Backer and Secretary, Department of Family and Community Services
[2002] AATA 1335
•24 December 2002
DECISION AND REASONS FOR DECISION [2002] AATA 1335
ADMINISTRATIVE APPEALS TRIBUNAL )
) No Q2002/594
GENERAL ADMINISTRATIVE DIVISION )
Re JACK BACKER and LYDIA BACKER
Applicants
And SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES COMCARE
Respondent
DECISION
Tribunal Mr R G Kenny, Member
Date24 December 2002
PlaceBrisbane
Decision The Tribunal affirms the decision under review.
...................(Sgd)......................
R G Kenny
Member
CATCHWORDS
SOCIAL SECURITY – age pension –– money invested in family trust – whether monies constitute loans - whether loans to be treated as assets –– ordinary income – attribution of income - Guide to Social Security Law
Social Security Act 1991 ss 8, 9, 1077, 1207, 1207A, 1207C, 1207D, 1207P, 1207V, 1207X, 1207Y, 1209E
Social Security (Attribution of Income) Principles 2002
Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409
Minister for Immigration, Local Government and Ethnic Affairs v Roberts (1993) 41 FCR 82
Re Drake and Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634
Re Dainty and Minister for Immigration and Ethnic Affairs (1987) 6 AAR 259
REASONS FOR DECISION
24 December 2002 Mr R G Kenny, Member
The Application
Jack Backer and Lydia Backer (the applicants) are in receipt of age pension and were in receipt of that pension when Part 3.18 (Means test treatment of private companies and private trusts) of the Social Security Act 1991 (the Act) commenced operation on 1 January 2002. In January 2002, a Centrelink officer, as delegate for the Secretary, Department of Family and Community Services (the respondent), determined that the rate of age pension payable to Mr and Mrs Backer should be reduced because of the application of Part 3.18 of the Act (see T22). Those decisions were affirmed on 13 February 2002 by an authorised review officer (see T29) and, in turn on 15 March 2002, by the Social Security Appeals Tribunal (see T2). On 10 July 2002, Mr and Mrs Backer sought review of that decision by the Administrative Appeals Tribunal (the Tribunal) (see T1).
Appearances
Mr and Mrs Backer attended the hearing. They were not represented. Mr R McQuinlan appeared on behalf of the respondent.
At the hearing, the documents prepared in accordance with section 37 of the Administrative Appeals Tribunal Act1975 were taken into evidence as exhibit 1 (T1-T33) as well as the following:
Exhibit 2: a statement of facts and contentions, dated 3 December 2002, with annexures A–N from the respondent;
Exhibit 3: the Second Reading Speech for the Social Security and Veterans' Entitlements Legislation Amendment (Private Trusts and Private Companies – Integrity of Means Testing) Bill 2000;
Exhibit 4: a letter, undated, from Mr Backer;
Exhibit 5: a letter, dated 13 November 2002, from the Hon P Slipper MP;
Exhibit 6: a letter, dated 11 November 2002, from Tax Strategies Pty Ltd; and
Exhibit 7: a Centrelink letter, dated 21 January 2002, to Mrs Backer.
Issues and Legislation
From 8 June 1993, Mr and Mrs Backer, along with other family members, have been directors of and shareholders in the private company, that is, Jarokaleigh Macadamias Pty Ltd (the company) (see T9/88-102), which is the trustee of a private trust, the Backer Family Trust (the trust) (see T9/69-87). Mr and Mrs Backer each has a 35% shareholding in the company. The trust was established in 1994 and the trust deed shows that Mr and Mrs Backer are each primary beneficiaries (see T6/44-63).
In evidence (see T21/126-133) was the financial report of the trust as at 30 June 2001 and the trust balance sheet shows total assets of $255,859.56 and total liabilities of $260,050.86 (see T21/130). The assets listed are a "CBA Direct Investment A/C" valued at $45,297.12, shares in public companies valued at $195,270.05 and plant and equipment valued at $15,292.39 (T21/131-132). The liabilities are listed as comprising "Beneficiaries Loan Accounts" in the sum of $130,025.43 for each of the applicants (T21/130). The report also shows that the income of the trust for the year ended 30 June 2001 was $15,216.48 (T21/128). The amounts identified as Beneficiaries Loan Accounts comprise sums that the applicants received when they sold their macadamia nut farm and which they paid into the trust to be utilised by it for investment purposes.
Based on that information, the respondent assessed the assets of Mr Backer as totalling $360,865 comprising managed investments ($4,000), shares ($296,276) and other assets ($60,589). Liabities were assessed at $260,050 and the level of attributable assets as totalling $100,815 (see exhibit 2/A-G). Further, the respondent determined that, under the provisions in Part 3.18 of the Act, the trust was a designated private trust controlled by Mr Backer and that Mr Backer was an attributable stakeholder of the trust with an asset attribution percentage of 100% and an income attribution percentage of 100%. The respondent also determined that the monies advanced to the trust by Mr and Mrs Backer were loans and, therefore, financial investments in relation to which $15,216 was attributed income, and $5,488.47 for each of Mr and Mrs Backer was deemed income. The couple's combined income of $26,912.94 reduced the rate of pension payable to them.
The issues for the Tribunal are whether the monies paid by the applicants into the trust and recorded in the trust balance sheet as comprising Beneficiaries Loan Accounts are loans under the Act and whether the relevant provisions of Part 3.18 of the Act are applicable to them in the manner determined by the respondent.
The relevant provisions of the Act read:
"8(1) In this Act, unless the contrary intention appears:
income, in relation to a person, means:(a)an income amount earned, derived or received by the person for the person's own use or benefit; or
(b)a periodical payment by way of gift or allowance; or
(c)a periodical benefit by way of gift or allowance;
but does not include an amount that is excluded under subsection (4), (5) or (8).
income amount means:(a)valuable consideration; or
(b)personal earnings; or
(c)moneys; or
(d)profits
ordinary income means income that is not maintenance income or an exempt lump sum.
9(1) In this Act, unless the contrary intention appears
financial asset means:
(a)a financial investment; or
(b) …
financial investment means: …
(e)a loan that has not been repaid in full; or
…
1077(2) If one or both of the members of a couple have financial assets, the members of the couple are taken, for the purposes of this Act, to receive together ordinary income on those assets in accordance with this section.…
1207 The following is a simplified outline of this Part:
* This Part sets up a system for the attribution to individuals of the assets and income of privatecompanies and private trusts (sections 1207Y and 1208E).
* Attribution starts on 1 January 2002.
* For an asset or income to be attributed to an individual:
(a)the company must be a designated private company or the trust must be a designated private trust (sections 1207N and 1207P); and
(b)the company must be a controlled private company in relation to the individual or the trust must be a controlled private trust in relation to the individual (sections 1207Q and 1207V); and
(c)the individual must be an attributable stakeholder of the company or trust (section 1207X).
* A company or trust will be a controlled private trust or a controlled private company if the individual passes a control test or a source test.
* An individual will not be an attributable stakeholder of a trust if the trust is a concessional primary production trust in relation to the individual.
* The asset deprivation rules and the income deprivation rules are modified if attribution happens.
…
1207A In this Part, unless the contrary intention appears:
asset attribution percentage has the meaning given by section 1207X.
attributable stakeholder has the meaning given by section 1207X.
attribution period has the meaning given by section 1208D.
company has the same meaning as in the Income Tax Assessment Act 1997.
control includes control as a result of, or by means of, trusts, agreements, arrangements, understandings and practices, whether or not having legal or equitable force and whether or not based on legal or equitable rights.
controlled private trust has the meaning given by section 1207V.
decision-making principles means decision-making principles under section 1209E.
derivation period has the meaning given by section 1208C.
designated private trust has the meaning given by section 1207P.
income attribution percentage has the meaning given by section 1207X.
sufficiently influenced, in relation to a company, has the meaning given by section 1207D.1207C(1) For the purposes of this Part, in determining: …
(c)whether a trust is a controlled private trust in relation to an individual;
the following are associates of an individual:
(f)an entity who, in matters relating to the trust or company:
(i) acts, or is accustomed to act; or
(ii) under a contract or an arrangement or understanding (whether formal or informal), is intended or expected to act
(k)a company, where the company is sufficiently influenced by:
(i) the individual
…
1207D For the purposes of this Part, a company is sufficiently influenced by an entity or entities if the company, or its directors:
(a)are accustomed or under an obligation (whether formal or informal); or
(b)might reasonably be expected;
to act in accordance with the directions, instructions or wishes of the entity or entities.
…
1207P(1) For the purposes of this Part, a trust is a designated private trust unless:(a)all of the following conditions are satisfied:
(i) the trust is a fixed trust;
(ii) the units in the trust are held by 50 or more persons;
(iii)the trust was not created, continued in existence or operated under a scheme that was entered into or carried out for the sole or dominant purpose of enabling any individual or individuals to avoid the application of this Part and/or Division 11A of Part IIIB of the Veterans' Entitlements Act; or
(b)the trust is a complying superannuation fund (see subsection (3)); or
(c)the trust is an excluded trust (see subsection (4)).
1207P(2) For the purposes of subparagraph (1)(a)(ii), an individual and his or her associates are taken to be one person.
Complying superannuation fund
1207P(3) For the purposes of this section, a fund is a complying superannuation fund at a particular time if:(a)that time occurs during a particular tax year of the fund; and
(b)under section 45 of the Superannuation Industry (Supervision) Act 1993, the fund is a complying superannuation fund for the purposes of Part IX of the Income Tax Assessment Act 1936 in relation to that tax year.
Excluded trusts
1207P(4) The Secretary may, by writing, declare that each trust included in a specified class of trusts is an excluded trust for the purposes of this section.
1207P(5) The declaration has effect accordingly.
1207P(6) An instrument under subsection (4) is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901.
Definitions
1207P(7) In this section:
fixed trust means a trust where persons have fixed entitlements to all of the income and corpus of the trust.
income means income within the ordinary meaning of that expression.
unit, in relation to a trust, includes a beneficial interest, however described, in the property or income of the trust.
…
1207V(1) For the purposes of this Part, a trust is a controlled private trust in relation to an individual ifthe trust is a designated private trust and:(a)the individual passes the control test set out in subsection (2); or
(b)the individual passes the source test set out in subsection (3).
Control test
1207V(2) For the purposes of this section, the individual passes the control test in relation to a trust if:(a)the individual, or an associate of the individual (other than an associate covered by paragraph 1207C(1)(j)), is the trustee, or any of the trustees, of the trust; or
(b)a group in relation to the individual was able to remove or appoint the trustee, or any of the trustees, of the trust; or
(c)a group in relation to the individual was able to vary the trust deed or to veto the decisions of the trustee; or
(d)the aggregate of:
(i) the beneficial interests in the corpus or income of the trust held by the individual (whether directly or indirectly); and
(ii) the beneficial interests in the corpus or income of the trust held by associates of the individual (whether directly or indirectly);
is 50% or more; or
(e)a group in relation to the individual had the power (by means of the exercise by the group of any power of appointment or revocation or otherwise) to obtain, with or without the consent of any other entity, the beneficial enjoyment of the corpus or income of the trust; or
(f)a group in relation to the individual was able in any manner whatsoever, whether directly or indirectly, to control the application of the corpus or income of the trust; or
(g)a group in relation to the individual was capable under a scheme of gaining the enjoyment or the control referred to in paragraph (e) or (f); or
(h)a trustee of the trust was accustomed or under an obligation (whether formally or informally) or might reasonably be expected to act in accordance with the directions, instructions or wishes of a group in relation to the individual.
…
Income
1207V(5) In this section:
income means income within the ordinary meaning of that expression.…
Trust
1207X(2) For the purposes of this Part, if:(a)a trust is a controlled private trust in relation to an individual; and
(b)the trust is not a concessional primary production trust in relation to the individual (see section 1208U);
then:
(c)the individual is an attributable stakeholder of the trust unless the Secretary otherwise determines; and
(d)if the individual is an attributable stakeholder of the trust—the individual's asset attribution percentage in relation to the trust is:
(i) 100%; or
(ii) if the Secretary determines a lower percentage in relation to the individual and the trust—that lower percentage; and
(e)if the individual is an attributable stakeholder of the trust—the individual's income attribution percentage in relation to the trust is:
(i) 100%; or
(ii) if the Secretary determines a lower percentage in relation to the individual and the trust—that lower percentage.
Determinations
1207X(3) A determination under this section is to be in writing.
1207X(4) A determination under this section has effect accordingly.
1207X(5) In making a determination under this section, the Secretary must comply with any relevant decision-making principles.1207Y(1) For the purposes of this Act, if:
(a)during a particular derivation period of a company or trust, the company or trust derives an amount that is ordinary income; and
(b)an individual is an attributable stakeholder of the company or a trust throughout the attribution period that relates to the derivation period of the company or trust; and
(c)the attribution period begins on or after 1 January 2002; and
(d) if that amount:
(i) had been derived by the individual instead of by the company or trust; and
(ii) in the case of income accounted for on an accrual basis as mentioned in subsection (5)—had been so derived by the individual on a cash basis;
that amount would have been ordinary income of the individual; and
(e) that amount is not excluded income (see subsection (2));
then, in addition to any other ordinary income of the individual, the individual is taken to receive, during that attribution period, ordinary income at an annual rate equal to the individual's income attribution percentage of the amount worked out using the formula:
amount referred to in paragraph (a) x 365
number of days in the derivation periodExcluded income
1207Y(2) The Secretary may, by writing, determine that, for the purposes of the application of subsection (1) to a specified individual and a specified company or trust, a specified amount is excluded income.
1207Y(3) A determination under subsection (2) has effect accordingly.
1207Y(4) In making a determination under subsection (2), the Secretary must comply with any relevant decision-making principles.
…
1209E(1) The Secretary may, by writing, formulate principles (decision-making principles) to be complied with by him or her in making decisions under:(a) section 1207X; or
(b) subsection 1207Y(2); or
(c) …1209E(2) Decision-making principles are disallowable instruments for the purposes of section 46A of the Acts Interpretation Act 1901.
Applicants' Case
Mr and Mrs Backer conceded the factual matters as set out in paragraphs 4 and 5 above and also that Mr Backer was responsible for the operation of the both the company and the trust including the making of decisions about the investments made with the trust funds. They submitted that the decision was unfair in that it "doubled up" the amount that the respondent took into account as income for the purposes of applying the income test.
10. Mr Backer said that the trust had been established as a vehicle to sell the produce of the nut farm which they sold in 1998. The proceeds of the sale were paid into the trust and constituted his and Mrs Backer's money rather a loan to the trust. The money was to be used for investment purposes so that the trust could accumulate capital sufficient for them not to have to rely on any income support payments from the Commonwealth.
11. Mr Backer said that he had been advised by the same accounting firm since the trust was established and that the firm was responsible for preparing the taxation returns for the company, the trust, Mrs Backer and himself. He was referred to the trust balance sheet for the period ending 30 June 2001 (see T21/130) and agreed that these had been used for taxation purposes and that the amounts of $130,025.43 for himself and Mrs Backer were entered as loans and treated as such for taxation purposes. He was also referred to copies of documents that he and his wife had completed on 14 January 2002. These are entitled "Centrelink - Loan Agreements" and acknowedge the existence of a loan between each of them and the trust in the amount of $130,025.00. However, he submitted that this description did not reflect the reality of the character of the monies. Also, he said that he had completed the loan agreements under duress from Centrelink who had told him that, if he and his wife did not complete the forms, the monies would be treated as assets for the purpose of applying the asset test under the Act. This would have had the effect of reducing the level of their age pension payments.
12. Mr Backer conceded that there was a taxation advantage to him in having the monies in a trust and for the trust to own the shares. He said that this was not an immediate advantage but one which would be realised on the sale of shares in the form of reduced liabilty for capital gains tax. He said that he had obtained verbal advice from the Australian Taxation Office since the respondent's decision and had also discussed, with his accountant, strategies whereby the financial arrangements might be changed in order to avoid the impact of Part 3.18 of the Act. He said that these strategies included having the shares transferred to himself and Mrs Backer, repaying the loans, forgiving the loans and causing the trust to pay interest on the loans. He said that the advice was that there would be detrimental taxation effects if any of these approaches was adopted.
13. Mr Backer submitted that the reliance on the trust for investment purposes was a legal, logical and simple means of managing the financial affairs of himself and his wife and that it had been done for those reasons rather than for any purpose associated with taxation benefits.
Respondent's Case
14. Mr McQuinlan submitted that the monies provided to the trust by the applicants were loans and therefore financial assets under the Act and that, as such, the ordinary income from those assets is deemed to have been received by the applicants in the amounts of $5,488.47 for each of them.
15. Mr McQuinlan submitted that all of the qualifying criteria under Part 3.18 of the Act are met by Mr Backer and that, as a result, section 1207Y of the Act provides for the attribution of the trust's income, other than excluded income, to Mr Backer. He also submitted that there was no excluded income in Mr Backer's case and that attributed income in the amount of $15,216 had to be taken into account and that this was in addition to any ordinary income he received.
16. Mr McQuinlan also submitted that the applicants had been advised by Centrelink officers of means of overcoming the effects of Part 3.18 of the Act but that none of these had been adopted and he noted that the reason expressed by Mr Backer for this was the taxation impact that any such measure would have.
17. Mr McQuinlan also noted the reference by the applicants to the unfairness of the decision and submitted that the decision reflected the terms of the Act and the intention expressed in the explanatory memorandum which accompanied it.
Consideration
18. The level of payment of age pension is dependent on the application of an income test which is provided for in section 1064–E1 of the Act and, accordingly, it is necessary to determine the income levels of Mr and Mrs Backer. In this case, the respondent has determined that income comprised ordinary income in the form of deemed income and also ordinary income in the form of attributed income.
19. The proceeds from the sale of the applicants' farm were paid to the trust and the evidence is that these have been treated by the applicants as if they were loans for taxation purposes. They also completed the documents entitled "Centrelink – Loan Agreements" and each of those documents is signed by one of them as lender and by the other as the representative of the trust as borrower (see T21/137,137). In addition, both signatures are witnessed by a third party. Mr Backer claimed that these were completed under duress. However, his evidence was that the only persuasive mechanisms in place were those designed to overcome the effects that the assets test might otherwise have had on the rates of payment of their age pensions. That does not change the character of the monies in the trust account balance sheet where they are listed in the category of Beneficiaries Loan Accounts. I am satisfied that the amounts so described in that account, that is $130,025.43 for each of the applicants, constitute loans to the trust. On the basis of the entry in the trust account balance sheet, I am also satisfied that the loans have not been repaid in full. Under sub-section 9(1) of the Act, a loan that has not been repaid in full is a financial investment which, in turn, is a financial asset under that provision.
20. In evidence were extracts from the Guide to Social Security Law which is published by the respondent to provide assistance to those who administer the Act. The Tribunal, whilst not bound to apply policy guidelines of the kind referred to in the Guide (see Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409) may do so and, indeed, will usually apply the guidelines unless there are cogent reasons in a particular case for not doing so: see Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634 at 639-645; Re Dainty and Minister for Immigration and Ethnic Affairs (1987) 6 AAR 259 at 267; and Minister for Immigration, Local Government and Ethnic Affairs v Roberts (1993) 41 FCR 82 at 86. In this case, there is no material before the Tribunal to indicate that the Guide should not be applied.
21. Section 4.4.1 of the Guide is headed "General Provisions for Deeming" and it contains general information on the operation of the deeming provisions. Paragraph 4.4.2.10 refers to the manner in which deemed income from various kinds of saving imvestments is to be treated. In part, it reads:
"4.2.10 Deemed Income from Savings Investments
Summary
The following table describes the treatment of deemed income from savings investments, under the deeming provisions…
Type of Savings Investment Treatment of Deemed Income
Loans The value of a loan is the amount of principal outstanding. Loans made by customers to their own sole trader or partnership structures are NOT included as loans for deeming purposes. These are in effect 'loans to oneself' and are instead regarded as injections of capital and taken into account accordingly in the assessment of business income."
22. The exclusion of loans in that table arises where it is made to a sole trader or partnership structure because it is treated as a loan by the individual to him/herself. In a sense, the applicants treated the loan as one to themselves. However, the references in the table do not include loans made to a trust. The Guide make specific provision for loans of that kind. Section 1.1.F.135 of the Guide refers to certain loans as being financial investments. It reads:
"1.1.F.135 Financial investments
Examples:
loans made to individuals and business structures (ie private companies, trusts)"
23. I am satisfied that the reference in the table above to loans that are not included as loans for deeming purposes does not extend to loans to a trust and, accordingly, the applicants' loans to the trust in this case are financial investments and, therefore, financial assets for the purposes of the Act.
24. In accordance with sub-section 1077(2) of the Act, if one or both of the members of a couple have financial assets, the members of the couple are taken, for the purposes of the Act, to receive ordinary income on those assets. The calculation of the income taken to have been received, or deemed income, was made by the respondent in accordance with the deeming provisions in sub-sections 1077(3) and (3A) of the Act and this was done on the total value of the applicants' financial assets which included the loans, referred to above, and also funds invested in bank accounts. These latter amounts were not challenged by the applicants. The total was $262,532 and the application of the deeming provisions led to an amount of deemed income of $5,488.47 each for Mr and Mrs Backer (see T27/156 and exhibit 2/I).
25. I am satisfied that an amount of $5,488.47, as ordinary income in the form of deemed income, had to be taken into account in the application of the income test for the purposes of determining the level of age pension payable to each of the applicants.
26. Part 3.18 of the Act commenced operation on 1 January 2002. From the simplified outcome of the Part in section 1207 of the Act, it can be seen that it sets up a system for the attribution to individuals of the income of private trusts (see section 1207Y of the Act) where the trust is a designated private trust (section 1207P of the Act) and also a controlled private trust in relation to the individual who passes a control test or a source test (section 1207V of the Act). Further, the individual must be an attributable stakeholder of the trust (section 1207X of the Act).
27. Under sub-section 1207(1) of the Act, a trust is a designated private trust unless it falls into one of the categories listed in the provision. These are set out above and there is no evidence before the Tribunal that the trust in this case meets any of those requirements. I am satisfied that the trust is a designated private trust under the Act.
28. The control test is set out in sub-section 1207V(2) of the Act. Mr Backer will satisfy that test if he or his associate is the trustee of the trust. In accordance with sub-section 1207C(1) of the Act, the company in this case will be an associate of Mr Backer if it is sufficiently influenced by him and this has been conceded by him. I am satisfied that Mr Backer satisfies the control test and that the trust is a controlled private trust under the Act.
29. Under sub-sections 1207X(2) of the Act, Mr Backer will be an attributable stakeholder of the trust unless the Secretary otherwise determines. No such determinations are in place in that regard and I am satisfied the Mr Backer is an attributable stakeholder of the trust under the Act and that his income attribution percentage in relation to the trust is 100%.
30. This means that the terms of section 1207Y of the Act are applicable in this case and it provides for the attribution of the trust's income, other than excluded income, to Mr Backer. The trust's profit and loss account for the year ending 30 June 2001 records a net profit of $15,216. In Mr Backer's case, provided there is no excluded income, the amount to be attributed to Mr Backer as part of his ordinary income is $15,216.
31. Under sub-sections 1207Y(2) to (4) of the Act, the Secretary may determine, in compliance with relevant decision-making principles, that a specified amount is excluded income. The relevant decision-making principles were published in the Commonwelath Government Gazette on 18 January 2002 and are called the Social Security (Attribution of Income) Principles 2002 (see T5/36,37). There, circumstances are set out where double counting of attributable income may be avoided. However, these apply where there has been a distribution to a benificiary of the trust or the transfer of capital of the trust. I am satisfied that those circumstance do not arise in this case.
32. The ordinary income of Mr and Mrs Backer includes both the deemed income and the attributed income. I have noted their concern that the legislation has operated unfairly by introducing the concept of attributed income and by assessing it along with the deemed income level. However, the Act is clear that this must be done. Paragraph 1207Y(1)(e) of the Act requires that the attributed income be considered in addition to any other ordinary income of the individual.
Decision
The Tribunal affirms the decision under review.
I certify that the preceding 33 paragraphs are a true copy of the reasons for the decision herein of Mr R G Kenny, Member
Signed: Sarah Oliver
AssociateDate of Hearing 10 December 2002
Date of Decision 24 December 2002
The Applicants Appeared in Person
Solicitor for the Respondent Mr R McQuinlan, Departmental Advocate
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