Benton; Secretary, Department of Family and Community Services
[2004] AATA 942
•10 September 2004
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2004] AATA 942
ADMINISTRATIVE APPEALS TRIBUNAL )
) No N2003/1131
GENERAL ADMINISTRATIVE DIVISION ) Re SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES Applicant
And
WENDY BENTON
Respondent
DECISION
Tribunal REAR ADMIRAL A R HORTON AO Date10 September 2004
PlaceSydney
Decision The decision under review is affirmed.
[Sgd] REAR ADMIRAL A R HORTON AO
CATCHWORDS
SOCIAL SECURITY – pension, benefits and allowances – disability support pension (wife) – insurance policy maturing - bonuses on policy – whether part or all of bonus to be treated as income under s1073 of Social Security Act 1991 – whether exempt lump sum – relevance and application of departmental policy – policy change in July 1997 – bonuses assessed as exempt lump sum prior to 21 July 1997 – bonuses after 21 July 1997 assessed as income – decision affirmed
Social Security Act 1991 - s8(1), s8(2), s11, s39(1A), s1072, s1073
Act Interpretation Act 1901 – s15AD
McLaughlin and Secretary, Department of Family and Community Services [2003] AATA 298
Varcoe and Secretary, Department of Family and Community Services [2000] AATA 1002
Davies and Secretary, Department of Family and Community Services [2002] AATA 904
Reye and Secretary, Department of Family and Community Services [2003] AATA 1293
Clark and Secretary, Department of Family and Community Services [2003] AATA 1291
REASONS FOR DECISION
10 September 2004 REAR ADMIRAL A R HORTON AO 1. This is an application for review of a decision by the Social Security Appeals Tribunal (“SSAT”) dated 11 June 2003, which set aside a decision of an Authorised Review Officer (“ARO”) dated 23 October 2002 and determined that the difference between the maturity payment and the premiums paid by Mrs Wendy Benton prior to 27 July 1997 are not to be assessed as income and that the bonuses accrued after 21 July 1997 until the date of maturity, 25 September 2002, are to be taken into account in assessing income for the 12 months following that date.
2. At a hearing on 22 June 2004, Mrs Benton was represented by Ms Dianne Anagnos, solicitor, of Welfare Rights. Ms Hannelore Schuster, an advocate from the Centrelink Service Recovery Team, appeared for the Secretary, Department of Family and Community Services (“the Secretary”). The Tribunal took into evidence the documents provided by the Secretary pursuant to section 37 of the Administrative Appeals Tribunal Act 1975, (“the T documents”) and a ‘Statement of Facts and Contentions’ from each party. Mrs Benton gave oral evidence.
BACKGROUND AND EVIDENCE
3. Mrs Benton has been in paid employment as a casual schoolteacher “on and off” since 1981. Her husband suffers from multiple sclerosis and he has been in receipt of the disability support pension (“DSP”) since 1991. Mrs Benton has been in receipt of the disability support wife pension since 1991. There have been no new claims for that pension since about 1995, that is, it has been abolished or else is not available to new claimants. Should Mrs Benton lose this pension, there is apparently no other payment in lieu. Mrs Benton also contributes to a superannuation fund, the accrued benefit at this time being in the order of $14,000, this reflecting the nature of her casual employment.
4. On 25 September 1985, Mrs Benton took out an AMP Endowment policy. This policy matured on 25 September 2002, the value on maturity being $13,082.70. Mrs Benton paid $8,078.40 in premiums, the differential of $5,004.30 being bonuses accrued during the term of the policy. On or about 11 September 2002, Mrs Benton advised Centrelink, initially by telephone and then in person, of the imminent maturing of her policy. On 20 September 2002, Centrelink found that her policy was a “conventional life insurance policy” and as such, the differential of $5,004.30 was to be treated as assessable income over a period of 12 months from the date of maturity. The records show that Mrs Benton was so informed that day.
5. Prior to 21 July 1997, under Centrelink departmental policy, bonuses derived from insurance policies were not assessed as income. After that date, the policy was amended to state that “[o]n maturity, the difference between the maturity payment and the sum of the purchase price and premiums paid by the investor IS assessed as income for 12 months” (Guide to Social Security Law (“the Guide”) at 4.3.9.20) and “Bonuses on these policies are NOT assessed as on-going income during the term of the policy. However, any financial gain is assessed as income for 12 months following maturity. Financial gain is the difference between the:
· maturity payment, and
· sum of the purchase price and premiums paid by the investor” (4.4.410)
6. It was against this policy that Mrs Benton was advised that as of 25 September 2002, this income would be assessable for 12 months, but she would remain entitled to a part pension. Mrs Benton stated that she was only made aware of the 1997 change in policy once maturity was imminent. She agreed with the Secretary that the additional income in the year commencing 25 September 2002 resulting from this policy alone was not necessarily responsible for any reduction in pension; income from her work also being a contributing factor. But she considered that had she known of the policy change at the outset, it would have enabled her to consider her options, particularly when financial circumstances were difficult in 2000.
7. Mrs Benton sought review of this decision, predominantly basing her case on the decision in Varcoe and Secretary, Department of Family and Community Services [2000] AATA 1002, wherein Senior Member Dwyer determined that under section 8(11)(d) of the Social Security Act 1991 (“the Act”), part of the bonus earned by Mr Varcoe (which was the greater part of the total) prior to the policy change on 21 July 1997, was an “exempt lump sum” and therefore not to be treated as income..
CASE LAW
8. It is appropriate to summarise some recent decisions relating to the treatment of bonuses derived from insurance policies, as they differ from the reasoning in Varcoe. These decisions were drawn on by both parties as appropriate.
9. On 17 December 2003, Deputy President Muller handed down decisions in respect of the treatment of accumulated insurance bonuses in the matters of Karl and Anna Reye and Secretary, Department of Family and Community Services [2003] AATA 1293 and Kenneth and Nola Clark and Secretary, Department of Family and Community Services [2003] AATA 1291. In both cases, Deputy President Muller observed that:
“there is no dispute between the parties that the approach directed by the Guide [to Social Security Law at para 4.4.4.10 as earlier referred to] is appropriate for bonuses accumulated during a period when the investor is a recipient of social security benefits”.
10. Thus bonuses accumulated prior to the receipt of social security benefits are classified as assets, and hence are not income within the meaning of ss8(1) of the Act. Deputy President Muller did not consider tax to be a relevant issue in that scenario. Thus he followed, in principle, the decision in Varcoe that a certain component of accumulated bonuses are not be classified as income, albeit he did not relate that to a specific consideration of section 8(11)(d) nor to the change to Centrelink’s policy in July 1997.
11. In the matter of Davies and Secretary, Department of Family and Community Services [2002] AATA 904, Senior Member Purcell, whilst agreeing with Senior Member Dwyer in Varcoe, that “there is an inequality in the treatment of lump sum superannuation payments and lump sum payments on maturity of age insurance policies”, did not agree with the interpretation placed on section 8(11)(d), which she considered to be quite specific in referring to unexpected, non-anticipated amounts. She considered that insurance policy bonuses did not fit these criteria and hence in that matter, and in respect of the particular circumstances, affirmed the decision that the bonus was not an “exempt lump sum”.
12. Deputy President Wright QC in McLaughlin and Secretary, Department of Family and Community Services [2003] AATA 298 was of a similar opinion, contending that the Tribunal had incorrectly exercised the power in section 8(11)(d), and that the bonus in that case had been “received” and hence met the criteria of income under section 8 of the Act and, by virtue of section 1073, was assessable income.
LEGISLATION
13. Section 1064 - A1 sets out a method statement to work out a person's pension rate. Relevantly, step 5 therein provides that the rate of payment is subject to the income test:
“Step 5 Apply the ordinary income test using MODULE E below to work out the income reduction.”
14. Step 1 of Module E of the Rate Calculator requires that the person's ordinary income be ascertained:
"MODULE E - ORDINARY INCOME TEST
Effect of income on maximum payment rate
1064-E1. This is how to work out the effect of a person's ordinary income on the person's maximum payment rate:
Method statement
Step 1 Work out the amount of the person's ordinary income on a yearly basis."
15. The term "ordinary income" is defined in section 8(1) of the Act as follows:
"´Ordinary income' means income that is not maintenance income or an exempt lump sum."
16. "Income" is defined in section 8(1) as an income amount that is received by the person for their own use or benefit:
"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;
(whether of a capital nature not).”
17. Section 1073 of the Act, so far as is relevant, provides that if a person receives an amount that:
"(a) is not income within the meaning of Division IB or IC of this Part; and
(b) is not:
(i) income in the form of periodic payments; or
(ii) ordinary income from remunerative work undertaken by the person; or
(iii) an exempt lump sum.
the person is, for the purposes of this Act, taken to receive one fifty-second of that amount as ordinary income of the person during each week in the 12 months commencing on the day on which the person becomes entitled to receive that amount."
18. At issue is the question of whether or not the ´profit', (the difference between the maturity payment and the sum of the purchase price and premiums paid) of Mrs Benton’s life insurance policy, is to be treated as "ordinary income" under section 1073(1). If it is not "ordinary income" then the amount received cannot be applied, by operation of section 1073(1), to the rate calculators so as to affect the rates of payment.
19. That leaves the question of whether the profit is an "exempt lump sum". That term is defined in section 8(11) of the Act which provides:
“8(11) An amount received by a person is an exempt lump sum if:
(a) the amount is not a periodic amount (within the meaning of subsection 10(1A); and
(b) the amount is not a leave payment within the meaning of points 1067G-H20, 1067L-D16 and 1068-G7AR; and
(c) the amount is not income from remunerative work undertaken by the person; and
(d) the amount is an amount, or class or amounts, determined by the Secretary to be an exempt lump sum.
Note: Some examples of the kinds of lump sums that the Secretary may determine to be exempt lump sums include a lottery win or other windfall, a legacy or bequest, or a gift - if it is a one-off gift."
SUBMISSIONS
20. The Secretary submitted that in accordance with the definitions in section 8(1), the bonuses earned by Mrs Benton were properly an income for the relevant period as they were moneys received by her in September 2002. The Secretary submitted that the bonuses did not fall under the “exempt lump sum” discretion in section 8(11) as they did not conform to a class of amounts determined by the Secretary to be an exempt sum under section 8(11)(a), nor conform to the examples provided in the footnote to section 8(11).
21. The Secretary submitted that section 8(11) should be interpreted in light of the intention of the legislation and should the Tribunal decide to exercise a discretion in this matter, it should only do so on the basis that it “maintain the public policy requirement that public expenditure is directed to those who actually stand in the need of periodic support which income invalid pensions provide or to maintain the basic level of income to those who are unable to receive sufficient income to support these roles … In that sense, Department policy guidelines follow this approach of looking at the intent of the Act, and applying the rules accordingly.”
22. In respect of Mrs Benton’s claim that had she known of the policy change in 1997 she would have been able to consider her options, Ms Schuster stated that the Secretary did not know who had what type of policy and to her knowledge there had been no general mail out informing of the policy change. However, she believed the insurance industry had been made aware of the change. Further, if Mrs Benton had known of the policy change, she would still have been faced with the same income issue, which may have disadvantaged her further because of the then income reduction rates. Ms Schuster referred to the reasoning in Varcoe and submitted a contrary view to that of Senior Member Dwyer, stating that section 8(11)(d) did not lend itself to the notion of unjustness or unfairness. She also submitted that section 8(11)(c) should not be compared to superannuation policies and related policies which reflect the Government’s requirements for investment for retirement. She submitted that bonuses arising from insurance policies did not have that purpose or capability. She further submitted that the argument in Varcoe that the applicant might have been better off had he invested in other ways, did not justify exempting part of the lump sum.
23. Ms Schuster submitted that treating only so much of the life insurance bonuses as had accrued while the person was in receipt of a benefit or pension as income, was in itself inequitable and would disadvantage a long term beneficiary such as Mrs Benton. In Clarke and Reye,, Deputy President Muller noted that there was no dispute between the parties in respect of this interpretation. The Secretary further did not accept that some of the bonuses could be categorised as capital rather than income.
24. The Secretary agreed with the reasoning in Davies that an inequality in the treatment of lump sum superannuation payments and lump sum payments on maturity of age insurance policies is insufficient reason to treat only those bonuses received whilst in receipt of a benefit or pension as income. Senior Member Purcell went on to say in Davies that the discretion in section 8(11)(d), as exampled in the attached notes, relates to unexpected, non-anticipated amounts, a description not relevant to the assessment of insurance bonuses.
25. Ms Anagnos submitted that the approach adopted in Varcoe is the preferable approach in this matter, and that the central issue is whether section 1073 should have been applied to Mrs Benton. Ms Anagnos considered the Secretary’s narrow interpretation of section 8(11) to be at odds with section 39 (1)(a) of the Act which “roughly states that notes immediately following a section are to be read as part of that section” and section 15AD(a) of the Acts Interpretation Act 1901 which relevantly states:
“Where an Act includes an example of the operation of a provision:
(a) the example shall not be taken to be exhaustive”.
26. Ms Anagnos contended that the SSAT decision should be followed, observing that it applied Varcoe to the extent that all amounts derived as bonuses prior to the policy change on 21 July 1997 are to be considered as exempt lump sums under section 8(11) of the Act. She also submitted that to treat the return on insurance investment over a period of 17 years, in Mrs Benton’s case, as income received in just one year, was unfair, unjust and inequitable, as such a policy made no allowance for inflation. Such a policy also ignored the fact that Mrs Benton could have reassessed her financial position had she known of the 1997 policy change. Ms Anagnos further submitted that the inequality in treatment of superannuation and insurance policies was indeed a matter for consideration. This was particularly relevant in this case because as Mrs Benton was obliged to work on a casual basis in order to meet the carer requirements of her husband, she was unable to maximise her superannuation. In the event, she had only been able to accrue a small amount. It should also be taken into account that should Mrs Benton have lost her disability wife support pension, such a pension could not have been restored thereafter as no new claims for that pension nor one similar, are now being accepted.
27. Ms Anagnos submitted that the scope of the discretion in section 8(11) should not be constrained as suggested by the Secretary. The types of payment defined in section 8(11) are examples and should be seen as such. Those payments that have been determined as lump sums should not be seen as exhaustive, and there is no common theme within those types. Furthermore, the Act should be seen in a beneficial light.
28. In response, the Secretary submitted that the suggestion that Mrs Benton could lose her disability wife support pension was irrelevant, as this did not happen, nor is there any reason it would happen. Ms Schuster further emphasised that the legislation was not unfettered, but is reflective of a policy in place that states exactly what sort of sums will be exempt; insurance bonuses “simply do not fall within that general exclusion characteristic”. As to the list of lump sum exemptions at 4.3.2.35 of the Guide, these were reflective of one off matters given proper policy consideration.
CONSIDERATION AND FINDINGS
29. As earlier indicated, the relevant case law has reached different conclusions as to the interpretation of the issues, the legislation and the Guide. Varcoe considered that the part of the bonus earned before the policy change in 1997 was to be an exempt lump sum. In Reye and Clark it was determined that bonuses accrued prior to the date of receipt of social security benefits were part of assets and that only the component of bonuses received after that date were to be treated as income.
30. In Davies it was held that insurance bonuses did not fit the “unexpected, non-anticipated” criteria, and hence the bonus was not an exempt lump sum, irrespective of whether the person was a recipient of social security payments. McLaughlin agreed with Davies for similar reasons.
31. Mrs Benton’s circumstances differ materially from those of the applicants in the various cases already referred to. Her social benefit commenced in 1992 and she restricted her employment to casual teaching in order to meet the requirement to care for her husband. It follows, as has already been stated, that her ability to maximise her superannuation for later in life was extremely limited. But the issue at point is that if the Tribunal were to follow the decisions in Clark and Reye, in exempting only those bonuses arising outside the period of entitlement to a social security benefit, she would be further penalised. Of relevance is that unlike the matters in Clark and Reye,, such an arrangement was not agreed by the parties in this matter.
32. Section 8(11) of the Act is quite specific and requires that all parts of the subsection must be met. Ms Anagnos argued that the note to that subsection must be read as part of the subsection, vide section 39(1)(a) of the Act, (but went on to observe that the note cannot be taken to be exhaustive vide section 15AD of the Acts Interpretation Act 1901). In McLaughlin, Deputy President Wright agreed but on the basis that the note constrains the scope of the discretion. Thus, the issue before this Tribunal is whether the latter is the case.
33. Ms Schuster submitted that the bonuses “did not conform to a class of amounts …nor conform to the examples in the footnote to subsection 8(11)”. The note to section 8(1) refers to examples of the kind of exempt lump sums which include “a lottery win or other windfall, a legacy or bequest, or a gift – if it is a one–off gift.” It is thus argued that the bonuses received from an insurance policy do not fit the description of an “unexpected and non-anticipated amount”, a term used by Senior Member Purcell in Davies, who stated that such a description does not apply to this type of product. With respect, the Tribunal is of the opinion that this view must be considered against the myriad of lump sums determined to be exempt by the Secretary under section 8(11) of the Act, as listed in 4.3.2.35 of the Guide.
34. The Tribunal accepts the submission of the Secretary that the exempt lump sums identified in that list resulted from policy consideration and in many cases from legislation particular to the issue. Notwithstanding, in the view of this Tribunal, some do not seem to conform to the notion of being unexpected and non-anticipated, or one - off lump sums. For example, whilst the Dairy Exit Payment has a limited life, it is in place as a payment to be considered by individuals or corporations when assessing their options as to whether to continue in the industry. Should the decision be taken to leave the industry, then the Dairy Exit Payment follows. It is a once only payment, but its availability in the appropriate circumstance is well promulgated: it is not an unexpected payment. If that interpretation is correct then the Dairy Exit Payment, for example, does not meet the restricted criteria under the note to section 8(11) as sought by the Secretary, nor the directive at 4.3.2.30 in the Guide, which states that the characteristic of a lump sum not to be treated for income purposes “cannot be reasonably expected to be received or necessarily anticipated”.
35. It can be argued, with respect, that a payment of that nature is evidence that the Secretary has seen fit to expand the examples somewhat narrowly defined in the note to section 8(11). That being the case, it is not unreasonable, in the view of this Tribunal, to consider insurance bonus payments in the same light. The Tribunal decides that in principle, the bonus payments to Mrs Benton meet the criteria under section 8(11), in that they are not a periodic amount, nor leave payment, nor income from remunerative work, but an amount determined to be an exempt lump sum. The issue to be determined is whether that applies to the total bonuses accrued over the life of the policy, or whether that exemption can only apply for the period when Mrs Benton was not in receipt of a social security payment, and/or the period prior to the change of policy in 1997.
36. The inequity in the procedure as adopted in Clark, Reye and Varcoe is that Mrs Benton would be “penalised” to a far greater extent, having been in receipt of social security payments since 1992, that is, for much of the duration of the policy. The Secretary endorsed this view but of course, was taking the line that the whole bonus payment should be treated as income, an argument that the Tribunal does not agree with. Suffice that given that position by the Tribunal, there is no logical explanation to support the notion. Further, and to reiterate, the Secretary submitted that any discretion by the Tribunal should only be exercised to maintain public policy requiring that “public expenditure is directed to those who actually stand in the need for periodic support which income invalid pensions provide or to maintain the basic level of income to those who are unable to receive sufficient income to support these roles. (Tribunal emphasis)” The evidence before the Tribunal is such as to lead to a conclusion that the circumstances of Mrs Benton meet those criteria.
37. The remaining issue is whether the exemption of the lump sum should continue beyond the date at which policy changed, that is 21 July 1997. The Secretary was unable to confirm or otherwise that this change had been made public at that time. (Ms Schuster’s point that it would be difficult for the Secretary to know who indeed had relevant policies, and should be advised, is well taken). The Secretary had reservations that policy holders would consider the issue of bonuses being assessed as income when taking out such a policy, but agreed with the Tribunal that there was no evidence to support this view. In McLaughlin, Deputy President Wright stated at paragraph 32 that details of the policy were “made available to the public in a Centrelink publication dated March 2000”. Assuming this was the first occasion of so doing, there is an elapsed time of almost three years from the date of the decision.
38. The evidence from Mrs Benton is that she was not aware of this policy change, which may have given her the opportunity to review her financial situation had she known, until advised of the situation on 20 September 2002, when the policy was maturing.
39. As to the application of this policy, the Tribunal follows the reasoning in Varcoe, wherein Senior Member Dwyer observed that “there are strict rules on when legislation is given a retrospective effect. It seems that an unadvertised change in policy should not lightly be given a retrospective effect. I consider that only bonuses accrued after 21 July 1997 should be treated as income under section 1073 ….” It may well be argued that the policy could not morally be applied until promulgation of that policy change had been effected. The Tribunal believes this could be a logical and defensible approach to the matter, particularly given that the policy prior to 21 July 1997 stated that “bonuses on these (conventional) policies are not assessed as income either during the term of the policy or on maturity” (McLaughlin at paragraph 31 refers). As determined by the Secretary on 20 September 2002, the policy held by Mrs Benton was a “conventional life insurance policy”.
40. Whether Mrs Benton was aware of the pre 1997 policy is not relevant, she was bound by it at that time. So too, therefore, she is bound by the post 1997 policy and hence the Tribunal finds that bonuses accrued after 21 July 1997 should be treated as income under section 1073.
41. The Tribunal therefore affirms the decision under review, that is, the difference between the maturity payment and the premiums paid by Mrs Benton prior to 21 July 1997, (the accrued bonuses) are not to be assessed as income. The bonuses accrued after 21 July 1997 until the date of maturity, 25 September 2002, are to be taken into account in assessing income for the 12 months following that date.
I certify that the 41 preceding paragraphs are a true copy of the reasons for the decision herein of Rear Admiral A.R Horton AO, Member
Signed: A. Krilis Associate
Date/s of Hearing 22 June 2004
Date of Decision 10 September 2004
Solicitor for the Applicant Ms Dianne Anagnos
Advocate for the Respondent Ms Hannelore Schuster
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