CATCHWORDS Administrative Law - Judicial Review - appeal from findings. of trial judge - decision fixing nursing home fees ~ application of principles formulated by Minister - effect of amendments to the legislation - purpose of the legislation. National Health Act 1953 s.40AA Schroeder Holdings Pty. Ltd. & Anor v. Grimes (18 February 1986 unreported) Alexandra Private Geriatric Hospital Pty. Ltd. v. The Commonwealth (1987) 61 ALJR 171 Alexandra Private Geriatric Hospital Pty. Ltd. v. Blewett (1985) 7 FCR 341 OCTET NOMINEES PTY. LTD v. THE HONOURABLE DONALD JAMES GRIMES and MICHAEL HENRY CODD No. VG 365 of 1986 Sweeney, Northrop & Sheppard JJ. Melbourne 5 June, 1987 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY No. VG 365 of 1986 ~~ eS we we Hw GENERAL DIVISION ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: OCTET NOMINEES PTY. LTD. (trading as "Hallam Private Nursing Home") Appellant AND : THE HONOURABLE DONALD JAMES GRIMES (who is sued as the Commonwealth Minister of State for Community Services) and MICHAEL HENRY CODD (who is sued as the Secretary of the Commonwealth Department of Community Services) Respondents THE COURT: Sweeney, Northrop & Sheppard JJ. PLACE : Melbourne DATE : § June, 1987 MINUTE OF ORDER THE COURT ORDERS THAT: The appeal be dismissed with costs. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY No. VG 365 of 1986 ~~ Se we we GENERAL DIVISION ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: OCTET NOMINEES PTY. LTD. (trading as "Hallam Private Nursing Home") Appellant AND : THE HONOURABLE DONALD JAMES GRIMES (who is sued as the Commonwealth Minister of State for Community Services) and MICHAEL HENRY CODD (who is sued as the Secretary of the Commonwealth Department of Community Services) Respondents THE COURT: Sweeney, Northrop & Sheppard JJ. PLACE : Melbourne DATE : 5 June, 1987 tJ REASONS FOR JUDGMENT Sweeney J. . In this case I have had the advantage of reading the separate reasons for judgment of Northrop J. and Sheppard J. I agree that the appeal should be dismissed with costs, for the reasons which each of them has given. I certify that this and the preceding one (1) page are a true copy of the Reasons for Judgment herein of the Honourable Mr. Justice Sweeney Dated: 5 June, 1987 Associate IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V. No. G 365 of 1986 wee ewer GENERAL DIVISTON QN APPEAL FROM THE FEDERAL COURT OF AUSTRALIA OCTET NOMINEES PTY. LTD. (trading as "Hallam Private Nursing Home") Appellant and THE HONOURABLE DONALD JAMES GRIMES (who is sued as the Commonwealth Minister of State for Community Services) and MICHAEL HENRY CODD (who is sued as the Secretary of the Commonwealth Department of Community Services) Respondents a OUR HK : SWEENEY, NORTHROP AND SHEPPARD JJ. DATE: 5 JUNE 1987 as} LAC ts MELBOURNE REASONS FOR JUDGMENT NORTHROP J. This appeal is but another of the many cases illustrating the difficulties of construing and applying the provisions of the National Health Act 1953 ("the Act") relating to approved nursing homes. The relevant provisions of the Act are contained in Part V which is headed "Approved Nursing Homes." In broad terms, under the provisions of Part V, the Secretary of the Department is empowered to determine a scale of maximum fees that the proprietor of an approved nursing home may charge in respect of nursing home care of a qualified nursing home patient cared for in that nursing home. The appellant ("Octet") is the proprietor of an approved nursing home known as Hallam Private Nursing Home. By letter dated 12 August 1985, a delegate of the Secretary notified Octet of a determination the delegate had made of the scale of fees which would be charged from 15 August 1985. In making that determination, the delegate took into account an amount for rent of the nursing home premises far less than the amount which Octet considered he should have taken into account. Pursuant to the Administrative Decisions (Judicial Review) Act 1977, Octet applied for an order of review of the determination made by the delegate. By order made on 30 September 1986, the Court dismissed that application. That judgment 1s reported: Octet Nominees Pty. Ltd. v. Grimes (1986) 68 A.L.R. 571. Octet has appealed from that order. Following amendments made to Part V of the Act by the National Health Amendment Act 1983 (Act No. 35 of 1983), the Minister formulated principles in accordance with which scales of fees are to be determined. Those principles are known as the Nursing Home Fees Determination Principles 1984 ("the Principles"). Much of the argument on the hearing of the appeal was directed to the issue of whether the Principles were invalid as being ultra vires the powers conferred by the Act. After the conclusion of the hearing of the appeal, the High Court held that the provisions of Part V of the Act were within the legislative power of the Commonwealth and that the Principles were not ultra vires the powers conferred by the Act; see Alexandra Private Geriatric Hospital Pty. Ltd. v. The Commonwealth (1987) 61 A.L.J.R. 171. That judgment should be read in full. For present purposes, it is sufficient to refer to the following passage at p.174 of the judgment of the Court (Mason A.C.J., Wilson, Brennan, Deane and Dawson JJ):- "The principles that have been formulated in accordance with s.40AA(7) provide a detailed and extensive prescription of the matters that are to guide the Secretary in determining the scales of fees for the purposes of s.40AA(6)(c)(1) of the Act. It is clearly the purpose of the principles to impose strict limits on the charges made by Management in conducting a nursing home, no doubt for the reasons spelt out by the Minister in his speech on the second reading of the Bill. Paragraph 2(4) provides a general guideline in the following terms: 'The Secretary shall, in exercising any discretion permitted in these principles in determining a scale of fees, have regard to: (a) the desirability of ensuring the financial viability of nursing homes generally; (b) the need to ensure that nursing homes are efficiently and economically operated; (c) the need to ensure that the cost to nursing home patients of nursing home care is not excessive or unreasonable; (d) the need to ensure that public moneys are being economically and properly expended; and (e) the meed for consistent and fair administration of Part V of the Act.' (Nursing Homes Fees Determination Principles 1984, as amended, Commonwealth of Australia Gazette, No. S166, 9 May 1984.) In the event that the application of the principles leads the Secretary to determine a scale of fees for a particular nursing home which threatens the . economic viability of the home, the proprietor may resort to his right of appeal to the Minister. In dealing with an appeal, the Minister 1s not bound by the principles. Furthermore, his decision may be reviewed, aibeit not on the merits, on application to the Federal Court in accordance with the provisions of the Administrative Decisions (Judicial Review) Act 1977 (Cth), as amended." In the present case, Octet contended that the scale of fees determined by the Secretary threatens the economic viability of the Hallam Private Nursing Home, but Octet has not resorted to its right of appeal to the Minister. Having regard to the judgment of the High Court, the contentions made by counsel for Octet, who, incidentally, was one of the counsel appearing for the Alexandra Private Geriatric Hospital Pty. Ltd. ain the High Court proceedings, that the Principles are ultra vires the Act, are rejected. The material before the Court does not show that the delegate of the Secretary, 1n making his determination, erred in any way. On this aspect of the appeal, I agree with the reasoning of Sheppard J. and have nothing further to add. I would dismiss the appeal with costs. I certify that this and the three (3) preceding pages are a true copy of the Reasons for Judgment herein of the Honourable Mr. Justice R.M. Northrop. Sram P Aduav Qaxcuase, 5 June 1987 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY = fe) < a WwW nm mal 3) rn aad Oo m n GENEPAL DIVISION BETWEEN : OCTET NOMINEES PTY LIMITED (trading as "Hallam Private Nursing Home") Appellant AND THE HONOVRABLE DONALD JAMES GRIMES and MICHAEL HENPY CODD Respondents ev] ORAM: SWEENEY. NORTHROP and SHEPPARD JJ. DA : § JUNE 1987 REASONS FOR JUDGMENT SHEPPARD J.: This 18 an appeal from a judgment of a single judge of this Court (Jenkinson J.) in which he dismissed an application for the judicial review of a decision of a deleaate of the second respondent. The decision was dated 13 Auaust 1985. It determined the approved fee structure for the nursing home conducted by the appellant known as the Hallam Private Nursing Home. The determination was made pursuant to s. 40AA of the National Health Act 1953 ("the Act"). The appellant's complaint is that the amounts which were approved were too low because the delegate wrongly omitted from account the rental which the appellant was paying its lessor, Marsid Nominees Pty Limited, under the lease of the premises. In order to understand the matters which are ain issue it 1s first necessary to refer to the relevant leqislation. Section 40AA is found in Part V of the Act which 1s entitled, "Approved Nursing Homes". This Court has had to consider the operation of Part V of the Act, and particularly the provisions of s. 40AA, on a mumber of previous occasions. But, except for the decision of Smithers 7. in Schroeder Holdings Pty Limited v. Grimes (18 February 1986, unreported) and the decision of the learned primary Judge in this case ((1986) 68 A.L.R. 571), there has been no decision of the Court in which the legislation in its present form has arisen for consideration. However, after we had reserved our decision, the High Court delivered iudqgment in Alexandra Private Geriatric Hospital Pty Limited v, The Commonwealth (1987) 61 A.L.J.R. 171. In that case the Court heid that the amendments to s. 40AA and principles formulated pursuant thereto were not invalid as being beyond the constitutional power of the Commonwealth. It was also held that the principles formulated pursuant to the section were a valid exercise of the power conferred in that behalf by sub-sec. 40AA(7). It will be seen that the decision of the High Court in that respect has had a critical impact on a substantial part of the submissions which were made to us. Nevertheless, because of the very full arqument which we had on the matter, I feel it necessary to deal ata little length with the questions to which this appeal qives rise. The early sub-sections of s. 40AA provide for the approval of premises occupied as a nursing home as an approved nursing home. The appellant's nursing home has been an approved nursing home since 1979. Sub-section 40AA(6) provides that the approval of %. premises as an approved nursing conditions specified therein. condition 16 to be found in sub-6 home is subject to Ara. (6)ce)}1) So far as 1t 1s relevant, that sub-paragraph is as follows :- "ERY The approval of prem nursing home 1¢ subaect conditions: fe) a condition that. exce government nursing home (1) the fees charged nursing home c nursing home pati nursing home pat home will not ex from time to respect of the the patient in scale of fees subject to any been formulated and that are Secretary in rel home " ises te as an rhe approved follawindg in respect of the are of a qualified ent or a Repatriation ient in the nursing ceed such fees as are time applicable in nursing home care of accordance with such as is determined, principles that have under sub-section (7) un force, by the aticn to the nursing a number of For present purposes the relevant of the section It was pursuant to that provision that the scale of fees which 1s in question was determined by the Sub-section 40AA(7) referred to follows: - "O7) Minister, formulate principl which scales of fees are to purposes of sub-paragraph (6) nursing homes generally or i homes included in specified homes". Sub-sections 40AA(7A) and (7B) "CTA) Without limiting second respondent's delegate. in The Minister may, by writing signed by the es in accordance with be determined for the (c)(1) an relation to n relation to nursing classes of nursing are in the following the qenerality of the sub-paragraph terms:- as 4. sub-section (7), principles formulated under that sub-section may- fa) specify matters of a kind that are, in the ease of each nursing home or of each nursing home included in a class of nursing homes, to be taken into account in determining a scale of fees for the purposes of sub-paragraph (6)(c)(1); (pb) specify matters of a kind that are, in the case of each nursing home or of each nursing home included in a class of nursing homes, to be disregarded in determining a scale of fees for the purposes of sub-paragraph (6)(c)li); (a) specify criteria for assessing, in relation to matters of a kind that are required, in accordance with principles of a kind referred to in paragraph fa), to be taken into account in determining a scale of fees, the amounts that are to be so taken into account in relation to matters of that kind. (7B) In formulating principles under sub-section (7), the Minister shall have reaard to- (a) the need to ensure that nursing homes are efficiently and economically operated: (bh) the need to ensure that the cost to nursing home patients of nursing home care is not excessive or unreasonable; and (oc) any other matters the Minister considers to be relevant". The form of the various provisions I have quoted comes from an unofficial consolidation of the National Health Act provided to us during the argument. T have not checked the quotations against the various amendments which have been made. The unofficial consolidation was accepted by the parties to the appeal as an accurate reflection of the relevant form of the legislation, the major amendments to which were made by the National Health Amendment Act 1983 (Act No. 35 of 1983). The Act was substantially in the form to which I have referred when this Court decided Alexandra Private Geriatric Hospital Ptv Limited v. Blewitt (1985) 7 F.C.R. 341. But at the times of the relevant events in that case no principles pursuant to sub-sec. 40AA(7) had been formulated. It should be mentioned in passing that the decision of the High Court in the earlier mentioned Alexandra Hospital case was not qiven in an appeal from the judgment of this Court. Although they involved the same company, the two proceedings were separate and distinct. Principles pursuant to sub-section 40AA(7) were first formulated on 2 May 1984 and notified in the Gazette on 9 May 1984. The principles were amended on13 May 1985. The amendments were notified in the Gazette on 15 Mav 1985. The amended principles applied at the time the delegate made his decision in the present case. It 1s next necessary to refer to the relevant provisions of the principles. Paragraph 2 of them contains a number of definitions to the detail of which it is unnecessary to refer except in the case of the definition of "Return on Investment" which is defined, in relation toa nursing home, to mean the return referred to in para. 3(a) in relation to the nursing home. There are some preliminary matters stated in sub-para. 2(4) which is as follows:- "The Secretary shall, in exercising any discretion permitted in these principles in determining a scale of fees, have regard to: (bs (ec) (da) (e) the desirability of ensuring the financial viability of nursing homes generally: the need to ensure that nursing homes are efficiently and economically operated; the need to ensure that the cost to nursing home patients of nursing home care is not excessive or unreasonable; the need to ensure that public moneys are being economically and properly expended; and the need for consistent and fair administration of Part V of the Act". The paragraphs of the principles so far mentioned are to be found in Part I thereof. Paragraphs 3, 3B and 6 are also to be found in Part I. So far as they are relevant, paras. are as follows:- Subject to this Part, in determining a scale of fees in relation to a nursing home, the Secretary- (a) shall take into account a return to the proprietor of the nursing home on the investment inthe nursing home and in the business or undertaking carried on at the nursina home determined bv the Secretary in accordance with Part II; (b>) shall, if the proprietor of the nursind home, requests the Secretary so to do, take into account an additional return to the proprietor on the investment in the nursing home and in the business or undertaking carried on at the nursing home determined by the Secretary in accordance with Part III; (c) Shall take into account any operating expenditure referred to in Part IV necessarily incurred by the proprietor of the nursing home in providing nursing home care in the nursing home to the extent and in the circumstances specified in that Part and shall disregard all other expenditure; and (ad) may take into account all income. 3 and 3B 7, benefits and advantages received, earned or enioyed by the proprietor of the nursing home in respect of the business er undertaking carried on at the nursing home over and above the fees received in accordance with the determined scale of fees in respect of the provision of nursing home care in the nursing home. 3B. Notwithstanding anything contained in these principles, the Secretary- (a) may, in determining a scale of fees in relation to a nursing home, take into account the scale of fees determined in respect of, and the level of costs incurred ain, other comparable nursing homes; and (b) shall determine a scale of fees in relation to the nursing home that is not excessive or unreasonable. Paragraph 6 is entitled, "Abnormal Expenditure". Sub-paragraph (3) provides that the Secretary shall, in determining a scale of fees, disregard any operating expenditure which is unreasonable or excessive and sub-para. (4) provides that the Secretary may, in determining a scale of fees, take into account a portion of operating expenditure and disregard the balance. Sub-para. 6(5) is as follows:- "6(5) Where any transaction between a proprietor and another party is not at arm's length and where the Secretary is of the opinion that a purpose of the transaction was to increase the scale of fees at any time, the Secretary shall, in determining a scale of fees: (a) in the case of rent in respect of premises or increases in interest payments, disregard the transaction entirely; and R, (bh) in the case of other transactions, take into account in place of the transaction the reasonable price or payment for which the service or anods the subject of the transaction may have been obtained". By paragraph 2(2) a transaction between a proprietor and another party 1s not at arm's length 1f the other party to the transaction is an associate of the proprietor. Sub-paragraph 2(3) specifies the persons who are to be treated as associates for the purposes of the principles. It is unnecessary to refer to the detail of this sub-paragraph. Part II of the principles is entitled "Return on Investment". The relevant paragraphs of Part II for the purposes of the present case are sub-paras. 9(1), (4) and (5) and 10(1). These paragraphs are as follows:- "9OC1) The Secretary shall, subject to sub-principles (2) and (4) to (8) inclusive and principle 12A, in determining the return on investment in relation to a nursing home take into account a return on the land and buildings used as the nursing home being the fair market rental when the nursing home was first approved as an approved nursing home for the purposes of the Act as determined by a valuer from the Valuation Branch of the Australian Taxation Office. CC eae) eee (4) Where a nursing home was first approved as an approved nursing home for the purposes of the Act before these principles come into effect, the Secretary shall, in determining a return on investment in relation to the nursing home, take into account, in lieu of the return referred to in sub-principle (1) and the = returns referred to in sub-principle (3), the returns on the matters referred to in Qa . those sub-principles reflected in the scale of fees as at the date these principles come into effect save to the extent that the scale of fees reflects an allowance for operating costs in excess of those otherwise allowable under' these principles. . (5) The Secretary shall, in determining the return on investment in relation to a nursing home, disregard any increase or reduction in the value of any of the items constituting the investment in a nursing home or the business or undertaking carried on at the nursing home as provided in sub-principles 1) and (3) in sub-principles (6), (7), (7A), (7B), (7C) and (7D) and principles 12 and 12A shall not vary the return on investment. 1002) Where the premises occupied by a nursing home are or were at any time after they were approved as an approved nursing home, leased to the person who is, or was at that time, the proprietor of the nursing home, the Secretary shall, in determining the return on investment in respect of the nursing home- (a) take into account all reasonable increases and, subject to sub-principle (2), all reductions in the rent payable in respect of the premises during the period or periods during which the premises were so leased; and (b) disregard all other expenditure incurred on rent in respect of the premises. " Ce Para. 10(2) is not relevant to the present problem. Part III of the principles is entitled. "Additional Return on Investment". It contains a number of provisions enabling a nursing home proprietor who has made a request pursuant te 10. Ssub-para. 3(b) of the principles to obtain a higher allowance for his return on investment. It 18 unnecessary to refer to the detail of the various provisions which provide for the way in which the additional allowance is to be calculated. Part IV of the principles is entitled, "Operating Expenditure" and prescribes the way in which a number of recurring expenses are to be taken into account by the Secretary in making his determination. The items in question include salaries, wages and allowances, payroll tax, superannuation, long service leave, depreciation, lease and hiring charges and a number of other items. It should be clear that lease and hiring charges do not apply in relation to leases of land and buildings but to leases of plant and equipment. Part IV concludes with para. 48 which is as follows:- "48 The Secretarv may, in determining a scale of fees, take into account any other expenditure which, in the opinion of the Secretary, is necessarilv incurred in providing nursing home care in the nursing home". The determination which is the subject of this appeal had appended to it a schedule entitled, "Approved Expenditure in Fee Structure". This listed a number of items of expenditure showing the amounts which had been allowed in respect of each. Against the item "rent" the word "nil" was written indicating that no allowance at all had been made for rent. On the other hand, against the item "Return on Investment" was allowed the sum of $118,187. The break-up of that sum was not shown in the 11. attachment to the determination but is explained in the reasons for decision given by the deleaate pursuant to s. Administrative Decisions (Judicial Review) Act 1977. of tre Paraagraph 14 of the reasons 18 entitled, "Return or Investment" and is as follows:- "In accordance with Principle 9 and with a Ministerial decision as a result of an application for review under Section 40AE(2) of the National Health Act 1953, the level of return on investment included in the fee structure 1s as follows:- Funds Rate of Return Invested Return p.a. (as per Commonwealth Valuer)* Land & Buildings 79,560* Plant & Equipment- Owned 91,251 12.25% 11,178 Leased 95,886 12.25% 11,746 Motor Vehicle 11,600 less 30% Private 3,480 8,120 12.25% 995 Working Capital 30,000 12.25% 3,675 Establishment Costs 12,900 12.25% 1,580 Return on Investment 108,734 per annum In accordance with Principle 12 an additional return on investment of $9,453 per annum was calculated and included in the determination thereby increasing the return on investment included in the fee structure to $118,187,187 per annum". Neither sub-sec. 40AE(2) nor para. 12 of the principles is relevant for present purposes. 12. It is to be observed that the only amount allowed in respect of the return on investment for the land and buildings employe: in the mursing home was the sum of $79,560. The other items were allowed in respect of plant and equipment, motor vehicles, working capital and establishment costs. Central to the questions which arise for decision is the allowance of $79,5€° for the investment return on the land and buildings. It 1s this figure which the appellant claims was, not only far too low, but erroneously used by the delegate in reaching his conclusion as tz: the amount he would allow for return on investment. It 15 therefore necessary to explain the background of that figure. On 31 August 1979 a Mr. M.J. Dowd leased the nursing home tu a company, Hallam Private Nursing Home Pty Limited. The leas¢ was for a term of 10 vears commencing on 1 September 1979. The rental payable pursuant to the lease was $80,000 per annum witt. provision for reviews at the expiration of the second, fourth, sixth and eighth years of the term. It was common ground that the parties to the lease were not at arm's lenath within the meaning of that phrase as it is defined in the principles. Rent reviews did take place pursuant to the provisions of the lease but the increases were not in fact paid because, so it was said on behalf of the appellant, the lessee under the lease could not afford to pay them. In 1985 the freehold was sold to Marsid Nominees Pty Limited for the sum of $1.24 million. The lease which was then in existence was surrendered and the new owner entered into a new lease with the Hallam Company dated 30 April 1985. The lease was 13. for a period of 10 years commencing on 18 April 1985. The rental was $136,400 per annum. Provision was made for two further terms. each of 10 years. These were provided for in a conventional option clause which entitled the lessee to options for new leases provided certain terms and conditions were observed. The lease provided for a rental review. Tt 1s unnecessary to refer to the detail of the review procedure. The lessee's obligations to the lessor were quaranteed by Mr. and Mrs. Dowd. It 1s common ground between the parties that the lease entered into on 30 April 1985 was an arm's length transaction for the purposes of the principles formulated pursuant to the Act. The essence of the appellant's complaint is that the delegate, in calculating the return on investment, did not allow the amount of rental payable under the lease of 30 April 1985, namely, $136,400 per year. As mentioned, he allowed only the sum of $79,560. That was close to the rental originally payable under the lease of 31 August 1979. The difference is explained by the fact that the Department had the rental value of the nursing home established by a Commonwealth valuer from the Australian Taxation Office who determined it at $79,560 rather than the $80,000 provided for inthe lease. It 1s thus the appellant's submission that the investment allowance is less by $56,840 than it should have been. The reason why the delegate did not allow the increased rental derives from a consideration of paragraphs 9, 10 and 6 (in 14. that order) of the principles. Because the nursing home was approved as a nursing home for the purposes of the Act before the principles came into effect. the applicable sub-paragraph of para. 9 was sub-para. (4). That obliged the delegate to take into account, in determining the return on investment, the -return on the land and buildings used as the nursing home reflected in the scale of fees at the date the principles came into effect. Thus the starting point was not the rental payable under the lease entered into on 30 April 1985 but the rental value of the premises which had been established in 1979 when the nursing home was first approved. However, sub-para. 10(1) of the principles obliged the Secretary to take into account all reasonable increases in the rent payable in respect of the premises during the period or periods during which the premises were so leased. In the respondents' submission, this provision has to be read subject to sub-paras. 9(1) and (4) and tin conjunction with sub-para. 6(5) which provides that where any transaction between a proprietor and another party is not at arm's length and where the Secretary is of the opinion that a purpose of the transaction was to increase the scale of fees at any time, the Secretary shall in determining the scale of fees, in the case of rent, disregard the transaction entirely. The delegate disregarded the 1979 lease and was thus unable to find any increase in the rental upon which para. 10 could operate. This took him back to the provisions of sub-para. 9(4) which in turn led him to apply the former figure of $79,560. The submissions made on behalf of the appellant may be summarized as follows:- 15. Notwithstandina the amendments to s. 40AA and the principles formulated pursuant thereto, the underlying purpose, policy and scope of the Act remains unchanged. The power to formulate principles must be read subvect to that underlying purpose and policy. It must follow that principles cannot be formulated so as to cause or require a determination which would have the effect of preventing a nursing home from being conducted on an economically viable basis. Sub-section 40AA(7) of the Act should be construed so as not to empower the Minister to formulate principles which are arbitrary, capricious, wholly unreasonable or discriminatory in their operation. The principles formulated pursuant to the section are invalid because:- (a) They discriminate:- (i) between lessees and freeholders who operate nursing homes; and (ii) between those whose nursing homes were in existence prior to the principles coming into force and those whose nursing homes were established thereafter. (b) They are arbitrary, capricious and wholly unreasonable because they compel the determination of a scale of fees on the basis of costs and prices in the year when the nursing home was constructed or acquired and ignore increases which should be allowed to take account of 16. inflation and rising values. (c) They are uncertain in their effect and operation; see Television Corporation Limited v. The Commonwealth (1963) 109 C.L.R. 59 at pp. 71 - 73. 3. If. contrary to the earlier submissions, the principles are valid and applicable, the delegate was obliged to give effect to para. 10(1) of the principles by allowing the increase in rental paid under the current lease as compared with the rental paid under the lease entered into in 1979 because:- (a) Principle 6(5) does not apply for either or both of the following reasons:- (i) It does not apply to a_ prior transaction of lease which, although not a transaction at arm's length, fixed the rental at a fair market rental and the only purpose for which the transaction is used is the comparison of the rental payable under the lease with that payable under a later lease entered into at arm's length, the purpose of the comparison being to calculate an increase in rental for the purposes of principle 10. (ii) There was no evidence, or no sufficient evidence, that the prior transaction of lease, although not at arm's length, was entered into for the purpose of increasing the scale of fees. 17. (b) If, contrary to submission 3fa), the delegate was bound to apply para. 9(4) of the principles rather than para. 10 thereof, he still had an overriding discretion to take the difference in rental into account. He did net consider whether he should ezcrcise that discretion. (c) If, contrary to submission 3(a), para. 6(5) of the principles did apply, the delegate nevertheless had an overriding discretion to allowa fair and reasonable scale of fees; see paras. 2(4), 3(c), 3B, 6(3) and 48. He did not consider whether or not he should exercise that discretion. 4. The determination was so unreasonable that no reasonable person could have arrived at such a decision. In my opinion the decision of the High Court in the Alexandra Hospital case puts paid to the first two submissions. These challenge the validity of some of the principles which have been formulated. In respect of a similar argument the High Court said in the Alexandra Hospital case (p. 176) that enough had been said in the earlier part of the judgment in the description of the scheme to show that the amending Act "provided ample warrant for the principles that were subsequently made". The Court noted that Smithers J. had dismissed a similar arqument in Schroeder; see p. 176. In reaching its conclusion on the constitutional issues, the Court referred extensively to the judgment of Smithers J. in the Schroeder case. It is plain that what he said was approved by the five judges who decided the case. 1A. In the course of his judgment in Schroeder Smithers J. said (pp. 22-23):- "Tt is consistent with the purposes to be discerned in the Act as amended in 1983 that there be a level of fees so determined as to tend to : control the level of expenditure undertaken by proprietors, particularly expenditure which encourages the assessment of the value of goodwill at high levels. Tt has been a feature of the industry that the level of fees fixed in accordance with the requirements of sub-sec. 40AA(7) of the Act as in force prior to Act No. 35 of 1983 created a situation in which commercially accepted levels of goodwill were higher and accelerated upwards more swiftly than was regarded as appropriate for a protected industry supported by government subsidy. Those levels of goodwill translated into capital costs when nursing homes changed hands provided a basis for claims for high levels of permitted fees. This situation was regarded as contrary to the public interest. Rental expenditure at levels arrived at by agreement between parties was also a significant factor. It was to introduce a measure of control that s. 40AA(7) of the Act was repealed by Act No. 35 of 1983 and re-enacted in terms set out above. Section 40AA(7A) was enacted at the same time. It is certainly compatible with the purposes of the Act that appropriate action be taken to protect the revenue against inflation of the level of fees by expenditure in the conduct of a home that is incurred at a level higher than that which would obtain if strict scrutiny were applied to the relevant transactions on behalf of the taxpayer and patients". Later his Honour said (pp. 25 - 26):- "Accordingly, the implications that might otherwise have arisen from the Act are subject to such qualification as arises from the express provisions of s. 40AA(7) as amplified by s. 40AA(7A). The provisions of sub-s. (7A) that in the principles the Minister may specify matters of a kind that are to be disregarded in determining a scale of fees for the purpose of sub-para. (i) of para. (c) of sub-s. (6) of s. 40AA of the Act clearly contemplates that certain expenditure actually incurred may be disregarded. It follows 19. that theoretically, the level of fees determined under s,. 40AA(6)(c)(1i) in accordance wath the principles might possibly fall below the level of actual expenditure and to that extent the viability of a home might be in peril. But if so that is the effect of the law. Tt 18 clear, however, that the principles are designed to provide a framework which intending proprietors will have in mind when undertaking obligations as - such. And despite the limitations imposed on the Secretary the principles as formulated do reflect an intention to provide for and preserve the viability of approved nursing homes as business enterprises". In the present case the learned primary Judge said (68 A.L.R. at p. SBl):- "Before the amendments effected in 1983, Part V of the National Health Act 1953 did not give explicit guidance as to the considerations which should be weighed in exercise of the power to determine a scale of fees in respect of a nursing home, except that s. 40AA(7) at that time directed that regard should be had to 'costs necessarily incurred in providing nursing home care in the nursing home'. In those circumstances judicial reasoning upon Part V proceeded to discover, by reference to the legislative purposes which could be inferred to have animated the enactment of Part Vv, considerations of the kind which are now conveniently set forth in paragraphs (a), (b), (c), (d) and (e) of principle 2(4). In Alexandra Private Geriatric Hospital Pty Limited v. Blewett (1984) 56 A.L.R. 265 at 278 the trial judge summarised considerations to which judicial exegesis had drawn attention (and which he called 'principles') before the amendment of 1983. He expressed the opinion, in which Smithers J. later concurred (Schroeder Holdings Pty Limited and Extaris Giselle Nominees Pty Limited v. Donald dames Grimes) that the amendments of 1983 had 'made little, if any, difference to the underlving policy of the Act'. The principles which the trial judge (Woodward J.) thought 'still applied' after those amendments he summarised in these terms (56 A.L.R. at 278)". His Honour went on to quote the passage from the judgment of 20. Woodward J. in the Alexandra Hospital case to which he referred and continued (p. 582):- T "It may be - I need express no opinion - that none of the summarised principles was displaced by the 1983 amendments. But in my opinion those amendments did disclose a legislative intention ts subject those principles to displacement by the exercise of power conferred by the substituted s. 40AA(7). The provisions introduced into Part V in sub-sections (7A) and (7B) of that section made it clear, in My opinion, that 'principles' or considerations of the kind which had been judicially derived from an examination of Part V as it stood before the 1983 amendments were subject to alteration by the exercise of a power restricted in point of policy only by the first two paragraphs of s. 40AA(7B) and by the pleasure of each House of the Parliament. I think s. 40AA(7A) to be indicative of a legislative intention that the widest discretion as to policy objectives and as to the choice of means by which those objectives miqht be pursued should be available in exercise of the power conferred by the preceding sub-section. Neither of the quidelines imposed by paragraphs (a) and (b) of the following sub-section requires, in my opinion, that the economic interests of nursing home proprietors be regarded in the formulation of the principles which s. 40AA(7) contemrlates, unless and to the extent that experience may demonstrate that efficient or economical operation of nursina homes, or reasonable cost, or cost not excessive, of nursing home care to nursing home patients cannot be ensured without such a regard. Experience has not yet shown any of those things, so far as the evidence before the delegate or before this Court shows. The evidence on the point related only to the nursing home conducted by the applicant, not to nursing homes generally". am in respectful agreement with what both Smithers and Jenkinson JJ. have said in the passages quoted from their judgments. Furthermore, even if I had had a different view, it would not have been material for me to express it. What Smithers J. said has the approval of five judges of the High Court. 21. In written submissions made by counsel for the appellant lodged after the hearing of the appeal had been concluded, it was submitted that the appellant's arguments as to the invalidity of para. 9(4) of the Principles were not necessarily affected by the decision of the High Court in the Alexandra case. It was said that, if the Court in the appeal were to find that this paragraph of the principles must be applied to the appellant's nursing home and that the application of that principle must produce manifest unreasonableness or unfairness to the appellant and other proprietors in similar circumstances, the principle would "fall outside the scope of that which is embraced within the words 'their general conception and... their essential provisions'". The words, "their general conception and... their essential provisions", come from the iudgment of the High Court: see pp. 176-7. It was also submitted that the High Court, when dealing with the question whether the principles were ultra vires the statute, was concerned with the control of fees as a reasonable, and perhaps necessary, ingredient of a scheme designed to render effective the provision of sickness and hospital benefits to nursing home patients. Reference was made to a further passage from the judgment which is as follows (p. 176):- "It seems to us to be impossible to sav that the control of fees charged to qualified nursing home patients inan approved nursing home is not a reasonable and perhaps a necessary ingredient of a scheme designed to render effective the provision of sickness and hospital benefits to nursing home patients. Similarly, the conditions touching the keeping and auditing of accounts) and reasonable inspection of the home demonstrate a clear connection to the power". 22. In my opinion the submissions made by counsel for the appellant do not touch the question of the validity of the principles. Rather they put in different language matters relied upon in counsel's third and fourth submissions which are based upon the assumption that the principles are within power. -It is to those submissions that I now turn. It is plain that sub-para. 9(4) of the principles cuts down the obligation which the Secretary has under sub-para. 10(1) to take into account all reasonable increases in rent payable in respect of the premises. Under sub-para. 9(4) the Secretary was obliged, in determining a return on investment in relation to the nursing home to take into account, inter alia, the return on the matter referred to in sub-para. 9(1) reflected in the scale of fees as at the date the principles came into effect. The matter referred to in sub-para. 9(1) is the return on the land and buildings used as the nursing home being the fair market rental when the nursing home was first approved as an approved nursing home for the purposes of the Act as determined by a valuer from the Australian Taxation Office. The operation of sub-paras. 9(1) and (4) bring about a situation under which the fiqure assessed by a valuer from the Australian Taxation Office of $79,560 was the amount of the fair market rental which the Secretary was bound to take into account. Furthermore, pursuant to sub-para. 9(5) of the principles, the Secretary was bound to disregard any increase in the value of any of the items constituting the investment in a nursing home, including the return on investment referred to in sub-para. 9(1) of the principles. 23. The operation of the sub-paragraphs of para. 9 of the principles to which I have referred is enough to warrant the rejection of submission 3(a). But there is a further reason why it should be rejected arising from the provisions of sub-para. 6(5) of the principles. There was no issue between the parties that the 1979 lease was not a transaction at arm's lenath within the meaning of sub-para. 2(4) of the principles because Mr. Dowd and the lessee were associated. But it was submitted that there was no evidence, or no sufficient evidence, that the 1979 lease, although not at arm's lenath, was entered into for the purpose of increasing the scale of fees. It is to be observed that the provisions of sub-para. 6(5) of the principles oblige the Secretary to disregard the transaction if the transaction is not at arm's length and the Secretary is of opinion that a purpose of the transaction was ta increase the scale of fees at any time. The Secretary will be obliged to disregard a transaction if one of the purposes of it was to increase the scale of fees. That purpose need not be the sole or dominant purpose of those who are parties to it. It should also be observed that the opinion veferred to is that of the Secretary. It is not a matter for the Court to enquire into unless on no basis whatsoever could it be said that the Secretary was justified in forming the necessary opinion. In my opinion, on the whole of the material before him, the Secretary was entitled to take the view that the transaction was entered into for purposes which included the purpose of increasing the scale of fees. That would be enough to warrant the conclusion that the submission should be rejected. But, in 24. the course of his cross examination, Mr. Dowd conceded that one of his purposes in entering into the lease was to avoid the low profitability which was allowed to nursing homes which were conducted by the owners of the freehold. He said that that "would be part of the consideration". He also aqreed that "it would be a bit silly to set up a freehold nursing home because of the way in which the Department was treating them", This evidence establishes that Mr. Dowd in fact entered into the lease in order to obtain a higher scale of fees. For those reasons submission 3(a) should be rejected. Submission 3(b) suggests that, if the delegate was bound to apply sub-para. 9(4) of the principles rather than para. 10, he had an overriding discretion to take the difference in rental into account. In my opinion he had no such overriding discretion. Sub-paragraphs 9(4) and 6(5) of the principles make this clear. In submission 3(c) a number of paragraphs of the principles were referred to in support of the submission that there was a discretion. The first of these was para. 2(4). This is a general provision which obliges the Secretary, in exercising any discretion permitted in the principles in determining a scale of fees, to have regard to a number of matters, including the desirability of ensuring the financial viability of nursing homes generally. The provision has no application, in my opinion, because, relevantly, there is not vested in the Secretary any discretion 1n relation to the amount he may allow for the return on investment. 25. The next provision relied upon was sub-para. 3/c) of the principles. This provides that, in determining a scale of fees in relation to a nursing home, the Secretary shall take into account any operating expenditure referred to in Part IV necessarily aimncurred by the proprietor of the nursing home in providing nursing home care in the nursing home to the extent and in the circumstances specified in that Part and shall disregard all other expenditure. Rent is, in ordinary language, an operating expense. But it is plain that it is not an operating expense for the purposes of Part IV of the principles. The way it is to be taken into account is dealt with in Part II dealing with return on investment. The provisions of Part IV show that rent is not to be dealt with under that Part as an operating expense. Then reliance was placed on para. 3B of the principles. The part of that paragraph upon which special reliance was placed was the requirement that the Secretary should determine a_ scale of fees "that is not excessive or unreasonable". Tt was submitted that the determination was per se unreasonable because it failed to allow for the increase in rent which had come about between 1979 and 1985. But, in my opinion, the words "not excessive or unreasonable" serve to emphasize to the Secretary and his deleaates that fees are not to be excessive or unreasonable from the point of view of the nursing home patient and the Government. The provision is not one which obliges the Secretary to determine a scale of fees which is reasonable in all the circumstances and from the points of view of all parties concerned including the proprietor of the nursing home. The provision is thus not one 26, upon which the appellant can rely inthis case. The same considerations apply in relation to Sub-para. 6/3) which was also relied upon. That leaves para. 48 of the principles. That paragraph is contained in Part IV. It empowers the Secretary to take into account any other expenditure which, in his opinion, is necessarily incurred in providing nursing home care in the nursing home. But it applies only in relation to matters which fall within Part IV. As earlier mentioned, rent is not a Part IV expense. I would therefore reject each of the submissions made in paragraph 3 of the submissions. Tt remains to deal with submission 4 which is that the determination was so unreasonable that no reasonable person could have arrived at such a decision. In my Opinion this submission should also be rejected. The delegate has done no more than follow out the provisions of the principles which are valid and effective and which guide him in determining the scale of fees. In respect of a number of the critical matters he was obliged to take the course he did. He had no residual discretion. In those circumstances it could not be said that his decision was one at which no reasonable person could have arrived. In the result I would reject each of the submissions relied upon by the appellant. The appeal should be dismissed with { certity tnat this and the 257 preceding costs. pages are a true copy of the reasons for judgment herein of The Honourable Mr Justice Sheppard. vA Goth Assoclate pated 3 STOWE 987 VG 365 of 1986 Counsel for the Appellant: Solicitors for the Appellant: Counsel for the Respondent: Solicitors for the Respondent: Dates of hearing: Mr. B. Monotti Lloyd & Lloyd Mr. D. Graham Q.C. Mr. R. Robson The Australian Government Solicitor 2, 3 & 4 March, 1987