Editors --- "Assets test: value of interest in private company; charge over company assets - collateral security; unsecured loan - whether at arm's length; waiver of debt and special circumstances" [2008] SocSecRpr 10; (2008) 10(1) Social Security Reporter, Article 10

• SECRETARY TO THE DEWR and BOUTHIER
• Background
• The issues
• Discussion
• Formal decision

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Assets test: value of interest in private company; charge over company assets - collateral security; unsecured loan - whether at arm’s length; waiver of debt and special circumstances

SECRETARY TO THE DEWR and BOUTHIER

(2007/1904)

Decided: 31st October 2007 by G. Hughes

Background

Bouthier and Paolo established a company, Giordano Louis-Phillipe Pty Ltd, on 7 January 2003. Both were directors and equal shareholders of the company.

The company purchased a childcare centre valued at $485,000, and took possession of the centre on 6June 2003. The purchase was financed by a $400,000 loan to the company from the Commonwealth Bank, a second loan of $60,000 from the Commonwealth Bank and a personal loan from Paola of $18,128.

The $400,000 loan was secured by a charge over the company’s assets as well as mortgages over properties at Unit 4, 16 Walsh Street, Ormond (where Bouthier and Paola resided), Unit 1, 16Walsh Street, Ormond (an investment property jointly owned by Bouthier and Paola) and 103/80 Clarendon Street, Southbank (also an investment property jointly owned by Bouthier and Paola).

Between 6 June 2003 and 29March 2004, Bouthier was in receipt of disability support pension (DSP). Her payments ceased between 30 March 2004 and 25 May 2004. On 25 May 2004, Bouthier resigned as a director of the company.

Centrelink reviewed Bouthier’s entitlement to DSP during the period 6 June 2003 and 29 March 2004, and determined that Bouthier had been overpaid benefits.

Bouthier appealed the decision to the SSAT. The SSAT set aside the decision and directed that to DSP during the relevant period be reassessed, on the basis that the $400,000 and $18,128 loans were to be deducted from the value of the company’s assets.

The applicant applied to the AAT for a review of the SSAT’s decision. Bouthier cross-appealed, seeking that any debt arising in relation to the period be waived on the basis of special circumstances.

The issues

There was no dispute that the company was a controlled private company in relation to Bouthier for the purposes of s.1207Q(2) of the Social Security Act 1991 (the Act)and that Bouthier was an attributable stakeholder for the purposes of 1207X(1)(a) during the period6 June 2003 and 29 March 2004. Nor was there any dispute that the $60,000loan could not be deducted from the company’s assets as it was not a secured loan.

The issues for determination by the AAT were:

1. whether the $400,000loan could be deducted from the value of the company’s assets;

2. whether the unsecured loan of $18,128 could be deducted from the value of the company’s assets;

3. whether Bouthier had been overpaid DSP in the relevant period; and

4. if so, whether there were special circumstances in this case which warranted the waiver of the Commonwealth’s right to recover all or part of the debt.

Discussion

In relation to the loan of$400,000, the AAT found that the charge over the company’s assets was ‘collateral security’ for the purposes of s.1208G(2)(a) and therefore the value of the loan could not be deducted from the assets of the company.

The AAT noted that the term ‘collateral security’ was not defined in the legislation, but found that its meaning in the context of the Act was uncontentious. The AAT found that it was a reference to parallel or additional security. As the $400,000loan in the present case was secured by the charge over the company’s assets and the mortgages on the various properties, the charge was ‘collaterial security’ within the meaning of the legislation.

In relation to the unsecured loan of $18,128.55 to the company by Paola, the AAT concluded that the SSAT had failed to consider the effect of ss.11 to 14 of the Social Security(Attribution of Assets) Principles 2001, which the decision-maker is required to have regard to when assessing the value of an unsecured loan to a company.

The AAT concluded that the loan of $18,128.55 was not a loan which had been made at arm’s length, as an agreement in relation to the loan had not been made in writing, signed and independently witnessed as required by s.13 of the Principles. In the circumstances, the value of the loan could not be deducted from the assets of the company.

The AAT went on to consider whether the right to recover any debt that would be payable pursuant to its decision should be waived under s.1237AAD of the Act.

The AAT had before it evidence that Bouthier had been suffering from a major depressive disorder which developed in the late 1990s as a consequence of thoracic outlet syndrome and chronic torticollis. The AAT observed that the relationship between Bouthier and Paola was a unique relationship and that Paola’s emotional and domestic support had been a mainstay of Bouthier’s existence in the past. The AAT noted that that support had receded, given Paola had become a mother and that, as a result, Bouthier was in an emotionally and financially precarious position.

The AAT concluded that the situation confronting Bouthier was clearly out of the ordinary and represented the type of special circumstances which s.1237AAD was intended to embrace. The AAT concluded that the recovery of any amounts overpaid between 6 June 2003 and29 March 2004 should be waived pursuant to s.1237AAD of the Act.

Formal decision

The AAT set aside the decision under review and in substitution decided that:

1. the Secretary recalculate the amount of the debt in accordance with the reasons for decision; and

2. the recovery of any overpaid amounts between 6June 2003 and 29 March 2004 be waived pursuant to s.1237AAD of the Act.

[S.O.]