Editors --- "Age pension: assets test; treatment of loan" [2014] SocSecRpr 8; (2014) 16(1) Social Security Reporter, Article 8

• SECRETARY to the DSS and CARAPETA
• The issue
• Background
• Legislative context
• AAT reasoning
• Contentions
• Consideration
• Formal decision

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Age pension: assets test; treatment of loan

SECRETARY to the DSS and CARAPETA

Decided: 17th December 2013 by Marshall J

The issue

The issue was whether the Administrative Appeals Tribunal (AAT) applied the Social Security Act 1991 (the Act) correctly to arrive at the rate of pension to which the Carapetas were entitled. In particular, the correct application of the ‘assets test’ provided for in the Act was at issue.

Background

The Carapetas resided in Portugal and were in receipt of age pension pursuant to the agreement between Australia and Portugal. They borrowed 436,225.70 Euro from a bank and loaned it to a company controlled by them called ‘Teles Martins & Carapeta, LTD’ (the company). The Department’s Complex Assessment Officer treated the loan to the company as a personal financial asset of the Carapetas and applied a reduced rate of pension. The Department’s Authorised Review Officer (ARO) affirmed that decision and the Social Security Appeals Tribunal (SSAT) affirmed the ARO’s decision.

The AAT then set aside the SSAT decision.

Legislative context

The Act deals with the application of the ‘assets test’ at s.1064. Under s.1118 of the Act some assets, but not loans, are to be disregarded in calculating the value of a person’s assets. Section 1121 of the Act deals with the effect of charges and encumbrances on assets.

The Act also deals with loans made by a person. Section 1122 states that:

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.

AAT reasoning

The AAT held that the source of the loan was a bank and therefore s.1121 of the Act allows for an adjustment of the value of the asset by including the value of the encumbrance on it. The AAT noted that reading s.1122 with s.1118 would indicate that the amount of an unpaid loan should be included in the value of the assets. However, the AAT said that, due to ‘the fact that the loan moneys were borrowed as personal loans by the Carapetas from their bank, the sum of the loan was never an asset in their hands’.

Contentions

The Secretary argued that s.1122 deals with loans made by a person and that no distinction is made as to the source of funds for those loans. Section 1121, on the other hand, is a general provision dealing with a charge or encumbrance on an asset such that the person’s equity in the asset is reduced by the charge or encumbrance.

The Secretary further argued that the AAT did not state with precision what it considered was the relevant charge for s.1121 of the Act.

The Secretary also raised arguments about the nature of the loan from the Carapetas to the company. There was no evidence that the loan to the company was secured and thereby subject to a charge or encumbrance. In effect, there was no evidence of the company’s obligation to repay the loan.

The Carapetas agreed with the AAT reasoning and argued that if the AAT erred, it was only in fact and not as to law. The Carapetas argued that the Secretary’s contentions would result in an ‘absurd or irrational’ result.

The Secretary also raised a second legal issue alleging that the Secretary was denied procedural fairness at the AAT. The Court did not deal with this issue given its finding on the first issue.

Consideration

The Court upheld the appeal. There was no evidence before the AAT which showed that the sum loaned to the company was obtained by the Carapetas via secured loans from the bank. Therefore, there was no basis to apply s.1121 regarding a charge or encumbrance. In any event, s.1122 read with s.1121 applies to make so much of the loan advanced to the company as remains unpaid an asset of the Carapetas.

Finally, the Court considered that the Carapetas ‘lent money to a corporation which is their alter ego. In effect, they lent money to themselves. There is nothing absurd or rational about the loan being treated as their asset.’

Formal decision

The Court set aside the decision of the AAT and remitted the matter back to be heard in accordance with law. No order as to costs.

[M. O’H.]