Editors --- "Income maintenance period: whether a payment in lieu of notice is a termination payment; meaning of 'reasonable expenditure'" [2010] SocSecRpr 18; (2010) 12(2) Social Security Reporter, Article 4

• SAAD and SECRETARY TO THE DFHCSIA
• Background
• Legislation
• Was the IMP correctly calculated?
• Was Saad in severe financial hardship?
• Was Saad’s expenditure unavoidable or reasonable?
• Decision

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Income maintenance period: whether a payment in lieu of notice is a termination payment; meaning of ‘reasonable expenditure’

SAAD and SECRETARY TO THE DFHCSIA

(2010/325)

Decided: 4th May 2010 by A.K. Britton

Background

In June 2009 Saad was made redundant by his then employer, TeleTech International. He received a termination package of about $25,000 made up of separate payments:

• Redundancy payment - approximately 12 weeks wages ($9179.28)

• Payment in lieu of notice -approximately 4 weeks wages ($3059.76)

• Annual leave - approximately 16.8 weeks wages ($12,902.15)

Saad claimed disability support pension in July 2009. A decision was made by Centrelink that Saad could not receive disability support pension between 12 June 2009 and 11 January 2010 due to an ‘income maintenance period’ (IMP), which was calculated on the basis of the termination payment. Saad disagreed with the decision to apply an IMP and also argued that it should have been reduced on the basis that he was in severe financial hardship.

The issues for determination by the Tribunal were:

1) Whether the IMP applied to Saad was correctly calculated; and

2) Whether the discretion in s.1064-F11 of the Social Security Act 1991 (the Act) could be applied to determine that all or part of the IMP did not apply to Saad.

Legislation

Section 1064-F5 of the Act sets out the way termination payments are treated under the pension income test. It provides:

1064-F5 If:

(a) a person’s employment has been terminated; and

(b) the person receives a termination payment (whether as a lump sum payment, as a payment that is one of a series of regular payments or otherwise); the person is taken to have received ordinary income for a period (the income maintenance period ) equal to the period to which the payment relates.

The relevant definitions ‘leave payment’, ‘redundancy payment’ and ‘termination payment’ are found in s.1064-F14 and provide:

‘leave payment’ includes a payment in respect of sick leave, annual leave, maternity leave and long service leave...

‘redundancy payment’ does not include a directed termination payment within the meaning of section 82-10F of the Income Tax (Transitional Provisions) Act 1997 .

‘termination payment’ means:

(a) a leave payment relating to a person's employment that has been terminated; or

(b) a redundancy payment.

Section 1064-F11 provides a mechanism by which an IMP may be reduced in some circumstances:

If the Secretary is satisfied that a person is in severe financial hardship because the person has incurred unavoidable or reasonable expenditure while an income maintenance period applies to the person, the Secretary may determine that the whole, or any part, of the period does not apply to the person.

Note 1: For in severe financial hardship see subsection 19C(2) (person who is not a member of a couple) and subsection 19C(3) (person who is a member of a couple).

Note 2:For unavoidable or reasonable expenditure see subsection 19C(4).

The definition of ‘severe financial hardship’ for the purposes of s.1064-F11 is set out in s.19C and relevantly states:

Meaning of in severe financial hardship:

(2) A person who is not a member of a couple and who makes a claim ...for disability support pension... is in severe financial hardship if the value of the person’s liquid assets (within the meaning of subsection 14A(1)) is less than the fortnightly amount at the maximum payment rate of the payment, benefit, pension or allowance that would be payable to the person:

(f) if the person’s claim were granted; and

(g) in the case of a person to whom an income maintenance period applies, if that period did not apply.

Was the IMP correctly calculated?

The two parties agreed that an IMP applied to Saad from 12 June 2009. It was not in dispute that the payments made for annual leave and redundancy should be taken into account to calculate the IMP. The Secretary, however, contended that the payments in lieu of notice should also be characterised as ‘redundancy payments’.

The Tribunal pointed out that the Act’s definition of ‘redundancy payment’ in s.1064-F14 is of little assistance in determining the characteristics of a ‘redundancy payment’. The Tribunal considered the decision of Finch and Secretary to the DEEWR [2009] SSR Vol.11, No.4, which addressed the issue of how ‘payments in lieu of notice’ are to be assessed. In that case D.P. Jarvis decided that a payment in lieu of notice is not a termination payment within the meaning of the Act. It is neither a leave payment, nor a redundancy payment, and no provisions in the Act applied specifically to payments in lieu of notice. In such circumstances the Tribunal in Finch’s case decided that payments in lieu of notice should be treated as income paid on the day on which it was received, and that the IMP provisions could not apply to them.

The Tribunal agreed with the reasoning in Finch’s case. It also noted that the ordinary dictionary definition of the word ‘redundant’ was to be ‘no longer needed or useful’, or ‘to be superfluous’. On the other hand, payments in lieu of notice were made as a result of a decision made by an employer not to require an employee to undertake their normal duties during the notice period specified in the employment contract. For these reasons the Tribunal concluded that the payment in lieu of notice, equating to approximately 4 weeks of wages, was not to be taken into account in the calculation of the IMP. The redundancy and leave components of the termination payment, however, were to be taken into account to calculate an IMP of approximately 28 weeks.

Was Saad in severe financial hardship?

For the IMP to be reduced under s.1064-F11, Saad first had to be found to be in ‘severe financial hardship’. Saad had two bank accounts, of which he was the sole signatory. The money in the first bank account was depleted in early October 2009. Saad argued that the money held in the second bank account should not be considered as forming part of his liquid assets, as most of the funds had been deposited by his brother and sister. Saad argued that he and his siblings had set up the account in 2005 to raise funds to purchase a home. As at October 2009 the account had a balance of $110,000, of which Saad claimed $20,000 was his contribution. The funds were withdrawn from the bank account on 26 October 2009 to purchase the apartment in which he lived with his family.

The Tribunal found that the fact that only some of the money had been deposited by Saad was irrelevant, as was the purpose for which the funds were deposited. The funds were available to Saad and satisfied the definition of ‘liquid assets’, and should have been taken into account until they were withdrawn on 26 October 2009.

Was Saad’s expenditure unavoidable or reasonable?

The discretion to treat the whole or part of an IMP as not applying to a person cannot be exercised unless a person has incurred ‘unavoidable or reasonable expenditure’, leading to the severe financial hardship (ss.19C, 1064-F11).

Saad’s evidence was that he held approximately $45,000 of his own funds at the commencement of the IMP. Approximately $17,000 had been used to meet his day-to-day living expenses between 12 June and late October 2009. Another $28,000 was used to purchase the apartment in which he lived. The Secretary accepted that the $17,000 constituted ‘unavoidable or reasonable expenditure’ but disputed that the application of the $28,000 could meet this description.

The Act sets out a non-exhaustive list of expenses that can constitute ‘unavoidable or reasonable expenditure’ at s.19C(4). The definition includes a category of ‘reasonable costs of living’, which in turn includes ‘rent or mortgage payments’. However there is no mention of the use of funds to purchase a new property. The Tribunal further noted that the categories of expenditure in paragraphs 19C(4) and

(5) are non-exhaustive and include a general category described as ‘any other costs [the decision-maker] determines are unavoidable or reasonable expenditure in the circumstances in relation to a person’.

The Tribunal cited the cases of Finch (supra) and Vaszolyi and Secretary to the DEEWR [2009] AATA 268 and agreed with the approach in those two cases that the terms ‘unavoidable’ and ‘reasonable’ should be characterised as having ‘a high degree of necessity’ and should not be conflated.

The Tribunal had regard to Saad’s circumstances at the time the expenditure was made. Saad and his family originally paid rent for their apartment. Shortly before the apartment was purchased they had been ordered to vacate it by an order of the NSW Consumer Trader and Tenancy Tribunal. After receiving the vacation notice the apartment became available for sale. Saad’s evidence was that the premises were ‘ideal’, as they were close to the hospital where he was receiving dialysis and staying there would avoid the disruption and costs associated with moving. The property was purchased in Saad’s brother’s name, with other family members also contributing to the upfront cash payment of $112,000. Saad’s brother took on the mortgage for the remaining funds. Saad had no legal interest in the apartment on the understanding with his brother that he could live there rent-free.

The Tribunal stated that the issue for determination was whether Saad’s contribution towards the purchase of the apartment was reasonable or unavoidable. The Tribunal found it difficult to accept that Saad’s contribution of $28,000 was ‘unavoidable’ as it was open for him to keep some of that money to meet his living expenses. There was no evidence that the purchase of the apartment could not have been achieved if Saad’s brother had been required to borrow a larger amount, or that other alternative properties could not be found. The Tribunal also found that the application of the $28,000 in this manner could not be characterised as ‘reasonable’, in particular when considering that the decision was made while subject to the IMP. For these reasons the Tribunal concluded that Saad’s contribution towards the purchase of the property was neither unavoidable nor reasonable, and the discretion in s.1064-F11 to treat the whole or part of the IMP as not applying could not be exercised.

Decision

The Tribunal set aside the decision under review and remitted the matter to the Secretary to calculate the income maintenance period in accordance with the reasons in its decision.

[D.A.]