Editors --- "Assets and income test: offset of profits, losses and liabilities of multiple businesses" [2007] SocSecRpr 37; (2007) 9(3) Social Security Reporter, Article 11

• SALMON and SECRETARY TO THE DEWR
• Background
• Issues
• Formal decision

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Assets and income test: offset of profits, losses and liabilities of multiple businesses

SALMON and SECRETARY TO THE DEWR

(2007/1386)

Decided: 30th May 2007 by B. J. McCabe

Background

Salmon was in receipt of disability support pension (DSP). His wife was in receipt of wife pension (WP). They owned and operated a farm. They also owned and operated a traffic control business, and owned a number of rental properties. The traffic control business was carried on through a company called Traffic Man Pty Ltd. The other business activities were carried on through a partnership.

The traffic control business used many of the Salmons’ farm tools and equipment.

In the evidence before the Tribunal, it was clear that the farming business made a loss, while the traffic management business made a profit.

The Department recalculated the Salmons’ income and assets taking into account all of their business activities and assets, and raised a debt. The Tribunal’s decision does not give the amount of the debt originally raised, or the period to which it was said to relate. The Tribunal had to decide whether the Department correctly assessed the Salmons’ entitlements to their payments.

Issues

The Tribunal considered the following key issues in the Salmons’ case:

· Can loss-making activities in one business be offset against profitable activities in another business conducted by the Salmons for the purposes of the income test?

· How should the decision-maker value assets for the purposes of the assets test when some of the assets in question are used for a primary production business and others are not?

· Should loans taken out to acquire rental properties be debited against those properties, or against other properties for the purposes of the assets test?

· If there is a debt, should it be waived?

Can loss-making activities in one business be offset against profitable activities in another business conducted by the applicants for the purposes of the income test?

The Salmons argued that their various business activities should be treated as part of one larger business. This approach would allow them to combine outgoings of their various income streams and offset them against their gross income. The Tribunal did not agree with this approach. It reasoned that even though the farming and traffic management business used some of the same assets and personnel, they were distinct entities providing distinct activities.

The Tribunal then considereds.1075 of Social Security Act 1991 (the Act). That section deals with the specific issue of income derived from a business:

1075(1) Subject to subsection (2), if a person carries on a business, the person’s ordinary income from the business is to be reduced by:

(a) losses and outgoings that relate to the business and are allowable deductions for the purposes of section 8(1) of the Income Tax Assessment Act 1997 ; and

(b) amounts that relate to the business and can be deducted in respect of plant (within the meaning of the Income Tax Assessment Act 1997 ) under Division 40 of that Act; and

(c) amounts that relate to the business and are allowable deductions under section 290 (60) of the Income Tax Assessment Act 1997.

Note: Different provisions apply when working out a person’s ordinary income from a farm to find whether:

(a) the person satisfies the farmers’ income test for the purposes of Part 3.14A (see subparagraph 1185K(3)(a)(ii) and paragraph1185K(3)(c)); or

(b) the person satisfies the sugarcane farmers’ income test for the purposes of Part 3.14B (see subparagraph 1185Y(3)(a)(ii) and paragraph1185Y(3)(c))...

The Department argued that each business activity must be treated as a separate business, and losses or outgoings incurred in the course of one business activity should not be claimed against income derived from another business activity.

The Salmons argued that the social security legislation should be approached on the same basis as the deduction provisions in the income tax legislation. That is, that the deductions relating to one business activity should be permitted to be offset against the income generated from another business activity. They referred to the case of Secretary, Department of Social Security v Ekis (1998) 52 ALD 246, where Drummond J. concluded that the expression ‘carries on a business’ in s.1075 has the same meaning as the expression ‘in carrying on a business’ in the income tax legislation. In that case Drummond J said:

... the assumption would appear to be that, in contrast to the position generally obtaining in respect of deriving income from other sources, e.g., work as an employee, a person would only derive a gross amount of income from carrying on a business at the cost of having to incur what might be substantial expenses, so that it would be unfair to ignore those expenses in determining such a person’s pension entitlement.

(Reasons, para 15, citing Ekis at 250)

The Tribunal decided that the Department should allow expenses from one business activity to be offset against income from another business. Not to do so would result in a distorted view of the applicants ‘income and would go against the reasoning in Ekis. If the legislature had intended that the Department’s narrower reading of the legislation should apply, then it would have drafted the legislation in clearer terms. The Tribunal therefore concluded that the Salmons were entitled to offset outgoings incurred in connection with one business against income incurred from another business.

How should the decision-maker value assets for the purposes of the assets test when some of the assets in question are used for a primary production business and others are not?

The Salmons argued that all of their business activities should be characterised as a primary production business, and that its entire value should be assessed according to asset rules applicable to primary production.

The Tribunal referred tos.1121 of the Act. That section states that the value of a particular asset is worked out by assigning the market value to each asset and subtracting the value of any charge or encumbrance on that asset. Each asset and the debt owing in relation to it must be treated separately. Section1121A provided different rules for assets of a primary producer used in the course of primary production. In these cases s.1121A allows the offset of all of the primary production liabilities against the value of all of the primary production assets.

The Tribunal decided that the applicants could not treat their entire business activities as primary production activities. The traffic management and primary production activities were separate business. The Salmons’ assets therefore had to be distinguished as those connected with the primary production businesses, to be assessed under s.1121A, and those used in the traffic management business, to be assessed under s.1121. Asset-related liabilities arising from other business activities were not to be considered when calculating the value of the farm.

Should loans taken out to acquire rental properties be debited against those properties, or against other properties for the purposes of the assets test?

The Tribunal stated simply that, according to s.1121, any loan secured by way of a mortgage over a property should be deducted from the value of that property only.

If there is a debt, should it be waived?

The Tribunal decided that it was inappropriate to resolve this issue at this point. The respondent was first to reconsider the applicants’ entitlements having regard to the Tribunal’s reasons. If a debt remained after that process, the question of waiver should then be considered.

Formal decision

The Tribunal decided to set aside the decision of the SSAT and remitted the matter for reconsideration in accordance with its reasons.

[D.A.]