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Social Security Reporter |
Age pension: assets test; assessment of loans
(2008/982)
Decided: 5th November 2008 by R.W. Dunne
Mr and Mrs Reu received age pension. On 30 July 2004 they invested $40,000 by way of a mortgage loan to John West and Associates Pty Ltd (JWA) in a project called ‘MERCSHED’. They advised Centrelink of this loan, which was treated as an asset for the purpose of calculating their rates of age pension.
In March 2007 Mr and Mrs Reu were advised that their investment had been ‘totally lost’ as a result of a mortgagee sale in late 2004. They informed Centrelink of this. Centrelink decided that, despite losing their investment, the loan would continue to be assessed as an asset until evidence was provided showing the amount that was recoverable. The SSAT affirmed this decision.
The legislation relevant to Mr and Mrs Reu’s appeal is the Social Security Act 1991 (the Act).
Section 9 of the Act states that the term ‘financial assets ‘includes a ‘financial investment’. The definition of ‘financial investment’, also in s.9, includes ‘a loan that has not been repaid in full’.
The main section in the Act relating to the assessment of loans is s.1122 which states:
If a person lends an amount after 27 October1986, 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.
Part 4.6.5.65 of the Guide to Social Security Law relevantly states:
A loan no longer exists for social security purposes when:
• A company that borrowed the money is in administration and subsequently placed in liquidation, or loans to the company become subject to a deed of company arrangement. In these cases, the loan is taken to have ceased to exist from the date that the company was placed in administration (see explanation 7)....
Explanation 7: Where a loan has ceased to exist in these circumstances, the face value of the loan ceases to be assessable from the date the company was placed in administration.
However, the value of any remaining debt the person has the right to recover is assessed in line with the administrator’s/liquidator’s estimate... Given that a loan can only be determined to have ceased to exist when the company is placed in liquidation, or placed under a deed or arrangement, and this decision is applied back to the date the company was placed in administration, people with investments in the company will need to have their eligibility to social security payments reassessed ...back to the date of administration to take account of the difference in the face value of the loan that has been assessed and the value as determined by the administrator/liquidator/deed of company arrangement...The value of the debt owing to a person, to be assessed for the period from when the company is placed in administration, is the administrator’s/liquidator’s estimate of the expected return to creditors determined when it is decided the company is to be placed in liquidation and/or the loan is subject to a deed of company arrangement.
Evidence was given at the Tribunal that Mr and Mrs Reu lost their mortgage loan investment in December 2004. Mr and Mrs Reu did not become aware of the loss until March 2007. They advised Centrelink of their position on 26 March 2007. On 24 July 2007JWA was placed into voluntary administration.
Mrs Reu was eventually advised by the provisional liquidator that a pooled proposal was being sought to enable a distribution to be made amongst the lenders. On 18June 2008 Mrs Reu was informed by the provisional liquidator that it was difficult to estimate a dividend to JWA’s creditors, although the best possible result if all of JWA’s assets were realised would be a return to creditors of approximately 20 cents in the dollar.
Section 1122 requires that so much of a loan that remains unpaid is to be included in the ‘value of the assets’ of a person. The Tribunal looked closely at the Departmental policy in The Guide outlined above. While noting that the Tribunal was not bound to apply the policy, as per Drake v Minister for Immigration and Ethnic Affairs [1979] 46 FLR 409, the Tribunal did not see any cogent reasons for not applying the policy in this particular case.
The Tribunal decided that Centrelink had correctly applied the policy in Mr and Mrs Reu’s case. To show that the mortgage loan no longer existed, there would need to be evidence to that effect from a reliable source such as the liquidator or from the Australian Securities and Investments Commission. However, in this case the only evidence was that there was a possibility of a dividend to all creditors of around 20 cents in the dollar at some future date, although the amount could very well vary by the time the final dividends were paid.
Mr and Mrs Reu requested that the Tribunal determine the value of the loan based on the liquidator’s estimate, and for an adjustment to be made when the final dividend was eventually paid. They also contended that the adjustment should be made retrospective to the date the loan was ‘totally lost’ in December 2004instead of the date JWA was placed into administration.
In relation to the latter contention the Tribunal’s decision was that it did not have the power or authority under the Act to make such a decision to backdate to December 2004 any arrears that may be payable to Mr and Mrs Rue. In relation to how much of the loan was to be assessed before the final dividends were paid, the Tribunal decided that the full face value of the mortgage loan must be taken into account, as was mandated by s.1122, rather than the amount of the tentative estimate of the final dividend:
...s.1122 stipulates a simple and unambiguous method for valuing a loan and necessarily precludes other methods of valuing, such as determining the amount recoverable commercially. (Reasons, para.13)
The Tribunal affirmed the decisions under review.
[D.A]
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URL: http://www.austlii.edu.au/au/journals/SocSecRpr/2008/38.html