Bruce Stronach (Applicant in 2014/4874) Helen Stronach (Applicant in 2014/4875) and Secretary, Department of Social Services
[2015] AATA 186
•25 March 2015
[2015] AATA 186
Division GENERAL ADMINISTRATIVE DIVISION File Number(s)
2014/4874-4875
Re
Bruce Stronach
(Applicant in 2014/4874)
Helen Stronach(Applicant in 2014/4875)
APPLICANTS
And
Secretary, Department of Social Services
RESPONDENT
Decision
Tribunal Senior Member CR Walsh
Date 25 March 2015 Place Perth The Tribunal affirms the decision under review.
....(Sgd) CR Walsh................................
Senior Member CR Walsh
Catchwords
SOCIAL SECURITY – age pension cancelled - disability support pension cancelled – designated private company – controlled private company – applicants “attributable stakeholders” – attribution of “ordinary income” to applicants – combined annual income of applicants above the allowable limit – derivation period – attribution period - decision under review affirmed
Legislation
Social Security Act 1991 – Pt 3.18 –s 8 – s 23(1) – s 44 – s 1064 – s 1207N(1) – s 1207Q(1) – s 1207R – s 1207– s 1207X – s 1207X(1) – s1207X(5) – s 1207Y – s 1207Y (1) - s 1208 – s 1208(3) – s 1208A – s 1208B – s 1208C – s 1208D
Social Security (Attribution of Income – Ineligible Deductions) Determination 2004 – item 206 of Pt 2 to Sch 1
Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2000 – Pt 4 – s 27 – s 28 – s 29
Cases
Read v Commonwealth (1998) 167 CLR 57
Re Drake and Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634
Secretary v Cunneen (1997) 78 FCR 576
Secondary Materials
Guide to Social Security Law – s 4.12.2.20
REASONS FOR DECISION
Senior Member CR Walsh
25 March 2015
introduction
This application concerns whether Mr Stronach’s age pension and Mrs Stronach’s disability support pension, respectively, was correctly cancelled by Centrelink on 28 January 2014 because their combined annual income as at that date was above the allowable limit because profits on the sale by Stronach Holdings Pty Ltd (Stronach Holdings) of land in Queensland in the 2012/2013 financial year was properly attributed to them under Part 3.18 of the Social Security Act 1991 (SSA), titled “Means Test Treatment of Private Companies and Private Trusts”.
FACTual & procedural background
Mr Stronach and Mrs Stronach each hold one of the two shares issued by Stronach Holdings, a private company incorporated by Mr Stronach and Mrs Stronach in July 1999 to develop and sell land to fund their retirement.
Stronach Holdings’ only substantial asset is (and has only ever been) a subdivided block of land at Shaban Close, Mareeba in Queensland (Property).
As at 24 August 2012, Stronach Holdings owned eight of the lots on the Property.
On 31 August 2012, Mr Stronach was granted age pension and Mrs Stronach was granted disability support pension.
As at 30 June 2013, Stronach Holdings owned five of the lots on the Property.
In the 2012/2013 financial year Stronach Holdings recorded income from sales of $434,521, and a trading profit of $144,996 (comprising a taxable income of $88,798 plus prior year tax losses of $56,198).
On 28 January 2014, Centrelink cancelled Mr Stronach’s age pension and Mrs Stronach’s disability support pension on the basis that their combined annual income (of $149,747.76) was above the allowable limit (of $72,009.60)[1] (Original Decision).
[1] The income limit for a couple (combined) as at 28 January 2014 was $2,769.60 per fortnight or $72,009.60 annually: see “A Guide to Australian Government payments 1 January – 19 March 2014” at p 35.
On 31 January 2014, Mr Stronach and Mrs Stronach requested an internal review by Centrelink of the Original Decision.
On 4 March 2014, a Centrelink authorised review officer (ARO) affirmed the Original Decision (ARO Decision).
Mr Stronach and Mrs Stronach subsequently applied to the Social Security Appeals Tribunal (SSAT) for a review of the ARO Decision. Their stated “Reasons for Application” were:
There are a number of complex reasons as explained in the enclosed letter from the ARO. Our company set up over 20 yrs ago was for our super for self-funded retirees. The ARO stated he was governed by govt. policy and couldn’t rule otherwise. He commented that I take this further.
On 13 August 2014, the SSAT affirmed the ARO Decision (SSAT Decision).
On 18 September 2014, Mr Stronach and Mrs Stronach applied to this Tribunal for a review of the SSAT Decision. Their stated “Reasons for Application” are:
We object to our investment being for capital gain. This is & always was, a 20 year + investment, that was set up for the sole purpose to fund our retirement. Or superannuation. The bank, after the 2008 crash, forced us to sell blocks at very reduced rates to clear the development loan. Hence, we have been left with very reduced funds. After completing our retirement home, hopefully mid 2015, which will be suitable for home based case, together with palliative care, when needed, there will be little to no funds left. At the moment, we have funds in the bank to pay for the land, title should be issued by end of September 2014 & hope to sell the last remaining blocks to pay for the house. Whilst we have been waiting for the title we have had to pay heafty (sic) rent, medical & pharmacy costs & have been forced to use money that is set aside for the house & land, further reducing funds. With this money sitting in the bank account, we are unable to claim the pension. It has been stated to us throughout the appeals process, that, the rulings seem unfair in our case & we have been encouraged to take our appeal further. This is the reason for our application.
analysis
The rate of age pension and disability support pension is calculated using the Rate Calculators in s 1064 of the SSA which contain both an “assets test” and an “income test”. Whichever test results in the lower rate of pension is the test that is applied. A pension is not payable to a person if that person’s rate would be nil: s 44 of the SSA.
Part 3.18 of the SSA, titled “Means Test Treatment of Private Companies and Private Trusts”, provides for the attribution to individuals of the assets and income of private companies and private trusts in certain circumstances for the purpose of means testing the individual’s entitlement to certain income support payments under the SSA, effective 1 January 2002.
Broadly, for an asset or income of a private company to be attributed to an individual under Part 3.18 of the SSA:
(i)The company must be a “designated private company” (as defined in s 1207N of the SSA);
(ii)The company must be a “controlled private company” (as defined in s 1207Q of the SSA) in relation to the individual; and
(iii)The individual must be an “attributable stakeholder” of the company (within the meaning of s 1207X of the SSA).
Section 1207N(1) of that SSA provides that a company is a “designated private company” if it satisfies two of the three specified conditions, namely consolidated annual revenue of less than $25 million, consolidated gross assets of less than $12.5 million and fewer than 50 employees.
It is common ground that Stronach Holdings satisfies all three conditions and is a “designated private company” within the meaning of s 1207N of the SSA.
Section 1207Q(1) of the SSA provides that a designated private company will be a “controlled private company” if the individual passes the “control test” or the “source test”. The “source test” is not relevant in this case as it relates to the transfer of assets into a company after 2000. An individual passes the “control test” if the aggregate of the “direct voting interests” in the company that the individual holds is 50% or more. Sections 1207R and 1207S provide that a shareholder’s direct voting interest in a company is the shareholder’s percentage of voting power in the company.
It is not in dispute that Mr Stronach and Mrs Stronach each hold one of the two issued ordinary shares in Stronach Holdings and that, in accordance with Stronach Holdings’ Constitution each of them have 50% of the direct voting interests in Stronach Holdings. Consequently, Stronach Holdings is a “controlled private company” for the purposes of s 1207Q of the SSA.
Section 1207X(1) of the SSA provides that if a company is a “controlled private company” in relation to an individual, the individual is an “attributable stakeholder” of the company unless the Secretary otherwise determines, and the percentage of assets and income attributable to the individual is 100% or such lesser amount determined by the Secretary.
It is common ground that Mr Stronach and Mrs Stronach are “attributable stakeholders” of Stronach Holdings for the purposes of s 1207X(1) of the SSA.
To assist in the application of s 1207X of the SSA, the Secretary (Centrelink) has published the Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2000 (Principles). Part 4 of the Principles sets out the matters which the Secretary must consider when determining whether an attributable stakeholder’s income attribution percentage in relation to a company is lower than 100%. Section 27 of the Principles requires the Secretary to consider whether an individual has received a benefit from a distribution of capital or income made by the company. Section 28 of the Principles requires the Secretary to consider the benefit that an individual may receive from a future distribution by the company. Section 29 of the Principles requires the Secretary to consider whether an individual receives or derives any kind of benefit (other than a benefit mentioned in s 27 or s 28 of the Principles) from the assets or income, or both, of the company.
As stated above, Mr Stronach and Mrs Stronach are the only shareholders of Stronach Holdings. That is, Mr Stronach and Mrs Stronach each own 50% of the issued capital in Stronach Holdings, have equal voting rights and would each be entitled to half of Stronach Holdings’ assets on winding up. Further, Mr Stronach and Mrs Stronach have previously received equal dividend distributions from Stronach Holdings.
In accordance with s 1207X and the Principles, it is appropriate to attribute 50% of Stronach Holdings’ income and assets to each of Mr Stronach and Mr Stronach who are, as stated above, “attributable stakeholders” in relation to Stronach Holdings for the purposes of Part 3.18 of the SSA.
Section 1207Y of the SSA, in conjunction with s 1208 to s 1208D of the SSA, sets out the mechanics of how the “ordinary income” of a designated and controlled private company (like Stronach Holdings) is to be attributed to its attributable stakeholders (like Mr Stronach and Mrs Stronach) for the purposes of the “income test” in s 1064 of the SSA.
Section 1207Y(1) of the SSA provides:
1207Y Attribution of income
(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: [Emphasis Added]
The practical overall effect of s 1207Y of the SSA is that if a company derives an amount that is “ordinary income”, and an individual is an “attributable stakeholder” of that company, the individual is taken to receive their income attribution percentage of the “ordinary income” of the company as his or her own “ordinary income”. There is no discretion in Part 3.18 of the SSA in relation to the application of s 1207Y of the SSA.
Section 1208 of the SSA defines what is meant by “ordinary income” of a company as follows:
1208 Ordinary income of a company or trust
(1)For the purposes of this Division, the ordinary income of a company or trust is to be worked out as if:
(a)exempt lump sums were not excluded from the definition of ordinary income in subsection 8(1); and
(b)each reference in section 8 to a person included a reference to a company or trust; and
(c)the following provisions had not been enacted:
(i)subsection 8(7A);
(ii)subsection 8(8);
(iii)subsection 8(11);
(iv)Part 3.10.
(2)Paragraphs (1)(a) and (c) have effect subject to paragraph 1207Y(1)(d).
(3)A reference in this Division to the ordinary income of a company or trust is a reference to the company’s or trust’s gross ordinary income from all sources calculated without any reduction, other than a reduction under section 1208A or 1208B. [Emphasis added]
For the purposes of s 1208(3) of the SSA above, s 1208A of the SSA relates to the treatment of trading stock, and is not relevant to this application. Section 1208B of the SSA permits certain reductions for the purpose of calculating a company’s attributable ordinary income, but provides that an “ineligible deduction” cannot be taken into account.
In the Social Security (Attribution of Income – Ineligible Deductions) Determination 2004 (Ineligible Deductions Determination) the Secretary (Centrelink) has determined certain “ineligible deductions” for the purpose of s 1208B of the SSA.
Relevantly, the Secretary has determined that tax losses from earlier financial years are an “ineligible deduction”: Item 206 of Part 2 to Schedule 1 of the Ineligible Deductions Determination.
Section 8 of the SSA defines “income”, “income amount” and “ordinary income” as follows:
ordinary income means income that is not maintenance income or an exempt lump sum.
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 or not). [Emphasis added]
The meaning of “income” for the purposes of the SSA has been recognised by the courts as being broad: see Secretary v Cunneen (1997) 78 FCR 576 per Foster J at 584, citing Brennan J in Read v Commonwealth (1988) 167 CLR 57 at 69.
Section 1208C of the SSA (read with the definition of “tax year” in s 23(1) of the SSA) provides that a financial year is a “derivation period” in respect of a company for the purpose of Part 3.18 of the SSA.
Section 1208D of the Act states:
(1)The Secretary may, by writing, determine that, in the event that a specified individual is an attributable stakeholder of a specified company or trust at a specified time (the start time):
(a)a period beginning at the start time and ending at whichever is the earlier of the following times:
(i)the later time specified in the determination;
(ii)the time when the individual ceases to be an attributable stakeholder of the company or trust;
is an attribution period for the purposes of the application of this Part to the individual and the company or trust; and
(b)that attribution period relates to a specified derivation period of the company or trust. [Emphasis Added]
Section 4.12.2.20 of the Guide to Social Security Law (Guide)[2] states:
[2] The Tribunal is not bound by departmental policy but will usually apply it unless there are cogent reasons not to do so: Re Drake and Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634 at 645 per Brennan J.
Derivation periods
A derivation period generally refers to a tax year (section 23(1)) and can be of any length up to a 12-month period. Generally, each tax year that a trust or company is in existence will be a derivation period for the trust or company.
With reference to a derivation period, the ordinary income (section 8(1)-‘income’) generated by a trust or company in a derivation period is used to determine the amount of income to attribute to an attributable stakeholder of that trust or company.
Attribution periods
An attribution period is the period for which ordinary income is to be attributed to an attributable stakeholder. An attribution period MUST relate to a derivation period, which may or may not overlap.
An attribution period can be shorter or longer than the derivation period to which it relates. An attribution period would generally be a period of 12 months and start at the earliest possible time after the tax return in regard to the most current tax year is available. [Emphasis added]
Stronach Holdings’ company tax return for year ended 30 June 2013 shows Stronach Holdings’ taxable income for the 2012/2013 financial year as $88,798, after deducting $56,198 for prior year tax losses. Pursuant to s 1208B of the SSA and the Ineligible Deductions Determination, these prior year tax losses (of $56,198) must be added back to the taxable income amount (of $88,798) resulting in in an adjusted taxable income of $144,996 for Stronach Holdings. As this income amount exceeds the applicable income limit (of $72,009.60), the rate of pension payable to Mr Stronach and Mrs Stronach is nil.
In accordance with section 4.12.2.20 of the Guide, Centrelink determined that the relevant “attribution period” for the purposes of s 1207Y began on 30 August 2013 and ended on 30 September 2013, being the date that Mr Stronach signed Stronach Holdings’ 2013 company tax return on behalf of the company.
The unfortunate position that Mr Stronach and Mrs Stronach find themselves in is summarised in the following paragraphs of the SSAT Decision:
24.Mr and Mrs Stronach stated that Stronach Holdings was set up 20 years ago with the sole intention of purchasing a block of land to be subdivided to provide for their retirement; that is for capital growth and not for profit on sale of blocks. They said they did this in preference to setting up a superannuation fund. After purchasing a block of land in Queensland [in the 1990s] they had it subdivided in 2004 into eight blocks due to various factors including returning to Australia to care for Mrs Stronach’s parents. Further they said the Global Financial Crisis caused them to have to borrow $450,000 from the [Bendigo] bank and they had to sell five of the blocks to repay the [Bendigo] bank which resulting (sic.) in a profit showing in the 2013 tax return for the company (the company had previously not had a taxable income). Further, Mrs Stronach said she had inherited about $136,000 [i.e. $136,549] from her father’s estate and the [Bendigo] bank demanded the money to offset its loan. Mrs Stronach said she does not agree that her inheritance should be reflected as a loan to Stronach Holdings in the company’s balance sheet but rather it should have be deducted from the company’s taxable income (or adjusted taxable income). She said she does not understand why Centrelink has taken into account all their assets but has disregarded their debts/liabilities.
25.The Tribunal asked Mr and Mrs Stronach to explain why their accountant in the Stronach Holdings’ 2013 income tax return:
(a)described the main business activity of the (sic.) Stronach Holdings as “land development or subdivision” rather than say describing the activity as a long term investment; and
(b)included the profit from the sale of the blocks as “other sales” in calculating the company’s profits rather than say reflecting a capital gain on disposal of the blocks.
26.Their response was they are not tax/legal savvy and through no fault of their own have they landed in the situation they are in. Mrs Stronach said she had subsequently taken their work to another accountant when the (former accountant [Nexia Australia] refused to reduce Stronach Holdings’ 2013 taxable income by the amount of her inheritance from her late father. Mrs Stronach reiterated that Stronach Holdings does not carry on a ‘trade’; rather it is just selling blocks to fund their retirement.
27.Mr and Mrs Stronach said they are not arguing with Centrelink’s decision rather they want Centrelink to look at their situation in a different light……
28.Mr and Mrs Stronach stated that there seems to have been ‘miscommunication all the way.’ They said Mr Todd Passagne, a Centrelink complex assessments – subject matter expert told them that if he had his way he would overturn the decision.[Footnote: The Tribunal notes the following statement in the “ARO notes” in the documents provided by Centrelink ‘Whilst the operation of this policy seems a little unfair to me in the present case – much of the capital gain being assessed is attributable to periods in which the Stronach’s were not in receipt of an income support payment – I can see no alternative in this case’.]
29.Finally, Mr and Mrs Stronach said their financial advisor said he had not come across this before making the comment ‘there is always an exception to the rule’. They said their advisor strongly advised them to take the matter further. Again they reiterated they want the issue resolved by Centrelink looking at their circumstances in a different light as the norms do not apply.
30.The Tribunal finds the financial statements (profit and loss statement and balance sheet) of Stronach Holdings clearly reflect the sale of blocks as trading income (rather than as a capital gain from a long term investment ) and deductions in relation to the development and selling have been appropriately deducted from gross proceeds. The trading profit from the sale of the blocks has been similarly reflected in the 2013 tax return of Stronach Holdings. The financial statements and the tax return have been prepared by an accountant and have been signed off by Mr and Mrs Stronach including a declaration in the tax return that the information provided is true and correct. On that basis the Tribunal accepts the 2012/13 financial statements and 2013 company tax return correctly reflect Stronach Holdings’ net profit on the sale of the blocks. [Emphasis added]
Mr Stronach and Mrs Stronach made similar submissions at the hearing before this Tribunal. In particular, Mrs Stronach reiterated that she was not arguing with Centrelink’s decision but, rather, wanted Centrelink to look at her and her husband’s situation “in a different light” and commented that “there must always be exceptions to the rule” asking that an exception be applied in this case.
Stronach Holdings’ tax and financial records for the 2012/2013 financial year clearly indicate that the amount of $144,996 (being Stronach Holdings’ taxable income for the 2012/2013 financial year of $88,798, with the prior financial year tax losses of $56,198 added back) were monies or profits (whether of a capital nature of not: see s 8 definitions of “ordinary income”, “income” and “income amount” set out in paragraph 37 above) received by Stronach Holdings for its use or benefit. As stated by the SSAT (in the SSAT Decision at [30]), the financial statements and tax return of Stronach Holdings for the 2012/2013 financial year have been prepared by an accountant and signed off by Mr Stronach and Mrs Stronach, including a declaration in the 2013 tax return of Stronach Holdings that the information provided is “true and correct”. Accordingly, this Tribunal (like the SSAT) accepts that the financial statements and the tax return of Stronach Holdings for the 2012/2013 financial year accurately reflect Stronach Holdings’ net profit on the sale of the lots it owned on the Property in the 2012/2013 financial year.
Accordingly, the amount of $144,996 was “ordinary income” of Stronach Holdings (within the meaning of s 1208 of the SSA) and it was appropriately attributed to Mr Stronach and Mrs Stronach under s 1207Y of the SSA for the “attribution period” beginning on 30 August 2013. As stated above, the concept of “income” for the purposes of the SSA is broad and Part 3.18 does not provide the Secretary (and, in his shoes, this Tribunal) a discretion in relation to the application of s 1207Y of the SSA.
The combined income of Mr Stronach and Mrs Stronach, for determining the rate of pension payable to them at 28 January 2014, is therefore $144,996. Since this amount exceeds the applicable combined income test limit for a part pension (of $2,769.60 per fortnight or $72,009.60 per annum), the Tribunal is satisfied that the rate of age pension and disability support pension payable to Mr Stronach and Mrs Stronach, respectively, is nil. Consequently, Centrelink correctly cancelled Mr Stronach and Mrs Stronach’s respective pensions on 28 January 2014: s 44 of the SSA.
As discussed in the hearing, the Tribunal’s jurisdiction is limited to a review of the SSAT Decision. If Mr Stronach and Mrs Stronach are dissatisfied with the advice given to them by their previous accountant, or by Centrelink, or with their dealings with Centrelink there may be other avenues of redress open to them but the Tribunal is not the appropriate forum to pursue this.
decision
For the above reasons, the Tribunal affirms the SSAT Decision.
I certify that the preceding 46 (forty six) paragraphs are a true copy of the reasons for the decision herein of Senior Member CR Walsh .(Sgd) T Freeman..................................
Associate
Dated 25 March 2015
Date of hearing 20 March 2015 Applicants In person Representative for the Respondent Mr D Carroll Solicitors for the Respondent Australian Government Solicitor
Key Legal Topics
Areas of Law
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Administrative Law
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Statutory Interpretation
Legal Concepts
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Judicial Review
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Statutory Construction
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