FEDERAL COURT OF AUSTRALIA

ADMINISTRATIVE LAW - appeal from decision of Administrative Appeals Tribunal - proper construction of Reg 12N of the Austudy Regulations - actual means test - implied limitation regarding sources of income to be included in assessment of actual means - business expenditure excluded from assessment - “household” expenditure to include all other disposable income regardless of purpose of expenditure - no distinction between “active” and “passive” business expenditure

Austudy Regulations, Reg 12K, 12L, 12M, 12N

Bermingham v Corrective Services Commission of NSW (1988) 15 NSWLR 292, applied

DEETYA and Marchant (1997) 24 AAR 229, considered

LEAH and Anor v SECRETARY, DEPARTMENT OF EMPLOYMENT, EDUCATION, TRAINING AND YOUTH AFFAIRS

NG 1155 of 1997

MADGWICK J

SYDNEY

21 AUGUST 1998

SHORT MINUTES OF ORDER

THE COURT ORDERS THAT:

1.         The appeal is dismissed.

2.                  The appellants are to pay the respondent’s costs.

REASONS FOR JUDGMENT

HIS HONOUR:  This is an appeal on a question of law from a decision of the Administrative Appeals Tribunal (“the Tribunal”).  The decision of the Tribunal under appeal turned on whether expenditure relating to an investment property was properly to be included in the assessment of the “actual means” of the appellants’ parents under the Austudy Regulations (“the Regulations”).  In short, the issue before the Court concerns the proper construction of the actual means test provided for in the Regulations.

The Legislative Framework

Eligibility for payment under the Austudy scheme is governed by the Regulations, made pursuant to s 56 of the Student and Youth Assistance Act 1973 (Cth).  “Chapter 2 – Who can get Austudy?” of the Regulations sets out the requirements for eligibility.  All students must meet the general requirements set out in Part 1, which deals with citizenship, age and approved courses of study.  Divisions 1 and 1A of Part 1 indicate when Austudy benefits are payable and to whom such payments are to be made, and make provision for alteration of payments. 

“Division 1B – Means test:  parent and spouse” provides for the application of a means test to parents and spouses of students who apply for Austudy.  Eligibility for Austudy may be assessed according to different criteria, depending upon the circumstances of the particular applicant, and in relevant cases, his or her family.  In this case, the eligibility of the appellants was to be determined pursuant to the means test set out in “Subdivision B – Actual means test: parent” of Division 1B.  The appellants do not dispute that this was the appropriate method of calculation in their circumstances.  The relevant provisions relating to assessment are as follows:

“12K   Actual means test: parent

12K     (1)        A student (“the designated student”) who has a parent that is a designated parent is not entitled to receive living allowance in respect of a period of eligibility in a year of study, unless the Secretary is satisfied that, for that period, the actual means of the designated parent are less than, or equal to, the after tax income of a notional parent.

            (2)        For the purposes of subregulation (1), a notional parent, in relation to any particular designated student, is a parent who:

            (a)        received income solely from a salary or wage source; and

            (b)        is a parent of a student who qualifies for living allowance at the same rate as the rate for which, apart from this Division, the designated student would qualify; and

            (c)        has children of the same number and age as has the designated parent.

12L     Who is a designated parent?

12L      (1)        For the purposes of subregulation 12K(1), a parent is a designated parent if he or she:

            ....

            (e)        is a partner in a partnership.

...

12N     What are the actual means of a designated parent?

12N     (1)        For the purposes of subregulation 12K(1), the actual means of a designated parent for the period of eligibility are taken to be the total expenditure and savings made in that period by the parent and his or her family.

...” (emphasis added)

The hypothetical “notional parent” serves as a benchmark for eligibility.  The core concept of a “notional parent’s means” is “after tax income … solely from a salary or wage source”.  No issue has been taken with the respondent’s calculations of the actual after tax income of the

notional parent in this case, in accordance with Reg 12M.  That income would be $40,488 per annum in the case of both appellants.

Factual Background

The facts, which are not in dispute, are as follows. The appellants applied for Austudy for the student year commencing 1996. The appellants’ parents were partners in a sheep grazing enterprise.  As the appellants’ parents were in partnership, the applications for Austudy were considered in accordance with the actual means test contained in Regs 12F-12N of the Regulations. 

On 1 March 1996 the appellants were advised by a delegate of the respondent that they were ineligible for Austudy, because the “the actual means available to your family exceed the Pay-As-You-Earn (PAYE) benchmark” referred to in Reg 12K.  The appellants were advised that if they wished to appeal the delegate’s decision, they were to complete a form which required disclosure of information, among other things, relating to the family’s assets, “principal family home expenditure” and “financial expenses”.

The appellants’ parents completed such a form and disclosed that their expenses for the relevant period were $52,940, made up as follows:

Accommodation                                                                      2,881

Investment properties expenditure:

            Loan repayment                                  12,960

            House and contents maintenance            600

            Insurance                                                 541

            Rates and Taxes                                  2,724              16,825

Transport                                                                                5,091

Education                                                                               13,822

General Living Expenses                                                        7,200

Other Family Expenses                                                          5,050

Financial                                                                                 2,071

TOTAL                                                                                    52,940

The investment property expenditure was in respect of a block of home units from which the parents recovered rent and on which they paid outgoings, including mortgage loan repayments.  The parents’ taxable income from this investment was approximately $2,600 per annum.  They had acquired the property with the intention that it should later provide them with retirement income.

On 13 May 1996 the appellants were advised by letter that the original decision regarding their ineligibility had been affirmed. In the calculations, the delegate included expenditure on the investment property in the assessment of the parent’s actual means. 

On 17 May the appellants appealed to the Social Security Appeal Tribunal (“SSAT”).  At that hearing, it was argued by the appellants that the respondent erred in including the investment property expenditure as relevant expenditure when applying the actual means test.  The SSAT subsequently affirmed the decision of the delegate, finding no basis in the Regulations for excluding those expenses. The appellants then appealed to the Tribunal.

Findings of the Tribunal

The Tribunal member identified the essential issue as a legal question, namely:

“whether the terms ‘total expenditure and savings’, in particular ‘total expenditure’, in Regulation 12N(1):

(a)       on the one hand, includes all of the parents’ outlays made, including those characterised as commercial turnover or business expenses; or

(b)       on the other hand, is it limited to outlays of a non-business or household character?”

It was argued by the appellants before the Tribunal that, having regard to the object of the legislation, the words “total expenditure” could not be given their literal effect and, within the context of Reg 12N, were intended to mean only “household expenditure and savings” and did not include “business expenditure”, as which the outgoings relating to the investment property should be properly categorised.

The Tribunal considered a number of cases previously decided by the Tribunal and concluded:

“The solution urged by the applicants has as its basis the assumption that Parliament, or rather in this case the Minister, has through inadvertence failed to deal with an eventuality required to be dealt with if the purpose of the Regulations is to be achieved.  In other words, the submission is that through inattention, error or oversight, the Minister has in the Regulations failed to state what is, or alternatively [what] is not, encompassed by ‘total expenditure and savings’ within the context of the Actual Means Test.  Whether the difficulty exists because of inadvertence as distinguished from inadequate drafting may well be [debatable].  But what is abundantly clear, however, is that Regulation 12N(1) as it presently stands cannot be literally applied.

While the solution proposed by the applicants is understood and while it may be said to have been properly advanced in the context of the conditions set out in Bermingham, I am of the view, however, that as the Tribunal said in Marchant, ‘household’ is itself a somewhat ambiguous term in the context of the Regulations, a difficulty which in my opinion would not necessarily be resolved were Regulation 12N(1) to be constructed in the manner proposed by the applicants.

I accept the submission of the respondent that the approach adopted in Marchant should be followed.  As I have stated, that approach was that business expenditure is not to be included in ‘total expenditure’.  Assuming the facts relating to expenditure are fully presented, I see no insurmountable difficulty in determining in any particular case whether a business is, to use the applicants’ words ‘active’ or ‘passive’.

The manner in which the parties have brought this application for review before the Tribunal suggests that there is no dispute as to the facts of the matter.  That being so, I make the finding that the sum of $16,825 is to be included as a component in the parents’ ‘total expenditure’.”

In other words, the case was decided upon the basis that, although this was business expenditure, it was “passive” business expenditure and should be included in the assessment of means.

The only issue before me is whether the Tribunal erred in law, by making that finding, as to the proper construction of Reg 12N(1).

“Total expenditure”

The terms “total” and “expenditure” are not defined in the Regulations, nor do the Regulations expressly provide for any exception or exclusion from a family’s total expenditure.  On its face, the Regulation suggests that each and every expenditure is to be included for the purposes of calculation under the actual means test.  However, it is clear that that cannot be what was intended.  As an example, in Department of Employment, Education, Training and Youth Affairs and Marchant (1997) 24 AAR 229at 233-4, the Tribunal hypothesised that it would be an absurd result if all expenditure and savings of a self-employed shopkeeper, which would include money spent on stock, rent and other business-related expenditure, were taken into account for the purpose of determining actual means, when it may be that the shopkeeper had not made a profit during that period.  Similarly, in Re Duscher, Department of Employment, Education, Training and Youth Affairs and Marchant (1996) 43 ALD 752, the Tribunal pointed to the unfairness which would arise if a parent, who had taken out a loan to help pay for his or her child’s education, were then regarded as having “expended” that loan sum as well as the repayments of the principal, for the purposes of determining “actual means”.  Other examples were provided in Re Secretary, Department of Employment, Education, Training and Youth Affairs and Thies (1997) 24 AAR 424 at 432 and Re Department of Employment, Education, Training and Youth Affairs and Coleman (1997) 46 ALD 57 at 69.  In all of those cases the Department had conceded that such an interpretation could not be sustained.

A case for departing from the literal meaning of the Regulation

The question then becomes: how does one distinguish between expenditure that properly falls within the Regulation, and other expenditure? The relevant principle was considered in Bermingham v Corrective Services Commission of NSW (1988) 15 NSWLR 292, in which the Court applied the formulation by Lord Diplock in Wentworth Securities Ltd v Jones [1980] AC 74 at 105-6:

“My Lords, I am not reluctant to adopt a purposive construction where to apply the literal meaning of the legislative language used would lead to results which would clearly defeat the purposes of the Act.  But in doing so the task on which a court of justice is engaged remains one of construction; even where this involves reading into the Act words which are not expressly included in it. Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd [1971] AC 850 provides an instance of this; but in that case the three conditions that must be fulfilled in order to justify this course were satisfied.  First, it was possible to determine from a consideration of the provisions of the Act read as a whole precisely what the mischief was that it was the purpose of the Act to remedy; secondly, it was apparent that the draftsman and Parliament had by inadvertence overlooked, and so omitted to deal with, an eventuality that required to be dealt with if the purpose of the Act was to be achieved; and thirdly, it was possible to state with certainty what were the additional words that would have been inserted by the draftsman and approved by Parliament had their attention been drawn to the omission before the Bill passed into law.  Unless the third condition is fulfilled any attempt by a court of justice to repair the omission in the Act cannot be justified as an exercise of its jurisdiction to determine what is the meaning of a written law which Parliament has passed.  Such an attempt crosses the boundary between construction and legislation.  It becomes a usurpation of a function which under the constitution of this country invested in the legislature to the exclusion of the courts.”

Counsel for the appellants, correctly in my opinion, identified the mischief sought to be remedied by the Regulations as the difficulty of using notions of “income” to determine the actual means of all parents to educate their children.  If one accepts that proposition, it is clear, and this is evidenced by the number of cases on this point that have come before the Tribunal, that Parliament has overlooked an eventuality which must be dealt with if the purpose of the legislation is to be achieved. 

The third condition is that it be possible to state with certainty what the framers of the law would have provided had their attention been drawn to the omission.  The appellants’ primary submission is that the Regulation intended to distinguish between “household” or “domestic” expenditure, which is to be assessed according to the actual means test, and non-household or “business-related” expenditure, which is to be excluded from consideration.  The appellants relied upon an Explanatory Statement prepared by the relevant Minister, in which it was stated:

“The AUSTUDY Regulations... have introduced measures to improve the targeting of AUSTUDY to those in genuine need.  The AUSTUDY means testing arrangements have been modified by the regulations so that, in specified circumstances, the actual means available to a family, as indicated  by actual household expenditures and outgoings, will determine whether the student is entitled to assistance.”(emphasis added)

Counsel for the respondent relied on changes of approach evident in later amendments to the Regulations to demonstrate the difficulty of being “certain” that the framers of the Regulation would have inserted the word “household” as a qualification on the type of expenditure referred to in Reg 12N, had their attention been drawn to this issue.  Regulation 12N(1A)(j), inserted by Statutory Rule 302 of 1997, expressly excluded from the actual means of a designated parent expenditure on a “business activity” of either parent or a family member, where that expenditure derived from the income of that business activity. In my opinion, those amendments merely demonstrate that it was intended that some distinction should be made between “business” and "non-business" or “household” expenditure, whatever particular word or phrase is used to try to describe with precision the expenditure properly to be excluded as distinct from that which is to be taken into account.

What would “household” expenditure encompass?

As counsel for the appellants conceded, the term “household” is not itself without ambiguity.  This point was raised in Marchant, in which the Tribunal identified two possible meanings of the term in the context of the Regulation:  “household” may refer either to de facto expenditure on or by the persons in the household who constitute the family (or other domestic arrangement), or it may refer, more narrowly, to the characterisation of the expenses of actually maintaining a family. In that case, the Tribunal held that the reference to “household” in the Explanatory Statement was likely meant to refer to actual expenditure by the household members concerned of a non-business kind, rather than a narrowly “domestic” purpose or nature of their expenditure and savings. 

Contrary to the argument of counsel for the appellants, I agree with that notion.  Such an interpretation is borne out if one has regard to the purposes of the actual means test.  The “actual means” of a family can be understood to mean that family’s capacity to pay; that is, the assessment of actual means is concerned with the family’s available capacity for expenditure, regardless of how that family then chooses to use that capacity.  For example, a family that elected to spend $10,000 on shares or an investment property for financial security in the future, or on wine and song, has the same means as a family that spends it on clothes for the children, a car or a family holiday.  The characterisation of that expenditure as connected with maintenance of members of the household is not the issue. 

Another evident purpose of the actual means test is to attempt to achieve parity of treatment and assessment for all students, regardless of the manner in which their parents acquire their means of livelihood:  some parents are wage and salary earners; some are self-employed; some are business owners; some are rentiers; some live off other kinds of investments; some are social security recipients.  The Regulations as a whole manifest an intention to attempt to deal fairly with all these contingencies.

It is true, as counsel pointed out, that such an approach may not eliminate all possible inequities.  The example was given of two farmers.  One puts money into a superannuation fund.  The other seeks to provide greater income by enlarging the farm’s operations in order to save for his/her old age.  On my approach, the superannuation expenditure is included in the assessment but the enlarged farm operation expenses are not.  But, on analysis, this is at best just an example of the difficulty of achieving perfect equity by the application of broad concepts.  At least both farmers (or other business people) would have a choice as to such expenditures.  The salary or wage-earner, however, has no choice:  in principle, all of his/her income, however spent, is included.  In any case, whether such an approach may or may not be thought to disadvantage a family which chooses to apply its capacity for expenditure to investments not relating to a family-run business or partnership (such as, for example, superannuation) is not relevant for the purposes of the Regulation as it now stands: either expenditure is required for the running of that business or partnership, or it is to be regarded as evidence of capacity for other expenditure, or means, to be included in the assessment.  To consider the nature of the expenditure other than by those parameters would be contrary to Parliament’s purpose of introducing the actual means test, that is, to deal with the inappropriateness, in some cases, of assessing eligibility for Austudy by reference to after-tax income (in particular, having regard to the capacity for minimisation of taxable income, for example, by artificially causing what would otherwise be income to have the character of capital or to be turned, by “negative gearing”, into a current loss).

The “household”/”business” dichotomy

However, the decision in Marchant went a step further.  In that case, the Tribunal made a further distinction between business expenditure relating to the “major activity of the business”, which is to be excluded from the actual means test, and other business-related expenditure which is to be included (the Tribunal member in the present case referred to this distinction as “active” and “passive” business expenditure).  The facts in Marchant have some similarities to those in the present case: the parents were in partnership as primary producers, and the parents also owned residential property in a distant area, from which they derived rental income.  However, in Marchant, the parents argued that such property was not held for investment purposes but rather was part of the actual partnership business, to provide income to hedge against losses in their primary production venture.  The Tribunal held that, although the renting out of the residential property provided a source of income to the partnership, it was not a “major activity” of the business, and therefore expenditure on such property could not properly be regarded as a “business expenditure” to be excluded from “total expenditure” under Reg 12N.  The Tribunal considered it important that the partners spent little effort or time on the leasing activity, due to the physical distance between the family and the property. 

I do not, with respect, agree that such a distinction between “active” and “passive” business activity is required or warranted.  Whether expenditure relates to “business” or to “household” or “private” use is a question of fact and degree: see, for example, in the context of s 51(1) Income Tax Assessment Act 1936 (Cth), Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213, esp at 238.  Different businesses require different degrees of time and effort from their proprietor.  Some business people may be fortunate enough to derive a comfortable livelihood entirely from the efforts and expenditure of time by others; they are nevertheless the proprietors of the business and expenditure on such endeavours is business expenditure.  The nature of a person’s business may change; in the case of rental properties, rents that might, in the present context, in one year be regarded merely as income derived from a “non-business” investment (because, for example, income is greatly outweighed by outgoings on the rental property and the aim is for a long-deferred net profit or capital gain) might in time become so important a source of net current income as to be properly characterised as “business” income.  Similarly, expenditures on the rental property or properties might likewise vary.  A family might of course run two businesses concurrently, although one business’ operations are much larger and that business performs more strongly than the other.  Another family might have elaborate arrangements directed at future superannuation-type income support, which despite their involvement in the commercial world, would not fairly be thought of as falling on the business side of the business/household dichotomy at which, in my opinion, the Regulation is aimed.  The question is simply whether the expenditure is to be characterised as either business expenditure or non-business or household expenditure (in the wider of the two senses of that term discussed above), and the answer arrived at by a process of broad judgment, on a balance of indicators.  While this characterisation may not be easy in particular cases, the concept is clear enough.  For the purposes of the Regulations, in my view, a particular expenditure is either related to a business, and excluded, or it is not, and is to be included in the assessment of actual means.  Once that essential judgment between “business” and “household” has been made, there is no need to consider further distinctions between different types of business expenditure.

An investment for retirement benefits

In this case, unlike Marchant, the appellants’ parents did not claim that the property was part of the business of the partnership, but an investment for their retirement.  As such, I think it can only be regarded as “private” or “household” expenditure, and there is no scope for categorising it as a business expenditure, let alone to consider whether it might be called a “passive” or “active” business expenditure if, contrary to my views, that is an appropriate enquiry. 

That impression is confirmed by the express policy of the Regulations in relation to the calculation of “parental income” for the “parental income test” (see Regs 84-92), which is applicable to parents other than parents deemed “designated parents” pursuant to Reg 12L.  Reg 86 expressly brings into account, and treats as part of parental income of non-designated parents, “net rental property loss”; this is indicated to be “the amount by which expenses incurred by the student’s parent, or both parents, in relation to a rental property exceed the parent’s or parents’ gross income from the property”.  The calculation of such “parental income” is in turn imported into the calculation of “after tax income of a notional parent”.  That concept is used in determining eligibility in relation to “designated parents”:  see Reg 12M.  It would be an unjustified and unjust interpretation that would count as income (and means), for the notional parent, such net loss on the rental property, but, for the designated parent, would not count the expenditure represented by such net loss. 

Likewise, it would be erroneous to adopt an interpretation that would necessarily include, for the assessment of the non-designated (and notional) parent’s means, contributions by him/her to a conventional superannuation fund (because such contributions are made out of “income”) but to exclude from computation in an estimate of means, for a designated parent, the entirety of the net (see below) subvention of funds for an investment intended solely to provide a superannuation-type benefit.  Such subventions and contributions are both “household” or “private” and, in the case of a business person, are made from his/her means after the augmentation (or diminution) of such means by the proceeds of (or loss from) a business.

Expenditure may mean net expenditure

Equally, however, it would be wrong to treat as expenditure, where the assessment of the means of a parent is concerned, all outgoings on a negatively-geared rental property.  The “expenditure” cannot reasonably be said to exceed the net outgoings, that is the outgoings less the receipts.  The analysis is analogous to that applied in Re Duscher to the outlay in a given year of a borrowed capital sum for some purpose – in such a case, the “expenditure” is the sum of the instalment-repayments for the year, not the capital sum, far less the capital sum and the repayments.

Conclusions

Counsel for the appellants sought from the Court a definitive statement or phrase as to what the Regulation means.  However, as I indicated in the course of argument, that submission assumes that a degree of uncertainty concerning the operation of the Regulation is eradicable and that a re-statement of the verbiage adopted by the Tribunal in the various cases can do away with questions of degree and judgment in the plethora of facts and circumstances which can occur.  It is not, in my opinion, useful to attempt any more exhaustive delineation of the scope of the Regulation (as it was, at times relevant to this case, framed) than to point to the difference between “household” and “business” expenditure.  More, in my view, is not authorised by Bermingham.

Although the Tribunal, in my view, erred in asking whether the relevant expenditure related to “passive” business interests, rather than simply to either “business” or “household” expenditure, and by treating all the rental property outgoings rather than the net outgoings as “expenditure”, a reconsideration of the matter in accordance with what seems to me to be the correct approach could not, on the undisputed facts, affect the outcome of this case.  The

Tribunal’s factual conclusion must have been the same had it applied what I consider to be the correct tests.  In these circumstances it would be a futility to remit the matter to the Tribunal.

I will therefore order that the appeal be dismissed.  The appellants are to pay the respondent’s costs.

Associate:

Dated: