Editors --- "Age pension: treatment of loans to private company" [2012] SocSecRpr 14; (2012) 14(2) Social Security Reporter, Article 5

• GORTON and SECRETARY TO THE DFHCSIA
• Background
• The issues
• Formal decision

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Age pension: treatment of loans to private company

GORTON and SECRETARY TO THE DFHCSIA

(2012/127)

Decided: 22nd February 2012 by S. M. Walsh

Background

The Gortons’ sought review of the decision of the Social Security Appeals Tribunal (SSAT) on 6 April 2011 that Centrelink (i) recalculate the Gortons’ rate of age pension (AP) from 1 February 2002, taking into account their respective ‘Unsecured interest-bearing liability’ and ‘Unsecured financial liability’ balances (for their ‘loans’ to Mountway Holdings Pty Ltd) as directed by the SSAT and (ii) pay the Gortons arrears of AP in respect of specified periods. Mountway was a private company established in the 1980s as an engineering business but was also involved in shared trading. Mr Gorton held 99 shares in Mountway and his wife held 1 share.

This matter had been subject to previous proceedings before the Administrative Appeals Tribunal (AAT). A differently constituted Tribunal in its decision of 3 February 2010, whilst not making any findings on the actual quantum of the loans had urged Centrelink to reconsider the quantum of the loans, being assessed to the Gortons as financial assets and apply s.1122 of the Social Security Act 1991 (the Act) on the basis that the deemed income may have been capitalised each year. Following this Tribunal decision, Centrelink had reviewed and affirmed the calculations on the basis that t h e y had been based on the updated balance sheets which had been supplied by the Gortons in respect of the disputed financial years taken at face value and without Centrelink having added any deemed income to the balance of any of the financial assets. Dissatisfied with this decision, the Gortons had subsequently appealed to the SSAT and again to the AAT.

The issues

The AAT limited the issues to the following:

1. What was the quantum of the loans made by the Gortons to Mountway; and

2. Were arrears of AP payable to the Gortons and if so, in respect of which period?

Whilst the Gortons had argued in the current proceedings (as they had done in the previous proceedings before the AAT in 2010) that no loans existed between the Gortons and Mountway, the Tribunal concluded that it was not appropriate to revisit this issue in the current application as it had been already been decided by the AAT in the previous proceedings.

Issue 1: What was the quantum of the loans made by the Gortons to Mountway?

The AAT noted the starting point was s.1122 of the Act which states:

1122. Loans

1122. If a person lends an amount after 27 October 1986, 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.

Applying s.1122 of the Act and the decisions of Hughes and SDSS [1992] AATA 52; (1992) 25 ALD 754, Clayton and SDSS (1996) 42 ALD 796, SDFaCS and Downes [2002] AATA 737; (2002) 70 ALD 100 and Trewin and SDFaCS [2002] AATA 437; (2002) 69 ALD 774, the AAT consequently found that the Gortons’ loans must be given their ‘face value’ based on the amounts recorded in the financial statements supplied by the Gortons to Centrelink for the relevant years. The AAT similarly did not accept, applying the decisions of Repatriation Commission v Harrison, Hughes, Boyd, Wright, Saunders, Ling and Secretary, Department of Family and Community Services [2000] AATA 22, Trewin, Gordon and Smith, that the loans could be given any reduced rate which would recognise a component of their unrealisability.

Further the Tribunal disagreed with the SSAT’s decision to lift the corporate veil in an attempt to unscramble Mountway’s financial statements referring to the caselaw and in particular the Tribunal’s (Member BJ McCabe) comments in Dart and SDFaC [2002] AATA 1289; [2002] 72 ALD 521:

The separate entity doctrine lies at the heart of corporate law. In the absence of statutory authorisation, the courts will only consider piercing the corporate veil if the corporate form is being used to perpetrate fraud: see Jones v Lipman [1962] 1 All ER 442; [1962] 1 WLR 832.

The AAT also found that the SSAT had failed to consider all aspects of the transactions associated with the alleged ‘deemed interest’ applied to Mountway’s accounts.

The AAT went on to consider the Gortons’ submission that the interest which was paid on the loans is Centrelink deemed. The Tribunal noted that Centrelink did not impose any requirement that interest be charged on the loans and that the decision by the Gortons to charge interest on their loans to Mountway was entirely theirs. Whilst the Tribunal considered that on the evidence it was unclear as to what Gorton meant by ‘Centrelink deemed’ as to interest paid, it nevertheless took the view that it may however be interpreted in one of two ways.

The first interpretation was that the amount of deemed income attributed to the Gortons’ rate of AP that is paid to them personally has been passed onto Mountway as an expense. If this was the case, the Tribunal considered that as the Gortons’ personal finances were not at arms length with Mountway’s business it could not be treated as a legitimate expense and that it potentially could result in a detrimental effect on the Gortons' previous rates of AP.

Alternatively, the Tribunal found that if the ‘deemed interest’ was accepted as the legitimate expense of ‘paid interest’ then the SSAT had erred in its decision on the basis that the SSAT had failed to fully consider whether the ‘interest paid’ as recorded under the heading ‘expenses’ in Mountway’s financial statements for the relevant years, had in fact, been ‘paid’. On the Tribunal’s analysis the financial statements revealed that the ‘deemed interest’ had been paid as capital injections back to Mountway into each of the Gorton’s loans or ‘unsecured liabilities’. The Tribunal applying Siebel and Director-General of Social Security [1983] AATA 163 (10 June 1983) found that there was no legal requirement for the ‘paid interest’ to have been physically received by the Gortons. The Tribunal, noting that there were numerous abnormalities in the amounts reported in Mountway’s balance sheets and the Gortons’ contention that there was only a moral not a legally enforceable obligation to pay back the monies, took as the most reliable evidence the information available as presented in the Mountway financial statements/records for the relevant years. The Tribunal ultimately concluded that there was nothing in those statements to support the Gortons’ contention that the deemed interest amounts were added to the unsecured liabilities attributed to the Gortons. Further, the Tribunal concluded that the fact that the loans were recorded in the Mountway accounts as liabilities provided the pretext that there was some form of legal obligation that the amounts would be repaid.

Issue 2: Were arrears of AP payable to the Gortons and if, so, in respect of which period(s)?

The Tribunal noted that notwithstanding the Gortons’ position that there was no dispute that the arrears in AP were payable to them, it was required to consider the current application before it de novo and in doing so, held it had an obligation to come to the correct and preferable decision. As the Tribunal had found that Centrelink had correctly assessed the loans by Gortons to Mountway at their ‘face value’ as recorded in the financial statements, no arrears of AP were payable to the Gortons for the years concerned.

Formal decision

The AAT set aside the decision under review and the AAT substituted the decision that:

- The quantum of the loans to the Gortons as recorded in Mountway Holding Pty Ltd’s financial statements for the periods ending 30 June 2001 to 30 June 2009 were to be accepted as the outstanding loan amounts for the purpose of determining the rate of age pension payable to the Gortons in respect of those periods:

- Consequently, no arrears of AP were payable to the Gortons.

[G.B.]