Editors --- "Youth allowance debt: waiver; special circumstances" [2010] SocSecRpr 42; (2010) 12(3) Social Security Reporter, Article 8

• McGUIGAN and SECRETARY TO THE DEEWR
• Background
• Write off
• Waiver in special circumstances
• Formal decision

---

Youth allowance debt: waiver; special circumstances

McGUIGAN and SECRETARY TO THE DEEWR

(2010/593)

Decided: 11th August 2010 by S. E. Frost

Background

McGuigan was paid youth allowance (YA), his rate being based on his parent’s income, with whom he was living. Centrelink reviewed his entitlement and decided that YA should not have been paid and raised a debt of $6000 against him.

Write off

As McGuigan agreed that he had been overpaid YA of $6143.93, the AAT first considered whether the debt should be written off. Under s.1236(1) of the Social Security Act 1991 (the Act) the Secretary (or the Tribunal) may write off a debt, ‘for a stated period or otherwise’, but only if, according to s.1236(1A):

(a) the debt is irrecoverable at law; or

(b) the debtor has no capacity to repay the debt; or

(c) the debtor’s whereabouts are unknown after all reasonable efforts have been made to locate the debtor; or

(d) it is not cost effective for the Commonwealth to take action to recover the debt.

In this case, the AAT considered that paragraphs (a), (c) and (d) did not apply and noted that paragraph (b) of s.1236(1C) provides that:

... if a debt is recoverable by means of:

• deductions from the debtor’s social security payment; or

• deductions under section 84 of the A New Tax System (Family Assistance) (Administration) Act 1999; or

• setting off under section 84A of that Act;

the debtor is taken to have a capacity to repay the debt unless recovery by those means would result in the debtor being in severe financial hardship.

McGuigan provided a ‘Current Income and Expenditure Statement’ showing a net weekly wage of $330 and weekly expenses totalling $294, leaving a surplus of $36 for discretionary spending. He owed his parents $780, and although they were not pressing for repayment, he had been trying to repay this but was struggling.

The AAT noted that repayment of debts owed to a person’s family should not, as a rule take priority over the repayment of debts owed to the Commonwealth in circumstances where a person received benefits that he or she was not entitled to. McGuigan’s weekly surplus of $36 demonstrated that, while he had little capacity to repay the debt, it was not the case that he had no capacity to repay it, by modest fortnightly instalments. The AAT concluded that it was therefore not possible to write off the debt under s.1236.

Waiver in special circumstances

The AAT then considered whether the debt should be waived under s.1237AAD because of ‘special circumstances’. McGuigan submitted that:

• he and his parents made every effort to provide Centrelink with accurate information;

• his father was careful in his dealings with Centrelink because his elder brother had been overpaid YA a few years earlier and they did not want a repeat of this;

• Centrelink was slow to act on information provided, or failed to process information correctly, and this contributed to the overpayment and to late identification of the problem; and

• the Act operated unfairly.

The AAT considered that the overpayment arose because of the content of information provided to Centrelink and the way Centrelink processed that information. During 2006 and 2007, McGuigan’s father was a full-time salaried teacher. He invested in shares and only ever invested in ‘blue chip’ shares, but borrowed heavily for the purpose. He also paid a ‘protection fee’, described as an ‘insurance policy on the value of the shares’. He hoped to benefit from an expected appreciation in the value of the shares, but also sought to protect himself in the event that the share values fell.

The share values did fall and the protections he had put in place were not robust enough to save him from significant losses, which were considerable enough in each financial year to offset his entire salary income earned from his teaching. Therefore, his income in each year was negative, although for income tax purposes it was ‘nil’, with losses able to be carried forward to subsequent years. The effect in a financial sense, was catastrophic and he was declared bankrupt in September 2008.

In a Centrelink form ‘Parent(s)/ Guardian(s) details’ (a ‘Module JY’ form), signed on 9 July 2007 for the ‘base tax year’ of 2005/2006, McGuigan’s father provided the following information:

• What was/is your taxable income for the tax year? – NIL

• In the tax year, did you receive (or expect to receive) any income not already included in Question 7 (above) classified as net passive business losses (including negative gearing)? – No

• Were you a wage or salary earner who claimed (or will claim) a tax deduction for a business loss? – No

The question dealing with ‘net passive business losses’ included an instruction to refer to the Notes section. The Notes section gave the following explanation:

Net passive business losses (NPBL)

NPBL include net losses from rental properties (negative gearing) and non-property passive income investments such as shares. The value of such losses is added back to parental income.

A passive income earning investment is an investment in which a parent is usually engaged for less than 17.5 hours per week (on average) working on that investment.

That explanation was broadly consistent with Module F (Parental income test) of the Youth Allowance Rate Calculator at the end of s.1067G of the Act.

The questions on the Module JY form originated in Modules F and G of the Youth Allowance Rate Calculator, and in the definitions of certain expressions in the Act. In particular:

(a) Point 1067G-F10 in Module F of the Rate Calculator explains that the combined parental income of a person for a particular tax year is the sum of the following amounts for each of the person’s parents:

(b) the parent’s taxable income for that year;

(c) the parent’s adjusted fringe benefits total for that year;

(d) the parent’s target foreign income for that year;

(e) the parent’s net passive business loss for that year.

It follows that if a parent incurs a net passive business loss, then the amount of the loss must be added to the parent’s taxable income to determine the parent’s parental income.

Subsection1067G-F11(4) in Module F defines net passive business loss as the difference between:

(a) the total amount of the person’s loss or outgoings for that year that are or will be deductible under the Income Tax Assessment Act because they were necessarily incurred in relation to a passive business; and

(b) the gross income from the business for that year

A passive business (ss.1067G-F19A(1)) is a business ‘in relation to which the person is usually engaged for less than 17.5 hours in a week’ – which was applicable in this case, given the father’s status as a full time teacher.

(a) A business (ss.1067G-F19A(2)) is defined to include ‘the earning of income as a ren-tier’. The word ‘rentier’ is not defined in the Act but it has the following dictionary definitions:

• one who has a fixed unearned income, as from rent, interest on bonds, etc. (Macquarie);

• a person living on income from property or investments (Oxford);

• a person living on dividends from property, investments, etc. (Australian Concise Oxford).

Module G can apply to a person if, among other things, the person has a parent who is a designated parent (ss.1067G-G2).

Ss.10B(3) of the Act says that a parent of a person is a designated parent if:

...

(e) the parent derived income from salary or wages in the base tax year and has claimed, or will claim, a tax deduction for a business loss (whether for that year or a previous year) that does not consist only of a net passive business loss;

...

The AAT considered that it was clear from Module A that after applying Module F to McGuigan’s circumstances, he had a parental income test reduced rate (Step 8 of Module A) of nil. That rendered it unnecessary to resort to Module G of the Rate Calculator. Therefore, the question as to whether McGuigan’s father was a wage or salary earner who claimed (or will claim) a tax deduction for a business loss was relevant only to Module G and not to Module F and could have no bearing on the calculation of McGuigan’s entitlement to YA and no bearing on the eventual overpayment to him.

That circumstance, in the AAT’s view, put the following question in the Centrelink form - /” In the tax year, did you receive (or expect to receive) any income not already included in Question 7 (above) classified as *net passive business losses *(including negative gearing)?” -/and McGuigan’s answer - “ /No” -/ under intense scrutiny. It was clear that the question was designed to identify a parent who incurred a ‘net passive business loss’. The obvious reason was that the net passive business loss had to be added to the parent’s taxable income, however the question itself was poorly expressed, asking not simply ‘Did you have a net passive business loss?’ but the much more complex ‘Did you receive (or expect to receive) any income ... classified as net passive business losses?’ In the AAT's view it was a matter of common sense, and confirmed by the definition of ‘net passive business loss’, that an amount ‘classified as [a] net passive business loss’ could not ever be an amount of ‘income’ that a person ‘receive[d]’ or ‘expect[ed] to receive’. On that basis no parent would be able to answer ‘yes’ to that question, and yet that was the only answer that would trigger follow-up action by Centrelink, by way of a re-examination of the child’s entitlement to YA.

The answer of ‘no’ to that question led to Centrelink’s continued payment of YA to McGuigan. It was a data-matching exercise some 12 months later with the Australian Taxation Office that highlighted the father’s status as a parent who had incurred a net passive business loss. By then, McGuigan had been paid over $6000 to which he was not entitled.

The rationale for adding net passive business losses to taxable income in the AAT’s view was presumably that the combined figure provided a more reliable indicator of a parent’s true ability to support a child financially. It was assumed that if a parent could afford to incur losses, the losses should not be taken into account in determining true financial capacity (in other words, once deducted, the losses are added back). That assumption seemed unobjectionable when the losses were modest by comparison with a parent’s salary or wage income. However, where the losses were as large as in this case, they exceeded not only the gross income derived from the ‘passive business’ but also the salary and wage income as well, there arose what appeared to be a very significant anomaly, as demonstrated in the table below. The table assumed the case of a parent with salary or wage income of $50,000 and gross passive business income of $20,000 (that is, a total gross income of $70,000):

Passive business	Net passive	Taxable income	Parental Income
losses & outgoings	business loss
30000	10000	40000	50000
40000	20000	30000	50000
50000	30000	20000	50000
70000	50000	0	50000
90000	70000	0	70000
120000	100000	0	100000

The table demonstrated that, provided the losses and outgoings incurred in connection with the passive business did not exceed the total gross income (lines 1 to 4), the ‘parental income’ would not exceed the income derived from salary or wages. However, once those losses and outgoings exceeded the total gross income (lines 5 and 6), the parental income rose above that figure and, as the losses increased, the ‘parental income’ could even exceed the total gross income derived from both salary or wages and the passive business (line 6). The AAT noted that curiously, the more ruinous the result, the greater the parental income. That was, of course, contrary to the presumed rationale that the ‘taxable income plus losses’ figure would indicate a parent’s true capacity to provide financial support for the child.

The AAT noted that s.1237AAD of the Act is a discretionary provision and provides:

The Secretary may waive the right to recover all or part of a debt if the Secretary is satisfied that:

(a) the debt did not result wholly or partly from the debtor or another person knowingly:

(i) making a false statement or false representation; or

(ii) failing or omitting to comply with the provisions of this Act, the Administration Act or the 1947 Act; and

(b) there are special circumstances (other than financial hardship alone) that make it desirable to waive; and

(c) it is more appropriate to waive than to write off the debt or part of the debt.

The main issue in the AAT’s view came down entirely to paragraph (b) as there was no suggestion that McGuigan or his father made a false statement or false representation that resulted in the debt. The Secretary suggested that McGuigan’s father had incorrectly stated in one of his responses to Centrelink that he was not ‘self-employed’, but that answer in the AAT’s view, even if incorrect was not at all responsible for the overpayment. The Secretary asserted that the father’s response prevented early identification as a ‘designated parent’ but that issue was irrelevant to McGuigan’s circumstances.

McGuigan’s circumstances were that:

• he was paid YA which he and his father were led by Centrelink to believe he was entitled to, but was not;

• the mistaken payment arose from his father’s answer (which was strictly correct) to an imperfect question which could not accurately have been answered in any other way;

• Module F of the Rate Calculator painted an unrealistic picture of his father’s capacity to support McGuigan financially during the relevant years;

• the father had no capacity to support McGuigan financially during the relevant years;

• McGuigan was in debt to his parents (one of whom was bankrupt);

• McGuigan earned a modest income and had little money left after reasonable living expenses;

• repayment of the debt would impose on him a financial burden which could accurately be described as ‘financial hardship’.

In the AAT’s opinion, those circumstances, taken together, amounted to ‘special circumstances (other than financial hardship alone)’ and provided a foundation for the exercise of the discretion to waive the debt.

Formal decision

The decision under review was set aside and a new decision was substituted to waive the debt under s.1237AAD of the Act.

[S.P.]