aCATCITY ORDS edainistrativ2 Law - Judive1al Review - Exercise of Minister's Powers - Determination of Scale of Fees applicahle to approved Nursing Home - Regard to costs necessarily incurred - whether application of policy inconsistent with statutory duty - width of discretion. Administrative Decisions (Judicial Review) Act 1977 Neattenai Heaith Act 1953 DENNIS MALCOLM CROFT v MICHADL J. R. MACKELLAR VG Wo. 100 of 198] Smithers 7. 8 February 1983 Melnourre, IN THR FPREVELAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) VG No. 100 of 1981 TT ) ) GENERAL DIVISION ' Between: DENNIS MALCOLM CROFT (Applicant) And: MTCHAEL J.R. MACKELLAR (Respondent) Judge Making Order: Smithers J. Date of Order: 8 February 1983 Where Made: Meibourne. ORDER THE COURT ORDERS THAT: (1) The decision of the respondent dated 2 April 1981 to refuse the applicant's request to review the decision of the Permanent Head be set aside and the matter to which that decision relates he referred to the respondent for further consideration. (2) The respondent pay the applicant's costs of the application. ~e VLCTORIA DISTRIC1 REGISTRY VG No. 100 of 1987 ~~ ew GENERAL DIVTS1OU Between DENNIS MALCOLM CROFT (Applicanv and: MICHARL J.R. MACKRLDIAR (Respondent) 8 February 1983 REASONS YOR JUDGMENT This 1S an application pursuant to s.5 of the Administrative Decisions (Judicial) Review) Act 1977 (the ADIR Act) for review of a decision of vhe Minister for Health (the respondent) affirming the refusal of the Permanent Tlead of the Department of Health to allow the applicant an increase in the scale of fees applicable to a nursing home known as the Sandown Nurcsing Home. In 1973 burldings were constructed and the business of a nursing home was commenced at 519% Princes Highway Morie Park in the State of Victorta under the name of "Sandown Private Nursing Home" (Sandown). At aLl material tues the premises of Sanacwn have been approved pursuant to o.40 AQ (2) of the National Heaith Act 1953 (the Act) as an approved wo nursing home for the purposes of the Act. 'The epplicant has been assoczrated with the ownership and management of Sandown since-jts inception. Ac the beginning of 1980 Sandown was owned and operated by d.H. Emerson Permanent Nominees Sandown Pty. Ltd. (Emerson), as the trustee of a unit trust, the henefic1ral interests in which were in the members of the families of the appiicant and two other persons. Tn February 1980 the applicant purchased [rom Emerson the goodwill and assets of the nursing home business, excluding the land on which 3t was carried on, Eor the sum of $200,000.00. In June 1980 a company called Mentmore Pty. Ltd., purchased from Emerson the freehold of the land for the sum of $509,000.00. Mentmore Pty. Ltd. was the trustee o* what 1S called Lhe Croft Class Trust. Those beneficially interested in that trust are the children and grandchildren of the applicant. On the day the land was purchased by Mentinore Pty. Ltd. 1t qranted a tenancy thereof on leaschoid terms ro the appiicant. The rent for the first year was $50,057. There was provision in the lease for subsequent adjustments of the rent chiefly by reference to the consumer price index. The term of the lease was three years and two months with an option of six further terms of three years. On 23 June 1980 the applicant applied to the Permanent Head pursuant to s.40 AD of the Act for a review oF conditions of approvai of the home with a view to substitution for the existing scale of patient's fees of a scale of fees providing for increases in rates peyeble by pacients 14 Lhe home. Yhe application set oul the basts on which the increases were sought, namely, that the scale of fees should return to the applicant the standard return of 12 1/2% per annum on his investment of $200,000.00 pilus $60,000.09 working Capital and take into account the rent which the appiicant was required to pay under the lease to Menimore Pty. Ltd. The history of ownership and management of the home and the hasis on which the transactions between the appiicant and Sandaova and Mentmore Pty. Ltd. were said to have been arrived at is set out in the appiication as folliows:- "Dear Sir, As the Department is aware, [ have been the responstihie Director ain charge of the Sandown Private Nursing Home since its inception. The Nursing Home has hitherto been owned by a Unit Trust, in which a Trust for my family has owned a one-third share, and the other two one~third shares have been owned by Trusts for the families of Messrs. Arnold Bioch and Nathan Rothfield respectively. Messrs. Bloch and Rothfi1eld advised me in January 1980 that they wished to realise their iunvestmenL and to sell the Nursing Home, and that they wished to do this by selling the freehoid and leasenold separately. The Directors decided that the freehold wouid be put on the market at $500,000.00 and that a Purchaser should be sought for the leasehold and business at $259,000.00. Both these fiqures were fixed after discussions with agents experienced in this field. I have been intimately involved ain this Nursing Hoine from the outset. T pianned and bulit it, I have deveioped a feeling of personal attachment to the staff and inéeer to some of the paticnts, For this reason £ decided that T would purchase the business myself. In view of the fac that it was IT who was the purchaser, my associates agreed to reduce the price and to seit the business to me on a wai*i-3n walk-out basis for $200,000.00. Prior to entering iwmto a concracr 1 cajculated the replacement value of the Nursing Home equipment and also considered che arount of interest on capita) required to start a new Nursing Home and bring it to futi occupancy. The conclusion was that the total of these items would considerabiy exceed the purchase price which T was to pay for Sandown Private Nursing Home. T therefore proceeded with the purchase. In order that T should not have to deai with a complete stranger as owner of the freehold, 1 arranged for a new Trust to be established for my three children which would purchase the freehoid and jenase it to me at a rent and on terms determined on an arm's length basis. I enclose for your information copies of the following documents - l. Contract of Sale of the Business. 2. Replacement Valuation of the Trade Fixtures, Fittings, Piant & Equipment. 3. Lease. This provides for a rental of $24.00 per bed per week, which 3s in line with rentais currentiy being patd for nursing homes of this type. 4. Contracts of Sale of the freehold. 5. Vaiuation of the freehold by Messrs. McGee O'Callaghan Gill and Co. This places a value of $520,090.00 on the freehold. 6. Letter from Lew1s Lyie Pty. Ltd. (who are highly experienced in the sase of nursing homes) seLting out their views as to the rental valve and the lLeasehoid value of the Nursing flome. 7. Trust Deed of the Croft Ciass Trust. You will see that neither I noc my wife has anv henefic1al anterest in the Trust. The 1oney required for the purchase of the [reehold has been provided from loars made te the new Trust by each of my children, the mwonev in each case belonging to the children abso.utely and beneficialiy. a. Current roster togerher with a budget for the ensuing twelve months based on wage rates operative on the 12th May, 1980. On 8 July 1980 the Permanent Head, dealing with the matter pursuant to ss.40AD and 40AA(6)(¢)(7), advised the applicant that the application for a fee increase was refused. The Permanent Head antimated that he had had regard to costs necessarily incurred in providing nursing care in the home, that he could only adjust fees on the basis of costs necessarily incurred, that the lease was not considered to represent an arms iength transaction and consequentiy no adjustment had been made to the approved fee structure. On 23 July 1980 the applicant requested the Minister for Iealth, pursuant to s.40AE(2) of the Act, to review the decision of the Permanent Head. As a result the duty arose in the Minister under s.4Q0AE(3) of the Act either to confirm or vary the decision of the Permanent Head "after such investigation of the matter as he considers necessary". Section 40AE(4) of the Act provides that the Minister shail "as parl of his investigation of the matter refer the matter to the appropriate Nursing Homes Fees Review Commitiee of Inquiry established under Division 3A of Part VITI of 'thet Act for examination and report to the Minister". The Minister having so referred the applicant's request, the appropriate " 6. commitkee examined the matcer and on 2] Jenuary 1981 at presented its report to the Minister. The Committee conducted a hearing at which the applicant's sol.rcitcr made representations. The applicant, a director of Mentmore [ty. Ltd. and the applicant's accountant also attended. The matn submission was that the Permanent Head had failed "to allow" rent paid as a cost necessarily incurred. The soiicitor submitted:- "In support of the above assertions, Mr. Bloch submitted that had the freehold been sold separately to a stranger and the business sold separately to another stranger for the game prices as the freehold and the business resnectively were sold to Mr. Croft and to Mentmore Pty. Ltd., and had the owner of the fFreehoid leased the nursing home to the owner of the business on the same terms as those contained in the lease from Mentmore Pty. Ltd., to Mr. Croft, the Department would have allowed a fce struclure based unoen the rental under the lease. He further submitted that Mr. Croft should not be penalised because he arranged for the Ffrechold to be purchased by a Trust for his children instead of by a third party and because he purchased the business lhimsetf instead of buying another hospital." In later comments he said that although costs necessarily ancurred might be considered in relevant circumstances to he excessive or unreasonable and accordingly subject to reduction or non-allowance, what had happened in th:s case was that the Permanent Head had paid no attention at all to the rent considered as a cost necessarijy incurred. The committee toor the view that the rent of $50,057 payable by the applicant to Melntmere Pty. Lid. aithough on Lhe high side, was revertuhestio we * an amount that could have heen ageeed upen in an arms Length commercial transaction. It took che view also that that. rent was "Lechnicaliy" a cost necessariiv sncurred within che meaning of s.ANAA(7) of the Ack. The conmittee reported that while it regarded the rent payable in the first year, $50,057 as a "cost necessarsiy incurred" within the meaning of s.40 AA(7) 1t believed, on the wording of that section and the judgment in Re Nunt ex parte Sean Investments Pty. Ltd. (1879) 53 A.L.J.R. 552 that "the Minister and the Permanent Head had a discretion in determining whether the fees should be increased to refiect that cost." The committee presented to the Minister what it calied propositions A,B, and C an which st set out three different iines of approach which might be adopted by the Minister in exercising that discretion. "Proposition A Government policy as expressed in a letter from the Minister to the Minister for of 9 September 1980 re Nursing Home 196 that: "... new proprietors are required to acquire the existing fee structure as part of the package when they acquire @ nursing home or a nursing home husiness, and any subsequent fee Increases have to be justified by increased costs. They obviously need to iook at the fees and decide the level of tuncome cenerated against the cost of acquisition, Operation and external borrowings, wf any. This means they are required to pay Lnterest cormitments and rental out of the visible profit and thereby be satisfied with a ie¢sser actual level of profit.' , 9. TE this approach is fojlowed profit after rent should be shown as a percentage of the vaiue of fixed assets: $12 362 26.39% S16 O38 This Committee considers this return on "invested funds" as being adequate and at Jeast reasonable; and as such recommends no variation to the approved scale of fees using this approach, Proposition C Re_ Goodwili ~- vital caiculations During proceedings the Chairman put the following question to Mr. Bloch, "Could you envisage a policy decision being made, an official policy decision being made, whereby no amount would be conceded as a return on goodwili, however we define it, but that some amount, for example $12 1/2%, might be alltowed on an amount paid for other assets?". Mr. Bloch madc the following reply, "Weil Mr. Chairman T wouid have thouglit that if there were toe be such a policy decision it should be announced cleariy with some leadtime because it would mean that most of the people running nursing home businesses in this State, prohabiy dn Austraiia, would umnmediately lose a_ substantial part of the vaiue of their iunvestments and while I can conceive of such a ruling being made T can't concede as practical politics of that ruling being made, and I don't see that the policy should be applicd with any kind of discrimination against Mr. Croft because of the fact that he purchased this from a partnership in substance, if we Aisregard jiegal form, from a pactnership which in one sense he was a member." These comments are relevant to the case at hand because 1f a return on ""goodwili" is recojnised the return achieved seens no ionger adequate. This ts demonstrated bclowv:-- ee - LO. DeparLlmental Projected Profit $ 6? 419 . Ne) an ~ "Monies Invested incLludina Goody ih $700 900 (Land & Bu1ridings $500 000 "Leaseboid" $200 ONO) The exclusion of goodwiil 1s fundamental to the caiculations under proposition B above. However, 1t 1s a matter of policy whether the decisions should be based on proposition A, B or c." The Committee's recommendation was: "COMMITTEE'S RECOMMENDATION If proposition A or B is adopted in principle the Comuittee recommends that the scale of fees for Sandown Nursing Home shouid remain as:- Ordinary Care Uxtensive Care 4,3,2 Bed $31.65 $37.65 1 Bed $34.05 $40.05 This scale of fees inciudes a toading for lost income of $0.90 per patient per day which is due to expire on 30 June 1981. Nowever, if proposition C were adopted, for reasons detalied by Mr. Bloch, some increases in fees wouid probably be necessary." On 2 Aprii 1981 the Minister Intimated to the applicant that, "Dear Mr. Croft, I refer to your apreai under Section 40 AE(?) of the Nationa! Meaith Act concelning the scale of fees for Sandown Private Nursing Home. l hevt reesgived and considered the roaport of TT. the Nursing Homes Fees Review Comnmitiee of Inguiry for Victoria relating to the above anneal. 1 have decided that the scale of fees for Sandown Nursing Home should not be increased to reflect the cost of rent payable to Mentmore Pty. Ltd. T have made my decision on the grounds that new proprietors are required to acquire the existing fee structure when they acquire a nursing home or nursing home business. They obviously need to look at the fees and assess the level of net income generated against the cost of acquisition, rental and external borrowings, if any. This means they are reaquired to pay interest commitments and rental out of the visible profit. In making my decision, I have had regard to costs necessarily incurred in providing nursing home care and accommodation, as I am required to do under the National Health Act." As the matter stood hefore the Committee and the Minister the applicant's first submission was that the renta} obligation of $50,057 was a cost of a class and ain fact necessarliy incurred in providing nursing care in the home and was thus a cost to which the Minister shouid have regard in ' the determination of the appropriate scale of Fees in accordance with s.40AA(7) of the Act. The applicant's second submission was that the $200,000 was a payment for good will reasonably incurred and which ought to be taken into account un the exercise of the Minister's discretion. Rent Considered as a Cost So fac as the matter of rent was concerned its submission was that atthough, 1F rcaard hid been had to the rent obligation it might not have been reftectecd an the Perraunant Heai's new determsuavion in whole, or mm port, cle a 12. Simpie fact was that no reyard had been had to tk. The argument before this Court was that such regard had been excluded because of the strict application of a policy in the amplementation of which there was no place for any such regard. However, the policy by which, according to the letter of 2 Apri) 1981, the Minister was actuated in whole or in part was applied to the problem before him in the light of a report which set out before him fairly and fully the circumstances concerning the applicant's obligation to pay rent. Tt toid the Minister that the payment was a cost necessarily incurred within the meaning of of s.40AA(7), 1t told him how 1t became payable, it told him the extent to which the existing fee structure provided a profit after payment of all outgoings, it told him that after providing for the new rental of $50,057 that profit would provide a return to the applicant of 26.39% per annum on $46,836 being that portion of the $200,000 pard by the applicant to Emerson for the business which represented the vaiue of "Eixed assets included in the purchase. It aiso reminded him, in effect, that good will may arise as a Government creation, and that under successive Governments, 1t had been accepted as unreasonable to recognire payment for goodwill merety because a decision has been made hy the parties concerned to pay such an amount. Tt reminded lim also of the policy outlined 1n proposition A above. Irom the findings of the Committee 1t appears that the rental ohisgation was an obligation of a class necessarily 13. auncurred in providing nursing care in the home and thak Lhe Committee accepted that the agrecd amount was a cost necessarliy iuneurred in so providing that nursing care. Once the business of conducting the home passed from the owner of the freehoid to a proprietor of the business who occupied the premises on iease 1t was inevitable that a renta) oblagation must arise as a cost necessarily inerrred. It 18 clear therefore, that in considering the application for a substituted scale of fees the rental obligation was one to which it was the duty of the Permanent Head and the Minister to "have regard". The following passages in the judgment of Mason J. in In Re Hunt (supra) indicate the significance of that expression. After indicating that rent us an item of cost in providing accommodaticn and care in & 'nursing home and normally, except where it 1s paid voluntarily in whole or in part a cost necesserliy incurred, his Honour said at p.554:- "When sub-s. (7) darects the Permanent Head to "have reyard to" the costs, it requires him to take those costs into account and to give veight to them as a fundamental element ain making his determination. ... In many cases it 138 to be expected that the scale of fees will be fixed by ascertaining the costs necessarijy sneurred and adding to them a profit factor. In the very nature of things, the costs necessarily incurred by the proprictor in providing nursing home care in the nursing home are a Fundamental matter for consideration. However, the sub-section does not direct the Permanent Hend to Fux the scale of Fees evciusively by reference to costs necessarily o~ It was said by Fox and Franki Jd. Dr. Gwyn Howells and Michael MacKelliar v. Nagrad Nominees Pty. 14. incurred and profie. The sub-sé¢ction 1s s0 generally expressed that 1t 1s not possible to say that he is confined to these -wo considerations. The Permanent Head 1S entitled to have regard to other considerations which show or tend to show that a scaie of fees arrived at by reference to costs necessarily incurred, with or without a profit factor, is excessive or unreasonable. It may be that the rent paid by the proprietor of a nursing home, though a cost necessarily incurred, exceeds the prevailing rental which 1s paid for comparable premises and that the determination of a scale of fees by reference to that rent would result in a scale of fees which is unreasonably high. The Permanent Head would be entitled to take this factor into account in making his determination." Ltda. (1983) 43 A.L.R. 283 (the Nagrad Case): "As was pointed out by Mason J. in Sean Investments (supra, at p.504) to "have reoard to" in the context of s.40AA(7) means to have regard to as a "fundamental" element. We do not wish to attempt to find a synonym for what, with respect, is such an apt term, but it is obvious that costs necessaritly incurred in accordance with sub-section (7) are to be given due weight, as matters of basic importance. The discretionary power vested in the Delegate must be exercised separately un relation to each nursing home. It as the purpose of the Legislation that the position of each nursing home business be considered on its merits, and s.4NAA(7) requires that. due we1lght be given to each cost to which it relates. The consideration must at least be sufficientiy open-minded to permit of a particular cost being Laken into accounc un greater or less degree." in the same case 1 said:- in their joint judgment in . "Once the classes of costs necessarily incurred in providing heaith care jin the home are identificd Lhen in determining the scale of fees ander sub-section (G) the Permanent Head must have regard to ail of them. This 1s a mandatory ohilgation. lle must treat them as fundmanetal elements (see Fx parte Sean Investments Pty. Limited (supra)) jn the making of the determination. As fundamental elements, suitabie aiLlowance must be made in respect thereof. 1t 1s im determining what that sultable allowance 1s that questions of the reasonableness of the amount of any alleged atem of cost may arise. It 1s at this stage that all relevant considerations are to be applied, such as, the appropriate level of such costs From a business point of view, from the point of those who have to pay the fee and the appropriate fee from the point of view of the viability of the establishment and the purposes of the Act. When the duty to determine the fee aimposed by sub-section (6) is read subject to the duty amposed by sub-section (7) then it 1s in my opinion, permissible and proper to adopt the language of Vascount Simon in Palser v. Grinling (1948) A.c. 291 at p. 534 where he said "the direction that regard 1s to be had to the value to the tenant Tof services and furniture! i.e. that such value must not be overlooked must be suitabiy allowed for ...". His Lordship used these words with respect to a very different problem from the present, but in view of the context of s.40AA(7) of the Act, they do seem appropriate to describe what Parliament antended to convey in the statutory direction in that section." It would seem therefore that consideration of an item of cost such as rent as a fundamental element in the relevant cost structure 1S an ecssentiai function to be performed in determining a scale of fees. Indeed 1t appears to me that in the absence of some particular feature of such a cost affecting its reasonableness or propriety, or of some circumstance such as, that if 1s aiready suitabtiy provided for un some other discretionary allowance made in the [ec , 16. siructure, perhaps by way of profit, suitable allowance will be made for it in the fee determinad. In this case the rental obiigation arose, not from the operation of ordinary commerciai negotiations between persons at arts length but as a re-arrangement of the legal relationships of parties already in close business association. It may be too much to say that the whole re-arrangement was designed to increase the costs necessarily incurred in conducting the home and thus place an additiconal burden on patients and the taxpayer, but it is clear that the re-~arrangement had benefits for the persons previousiy beneficiaily interested in the returns from the home, and, if the fees of the home were increased as a result of the re-arrangement it would benefit some 1f not all of the parties already beneficially interested (at the expense of the patients and the taxpayers of Australia). And this would occur while the service rendered to the patients at Sandown wouid remain precisely at its former level. It was no doubt with considerations of this kind in mind that on 8 July J989 the Permanent Head rejected the applicant's submission stating, "It should be noted that this Department can only adjust fees on the hasis of costs necessarily incurred in providing nursing home care. The lease arrangerent submitted is nok considered to represent an "arms length transaction" and consequently no adjustment has been made to tre approved Cee struccure." This statement points un a problem. The mere ~ L7. fact that an arrangement 18 not negociated at arms iength Gocs not mean that its terms are noc binding, nor that it necessarliy Jacks bona fides, nor that the obligations undertaken are not fair and reasonable. And 31£ one of those obligations be rent, and found to be a reasonable rent, then that would be a cost of a class necessarily incurred in providing nursing care in the nursing home, and in fact, so incurred. The Permanent Head would be hound by s.4NAA(7) to have regard to it. What allowance, if any, should be made for it would depend on all the relevant circumstances after proper scrutiny of the reasonableness and propriety of the arrangement in question. But it would not he sound to ignore that obligation by farling to consider whether any allowance at all should ke made in respect of it. Yet that appears to have been what the Permanent Head did. It would seem that to have regard to a genuine cost within the meaning of s.40AA(7) mast involve considering that cost items in the total] financial burden of the proprietor in providing care in the home and as reievant to the assessment of a fee structure appropriate for current circumstances. or course aS indicated elsewhere in these reasons, this does not mean that every cenuine cost is to be reflected in the fees as determined. Tu this case, if the facts were as presented by the Cormittee, to have regard to the rental gm whe monn + "- discussed above might have involved an approach along j1ines such as, namely:- an assessmenc of the genuineness and reasonableness of the rental obligation incurred by the applicant tn the jiight of all aspects of . the business and family rejationships of the parties involved, the recognirion that the existing fee structure contained a substantial element of profit, that the previous proprictor paid no rent but did provide the premises, that the profit might be regarded as representing in part, at least, a return on capital, that the new fee structure did not call for an allowance for return on capital but did cali for an examination of the profit comnonent and for recognition that rent was now involved. But however the probiem be approached, the real task would be, not to adjust new costs to an old fee structure however convenicnt that may be, but to determine a current level of fees in the light of current costs. The Minister did not make his decision on the same ground as did the Permanent Head. If one looks at the Minister's ietter of 2 April 1981 he made the decision by reference to a particular policy. In this context a policy can only mean a ruie appiicable to ail situations of a specified kind. Tt 3S implied in the terms of the stated policy that the relevant rule was one to he applied to all cases where there was a new proprietor of a nursing home in respect of which there was at the time of acquisition an established fee structure. And it appears that the rule was that no change would be made in that structuce by reason of 19. rental obligations or certain other specified items of cost that might be incurred by the new propristor. And the ruie was appilcable in respect of those costs albeit necessarily incurred in providing nursing care jin the relevant nursing home and constituting reasonable additional costs of providing nursing care in the home. The Minister said that he had had regard to the costs necessarily incurred in providing nursing care. Presumabiy, this was not intended to indicate more than that the Minister was aware that the rontal obligation was such a cost. Tt does not indicate that he had given thought as to whether any allowance ought to be made in the fee structure on account of that cost as a matter to be considered in the light of the total cost constituent involved in providing nursing care in that particular home. The policy as expressed made any such consideration irrelevant. In the statement of reasons delivered by the Minister pursuant to s.13 of the ADJR Act the Minister stated that in making his decision the Minister had regard to the following 1tems:- (I) the established policy that new proprictors are expected to pay interest and rent outside of the visible profit obtainable from the fees at the time of acquisition; (II) the merits of this case; a 20. {ITL) the consideration that should a nursing home proprietor receive an unchaltenged increase in the fees to service a more expensive Fanancial structure it couid be expected that many nursing home proprietors would take advantage of this precedent to refinance their operations, resulting in increased fees and increased government subsidies. That the Minister had regard to the policy expressed in paragraph (I) above is clear. Tt aus a question how the statement that he had had regard to the merits of this case is to be understood. Does it indicate that although it wouid he incompatible with the implementation of the policy as stated to consider the new rental cost in relation to the total costs anvolved in conducting the particular home to decide whether some and what altowance should be made in the level of fees with respect thereto, the Minister did that? Does it indicate that the Minister directed his mind to whether any and what allowance should be made in the fee structure because of the new rent, as for instance, would be done in the case of an znerease ain rental suffered jin the ordinary way by a proprietor oF a hom2? Or is it to be understood as indicating that he tooked at the merics to decide whether or not he shioutd appiy the pelirey aceordirg fo ats terms un thas 21. particular case, with the result that if he decided that he should, then, giving the kind of consideration as last menLioned, to the rent, just would not have to be undertaken. To answer these questions it 1S necessary to consider the statements of the Minister as a whole. In the end it appears to me that the Minister has said that he 18 acquainted with the whole of the material submitted to him and after consideriing it all he has decided to apply the established policy that subject to peculzrar or extenuating circumstances an particular cases a purchaser of an existing nursing home should take over the approved fee structure existing at the change of ownership. Amplifying this it 1s sald by the Minister that under this policy a cost such as rent associated with acquiring the home should be met. from the existing fee and that subsequent fee increases have to be 'justified by increased costs. ' JT think that such a statement has to bo understood as an aintimation to the applicant to the ecffect, namety, although 1t may be that his cost burdens in conducting the home iunctuding his rent were such as would justify the Permanent Head wn determining a highcr level of fees if they had come about otherwise than as part of an arrangement under which the applicant purchased the home, as to whetner they would or not the Minister had not dec1ded and did not enquire, he 1efused an increase on the ground that part of the applicant's costs, namely rent, which might possibly have . . ' justified the increase in fees, constituted a cost assocr1ated with the purchase. In such case 1 18S apparent that in the exercise of determining the level of fees pursuant to s.40AA(6) of the Act there has been no consideration as to whether the applicant's actual costs, necessarily incurred, of running the home would justify an increase above the existing fees. The rental component of those costs 1s just excluded from consideration because they arose in association with the purchase of the home. In my opinion the Minister did not intend to he understood as saying that he had considered the merits of making an allowance in the level of Fees for the rent in the sense that he considered the cost of the rent as a component of the total costs of running the home with a view to making an allowance therefore if that rent was a cost reasonably and properly incurred. The thrust of his ietter and his stated reasons 1s to the contrary. He regarded the rent as having no place in the fee structure because it arose in association with the purchase of the business. It is io be noted that the Minister's reasons state that "The Minister had regard to tne rental cost as a cost necessarily incurred. However, in exercising his discretion in this matter to have reqard to "okher considerations" the Minister decided to accept the Committee's Proposition A." That proposition is put forward in the Committee's report aS an alternative to proposition 8. — ewerr > 23. 'oe Under proposition A the matter is disposed of by the simple application of policy which excludes any consideration of the rental as an item which wholly or in part might be uncluded in the fee structure. On the other hand, proposition B provides reasoned argument relevant to a decision should the Minister enter upon consideration of the rental as a cost in respect of some or all of which an allowance might be included an the level of the fee structure of the home. Proposition B contains, in my opinion, one way of implementing the statutory injunction to have regard to costs necessarily incurred in providing nursing care in the nursing home. Proposition A does not. Accordingly, when the Minister chose Proposition A in preference to proposition B he inevitably chose to have regard to the rental cost, not as a cost to be considered in relation to the actual costs of running the home, and relevant to the determination of the appropriate current fee structure, but as a cost to be put on one side because it was a cost of a new proprietor and therefore not to be considered as relevant in reiation to that determination. It may be observed that from the figures before the Minister 1t would appear that the existing scale of fees provided a profit which was adequate, from the standpoint of arithmetic, to meet the amount of the applicant's rent. But it does not follow that had the Minister had regard to the rent as a fundamental element of cost, and looked at it in the light of the totai financial structure of the home, he would not have decided, by a process of appropriate reasoning, that the rent or some allowance in ry . , 24. respect of it should be included in the fee as determined by him. To have regard to a cost in the nature of a cost necessarily uncurred in providing nursing care in the nursii:.g home in the sense enjoined in s.40AA(7) of the Act it 1s necessary in the first place to realise that jt is to be treated as a fundamental element to be given Aue weight as a matter of basic importance. Compare the observations in Jn re Hunt (supra). To apply a policy under which such a cost is excluded from consideration is of course to exclude it from being given any weight at all. It 1s to be observed also that to perpetuate the existing fee structure in the new circumstances is to introduce a degree of artificiality where there ought to be reality. When new circtmstances arise they call for a decision with reference to them and not the continuance of a fee structure which may or may not be appropriate in the new circumstances. As was said by Fox and Frankt JJ. 1n the Nagrad Case (supra):- "What 1t requires is that the scale of fees be determined hy reference to the business as conducted by the proprietor for the time being. To taik of the cost of a nursing home 1s but an elliptical way of referring to the costs incurred by the proprietor of the nursing home business. A change of ownership will un all probability become Known to the Department in the due course of administration, but there 1s also a specifie requirement that an outgo1nq provrietor notify the Permanent Wead within one month ater ceasing to be propriecor (s.43(1)). Yhe nursing home cannot be treated as an abstract entity, a continuum, persisting regardiess of changes made, Ltocluding res nv ut changes related to the situation in which the new proprietor acquires it and carries it on. This does not mean that the Delegate is the slave of ail that has happened, or of al) that he 1s Loid 1s likely to happen. Tt 1s expected of ham that he use his experience and good sense, his own judgment." Thus in looking at a cost in the nature of a cost necessarily incurred in its setting as part of the financial structure of any home, and considering to what extent 1t shouid be allowed, the Permanent Head 1s not helpless. In using his judgment the Permanent Head or the detiegate will have regard to the circumstances in which costs have arisen. If he were not satisfied that they are the resuit of bona fide commercial arms length bargaining or if he were satisfied that they were the resuit of a legal arrangement between the parties deliberately designed to increase costs at the expense of future patients and the taxpayer, or that the system had been otherwise exploited, such circumstances would surely constitute, an the words of Mason J., those "other considerations which show or tend to show that a scale of fees arrived at by reference to costs necessarily incurred ... 185 excessive or unreasonable." But to adopt a policy pursuant to which no regard 1s paid to such fees 1s to fail to observe the requirements of the statute. Proposition B provides a method of approach suitable to a consideration of the question whether in the particular circumstances of the Sandown home an allowance shouid be made in respect of the new rent. Tt is suggested that there was a discretionary profit component in the exiscing fee which wight he treated as adequate provision . 26. for the rental obligations of the new proprietor. It shouid be noted however that in the hearing before this Court, various questions of fact arose as to the actual existence of this profit and as to whether there 1s in the existing fee structure a component such as an allowance for return on capital. When the new cost 1s locked at in relation to the total financiai structure of the business of providing nursing care in the home all these matters would be relevant. By their consideration the worthy objective of the policy would be achieved in those cases where it ought to be achieved, and thereby 1t would be achieved in conformity with the Act. To have regard to the merits of the case in this latter way is to perform the requirement of the statute. To have regard to them in the former manner resuits in the application of a policy according to which regard cannot be had to certain costs including rent. The policy, formulated in the way it 1s, disables the Minister from making individual assessment of the items of such cost in a specific application made in respect of the particular nursing home. The contents of item III referred to above of the Minister's stated reasons appear to me to go directly to support the validity of the policy formulated in item I. Tt 1s no doubt proper to take into account, when looking at a cost arising cn a change of structure of ownership and occupancy of a nursing home and which is said to be a cost necessar1lly ancurred, the danger that such changes may be 27. deliberately contrived to increase costs without improving the service to patients. Such a matter 18 clearly a proper one to be looked at when deciding whether or not an ailowance in respect of such cost should be included in the fee structure. ne difficulty is that 1f the policy 1s applied no such cost 1s ever so looked at. Regard is not paid to it. That this contravenes the requirements of s.40AA(7) of the Act 1s apparent when it 1s remembered that a fee restructure involving added costs may be well justified and might if looked at by the Permanent Head be taken into account and made the subject of some allowance in the fee. Item III therefore in my opinion adds nothing. So far as it takes effect as an independent ground it operates to the same effect as the policy formujated in item I. It is to be observed that receipt by a proprietor of an unchallenged increase in fees 1s not an issue in the case. What 1s in 1ssue is whether the new structure 1s to be looked at in an enquiry as to whether or not some increase in the fee structure is appropriate. It was emphasised by Dr. Griffith for the respondent that it 1s not essential for the Minister to set ouk in his stated reasons every consideration which has influenced him in coming to his decision. He submitted that the Minister was to be understood as having all the matters referred to in the revort of the Committee in his mind and indeed also the evidence before the Committec. He relied upon the observations of Deane J. in Sean Investments Pty. Ltd. v. MacKellar (1981) 38 A.L.R-. 363 particularly at pp.369 and 370 where he said:- "It 1S apparent that the Act contemplates that the primary inquiry on any review by the Minister of a decision by the Permanent Head on a request to alter the conditions relating to the fees applicabie to a nursing home shall be conducted by the appropriate Committee of Inquiry. Such a Committee possesses coercive powers to obtain oral evidence and access to material which are not possessed by the Minister. It 1s entitled to make recommendations to the Minister in respect of the matters which must be referred to it for inquiry and report. Indeed, in the ordinary case, , one would expect that a Committee would make such recommendations. The Minister is, for his part, plainiy entitled to pay regard to the Committee's report and any recommendations which it may contain: otherwise, there would be little point in having the preliminary inquiry by the Committee. A question arises, however, as to the extent to which the Minister may rely upon the Committee's report in reviewing the decision of the Permanent Head. In particular, 1s the Minister entitied, if he thinks it appropriate, simply to adopt the Committee's report and recommendations or is he obliged to review and assess for himself the evidentiary material and information upon which it is based? The power conferred upon the Minister by s.40AE(3) of the Act must be exercised personally by the Minister in the sense that it cannot be exercised for him by a responsible officer of his Department. The reason for this 1s that the decision of the Minister, un@er that sub-section, is by way of review of a decision of the Permanent Head of the Department and, even though the Permanent Head may commonly, as he did in the present matter, act through a delegate, 1t could scarcely have been the legislative intent that that review should be susceptible of being delegated either to the Permanent Head himself or to an officer in his Department under his authority. It may well be that it was this consideration which Jed the Parislament to provide mee re ee ee ee ee , 29. ° $ for an inauiary by an independent committee whose report would be available to guide the Minister. The statutory requirement that there be a report from the Committee before decision by the Manister, the inquisitorial powers conferred upon the Committee, the nature of the decision, the realities of the functioning of responsibie government and the limitations of human capacity combine to make unavoidable the conclusion that, having received the Committee's report, the Minister is entitled to decide to adopt 1t and any recommendations which 1t may contain wtthout having examined and assessed for himself all the material which was before the Committee. Alternatively, he may decide to reject the report aun whole or in part or to rely only on certain conclusions expressed in it." However, in the instant case the situation 1s that the Minister has plainly indicated how he used the report of the Committee. He has adopted one of the three different courses presented to him by the Committee. And the course he adopted relieved him from considering matters, such as those discussed by the Committee in Proposition B, which would have been relevant to considerations of whether any aliowance should be made in the fee structure in respect of the rental costs regarded as a not unreasonable or excessive fundamental element in the cost structure of the home. It also relieved him of consideration of matters such as the relevance of the circumstances that the re-arrangement of legal interests was not an arms length transaction. The Minister had the knowledge which could have been applied to the problem before him if, 1n the relevant sense, he had had regard to the rental as a cost of providing nursing care in the Sandown nursing home, but he did not apply that knowledge to the real problem. ne es ee en re ere ee ree see me ee a mm ere oe UI Ve Ee Se, bd 30. Dr. Griffith further submitted that 1t 18S Clear that the Minister 1s entitled to adopt a general policy in regard to the scale of fees and deal with a review of fees for a nursing home in the light of that policy. He pointed to the observations to this effect of Murphy J. an In Re Hunt 53 A.L.g3.R. 556-7 cited by Deane J. in Sean Investments Pty. Ltd. v. MacKellar (supra) at p. 368. But again, the application of the general policy as formulated by the Committee and in the Minister's letter of 2 April 1980 and his statement of reasons in this case excluded consideration of the new rental cost as relevant te the financial scenario of the particular nursing home in question. Any policy that does that contravenes s.40AA(7) of the Act. It invokes a circumstance which has nothing to do with the genuine cost of providing the care. A policy, for instance, that rentais above a certain relationship to capital value wouid not except i1n special circumstances be reflected in a fee structure might stand ina different category. It 1s to be noted that the observations of Murphy J. last referred to proceed as foliows, "but his determination or review must be in order to arrive at an appropriate scale of fees for the particuJar nursing home." The application of the policy involved a determination for a purpose far removed from that. His Honour continued:- "If the costs necessarliy incurred are excessive for any reason whether inside or outside the control of the proprietor, it may be that the scale of fees the Minister determines is such that 1f those costs continue, the home can be conducted only at iittle profit or at a loss. If that result follows 1t 1s because the Minister is now * 31. engaged in determining a scale of fees according to a cost pius system; he 1s carrying out a statutory duty to determine what, in his opinion, as an appropriate scaie of fees in relation to the approved nursing home." But because of the course adopted by the Minister he never formed an opinion as to an appropriate scale of fees in relation to the Sandown nursing home. He said the existing scale, appropriate or inappropriate, had to be maintained. Dr. Griffith said that the policy considerations which found favour with the Minister could not be said to have been extraneous to the problem before him. He relied on the observations of Dixon J., as he then was, in Browning v. Water Conservation and Irrigation Commission (N.S.W.) (1947) 74 C.L.R. 492 at vo. 505 and Swan H1ili Corporation v. Bradbury (1937 56 C.L.R. 746 at p.757 which were approved in The Queen v. The Australian Broadcasting Tribunal and Others (1980) 144 C.L.R. 45 at p. 49. His Honour was there dealing with a provision placing an embargo upon an individual's private rights "unless he obtains the sanction of a public authority". He said at 56 C.L.R. 757-8:~ "When a provision of this kind 1s made, it is incumbent upon the public authority in whom the discretion is vested not only to enter upon the consideration of applications for its exercise but to decide them bona fide and not with a view of achteving ends or objects outside the purpose for which the dis¢cretion is conferred. The duty may be enforced by mandamus. But courts of law have no source whence they may ascertain what 1s the purpose of the discretion except the terms and subject matter of the statutory instrument. They must, therefore, concede to the authority a discretion unlimited by anything but the scope and object of the instrument conferring it. This means that only a negative definition of the grounds governing the discretion may be given." The problem arising out of s.40AAQ of the Act 1s of a different nature from that considered in these cases. [In thjs case the question is, what 18 meant by a positive command to have regard to certain costs in determining a level of fees to be paid by or 1n respect of patients in a nursing home run on a private enterprise basis as part of a scheme for providing essential nursing care to needy people. The statutory command in s.40AA(7) 1s to be understood by reference to the scope and object of the instrument in which it is given. It 1s apparent that the general intention of the Act 1s that there shall be as many nursing homes conducted on a private enterprise basis, as are thought desirable for providing nursing care for qualified patients necding it. It 1s manifest that the success of the scheme, depends upon there being avallabie to the proprietors of nursing homes financidai returns which will constitute reasonable income taking into account all genuine items of cost. The provisions in s.40AA(7) serve the objective that the essential interest of the o1d and largely helpless inmates of nursing homes that care is honestly provided and 1s reasonably adequate. Hence the command in s.40AA{(7) requires attention in every case to be the reasonableness and propriety of necessary costs said to be involved in providing nursing care in the particular home concerned. That the level of fees