The Department argued that none of the loans were forgiven until this time.

The total amount transferred to the trust and company was $270,964. This amount comprised two amounts ‘invested’ in the company of $7885 and $90,929 and a further $172,132 described on the pension claim form as a ‘gift of unsecured loans to trust’, made by way of an endorsed promissory note in 1999.

The issues

The issues to be decided by the Tribunal were:

· whether the loans ceased to be assets or ceased to have any value;

· what was the effect of the statute of limitations; and

· whether endorsement of the promissory note had effectively ‘gifted’ the $172,132 to the trust.

Discussion

It was agreed by both parties that the loans of $7885 and $90,929 were repayable on demand and that the lender’s cause of action arose when the borrower received the money. The Tribunal was satisfied that recovery of these amounts was statute barred well before the claim for pension was lodged in 2003.

The Tribunal then looked at whether the fact that the loans were statute barred impacted on how they were assessed under the Social Security Act 1991 (‘the Act’). The Tribunal had regard to the High Court case Commonwealth v Mewett (1997) 191 CLR 471 which held that the effect of the limitation period expiring was ‘to bar the remedy, but not to extinguish the right’ and that although not enforceable in a court, the loans might still be enforceable and valuable. The Tribunal noted that some limitation Acts, such as that in New South Wales, do extinguish rights substantively, but that this was not the case with the Queensland Act.

The Tribunal also noted that an ‘asset’ is defined in s.11 of the Act as meaning ‘money or property’ and that loans and debts are a species of property which are ‘capable of ownership’ (see Secretary Department of Social Security and Vonhoff (1998) 54 ALD 227 and Secretary, Department of Family and Community Services v Draper [2003] FCA 1409).

The Tribunal then discussed the definition of ‘value’ of loans in s.11 of the Act as ‘that amount as remains unpaid’. The Tribunal agreed with Re Boyd and Secretary Department of Social Security (1994) 36 ALD 331 that these words cannot be replaced by the words ‘remains recoverable’.

The Tribunal found that the loans were ‘assets’, and noted that the effect of the Queensland limitations statute on the value of the asset and questions about the ability of the loans to be realised could only be addressed under the hardship provisions of the Act.

Next the Tribunal considered the nature of the loan of $172,132. On the promissory note made out in favour of Hawkins the Jindalee Trust agreed to unconditionally pay Hawkins or bearer the amount of $172,132. On the same day, Hawkins endorsed the back of the promissory note to the effect that he unconditionally promised to pay the trustee (Doric Holdings Pty Ltd) the sum of $172,132. A statutory declaration recorded that he told an officer of the company that the promissory note ‘represents a gift from me to be held for the beneficiaries of and subject to the terms of the Jindalee Trust’.

Hawkins argued that the loan was forgiven on that day. The Tribunal looked at the Bills of Exchange Act 1909 and agreed with this contention. The Tribunal noted that as the ‘gifting’ occurred within five years of the claim for pension in 2003 it might affect the claim. The Tribunal remitted the overall assets assessment to the Department for reassessment.

Finally, although not asked to do so, the Tribunal considered, and agreed with, the findings of the Social Security Appeals Tribunal to ascribe 51% of the capital of the company to Hawkins in line with his 51% shareholding and to treat him as a homeowner for the purposes of the assets test given his interest in the home, the length of his lease and his security of tenure.

Formal decision

The Tribunal set aside the decision under review and remitted the matter to the Department to re-assess Hawkins’ assets in the relevant period in accordance with the following:

· Loans of $7885 and $90,929 had to be assessed at face value as these had not been repaid at the time of claim for disability support pension;

· The amount of $172,132 was gifted to Jindalee Trust on 13 November 1999;

· The value of Hawkins’ interest in Doric Holdings Pty Ltd was $23,356;

· The value of Hawkins’ other assets were as set out in the decision of the Social Security Appeals Tribunal.

[A.M.]