Secretary, Department of Social Security and Ronald and Kathleen May [1997] AATA 367 (13 October 1997)

ADMINISTRATIVE APPEALS TRIBUNAL

SECRETARY, DEPARTMENT OF SOCIAL SECURITY v RONALD AND KATHLEEN MAY
No.
V97/561, V97/562
AAT No. 12284
Number of pages - 11
Social Security

COURT

ADMINISTRATIVE APPEALS TRIBUNAL

GENERAL ADMINISTRATIVE DIVISION

J DWYER (Senior Member)

CATCHWORDS

Social Security- Age Pension - Assets Test - Social Security Act 1991 s 1123(1) - transfer of farming property to daughter - whether adequate consideration in money or money's worth - whether transfer constituted a gift or payment of indebtedness for forgone wages - distinction between business partnership and family arrangement - whether relationship of debtor and creditor existed.

Social Security Act s 1123 (1)

Re Townsend and Secretary, Department of Social Security (1986) 10 ALD 496

HEARING

MELBOURNE, 13 October 1997 (hearing and decision)

13:10:1997

Solicitor for the Applicant: Mr D Perdon, Centrelink

Solicitor for the Respondent: Mr A Trigg, Pension Claims and Appeals Services

ORDER

The Tribunal sets aside the decisions under review and remits the matters to the Secretary for reconsideration in accordance with the direction that the entitlement to age pension of Mr and Mrs May be calculated in accordance with the Tribunal's finding that on 12 April 1995 Mrs May disposed of a farm property valued at $260,000 by transferring that property to her daughter Lois Dupleix and that Mrs May received no consideration in money or money's worth for that disposal.

DECISION

J DWYER

1. This is an application by the Secretary, Department of Social Security ("the Secretary") for review of decisions made by the Social Security Appeals Tribunal ("SSAT") on 1 April 1997. The SSAT set aside decisions of an Authorised Review Officer ("ARO") and in substitution decided that Mrs May had not disposed of assets without adequate consideration and that consequently Mr and Mrs May were entitled to age pension under the Social Security Act 1991 ("the Act").

2. Mr D Perdon a member of staff of Centrelink, appeared for the Secretary. Mr A Trigg of Pension Claims and Appeals Services appeared for Mr and Mrs May. The Tribunal had before it the documents ("the T documents") lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 and also the exhibits tendered by Mr Trigg. Evidence in the matter was given by Mr and Mrs May and by their daughter Ms Dupleix.

3. Mr and Mrs May lodged claims for age pension on 15 August 1995. In her claim form Mrs May answered "Yes" to a question asking whether in the last five years she had given away assets or property (T5 p37). She advised that on 12 April 1995 she had given a farm valued at $260,000 to her daughter Lois Dupleix.

4. The T documents include a declaration made by Mrs May and Ms Dupleix which was lodged in relation to the calculation of stamp duty in respect of the transfer of the farm from Mrs May to Ms Dupleix (T20 p97).

5. Mrs May's entitlement to age pension was assessed under the assets test required by the Act on the basis that she had disposed of assets. Under the Act the value of the asset disposed of affects the rate of pension for five years from the date of disposal.

6. The sole issue in this matter is whether the transfer by Mrs May to her daughter Ms Dupleix was a disposal of an asset within the meaning of that term in s 1123 (1) of the Act. It provides:

"1123.(1) For the purposes of this Act, a person disposes of assets of the person if: (a) the person engages in a course of conduct that directly or indirectly: (i) destroys all or some of the person's assets; or (ii) disposes of all or some of the person's assets; or (iii) diminishes the value of all or some of the person's assets; and (b) one of the following subparagraphs is satisfied: (i) the person receives no consideration in money or money's worth for the destruction, disposal or diminution; (ii) the person receives inadequate consideration in money or money's worth for the destruction, disposal or diminution; (iii) the Secretary is satisfied that the person's purpose, or the dominant purpose, in engaging in that course of conduct was to obtain a social security advantage.

The Secretary contends that Mrs May disposed of an asset and received no or inadequate consideration in money or money's worth for the disposal.

7. Mr Perdon referred the Tribunal to the decision of the Federal Court in Frendo v Secretary, Department of Social Security (1987) 13 ALD 681 which considered the meaning of the words "no consideration in money or money's worth".

In Frendo the appellant claimed that she had given substantial amounts of money to her adult children because of family arrangements and Maltese traditions which placed her under an obligation to make those payments. The Tribunal found that Mrs Frendo had received no consideration for those gifts and that in making the family arrangements "there was never any intention between the parties to enter into legal relations."

Woodard J rejected a submission that a promise, which was not legally enforceable could amount to consideration within the meaning of the Act. He said at p683:

"In my view the immediate and natural effect of a reference in legislation to "consideration" is to direct the mind of the reader towards the law of contract where, for hundreds of years, the word has had a special meaning. A closer examination of the context could lead to a different result, but when the word is used, as it is here, in the sense of a return or balancing factor for the diminishment of a person's assets, it is difficult to escape the conclusion that it is used in a technical, legal sense. ...."

He concluded, referring to the provisions regarding disposal of property in the Social Security Act 1947:

"Accordingly I take the view that, if a pensioner disposes of property, then to escape the effect of sub-s (10) of s 6AC of the Act, he or she must receive consideration in the sense recognised by the law of contract of an act, forbearance or promise sufficient to establish the existence of a binding contract. In the present case it was conceded that there was, at most, a family understanding for the future provision of accommodation, which did not result in any immediate benefit or provision of accommodation, which did not result in any immediate benefit or enforceable future right for the applicant."

That case is directly in point.

8. The consideration relied on by Mr Trigg was stated in paragraph (f) of the respondents' statement of facts and contentions to be:

"the extinguishment of the debt legally owing by her [Mrs May] to Ms Dupleix for unpaid salary under the terms of the oral contract."

9. There was no issue about the fact that Mrs May and her two daughters had signed a partnership agreement. A copy of that agreement was included in the T documents (T13 pp75-76). It is dated 30 April 1976 and made between Mrs May and her daughters Alison, now Mrs Butler and Lois, now Ms Dupleix. It makes no provision as to payment of salary to any partners. It provides that the partnership business shall be that of farmers and the firm shall be entitled to use lands of which a partner may be an owner or lessee for the purpose of the partnership business free of charge, and that "the net profits of the business shall be divided between the partners in equal shares and they in like proportion bear all loses including loss of capital."

10. In his statement of facts and contentions Mr Trigg contended:

Contentions: a The terms of the written partnership agreement were varied orally early in its existence (an oral contract) to "add" terms that did not appear on the face of the written agreement to give it the meaning that the parties wished it to possess. The orally added terms were to provide for payment of an annual salary to Ms Dupleix. Proof of the orally added terms is evidenced by the conduct of the parties in that Ms Dupleix was paid salary in 1979, 1980, 1990, 1994 and 1995;

b Payment of salary was not paid in other years as net profits from the farming operation were insufficient [to] meet the salary commitments. The unpaid salaries however remained payable and the unpaid salary became and constituted a debt owing to Ms Dupleix.

c The transfer of property by Mrs May to her daughter, Lois Dupleix. on 12 April 1995 was in consideration for the extinguishment of the debt owing by her for the unpaid salaries due and owing to Ms Dupleix;

d Mrs May being a member of the partnership along with her two daughters, was jointly and severally liable for all of the liabilities of the partnership. As a consequence Mrs May was not limited to liability for only one-third of the partnership debts. As Mrs May's daughter's were not in a position to meet their share of the liability, being the debt owing for the unpaid salaries due to Ms Dupleix, Mrs May meet her legal liability being payment by her of the debt in full.

e Since the commencement of the partnership Alison Joan Butler has contributed nothing to the partnership and has received no benefit from it over the years, i.e. no share of net profit."

11. Mr May gave evidence. He said that he is an accountant and registered tax agent and worked in a solicitor's firm until his retirement. He said that the agreement between his wife and daughters was varied by the partners agreeing that the active partners who worked on the farm, namely his wife, Mrs May and his daughter Ms Dupleix, should be paid a salary for their labour. He said that he had calculated that the sum of $232,000 was owing to Ms Dupleix for her labour over the last eight years. He had not calculated the amount owing to Mrs May for her labour over those years. He said that the transfer of the farm had been in payment of the partnership's indebtedness to Ms Dupleix on account of wages foregone.

12. Mr May set out some detail of his calculations in a letter to the Manager of the Department of Social Security at Warrnambool, which was received on 10 October 1995. In that letter Mr May wrote: [T21]

"We understand from members of your staff that the matter of the transfer of land from my wife to my daughter, Lois Dupleix, is your main concern in your appraisal of our applications.

My wife was advised to take this action to avoid any estate or death duties which may be re-imposed prior to her death. In her will she had bequeathed this land to Lois in payment of her indebtedness to her for her work on the property and in recent years her management of the business, for which she had received insufficient reward.

She commenced to work two day a week on the farm in July 1979, doing at least six hours daily, until mid 1984 and then because of a change in family circumstances, worked full time in conjunction with a three day, five hour a day job away from the farm. This arrangement continued until December, 1994.

I've calculated (see slip attached) that she worked at least 22350 hours on the farm for which she has received payments, only over the last five years, totalling $35,337.

If we calculate a wage of $10 per hour up to June, 1990 and of $15 per hour thereafter, we arrive at a figure of $269,250. Subtract from that the $35,337 and the indebtedness amounts to $233,913."

Mr May attached his calculations showing the amount owing for 22,350 hours of work at the rates quoted, and the amount of "income received" by Ms Dupleix, which totalled $35,337.

13. Mr May in his evidence seemed confused as to whether the partnership agreement was orally varied right from the commencement to provide for payment of salary to the active partners or whether that variation was made at a later date. He said that it was agreed that salary would be paid before any distribution of profits, but because the Income Tax Assessment Act does not "allow you to run into loss as a result of payment of salary to partners" this was not done. He acknowledged that there was no fixed amount as to what salary Lois was to be paid, or as to when she was to be paid but said:

"I would have thought she would be paid monthly if the money was there to do that or if not it would be settled at the end of each year".

14. There were a number of problems with Mr May's evidence as to the partnership accounts. First, the figure of $14,429 set out in a statement prepared by Mr May (T28 p115) as salary paid to Ms Dupleix, includes the amount shown in the profit and loss statement (T15 p85) as her share of the income distribution to partners as well as the salary figure of $11,429.47 shown in the schedule to the profit and loss statement at T15 p84. Secondly, the figures in T28 were not the same as the figures set out in the enclosure to T21 p100. Thirdly, Mr May said Mrs Butler took only $1.00 share of profits each year, but as Mr Perdon pointed out the partnership accounts for the year ending 30 June 1995 (T15 pp84-85) showed equal distributions and equal partnership funds for all three partners and also equal drawings. The Tribunal did not see partnership accounts for any other years. When Mr Perdon asked Mr May to explain the discrepancy between his evidence and the partnership financial statements, Mr May said the financial statements were inaccurate. He added:

"Equality of partnership would be important in a business partnership but in a family partnership it doesn't matter at all. ...

The figures at page 86 are wrong I never bothered to correct them."

15. At another stage of his evidence Mr May said:

"We dare not have profits because it would be unfair to everybody. We had to pay out profits in salary."

Mr May said he worked out the amount to be paid to Ms Dupleix as salary by taking into account questions of tax indebtedness and the fact that she had to pay $8,000 in respect of mortgage repayments on the property she was purchasing. That sounds like a family arrangement rather than a way of working out salary legally owing for work done.

16. Mr May's evidence did not satisfy me that there was an oral agreement between the partners which was intended to vary the partnership agreement in such a way as to create a legal indebtedness from one partner to another. From the evidence of Mrs May and Ms Dupleix I find that they never intended that the members of the partnership be under a legal obligation to pay either of them salary beyond the salary that could be paid out the profits of the partnership farming enterprise.

17. Mrs May was very frank in her evidence. She said that she had always been a farmer, and she is a good farmer and she thinks it is very important for the good of Australia that family farms continue. It was clear from her evidence and that of Mr May that she has been the farmer in the family while he, over the relevant years, worked in a local solicitors office. Mrs May said that the understanding between her and her daughter Ms Dupleix was that as they worked the farm they would share the farm income. When Mr Trigg asked Mrs May whether it was agreed that Ms Dupleix would be paid a salary for her work, Mrs May replied:

"no it wasn't exactly agreed to pay a salary because we never knew what we had. It was a case of sharing what we had and I put in what I had from any other source."

Mrs May explained:

"you don't get a salary on a farm you just spend what comes in."

18. In September 1992 Mrs May made a will leaving her property to be divided equally between her daughters. She varied that will by a codicil made in November 1994 which left all her farming real estate except her house to Ms Dupleix. Mrs May said:

"my intention was to pay her back for work she had done and was doing on the farm."

19. Mrs May said that her daughter Ms Dupleix came back to live on the farm in about 1984, and then began to work full-time on the farm after the breakup of her first marriage. It was about that time that an arrangement was made between Mrs May and Ms Dupleix that Mr and Mrs May would work to keep the farm going as long as they could, so that Ms Dupleix could then take it over. Both Ms Dupleix and Mrs May wanted to see the farm continue in the family.

20. Ms Dupleix also gave evidence. She said that she was about 23 when she entered into the written partnership agreement and did not take any notice of the agreement at that time. She said that when she started working on the farm full-time it was agreed that the hours she worked would be rewarded in some way, but she expected that obligation to be met by her mother transferring the land to her or leaving it to her in her will. Ms Dupleix said

"Mum was the farmer and Mum and I did all the work together. I knew I would inherit a greater share than my sister and that I would get a salary in the years we made money."

21. I find that was the true arrangement between Mrs May and Ms Dupleix. As they both said, in the good years they would both get money out of the farm out of the profits and in the bad years they would not, but Ms Dupleix knew that she would inherit a greater share of the farm than her sister. She said:

"I was going to receive a greater share but there was no fixed amount."

I find that the evidence of Mrs May and Ms Dupleix gave a more accurate impression of the effect of any discussions between them than did the evidence of Mr May. I find that Mrs May and Ms Dupleix never intended that their discussion would affect their legal relations or would give rise to a legally enforceable debt from one member of the family to another.

22. I accept the evidence of Mr and Mrs May that the reason the property was transferred in April 1995 was to avoid stamp duty on the transfer and was not to obtain a social security advantage but I also find that there was no consideration in money or money's worth for the transfer.

23. Mr Perdon referred the Tribunal to the decision in Re Follone and Secretary, Department of Social Security (1987) 11 ALD 477. In the reasons for decision in that matter the Tribunal said at p481:

"It is possible, in the context of family life, to elevate all kinds of understandings and expectations between family members into agreements which might be claimed legitimately to have divested pension recipients of whole or part of their assets. If, through the Tribunal's interpretation of the assets test legislation, it were made possible to allow such expectations and understandings to be so elevated, the respondent would be in an impossible position in its attempts to dispute the legitimacy of dispositions of assets, as part of its duty to ensure fair and equal application of the assets test formula to all who might fall within it."

The Tribunal at p482 quoted from Cheshire and Fifoot Law of Contract (1981) the following passage:

"In the course of family life many agreements are made, which could never be supposed to be the subject of litigation."

The Tribunal then went on to say:

"This assessment is particularly telling in this context, where, as we have found, there was not even any "arrangement" about the transferred property, or indeed, about any property. There was, at the highest, an expectation, derived from family and cultural values, that ultimately the children would get as good as they gave. We are not going so far as to say that the arrangements which provided the context for the "consideration" which is claimed to have passed between transferors and transferees must have been pursuant to agreements made with the intention to create legal relations. But at the very least, there must have been agreements which were more than expectations and understandings typically part and parcel of family relationships. And there must be some external evidence of their existence, beyond the bald assertions of the parties that claim to be privy to them."

24. I find that in this matter there was no agreement that Ms Dupleix or Mrs May would be paid salary beyond that which could be paid out of the profits of the partnership, and that the only other agreement as to recognition of Ms Dupleix's contribution to the farming partnership was that she would receive a transfer of land either by will or gift to enable her to carry on the family farm. I do not find that Ms Dupleix did forego any wages because I do not find that there was an agreement to pay her wages or salary, beyond those that could be paid out of profits. I find that she was a working partner and, as partners do, she took the risk that the partnership may or may not be profitable.

25. Another difficulty with the submission made on behalf of Mr and Mrs May is that there is no reason why Mrs May should have reimbursed Ms Dupleix for her work on the farm. As was made clear by the evidence of both Mrs May and Ms Dupleix they both love farming and their intention at all times was to keep the farm as a working farm so that Ms Dupleix could take it over when her mother could no longer be involved. Any work Ms Dupleix did was to her benefit as she was a partner in the farming partnership. It was also to her benefit as it was understood within the family, at least from the time the codicil was made in 1994, that Ms Dupleix was eventually to become the owner of the property. Thus any work she did in increasing the farm profits or in improving the stock or the property was to her own advantage. In that respect this matter is similar to Re Ayliffe and Secretary to the Department of Social Security (AAT No. 3656, 23 July 1987, unreported) where the Tribunal said at paragraph 14:

"There was certainly no specific agreement on the part of the applicant to pay wages, ... Certainly there was no specific agreement reflected in the partnership accounts, which were produced on the hearing of this application. ... The fact is that Mr Brian Ayliffe was and is a part owner of the property. All the work that was carried out was by way of improvement to his own assets. The applicant said that she proposed to leave all her interest in the property by will to her son."

26. This matter is also similar to Re Townsend and Secretary, Department of Social Security (1986) 10 ALD 496. That was a case of a son who had worked on his parents' farm for many years with no wages and then became a partner of his parents in the farming business. His mother claimed that for assets test purposes the value of her farming land should be reduced by $104,000 for wages forgone and money contributed to the farm by the son. The Tribunal said at p501:

"At no stage of his evidence did Leonard state that, at the time when he spent money on improvements to Hillview, he and his parents had agreed or intended that they should create between them the relationship of creditor and debtors. He had expected that, when they died, he would inherit the land."

Similarly I find here that neither Mrs May nor Ms Dupleix intended that the work they both did on the farm should create between them the relationship of debtor and creditor. Ms Dupleix was under no legal obligation to pay salary or wages to Mrs May and Mrs May was under no obligation to pay salary or wages to Ms Dupleix.

27. As I said during the hearing I am aware of the fact that the assets test can create hardship for farming families. The Tribunal has pointed that out in earlier decisions (see Re Secretary, Department of Social Security and Doyle (1990) 22 ALD 512, Re Nagle and Secretary, Department of Social Security (1985) 15 ALD 486). But that does not mean that the Tribunal can uphold creative arguments as to the existence of legal obligations to family members when there was no legal obligation but only a family understanding. During the hearing I referred to the recently announced rural policy package "Agriculture - Advancing Australia". It is to be hoped that it will alleviate the problems facing farming families.

28. The decisions under review will be set aside. The matters will be remitted to the Secretary for reconsideration in accordance with the direction that the entitlement to age pension of Mr and Mrs May be calculated in accordance with the Tribunal's finding that on 12 April 1995 Mrs May disposed of farm land valued at $260,000 by transferring it to her daughter Ms Dupleix and that Mrs May received no consideration in money or money's worth for that disposal.