Report on Compensation for Detriment caused by Defective Administration (CDDA) Claim

Claim Summary

The department received a claim for compensation from the Hon Sharman Stone MP seeking compensation under the Scheme for Compensation for Detriment caused by Defective Administration (CDDA), on behalf of 12 of her constituents¹.

The claims relate to alleged losses suffered as a result of the closure of the Exceptional Circumstances (EC) exit grant program on 10 August 2011.

Background

The EC Exit Program commenced on 25 September 2007².

The grants were designed to facilitate adjustment for long–term farm families, who had continuously worked the same farm for more than five years and who depended on it for their livelihood, but because of drought conditions had made the difficult decision to sell the farm.

The package consisted of three program elements:

• An exit grant of up to $150 000
• An advice and retraining grant of up to $10 000
• A relocation grant of up to $10 000.

The program was originally targeted to provide assistance to farmers in EC–declared areas that existed as at 25 September 2007. It commenced as a two–year program with a budget of $13.5 million in the first year (of which $4.6 million was expended) and $35.7 million in the second year (of which $17.6 million was expended).

The program was extended on a 12 month basis consecutively in 2009–10, with a budget of $22.8 million (of which $20.0 million was expended), and 2010–11 with a budget of

$24.0 million (of which $23.9 million was expended). The 2011–12 Federal Budget allocated $9.6 million to extend the program to 30 June 2012 for farmers residing in an EC–declared area that existed on or after 1 July 2010, on the basis that the program was to close if all funds were expended before that date³.

Exceptional Circumstances Exit Grant

The EC Exit Grant offered time–limited, one–off exit assistance for those farmers within an EC declared area that sold their farm enterprise and left farming. To have been eligible for an EC Exit Grant in  2011–12, applicants must have, inter alia, resided within an EC declared area that existed on or after 1 July 2010.  Sale of a farm enterprise means a transaction on commercial terms and at arm’s length. Sale date is the date of settlement of a sale of farm enterprise.

To qualify for an EC Exit Grant in 2011–12, applicants needed to meet the following criteria:

1. prior to selling their farm enterprise, be a farmer and satisfy the following criteria:
   1. contribute a significant part of his or her labour and capital to the farm enterprise; and
   2. derive a significant part of his or her income from the farm enterprise; and
   3. be an Australian resident; and
   4. be in Australia; and
   5. the farm enterprise had to be located in an area that on or after 1 July 2010 was an EC–declared Area (includes prima facie and interim declared areas); and
2. prior to selling their farm enterprise, have a right or interest in the same farm enterprise (i.e. the farm being sold):
   1. for at least five years immediately prior to the sale date of the farm enterprise; or
   2. have taken ownership and control of the farm enterprise (due to death, illness or retirement of another family member) that has been in the family for at least five years.
3. be eligible to apply for the EC Exit Grant at the time of claim;
4. have sold their farm enterprise (based on the date of settlement of the sale), and:
   1. immediately before the sale the person was effectively in control of the farm enterprise; and
   2. the sale was on commercial terms and at arm’s length;
   3. where the farm enterprise was sold using vendor finance, specific conditions had to apply in addition to the normal eligibility requirements.; and
   4. the person and, if the person had a partner when they applied for the EC Exit Grant, the partner (whether or not they remain a couple), were not farm owners or operators, and did not own any plant or machinery, or other assets essential for the effective running of a farm enterprise; and
5. have met the required assets test;
6. have not (or their partner) previously received an exit grant under this program or an exit or re–establishment grant under any other past or present Australian Government program.
7. if having a partner when the person applied for the exit grant, the partner had not previously received an exit grant; and
8. if having had a partner when the person applied for the exit grant, and the partner had asked to be paid an exit grant:
   1. the partner had withdrawn the claim; or
   2. the claim had been rejected.
9. the applicant was not a sharefarmer;
10. if a leaseholder holds a lease for at least five years over the same area of land and is able to sell the lease (for example, a crown land lease) and thus the farm enterprise, and meets all eligibility criteria, then a leaseholder would have been eligible for the grant.

Pre–assessment

The EC Exit Grant program was administered by Centrelink on behalf of the department⁴. In its role as program administrator, Centrelink offered prospective applicants the opportunity to have a pre–assessment of their eligibility for a grant undertaken, prior to the sale and settlement of their farm.

The pre–assessment process was an optional service provided by Centrelink for farmers who were considering the sale of their farm enterprise and applying for an EC Exit Grant. It established whether there was a potential for meeting the eligibility requirements of the EC Exit Grant. A pre–assessment result was the outcome of a distinct process and did not constitute pre–approval for the EC Exit Grant. It also did not provide any priority in the application process.

Centrelink published a fact sheet on the EC Exit Package on its website for prospective applicants, including information on the EC Exit Grant⁵. The fact sheet provided the following advice to prospective applicants regarding the option to have a pre–assessment undertaken:

“If you are considering selling your farm you may wish to find out whether you will meet the eligibility for the EC Exit Grant. For this assessment to be made, you must complete the claim form for the Exceptional Circumstances Exit Grant and supply very similar documents to those that would be required had you already sold.” (August 2010).

When requesting a pre–assessment from Centrelink, prospective applicants were required to complete a Claim for EC Exit Grant form (the same form that applicants used when applying for an EC  Exit Grant). The claim form informed prospective applicants that if they were using the form for the purposes of pre–assessment:

• ‘the outcome of the pre–assessment is only valid if all information that has been supplied is correct and does not change’ and
• ‘I will need to complete another claim form once my farm is sold’⁶.

Following the completion of a pre–assessment, Centrelink wrote to applicants to inform them of the outcome. If the pre–assessment indicated a possible eligibility for an EC Exit Grant, Centrelink advised applicants that based on the information they provided, ‘if you sell your farm on commercial terms and at arm’s length, you may be eligible for an Exceptional Circumstances Exit Grant’ (emphasis added).

Closure of the EC Exit Grant program

The 2011–12 EC Exit Grant program was closed on 10 August 2011. There were three key factors that appear to have contributed to the early closure of the program:

1. A significant improvement in seasonal conditions, leading to the expiry of an unprecedented number of EC area declarations and increased farm sales.
2. The publicised position that the 2010–11 EC Exit Grant extension would close on 30 June 2011.
3. The  2011–12 program guidelines that were issued to extend the program until 30 June 2012 or that it would close earlier if all funds were expended.

Improvement in seasonal conditions

The dramatic improvement in seasonal conditions during 2010–11 resulted in the expiry of 26 EC area declarations and apparently prompted many farmers to make the decision to leave farming, some of whom had been in an EC–declared area for many years. There was an increase in EC Exit Grant applications during the final quarter of 2010–11, including an unprecedented spike in applications in June 2011.

It appears that there is a relationship between the availability of EC assistance and people not moving to sell their properties. It is also possible that the payment of the EC Interest Rate Subsidy (ECIRS) masked the underlying viability of some farming enterprises. The 2009 Productivity Commission report, “Government Drought Support”, noted that some forms of EC business assistance, such as the ECIRS, may have resulted in reduced effectiveness and uptake of the EC Exit package. It noted the potential for drought assistance measures to enable non–viable farmers to stay on the land longer than they may otherwise have done if such measures had not been in place (see pages 165 and 366 of the Productivity Commission’s report).

It is also likely that the improved seasonal conditions increased interest in the property market, resulting in more buyers being available and more property sales. For those farmers already considering exiting the industry, the increase in buyer interest meant that it was easier for them to meet the criteria of the EC Exit Grant to have sold their property.

The absence of EC  assistance together with improved market sales appears to have accelerated the decision to leave farming.

Expected 30 June 2011 program closure

Prior to the May  2011 budget, the position was that the EC Exit Grant component of the program would close on 30 June 2011. This is likely to have contributed to an end–of–year rise in applications, which was the experience in previous years.

On 24 May 2011, Centrelink, which administers the program on behalf of the department, wrote to all applicants who had been pre–assessed as potentially eligible for the grant, to advise them that applicants who resided within an EC–declared area that expired before 30 June 2010 would need to sell their farm enterprise (based on the date of settlement of the sale) and lodge a claim before 30 June  2011 to be eligible⁷.

The 30 June 2011 closure date for the 2010–11 EC Exit Grant program extension was publicly available on the department and Centrelink websites, and communicated through the EC Exit fact sheets, by call centres and the Rural Financial Counselling Service.

It appears that notification of the closure of the 2010–11 EC Exit Grant program for some farmers (those who resided in an EC declared area between 25 September 2007 and 30 June 2010) may have created a rush on applications which led to a greater than normal rise in the average number of applications lodged in the final quarter of 2010–11.

2011–12 budget announcement

The 2011–12 Federal Budget allocated $9.6 million to extend the EC Exit Grant program to 30 June 2012. The program was to close if all funds were expended before that date. The combination of the notification that the program was capped and may close early (which had not been done before) and the significantly lower allocation for the 2011–12 EC Exit program extension appears likely to have caused to a rush on applications.

In Centrelink’s letter of 24 May 2011 to all applicants who had been pre–assessed as potentially eligible for the grant, it was advised that applicants who resided within an EC–declared area that existed on or after 1 July 2010 would be eligible for the  2011–12 EC Exit Grant extension, and that while the program had been extended for 12 months, the overall program funds had been capped and that as a result, the program may close earlier than scheduled.

The 2011–12 EC Exit Grant program guidelines provided:

‘The Australian Government has allocated $9.6 million for the EC Exit Package for 2011–12. The program will close on 30 June 2012 or earlier if all funds are expended before that date’.

Notification of the cap on program funds was also provided on the department and Centrelink websites and communicated directly to applicants through the Centrelink call centres and Rural Financial Counselling Service network.

Convergence of key factors

The convergence of the above factors seems to have accelerated the decision of many farmers to leave farming, resulting in an unprecedented number of applications lodged in the final quarter of the 2010–11 financial year.

The average number of applications over the life of program was 21 per month until April 2011. However, from April 2011, there was an increase in applications as follows:

• In April 2011, 36 new applications were lodged
• In May  2011, 32 new applications were lodged
• In June  2011, 62 new applications were lodged and
• In  2011–12, 31 new applications were lodged before the program’s closure.

At the conclusion of the 2010–11 financial year, 110 of the applications received in that financial year had not been finalised and were required to be carried over into the 2011–12 financial year.

In addition to the increase in the number of applications lodged, the rate of successful applications increased from 55 per cent over the life of program to 75 per cent in the last quarter of 2010–11. Increases in the success rates of grant applications are commonly found in the latter stages of government programs, as client advisers, such as rural financial counsellors, become more experienced with the requirements for a successful application.

The modelling for the 2011–12 EC Exit Grant program extension used historical trend data⁸ to project the budget required for a reduced population of eligible farmers who were in an EC–declared area on or after 1 July 2011.

The change in eligibility criteria, from farmers who resided in an EC–declared area on or after 25 September 2007 to those who resided in an EC–declared area on or after 1 July 2010, represented a downward revision in the eligible population for an EC Exit grant from 24 500 to 11 500.

The reduction in population size aimed at those farmers located within recent EC–declared areas, and based on historical trend data, was calculated to reduce the expected number of grants for the 2011–12 financial year.

The modelling could not account for the events (outlined above) that occurred in the lead up to the last quarter of 2010–11. The events were unknown at the time the budget for the  2011–12 EC Exit Grant extension was being formulated and consequently the unprecedented spike in applications in the last quarter of 2010–11 was not anticipated.

In June 2011, the convergence of these key factors resulted in the projection that, if 75 per cent of applications already lodged were successful, the program budget for 2011–12 would be exceeded early in the new financial year.

The EC Exit Grant program extensions are demand–driven and capped, and there is no government authority for expenditure above the budget allocation. By the time the department was in a position to confidently project the expenditure, the program was already well towards a projected overspend position.

Reporting and advice

Under the protocol agreed between Centrelink and the department, Centrelink monitors the EC Exit Grant and provides the department with monthly data reports detailing program uptake and expenditure. This was increased to weekly monitoring in April 2011 and to daily monitoring from 1 July 2011.

Centrelink’s processing of EC Exit applications takes on average 90 days due to the complex business structures of many farm enterprises and the need to conduct a thorough assessment. During this time, the status of an application can move in and out of rejected’ for various reasons, such as the applicant’s failure to provide adequate information. Further, if an applicant’s claim is rejected, the applicant has three months to request a review of the decision by Centrelink.

The number of successful applications reported maintained an average of 10 grants per month over the life of the program until June 2011, when the number of successful applications more than doubled to 28 grants for the month.

The increase in applications in April 2011 occurred late in the month and was initially considered to be associated with a natural rise in applications towards the end of the financial year. However, the rise in applications continued following the announcement in the Federal Budget in May 2011 and into the new financial year.

On 5 July 2011 the department briefed the minister, advising that due to the unexpected rise in applications since April 2011, the EC Exit Grant was projected to be oversubscribed and, without an additional funding allocation, the department had no standing government authority to keep the program open.

The department again briefed the minister on 13 July 2011, advising that, in order to minimise the program over–spend, the department would need to close the program to new applications from 18 July 2011 unless the government agreed to an alternative funding approach.

These briefings led to government consideration of the matter and resulted in the decision to immediately close the program. The government allocated an additional $4.4  million in funding, increasing the total budget for the 2011–12 EC Exit Grant extension to $14.0 million. The additional funding provided for all applications that had been lodged up until and including 10 August 2011 to be processed, and, if eligible, paid the grant.

On 10 August 2011, following the government decision to close the EC Exit Grant to new applications, the department issued a media release advising of the closure of the EC Exit Grant to all new applicants as the program allocation of $9.6 million had been fully committed for the 2011–12 financial year.

The media release also advised that landholders who had sold their farm and submitted a claim for the EC Exit Grant, or dispatched a claim for the grant in the mail, before close of business on 10 August 2011, would have their claims assessed under existing arrangements.

CDDA Scheme

The Finance Circular 2009/09 – Discretionary Compensation and Waiver of Debt Mechanisms (the Finance Circular) provides that the CDDA Scheme is an administrative scheme to enable Commonwealth agencies to compensate persons who have suffered detriment as a result of an agency’s ‘defective’ actions or inaction, and who have no other avenues of redress.

The Finance Circular provides guidance on the requirements of the CDDA Scheme, including the three elements that need to be established for a successful claim:

• Defective administration and
• The claimant has suffered a detriment (that is, a quantifiable financial loss) and
• The defective administration has caused the loss.

Defective administration is defined as⁹

1. a specific and unreasonable lapse in complying with existing administrative procedures; or
2. an unreasonable failure to institute appropriate administrative procedures; or
3. an unreasonable failure to give to an applicant the proper advice that was within the official’s power and knowledge to give (or reasonably capable of being obtained by the official to give); or
4. giving advice to an applicant that was, in all the circumstances, incorrect or ambiguous.

It should be noted that there are two key features of the CDDA Scheme –that is, decisions are made at the discretion of the decision maker and that payments are approved on the basis that there is a moral, rather than legal, obligation to the person or body concerned.

Each case is determined on its own merits and the guidelines is not intended to be exhaustive but it does identify criteria and factors that may be taken into account.

Analysis

Legal liability

In order to be eligible for compensation under the CDDA Scheme, there must not be any likelihood that the Commonwealth would be found liable if the matter were litigated. The department considers there is no likelihood that the Commonwealth would be found liable to compensate any potential applicants on the basis of any failure to warn potential claimants of the pending closure of the program.

Defective administration

The department received a claim for compensation from the Hon Sharman Stone MP seeking compensation under the Scheme for Compensation for Detriment caused by Defective Administration (CDDA), on behalf of 12 of her constituents.

The claims relate to losses suffered as a result of the closure of the Exceptional Circumstances (EC) exit grant program on 10 August  2011.

It is understood from Dr Stone’s letter that the application for compensation for

each of the farmers under the CDDA Scheme was made on the basis that:

• the pre–assessment process was equivalent to giving prior–approval for a grant and/or
• the defective administration was an unreasonable failure by the department to institute appropriate administrative practices to provide sufficient warning regarding the closure of the EC Exit Grant Program.

Pre–assessment of eligibility

Dr Stone’s request specifies, “farmers in her electorate who it is claimed were eligible, and had been approved, for the EC Exit Grant”.

Dr Stone’s letter refers to the applicants having been ‘approved’ for the EC Exit Grant.

It appears that what was known as a pre–assessment undertaken by Centrelink regarding probable eligibility for the EC Exit Grant may have been mistaken with being ‘approved’ for the EC Exit Grant.

It appears Dr Stone’s view is that the pre–assessment process was an approval process for the EC Exit Grant, as a farmer would not take irreversible action to sell his/her farm and home, often for a loss, without having prior approval of eligibility for a grant. As noted above, the pre–assessment process was an optional service provided by Centrelink to give farmers who were considering the sale of their farm enterprise, an indication of their eligibility for an EC Exit Grant¹⁰. The outcome of a pre–assessment was a separate process to the grant approval process and did not constitute a pre–approval for the EC Exit Grant nor provide any priority or certainty in the formal application process. This was stated in the Claim for EC Exit Grant form.

Was sufficient warning provided?

The Finance Circular provides that:

‘An unreasonable lapse or failure is one where the actions of the officer(s) involved are considered to be contrary to the standards of diligence that the agency expects to be applied by reasonable officers acting in the same circumstances with the same powers and access to resources’ (para 28).

It would have been preferable if the department had been able to provide additional notice to applicants in the lead up to the program closure. It is evident the lack of notice has caused difficulties for a number of potential applicants. The actions of the department and its officers, though, cannot be considered to be contrary to the expected standards of diligence for the following reasons:

• The EC Exit Grant Policy Guidelines for the 2011–12 financial year clearly state that the program had a capped budget of $9.6 million. Further, whilst the program was scheduled to close on 30 June 2012, the program guidelines clearly state that the program would close before this date if all of the funds were expended. Due to the demand–driven and financially capped nature of the program, the Guidelines did not specify whether a period of notice would be provided to potential applicants if the program was required to be closed early.
• The unprecedented and unforeseen surge in applications meant that the department had minimal time to act and warn potential applicants of the program’s closure. The department had seen noticeable increases in the number of applications received on previous occasions when the program was scheduled to close, however none were on the scale of the circumstances that eventuated in June 2011.
• Based on per month average application statistics up to April 2011, there was no evidence to suggest that departmental officers should, or could, have foreseen the size of the surge in applications that occurred. In previous years, the program had always underspent its annual budget allocation.
• Due to the complicated and lengthy EC Exit Grant application process, by the time the data on program uptake and expenditure revealed the impact of the unprecedented spike, expenditure was already projected to exceed the budget for the 2011–12 EC Exit Grant extension. Due to the capped nature of the program, the department did not have the authority to permit expenditure above the program budget allocation.
• As soon as officers had sufficient data to indicate that the surge was ongoing and was of such an unprecedented level that it would result in the capped budget being fully committed within weeks, they initiated advice to the minister regarding the need to either provide additional program funding or to close the program.
• It was the government’s decision to close the program to new applicants. The department then implemented this decision.
• In advising the minister and then the government of the situation once it was evident, the department displayed due diligence and compliance with good program administrative practice, the budget rules and the requirements of the Financial Management and Accountability Act 1997.

For these reasons, the department and its officers acted reasonably and in accordance with the standards of diligence expected of them. The actions of the department and its officers, therefore, did not amount to an unreasonable failure to institute appropriate administrative practices to provide sufficient warning to potential applicants about the closure of the EC  Exit Grant.

Detriment and loss

The other two elements that need to be established for a successful claim are:

• The claimant has suffered a detriment (that is, a quantifiable financial loss) and
• The defective administration has caused the loss.

In the absence of defective administration, it is not necessary to determine whether a claimant has suffered detriment and whether a causal link exists.

Conclusion

On the basis of the assessment above, the final assessment is that the department was not defective in its administration of the EC Exit Grant program.

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