BAIRD and SECRETARY, DEPARTMENT OF FAMILIES, HOUSING, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS

[2009] AATA 987

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 987

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2009/2783

GENERAL ADMINISTRATIVE DIVISION		)
Re		RICHARD BAIRD

Applicant

And SECRETARY, DEPARTMENT OF FAMILIES, HOUSING, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS

Respondent

DECISION

Tribunal Ms G Ettinger, Senior Member

Date23 December 2009

PlaceSydney

Decision The Tribunal affirms the decision under review.

..................[sgd]............................

Ms G Ettinger     
  Senior Member

CATCHWORDS

TRUST – Applicant inherited moneys from his sister via her will – Established a trust and  invested the money – Applicant says it is for the benefit of his children aged 18 and 20 so that they can have the money when they reach the age of 25 – Applicant says he has had no benefit from the moneys as he does not have a cheque book, and does not access the funds -– However he has full control and meets the source test for the trust – DSP accordingly reduced – Decision under review affirmed.

Social Security Act 1991 ss 8, 94, 117, 1064, 1207, 1207P, 1207V, 1207X, 1207Y, 1208E

Social Security and Veterans’ Entitlements Legislation Amendment (Private Trusts and Private Companies – Integrity of Means Testing) Bill 2000

Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2000

Elliot v Secretary, Department of Education, Employment and Workplace Relations (2008) 103 ALD 318

Re Backer and Secretary, Department of Family and Community Services (2002) 72 ALD 491

Re Edstein and Secretary, Department of Family and Community Services (2004) 79 ALD 88

Re Geidans and Secretary, Department of Family and Community Services (2003) 75 ALD 768

Re Secretary, Department of Employment and Workplace Relations and Chapman [2005] AATA 1161

REASONS FOR DECISION

23 December 2009 Ms G Ettinger, Senior Member

1.      Mr Richard Baird, the Applicant in these proceedings is aggrieved because having received approximately $400,000 from the sale of his sister’s house as the sole beneficiary of her will, he established the Richard Baird Family Trust (the Trust), and invested approximately $300,000 in the Trust, the consequence of which was that his Disability Support Pension (DSP) was reduced. He said that he made the decision to establish the Trust with the advice of his accountant and a solicitor on behalf of his children aged 18 and 20, so that they would have access to the funds when they reached 25 years of age.

2.      Mr Baird’s argument is that he has serious health problems, and whilst he acknowledges that he is the sole trustee, and is a beneficiary of the Trust, he does not use any of the money in it, and that he therefore should not have his DSP reduced.

3.      I am satisfied that Mr Baird is a witness of truth, and that he acted properly in disclosing the inheritance to Centrelink. However in regard to the Trust, I preferred the Respondent's argument that Mr Baird satisfies the “control test” in regard to the Richard Baird Family Trust (the Trust). He is the sole trustee and also satisfies the “source test”. Given the evidence I am satisfied that it is appropriate to attribute the Applicant with 100% of the assets of the Trust. This means that Mr Baird’s income and assets of the Trust are taken into account in full, and his DSP accordingly reduced. The decision under review must be affirmed. My reasons follow.

ISSUE BEFORE THE TRIBUNAL

4.      The issue before the Tribunal was whether Mr Baird’s Disability Support Pension (DSP) must be reduced due to the attribution of income and assets from the Richard Baird Family Trust (the Trust).

THE RELEVANT LEGISLATION

5.      The relevant legislation is the Social Security Act 1991 (the Act), the Social Security and Veterans’ Entitlements Legislation Amendment (Private Trusts and Private Companies – Integrity of Means Testing) Bill 2000 and the Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2000, which are referred to in these Reasons for Decision.  

BACKGROUND AND THE EVIDENCE

6.      Mr Baird told me that he suffers a number of health conditions, and was granted DSP on 26 September 1991. He is very concerned about his health and needs to expend weekly funds for medication and treatment, particularly for his back. He gave the Tribunal a document from his doctors dated 15 November 2009, (Exhibit A2), which lists his conditions. Mr Baird said that he spends $70 a week on massage and $78 a week on medication, and, with the reduction in DSP, is suffering hardship.

7.      Mr Baird told me that he went through a divorce in 1998 which caused him emotional problems, and that it was only in 2002 that he realised what was wrong with him. He feels he has had a “rough deal” in regard to his dealings with hospitals and certain doctors. I have noted that by way of background, although it is not strictly relevant to the claim before me.

8.      Mr Baird told me that his sister died, and in a will dated 26 May 2008, she bequeathed the whole of her estate, both real and personal, to him. Mr Baird told me that he did work on her house to the value of approximately $20,000. He sold it for approximately $400,000, and also applied some of the money for his sister’s funeral, to buy a car for his son, and to pay off a debt on his daughter’s credit card. He said that he deposited approximately $50,000 into his Commonwealth Bank account, out of which he lent his friend $6,000, and otherwise assisted his daughter. On 14 November 2008, after seeking advice from his solicitor and accountant, but without consulting Centrelink about the implications for his DSP, he arranged for the creation of the Richard Baird Family Trust and invested $300,000 in it.

9.      There is no dispute that Mr Baird is the sole trustee of the Trust, which he told me he set up for his children. He agreed no one else invested any money in the Trust, that he is the only person authorised to operate the Trust and its account, and agreed that he could make a distribution from it at any time. Both he and the children are the Trust's beneficiaries. When asked at the Tribunal, Mr Baird agreed that he had no legal obligation to invest the $300,000 in the Trust, added however that it was to honour his sister’s wishes that the children be cared for. Mr Baird told me this was what his sister had said he should do, although he acknowledged it was not stipulated in the will.   Mr Baird said that he had no intention of touching the Trust moneys, and has not used any to date.

10.     In January 2009, Mr Baird notified Centrelink about the money he inherited, and the creation of the Trust, and at Centrelink’s request, the Applicant provided further information about the Trust.

11.     On 12 March 2009, Centrelink decided to reduce the rate of DSP payable to the Applicant due to his interest in the Trust. The Centrelink Complex Assessment Officer found that the Applicant was the appointer and trustee of the Trust set up on 14 November 2008 with funds inherited from his sister, and that the Applicant and his two children were the beneficiaries of the Trust.  

12.     At the relevant date, the Trust had a Commonwealth Bank account with a balance of $300,238 at an interest rate of 4%, deriving income of $12,009. Centrelink then issued a notice to the Applicant formally advising him of his new (reduced) rate of DSP, and listing the Applicant's annual income as $13,549.87. Mr Baird is aggrieved because he says that he had advice which indicated if he bought a house instead of holding the funds in the Trust, he could receive his DSP in full.

13.     Mr Baird sought review of the decision of Centrelink to the Authorised Review Officer who affirmed the initial decision. Mr Baird then exercised his right to appeal to the Social Security Appeals Tribunal (SSAT), and ultimately to this Tribunal.

CONSIDERATION OF THE LEGISLATIVE ENVIRONMENT & CONCLUSIONS

14.     The facts are not in dispute; I have noted them in the paragraphs above, and accept them as provided to me. I have considered the facts in this case, the submissions and the legislation, being the Social Security Act 1991, the case law, and the Explanatory Memorandum to the Social Security and Veterans’ Affairs Legislation Amendment (Private Trusts and Private Companies – Integrity of Means Testing) Bill 2000 which amended the Act when it came into effect on 1 January 2002. The amending Act sets out the means test treatment of private companies and private trusts.

15.     The Explanatory Memorandum for the amending legislation states that its purpose was to ensure that under the means test, assets in private companies and private trusts are treated on a comparable basis to assets held directly, since it was considered that the previous provisions with respect to valuing assets did not extend to trusts. Now, it achieves this aim by attributing, in specified circumstances, the assets or income of private companies and trusts to individuals.

16.     Section 8 of the Act defines income as “an income amount earned, derived or received by the person for the person's own use or benefit”. The term “asset” is defined in the Act to mean “property or money (including property or money outside Australia)” (section 11 (1) of the Act).

17.     The Outline of the Bill provided by the Explanatory Memorandum explained its aim:

This measure aims to ensure that customers who hold their assets in private companies or private trusts receive comparable treatment under the means test to those customers who hold their assets directly. The assets and income of the structure will be attributed to the person or persons who control the company or trust, or to the person or persons who were the source of the capital or corpus of the company or trust.

18.     It continued:

Social security payments are targeted to those most in need through assets and income tests - together known as ‘the means test'. The means test is the fairest way to ensure that the limited taxpayer funds available for social security expenditure go to those in greatest need.

The assets test is based on the principle that people with substantial assets apart from their home should use those assets either directly or to produce income to meet day to day living expenses before calling upon community resources for income support through the social security system.

A key principle of our social security system is that people with similar levels of private resources should receive similar pension or allowance payments. However, the existing means test treatment of private trusts and private companies is inconsistent with the principles underlying effective targeting of social security payments. Under current social security law, assets and income are only attributed to a person where legal ownership or a fixed right to income is established. This means that private trusts and private companies may be used to hold and control assets and/or income outside the scope of the means test.

The key issue for means testing purposes is: to whom the assets and/or income of a structure should be attributed? At present, assets held by individuals, sole traders or partnerships are taken into account. Similarly, investments in public companies and public unit trusts currently are assessed as financial assets of the customer. It is with structures legally separate from, although controlled by, the customer, where the current means test does not consistently attribute assets and/or income to reflect a customer's real circumstances.

19. As to the Richard Baird Family Trust; there is no dispute that Mr Baird is the sole trustee. No one else has invested any money in the Trust, and he is the only person authorised to operate the Trust and its account. Both Mr Baird and his children are the Trust's beneficiaries, and Mr Baird could make a distribution from the Trust at any time. I am satisfied from the evidence, and consideration of section 1207P of the Act, that the Trust is a designated private trust as it does not comprise of units held by 50 or more persons, (section 1207(1)(a) of the Act), and that it is not a complying superannuation or an excluded trust.

20.     I moved then to consider whether the Applicant “controls” the Trust in the terms of the legislation. Section 1207V(1) of the Act states that a person may be assessed as having “control” over a private trust in one of two ways, either through a “control test”, or a “source test”.

21.     In that regard I was referred by Mr Lozynsky who represented the Respondent, to the Federal Court decision of Elliot v Secretary, Department of Education, Employment and Workplace Relations (2008) 103 ALD 318, and noted that the Court there held that the term "control" signifies control that would permit the individual alone, or with associates, to control the Trust income or capital, so that the individual alone, or with associates, can enjoy economic benefits. In Elliot, the Court held that the Elliotts, acting with or without their daughter, did not have any legal or practical capacity to take control of the Trust, and that they therefore should not be attributed with the beneficial interests in the corpus or income of the trust fund which were capable of aggregation.

22.     However, Mr Baird will be considered to satisfy the “control test” (section 1207V(2)), as there is no dispute that the evidence indicates he is the sole trustee of the Trust. Unlike the Elliotts in Elliot, he holds the power to undertake and control the main tasks in relation to the Trust including how investments should be made, that is, he can, and does, control the Trustee, he can change trustees or the terms of the Trust which he set up with himself and his children as beneficiaries, and he can in fact determine and control distributions from the Trust. Accordingly I am satisfied that Mr Baird satisfies the “control test” pursuant to section 1207V(2) of the Act.

23.     Satisfying the “control test” would in itself be sufficient to find that Mr Baird should be attributed with the assets of the Trust, the consequences of which would be an impact on his DSP payments. However, for the sake of completeness I have also considered if the Applicant satisfies the “source test” pursuant to section 1207V(3) of the Act. Section 1207V(3) states that a person passes the “source test” if they transferred property or services to the trust after 9 May 2000, and that transfer was made for “no consideration” or for consideration less than the “arm's length” amount.

24.     I have already stated above that there is no dispute Mr Baird was the sole beneficiary of his sister's entire estate, and that he sold her house for approximately $400,000, $300,000 of which he later transferred to the Trust he established. I am satisfied that the funds were transferred to the Trust after May 2000, and that accordingly, Mr Baird satisfies the “source test”.

25. The next section of the Act which must be considered in this context is section 1207X which states that if a trust is a controlled private trust in relation to an individual, which the Trust in this case is, then the individual is an attributable stakeholder of the Trust unless otherwise determined by the Secretary. Thus Mr Baird’s attribution percentage is taken to be 100% of all assets held by, and all income distributed by the Trust, unless otherwise determined by the Secretary.

26. Section 1207X(5) of the Act states that, when examining whether or not an individual, in this case Mr Baird, should be attributed with 100% of the assets of the Trust, a decision-maker must comply with any relevant decision-making principles. These relevant principles are contained within a disallowable instrument, the Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2000 (the Principles). The decision-maker, and the Tribunal standing in his shoes should have regard to one or more of the following circumstances, when making a decision regarding attribution. They are:

·circumstances affecting the relationship with the company or trust;

·contribution to company or trust;

·past benefit from distributions by company or trust;

·future benefit from distributions by company or trust;

·benefit from assets and income of trust

·existing attributions to individual (and whether they are stakeholders of any other trusts); and

·other circumstances.

27.     As to Mr Baird, I have already discussed his situation above. In considering the Principles, I am satisfied that he is the sole trustee of the Trust, the sole source of the funds in the Trust, and controls the Trust, as well as being the sole beneficiary of his sister’s estate. It was Mr Baird’s sole decision to invest the moneys in the Trust which, based on his sole decision making power, has to date made no distributions.

28.     In support of his submission that Mr Baird should be attributed with 100% of the assets of the Trust, Mr Lozynsky submitted that in Re Geidans and Secretary, Department of Family and Community Services (2003) 75 ALD 768, the Tribunal observed that Mr Geidans had taken progressive steps to divest himself of control of the company, and that he had various health conditions that rendered him unable to act as he had previously. Further, Mr Geidans' daughter was also a co-director of the company, yet the Tribunal had found no basis to vary the asset attribution percentage to less than 100 percent.

29.     I am persuaded by the Respondent’s submissions, and am mindful of Mr Baird’s situation, as discussed above. I am satisfied regarding Mr Baird’s control of the Trust pursuant to the legislation, and note also that I am also satisfied that he passes the “source test”. I find that taking into account the Principles, it is the correct or preferable decision to attribute Mr Baird with 100% of the assets of the Trust pursuant to section 1207X(2) of the Act.

30.     I am mindful that at T8/53, there is a Centrelink file note in which the officer records a conversation with Mr Baird, encouraging him to seek assistance from the Centrelink financial advice system. The officer recorded as follows:

Cus attended FIS appt to discuss assessment of TRUST as he does not agree it should be taken into account and redcue (sic) his pension.

… I explained assessment of Trust to him under both income and assets test. Monies in Trust has been invested in IBD. I explained that actual interest received will be assessed and reviewed on a financial year basis.

… I expl the income and assets tests, the thresholds and limits…adv that he is paid under the income test due to Assesable (sic) income of $12009 pa from trust and deeming.

… I expl that the higher the Income from the trust the lower the pension will be but expl actual interest received from savings outside Trust are not taken into account as only deeming rates apply.

Such advice may well be of benefit to Mr Baird, and I encouraged him to seek the assistance offered. 

What this means in terms of Mr Baird’s DSP

31. It is not in dispute that Mr Baird suffers a number of health conditions, and was granted DSP on 26 September 1991 (section 94 of the Act). Section 117 of the Act states that the rate of DSP is calculated in accordance with the pension rate calculator contained in section 1064 of the Act. Section 1064 requires that a person's rate of DSP be worked out by applying income reduction and assets reduction tests. The rate of pension is the lesser of the rates determined under the income test and the assets test. The ordinary income and assets of the Trust can also affect the rate.

32. In order to come to a decision regarding Mr Baird’s DSP entitlements, I had to next consider section 1207Y of the Act which provides for the attribution of the Trust's income, other than “excluded income” to him. What happens is that the ordinary income of the Trust (unless it is excluded income), must be added to the attributable stakeholder's ordinary income for purposes of the calculation of DSP. I have already held above that Mr Baird is an attributable stakeholder of the Trust, and that his income attribution percentage is 100%. Accordingly, pursuant to section 1207Y(1)(e), the attributed income must be considered in addition to any other ordinary income of the Applicant when determining the rate of DSP payable to him.

33.     The Secretary, and the Tribunal standing in his shoes, may determine pursuant to the Principles, that a specified amount is excluded income. The Principles provide for circumstances where double counting of attributable income may be avoided, where there has been a distribution to a beneficiary of the trust or the transfer of capital of the trust. That hasn’t occurred in Mr Baird’s case because, as he has told me, he does not intend to distribute from the Trust or use the money.

34. I noted that section 1208E of the Act provides that the value of an asset of a trust be added to the value of an attributable stakeholder's assets for pension purposes. As Mr Baird is an attributable stakeholder of the Trust, his asset attribution percentage is 100%. This means that the value of Trust's assets must be added to the value of the Applicant's own assets when determining the Applicant's rate of DSP.

35.     I am mindful of ReSecretary, Department of Employment and Workplace Relations and Chapman [2005] AATA 1161 referred by Mr Lozynsky who submitted that the AAT there addressed the Applicant’s concerns about “double counting”, when it  stated at [37]:

I respectfully agree with the interpretation of the relevant sections of the Act given by the Tribunal in the decision of Re Backer (supra). I understand Mr Chapman's concerns about 'double counting', however I am satisfied there is no discretion available to the Tribunal in the application of this legislation. I find that the ordinary income of Mr Chapman includes both the attributed income and the deemed income. I find that none of the income can be considered as excluded income for the purposes of the Act.

36.     Mr Lozynsky submitted that as in ReSecretary, Department of Employment and Workplace Relations and Chapman, Mr Baird is attributed with 100 percent of the assets and income of the Trust. He stated that at the time of the original decision, the value of the assets of the Trust was $300,238.93 and the annual deemed income of the Trust was $12,009 ($300,238.93 x 4%). He submitted that both amounts were added to the value of the Mr Baird’s own assets and income (which Centrelink had calculated and included assets such as motor vehicles and household contents), in order to determine his rate of DSP. This had resulted in Mr Baird exceeding the threshold figure for the maximum rate of DSP, and his pension was accordingly reduced.

37.     Mr Lozynsky contended that the social security system's purpose is to provide financial assistance to persons whose means are limited. He submitted that even before the 2000 amendments, the Act was concerned to ensure that persons who had assets and income beyond a certain level should not be recipients of benefits, and that they should utilise the means available to them, as he submitted Mr Baird should.

38.     In that regard Mr Lozynsky also referred me to the case of ReEdstein and Secretary, Department of Family and Community Services (2004) 79 ALD 88 where the Tribunal addressed similar issues. Mr Edstein argued, as Mr Baird does, that he did not derive any benefit from the Trust nor did he receive any income from the Trust. The Tribunal there stated at [13]-[16]:

Mr Edstein says if he is an attributable stakeholder, then he should not have any income attributed to him because he does not intend taking any money out of the trust by way of distribution or otherwise. He has not taken money in the past, and does not derive any benefits other than the gratification that might accompany control.

After having regard to the Principles, one is compelled to ask the question: if Mr Edstein is not “in practice” taking any money out of the trust, why not effectively ignore the income derived by the trust when calculating his entitlements to an aged pension?

I think the answer lies in the policy underlying the Act. That policy was explained in the second reading speech of the Minister when the amendments to the Act incorporating the provisions dealing with trusts were introduced to parliament (Commonwealth, Hansard, House of Representatives, 17 August 2000, at p. 19226). The Act and the extrinsic material make it clear the social security system is intended to provide relief to those genuinely in need. If one does not need help, if one is able to look after one's self out of one's own resources - one must not look to the taxpayer for assistance. One should provide for one's self as far as possible. The system is designed to assist the hungry, not provide everyone with a free lunch.

Articulating the policy in those terms might seem harsh in so far as Mr and Mrs Edstein are concerned. Their intentions are admirable. The trust income is being used at their direction to assist family members, in need. But they are consciously refraining from using funds that might otherwise be available for their own maintenance. To that extent, the taxpayer is subsidising their charitable activities. That is inconsistent with the policy and scheme of the Act. I think the Secretary is right to determine the applicant is an attributable stakeholder. The respondent is also right not to reduce the amount of income that is attributed to Mr Edstein.

39.     In summary, the Respondent submitted that the Applicant passes the “control test” in relation to the Trust as he is the trustee of the Trust, and attributable stakeholder of the Trust. In such circumstances, Mr Lozynsky argued, the value of the assets and income of the Trust are attributable to him. Therefore, the decision to reduce Mr Baird’s rate of DSP must be affirmed.  

40.     I am persuaded by the argument as put by Mr Lozynsky and as articulated by the Tribunal in Edstein.  From the evidence before me, the legislation, the Principles and the case law, I can only conclude that Mr Baird has “control” over the private Trust he created with the best of intentions, (but without regard to the financial consequences for him), to provide for his children when they become 25 years of age. He not only has “control” in terms of the legislation, but is caught by the “source test”.  As noted above, Mr Baird’s income and assets of the Trust, notwithstanding he does not draw on that money, may not be characterised as excluded income and must be taken into account when calculating his DSP.  He is attributed with 100% of the assets and income of the Trust. Mr Baird’s DSP payment is accordingly reduced. 

DECISION

41.     The Tribunal affirms the decision under review.

I certify that the 41 preceding paragraphs are a true copy of the reasons for the decision herein of Ms G Ettinger, Senior Member

Signed: .....................[sgd].......................................

Associate

Date of Hearing  30 November 2009
Date of Decision  23 December 2009
The Applicant  Self represented
Respondent’s Representative       Mr G Lozynsky