Brown and Secretary, Department of Family and Community Services

[2004] AATA 48

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2004] AATA 48

ADMINISTRATIVE APPEALS TRIBUNAL      )

)No W2003/13 and W2003/14

GENERAL  DIVISION		)
Re		DOUGLAS BROWN GAIK BROWN

Applicants

And SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES

Respondent

DECISION

Tribunal Associate Professor GA Barton, Member

Date22 January 2004

PlacePerth

Decision The Tribunal affirms the decision under review.

......….(sgd G A Barton)..........

Member

CATCHWORDS

SOCIAL SECURITY – benefits – rate of disability support pension and carer payment – nature of loan by applicants to a trust – amount of loan outstanding.

SOCIAL SECURITY – benefits – rate of disability support pension and carer payment – ordinary income test – loans owed by a trust to the applicants – whether s 1083(1) of the Social Security Act 1991 operated to exclude a trust distribution from the applicants’ ordinary income.

Social Security Act 1991, ss 9(1) ‘financial asset’; ‘financial investment’; 1122; 1083(1)

Re Harris and Repatriation Commission [2001] AATA 905; (2001) 34 AAR 137

Re O’Brien and Secretary, Department of Family and Community Services [2002] AATA 848

Re Schulz and Secretary, Department of Family and Community Services [2003] AATA 770

REASONS FOR DECISION

22 January 2004 Associate Professor GA Barton, Member          

1.      The applicants, Mr Douglas John Brown and his spouse Mrs Gaik Lin Brown, receive social security payments under the Social Security Act 1991 (“the Act”).  Mr Brown receives a part Disability Support Pension (“DSP”) and Mrs Brown receives a part Carer’s Payment (“CP”).  The applicants are beneficiaries of a family trust estate.  They direct and control the corporate trustee which acquired the trust assets using moneys loaned from them.  The applicants contended that their rates of DSP and CP when they commenced receiving their benefits in 2001 should have been higher.  This was because the rate of benefit should be calculated by excluding a trust distribution from their income and by excluding the amount of a trust exchange loss from the amount of their outstanding loan to the trustee.

2. The Tribunal had before it the respondent’s Statement of Facts and Contentions and the “T documents” (T1-25) lodged by the respondent pursuant to s 37 of the Administrative Appeals Tribunal Act 1975. The applicants were not represented.  Mr Brown attended the hearing on behalf of himself and his wife.  He gave sworn evidence at the hearing and tendered full written submissions, which had not been served on the respondent’s advocate, Mr Chris Ward.  After the hearing Mr Ward and the applicants made further written submissions received by the Tribunal on 24 September 2003 and 13 October 2003 respectively.

3.      In 1994 the applicants settled $100 creating the Tajucca Family Trust Estate (“the trust”).  The applicants are beneficiaries of the trust and the directors and sole shareholders of the trustee, Tajucca Pty Ltd.

4.      Mr Brown applied for DSP in May 2001 and, at the request of the respondent, he provided further information which included the balance sheet for the trust as at 30 June 2000 (T6).  The balance sheet reflects total assets of $356,479.70, consisting of a rental property, shares and bank deposits, and current liabilities and beneficiaries loan accounts of $356,379.70, to produce net trust assets of $100.  The only current liability is a loan of $268,231.38 owed to the applicants.  The beneficiaries loan accounts total $88,148.32 of which $85,205.32 stands to the credit of the applicants and the balance of $2,943.00 is credited to their daughters Serena and Natalie Brown.  The profit and loss statement for the trust for the year ending 30 June 2000 shows that the net profit of $14,232.13 was distributed equally to the applicants (T6).  The trust income tax return for the 1999/2000 year reflects that the taxable income of the trust was distributed equally to the applicants (T6).

5.      At the start of his evidence the Tribunal enquired of Mr Brown how the investments of the trust had been financed and he testified that they were financed from contributions from the applicants that were understood to be loans.  He testified further that the loans were not documented and they were interest free.  He did not dispute the amount of the loans shown in the trust balance sheet as at 30 June 2000.  He estimated the amount to be about $350,000.  The actual amount, using the figures taken from the balance sheet, is $353,436.70.  Included in this amount is $141,000 deposited with a South African bank to take advantage of the favourable interest rates in that country (“the S.A. deposit”).  The effect of this deposit, and its subsequent withdrawal, for the purposes of the income and assets test, is a matter in contention between the parties.

6.      Mr Brown testified that the trustee made the S.A. deposit in 1995.  Interest was remitted to the trustee.  The S.A. deposit was rolled over a couple of times but was repatriated after a significant decline in South African interest rates.  According to Mr Brown’s written submission this occurred in two tranches, on 16 and 20 February 2001 at an overall exchange loss of $50,665.  His evidence is that the trustee paid the diminished principal of $90,335 to the applicants and they lent it back to the trustee for investment.

7.      On 21 June 2001 the respondent sighted and returned to Mr Brown a balance sheet for the trust as at 25 May 2001, the date Mr Brown applied for DSP (T8), showing current liabilities of nil.  The accompanying note says: “$225,363 transferred to trust company and balance of loan funds repaid.”  The Tribunal questioned Mr Brown on this aspect of the balance sheet.  He explained that the DSP application required information about monetary donations.  On reflection he concluded that the applicants’ contributions to the trust were more in the nature of gifts than loans and the balance sheet was drawn accordingly.

8. On 6 July 2001 the respondent assessed the applicants’ income and assets in the trust and trustee (T9). This assessment was made on the basis that the S. A. deposit was cashed in as to $71,846.11 on 19 February 2001 and $19,137.11 on 21 February 2001, to provide a total of $90,984.03, an amount slightly greater than the amount testified to by Mr Brown. The assessment, as explained to Mr Brown in the respondent’s letter of 9 July 2001 (T10) was made on the basis that for the 1999/2000 year and until 21 February 2001, the trustee owed the applicants an amount of $353,436.70. This was reduced to $262,452.67 on 21 February 2001 when the trustee paid the applicants the amount of the repatriated S.A. deposit namely $90,984.03. The balance of the loan was taken to be forgiven from 25 May 2001 when Mr Brown produced the balance sheet of the trust to that effect. The result of these determinations was a recommendation to the respondent’s Customer Service Officer dealing with Mr Brown’s application, that Mr Brown had a financial investment, as defined in s 9 of the Act, of $353,436.70 for the period 1 July 1999 to 21 February 2001, and of $262,452.67 for the period 22 February to 25 May 2001. Thereafter he had an assessable gifting amount of $252,452.67 (i.e. $262,457.67 less an allowable gifting amount of $10,000.00) to be assessed for a period of 5 years from 25 May 2001 because he had disposed of the trust loan at no consideration for the purpose of s 1123(1) of the Act.

9.      As noted by the Tribunal above, Mr Brown testified that the proceeds of the S.A. deposit were again loaned to the trustee for investment.  The balance sheet of 25 May 2001 shows current assets of $248,973.00, a decrease of $107,506.70 from the balance sheet of 30 June 2000.  The Tribunal finds, as accepted by the respondent, that the proceeds of the S.A. deposit were paid to the applicants and debited against their loan accounts.

10.     Mr Brown’s DSP was assessed on the basis that the applicants had assessable annual income of $25,442.62 made up of the trust distribution of $14,192.00 (the profit and loss statement of 30 June 2000 shows a net profit of $14,232.13) and deemed income of $11,251.62 from the assessable gifting amount of $252,452.67, the deposits in a couple of bank accounts ($13,252) and 900 AlintaGas shares valued at $2,934 (T12).

11.     Mr Brown wrote to the respondent on 10 July 2001 seeking to clarify certain matters (T11) and wrote again on 20 September 2001 applying for a review of the decision that the applicants’ income was $25,443.62 (T13).  In this letter he alleged that the income amount was too high on three grounds and so he was being paid DSP at a rate below the correct rate.  The issues he raised are:

(1)the payments of the repatriated S.A. deposit to the applicants reduced the loans to the trust by $141,000 (the amount invested) and not $90,984.03 (the amount repatriated);

(2)$205,000 of the assessable gifting amount was gifted to the trustee on 18 February 1997 and not on 25 May 2001; and

(3)the applicants’ income was double counted because the trust distribution and the deemed income are sourced in the same assets.

In a letter of 27 October 2001 Mr Brown complained to the respondent that his application for review had not been acknowledged or decided (T15).

12.     On 5 December 2001 Mr Brown wrote to the Social Security Appeals Tribunal (“SSAT”) appealing against the rate of DSP being paid to him (T17).  The Registrar sent the appeal to the respondent requesting that it be treated as a request for review by an Authorised Review Officer (“ARO”) (T18).

13.     Mr Brown testified that Mrs Brown applied for CP in July 2001.  In the reasons for decision of the SSAT of 17 December 2002 it is stated that Mrs Brown was granted CP in November 2001 and the Tribunal so finds.

14.     Mrs Brown is joined with Mr Brown in the ARO’s decision which was made on 7 February 2002 (T19).  The ARO confirmed that the rate at which DSP and CP was being paid to the applicants was correct.

15.     On 3 April 2002 Mr Brown lodged an appeal with the SSAT in respect of the ARO decision.  Mrs Brown lodged her appeal on 1 November 2002.  In a letter to the SSAT of 24 November 2002 Mr Brown conceded the respondent’s position that $205,000 of the assessable gifting amount was not gifted to the trustee in February 1997 (T2).

16. The SSAT, in its reasons for decision of 17 December 2002, found that the applicants had at no stage made gifts to the trustee and that when their entitlements under the Act commenced in 2001 they should have been assessed on the basis that their assets included an outstanding loan of $262,451 by the applicants to the trustee (T2) i.e. the balance owing after the trustee paid the applicants the amount of the repatriated S.A. deposit on 19 and 21 February 2001. The SSAT also found that s 1083(1) of the Act did not operate to exclude the trust distribution from the income of the applicants.

17.     The applicants raised two issues for determination by the Tribunal.  They contended that the amount of their outstanding loan to the trustee should not include the exchange loss of $50,016 on the S.A. deposit and that their income should not have included the distributions made to them from the trust.

Exchange Loss of $50,016 on S.A. Deposit

18. The rate at which DSP became payable to Mr Brown and CP became payable to Mrs Brown, depended on the extent to which the maximum payment rate was reduced for their income or their assets. The method statement in s 1064-A1 of the Act provided that the provisional annual payment rate is the lower of the income reduced rate and the assets reduced rate. The ordinary income test to work out the income reduction may include deemed income from financial assets (s 1078(3A) of the Act) and the assets test is based on the value of a person’s assets (s 1064-GI of the Act). A “financial asset” means ‘a financial investment’ which in turn means, amongst other things, ‘deposit money’ or ‘a loan that has not been repaid in full’ (“financial asset”; “financial investment”; s 9(1) of the Act). Section 1122 of the Act provides that if a person lends an amount after 27 October 1986, the value of the assets of the person for the purposes of the Act includes so much of that amount as remains unpaid but does not include any amount payable by way of interest under the loan.

19.     In calculating the applicants’ rates of DSP and CP the respondent took the position (based on the financial statements of the trust at the time) that the applicants loaned $141,000 to the trustee for the purposes of the S.A. deposit and that this loan was repaid in the amount of $90,984 in February 2001 leaving an unpaid balance of $50,016 which reflected the exchange loss that occurred when the S.A. deposit was remitted to Australia in February 2001.

20.     The applicants contended that the respondent’s position in relation to the S.A. deposit was incorrect because the loan of $141,000 had been fully discharged by the trustee when they were paid $90,984 in February 2001.

21.     The applicants submitted that the loan was fully discharged because they had assumed the risk of an exchange loss under the loan agreement with the trustee.  So when the S.A. deposit was repatriated and the trustee paid the Australian dollar amount of the principal to the applicants, the original loan of $141,000 was discharged in full and they had no legal recourse to the trustee for the shortfall.  The applicants explained that the reason for structuring the loan in this way was that the cost of hedging the S.A. deposit would have absorbed most of the interest derived from it.  They did not tender any written agreement, minute or note of the loan because their financial arrangements with the trustee were not formally recorded.

22.     The applicants control the trustee and they are the principal beneficiaries of the trust.  Subject to the trust deed, they manage the trust estate through the trustee.  The Tribunal does not question the fact that in their minds they have personally borne the exchange loss associated with the S.A. deposit.  The trustee, however, is a person separate from the applicants.  On the evidence before it, in particular the relevant financial statements of the trust, the Tribunal finds that the loan in relation to the S.A. deposit was made on terms no different from those of the other loans made to the trustee by the applicants.  So the Tribunal finds that the loan for the S.A. deposit was unpaid at the relevant time in the amount of $50,016 (see the conclusion to the decision of the Tribunal in Re O’Brien and Secretary, Department of Family and Community Services [2002] AATA 848 at paragraph 21). It follows from these findings that the Tribunal rejects the applicants’ related submissions that no part of the loan remained unpaid for the purposes of s 1122 of the Act and in relation to clause 4.6.5.65 (entitled ‘Loans that no longer exist’) of the respondent’s Guide to the Administration of Social Security Law or, alternatively, that the balance of $50,016 was disposed of in 1995 (when the loan was made) for the purposes of s 1127(a) of the Act.

23. The applicants made the further submission that the amount paid to the trustee for the S.A. deposit should have been classified by the respondent as ‘deposit money’, rather than a loan, for the purposes of the definition of ‘financial investment’, in s 9(1) of the Act and for the purposes of s 1122 of the Act. They supported this submission by citing the decision in Re Harris and Repatriation Commission [2001] AATA 905; (2001) 34 AAR 137.

24.     There are similarities between the facts in this matter and those in Re Harris and Repatriation Commission.  The applicants in that case were the beneficiaries of a family trust which they had financed by interest free loans.  The trustee distributed trust income to the applicants and made no allowance for interest owed on the loans owing to the applicants.  In applying provisions of the Veterans’ Entitlement Act 1986 not dissimilar from the provisions of the Act under consideration, the Tribunal ‘looked through’ the trust structure for the following reasons:

“25.     Because the beneficiary loan accounts are interest free there is an assimilation of the beneficiaries in their capacity as creditors with their capacity as beneficiaries;

26.      In these circumstances it would, in my view, be reasonable to characterise the beneficiary loan accounts as capital accounts so as to reflect the fact that the moneys described as loans are in fact more properly described as investment accounts.  It is the “investment” of these moneys in the trust that enables the derivation of the net income of the trust.  The loans are of the character of deposit moneys and should be defined as a financial investment and therefore a financial asset: s 5J(1).  Because the applicants have a beneficial interest in the assets of the trust so that they are the owners of the equitable rights in the assets they are not creditors per se and the loan accounts are in reality capital or deposit accounts albeit they are described as loan accounts.”

25. The applicants contend that the Tribunal should likewise look through the trust to the reality that the trustee acts as their investment agent and manager and that the S.A. deposit was for all practical purposes made by them. Whatever the commercial reality of the applicants’ position may be, in the absence of a provision in the Act to the contrary, it is not open to the Tribunal to ignore the legal reality of the trust. The trustee is a person separate from the applicants albeit that the trustee is controlled by them. There is no evidence whatsoever that the trustee agreed to act merely as agent or depositary of the applicants in relation to the $141,000 invested in the S.A. deposit. Furthermore, in the view of the Tribunal, that position is not reached simply because the applicants are both creditors and beneficiaries of the trust.

26. The Tribunal finds that the unpaid balance of $50,016.00 in relation to the S.A. deposit loan was required to be included in the value of the applicants’ assets pursuant to s 1122 of the Act to determine their respective rates of DSP and CP when they applied for these benefits in 2001. The Tribunal also finds that it was a financial investment for the purposes of s 9(1) of the Act because it was a loan that had not been repaid in full. So the applicants had financial assets of $262,452 being the amount of all loans owed them by the trustee after they were paid $90,984 in respect of the repatriated principal of the S.A. deposit.

Inclusion of Trust Distribution in Income

27. The applicants acknowledged that their ordinary income for the purposes of the ordinary income test included deemed income from their financial assets pursuant to s 1078 of the Act. Section 1083(1) of the Act excludes double counting by providing that any return on a financial asset that a person actually receives is taken, for the purposes of the Act, not to be ordinary income of the person. The net profit of the trust for the year ending 30 June 2000 (an amount of $14,232.13) was distributed to the applicants. The respondent included this amount in their ordinary income for the purposes of the ordinary income test pursuant to s 1073(1) of the Act. The applicants submitted that this should not have occurred because s 1083(1) of the Act operated to exclude the trust distribution from their ordinary income. Section 1083(1) can only have the effect contended for by the applicants if the trust distribution constituted an actual return on their financial assets.

28. The applicants received the trust distribution because they are beneficiaries of the trust and the trustee resolved to distribute the income of the trust to them pursuant to the provisions of the trust deed. The trust distribution related to their interest in the trust estate as beneficiaries and it did not constitute a return on their financial assets which are the loans they made to the trustee. The applicants made the loans on an interest free basis which means that they produced no actual returns that would have been excluded from ordinary income under s 1083(1).

29.     The applicants, relying on the decision in Re Harris and Repatriation Commission, made the submission that the Act be applied to reflect the commercial reality that the trust distribution was sourced in the investment of the loan moneys and was therefore a return on the loans because the applicants are the creditors and the beneficiaries of the trust. Legal reality is not dictated by commercial reality but by the transactions deliberately entered into by the applicants. As was stated in relation to the S.A. deposit it is not open to the Tribunal to look through the trust in the manner suggested by the applicants in the absence of a relevant provision in the Act requiring or permitting it to do so, see Re Schulz and Secretary, Department of Family and Community Services [2003] AATA 770 at paragraph 24. Although the facts and statutory provisions may be similar, the Tribunal respectfully declines to follow the decision in Re Harris and Repatriation Commission in applying the Act to the decision under review.

30.     The Tribunal finds that the trust distribution is not excluded from the ordinary income of the applicants by s 1083(1) of the Act and that it is correctly included in their ordinary income pursuant to s 1073(1) of the Act.

31.     The Tribunal affirms the decision of the SSAT in this matter made on 5 December 2002.

I certify that the 31 preceding paragraphs are a true copy of the reasons for the decision herein of Associate Professor GA Barton, Member

Signed:         ....................(sgd J Lim).........................

Associate

Date/s of Hearing  3 September 2003
Date of Further Submissions    24 September 2003 and 13 October 2003
Date of Decision  22 January 2004
Counsel for the Applicants       In person
Counsel for the Respondent     Mr C Ward 
Solicitor for the Respondent     The Service Recovery Team, Centrelink