Carugno and Secretary, Department of Families, Community Services and Indigenous Affairs

[2006] AATA 690

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2006] AATA 690

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No A2005/335 & 336

GENERAL ADMINISTRATIVE  DIVISION		)
Re		BENITO CARUGNO PAOLA CARUGNO

Applicant

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

Respondent

DECISION

Tribunal Mr S. Webb, Member

Date9 August 2006

PlaceCanberra

Decision The decisions under review are affirmed.

..............................................

Mr S. Webb, Member

CATCHWORDS

SOCIAL SECURITY – age pension – value of assets – properties settled in fixed trust – variation of trust by discretion of trustees after reference date – issue of validity – transfer of property – designated private trust – trust not excluded – assets value limit for age pension exceeded – decisions affirmed

Social Security Act 1991 ss 55, 1064, 1207, 1207A, 1207G, 1207P, 1207V, 1207X

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

Acts Interpretation Act 1901 ss 15AA, 25

Trustees Act 1925 (NSW)

Social Security (Means Test Treatment of Private Trusts - Excluded Trusts) Declaration 2001

Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577

Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547

Mallott v Wilson [1903] 2 Ch 494

Muhling v Perpetual Trustees WA Ltd [2001] WASC 225

Scott v Comptroller of Stamps [1967] VR 122

Commissioner of Stamp Duties (Qld) v Hopkins (1945) 71 CLR 351

REASONS FOR DECISION

9 August 2006 Mr S. Webb, Member         

1.      Benito and Paola Carugno claimed and qualified for Age Pension in 2004.  They were and are presently trustees of the Carugno Trust Fund (“Trust”).  Trust assets were considered as assets of Mr and Mrs Carugno when assessing their claim for Age Pension in 2004.  The value of Mr and Mrs Carugno’s assets was sufficient to preclude payment of Age Pension at that time.

2.      Mr and Mrs Carugno assert that the value of assets in the Trust should not have been taken into account when assessing their claims for Age Pension.

3. In order to determine whether the Trust assets are to be taken into account as assets of Mr and Mrs Carugno for the purpose of assessing their entitlement to Age Pension it is necessary to resolve the following issues (see s1207, and Part 3.18 of the Social Security Act 1991 (“the Act”)):

(a)Is the Trust a designated private trust, and if so,

(b)Is the Trust a controlled private trust, and if so

(c)Are Mr and Mrs Carugno attributable stakeholders of the Trust?

4. If these issues are resolved in the affirmative, and the assets under trust are to be taken into account, it is necessary to determine Mr and Mrs Carugno’s attributable asset percentages (s1207X) and to calculate the value of their assets for the purposes of ss55 and 1064 of the Act. If the value of their assets exceeds the applicable Age Pension assets value limit for a couple, the Pension will not be payable.

5.      The matter was dealt with on the papers by agreement of the parties.  An agreed statement of facts was tendered (“Exhibit A”).  I will proceed on the basis that those agreed facts are true.  It is convenient to observe at the outset that the Trust is minimally expressed and the deed:

(a)makes no reference to the applicable law, although I note that the settlors and one of the properties in trust were located in the Australian Capital Territory whereas the beneficiaries and the second property in trust were located in New South Wales;

(b)makes no provision for variation or revocation and confers no such powers on the trustees or any other person; and

(c)specifies the beneficiaries and their interests as fixed, but does not specify any term or timetable for distributions and confers no express powers on trustees in that regard.

6.      Written submissions addressing disputed issues were filed (Applicant – “Exhibit B”; Respondent – “Exhibit C”).  I note that in challenging the decision under review, the only issue agitated by Mr and Mrs Carugno is whether the Trust is an ‘excluded trust’ and not a ‘designated private trust’.  Mr and Mrs Carugno did not address other issues of relevance to which I have referred (despite these being clearly addressed by the Respondent Secretary in statements of contentions and written submissions).  Indeed, Mr and Mrs Carugno assert that “matters coming before the Tribunal are … limited to and restricted by the notice of appeal lodged and the Contentions postulated by the party… appealing/applying”.  The case for Mr and Mrs Carugno, as I understand it, is solely and squarely directed to the contention that the Trust is an ‘excluded trust’ and no issue is taken in these proceedings with other matters dealt with by the decision under review.  I will proceed on that basis.  I note that the task of the Tribunal is to consider afresh matters that are placed before it and to make the correct or preferable decision (see Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577 at 589): that is, to affirm or vary the decision under review, or to set the decision aside and substitute a new decision. For that purpose the Tribunal exercises all of the powers conferred on the original decision maker.

Is the Trust a designated private trust?

7.      Mr and Mrs Carugno assert that the Trust is not a designated private trust.  On that basis it is said that the Trust is excluded from the effects of the Social Security and Veterans’ Entitlements Legislation Amendment (Private Trusts and Private Companies – Integrity of Means Testing) Act 2000 (“the Amendments”).  If that is correct then the Trust assets will be alienated from Mr and Mrs Carugno’s assets for the purpose of assessing their claims for Age Pension in 2004.

8. Mr and Mrs Carugno assert that the Trust is a fixed trust that was established in 1992, with beneficiaries and distributions fixed by the trust instrument on establishment. In their submission purported variations to the trust on 27 July 1994 and 27 August 2003 are unauthorised, illegal, invalid, and therefore null and void. On that basis it is submitted that the Trust has not been legally varied since establishment in 1992 and is an ‘excluded trust’ for the purposes of Part 3.18 of the Social Security Act 1991 (“the Act”).

9. Under s1207P a trust is a designated private trust unless it is a fixed trust with more than 50 unit holders that was not created or operated to circumvent Part 3.18 of the Act (s1207P(1)(a)), or the trust is a complying superannuation fund (s1207P(1)(b)), or the trust is an ‘excluded trust’ (s1207P(1)(c)).

10.     It is plain enough that the Trust is not within the terms of paragraph 1207P(1)(a).  Subparagraph 1207P(1)(a)(ii) requires at least 50 people holding units in the Trust.  Those persons must be identified as present unit holders.  Nancy Carugno deceased on 3 April 1994 without issue.  The possibility that Maria’s direct issue may increase the number of unit holders in the future is not a relevant consideration.  Presently she has three children.  It follows that at the date of Mr and Mrs Carugno’s claim for Age Pension, and presently, there are not more than 50 people holding units in the Trust. 

11.     The Trust is not a complying superannuation fund and is not with the terms of paragraph 1207P(1)(b).

Is the Trust an ‘excluded trust’ within the terms of paragraph 1207P(1)(c)?

12. For the purposes of paragraph 1207(1)(c) an ‘excluded trust’ is a trust within a class of trusts that is excluded by declaration of the Secretary pursuant to subs 1207P(4). The applicable declaration is the Social Security (Means Test Treatment of Private Trusts - Excluded Trusts) Declaration 2001 (“the Declaration”).  Under clause 7 of that Declaration a fixed trust that was created before 9 May 2000 is an excluded trust only in so far as the trust was not varied under the trust deed and no property transferred to the trust (other than income generated by the trust) after that date. 

13. The term ‘fixed trust’ is not given special meaning in the Declaration or the Amendments or the Act. Nevertheless the term is in common usage and can be understood as a succinct description of a trust with certain characteristics on establishment that are not discretionary. The definition of kinds of trust, fixed or discretionary, has been the subject of judicial discourse in settled cases over time. Gummow J said in Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547 at 551-552 that a ‘fixed trust’ is an “express trust where all the beneficiaries are ascertainable and their beneficial interest are fixed, there being no discretion in the trustee or any other person to vary the group of beneficiaries or the quantum of their interests”.  That definition is appropriate and sufficient for present purposes.

14.     The Trust was established on 24 September 1992 with Mr and Mrs Carugno as trustees.  Mr and Mrs Carugno settled two properties in trust: 7 Gerald Street Queanbeyan in New South Wales and 1 Renwick Street (Block 10 Section 11) Chifley in the Australian Capital Territory.  The beneficiaries were Nancy and Maria Carugno and their direct issue.  The benefits of the property in trust were to be distributed one third to Nancy Carugno, one third to Maria Carugno, one sixth to the issues of Nancy and one sixth to the issues of Maria. 

15.     As can be seen, the beneficiaries of the Trust are ascertainable and their beneficial interests are fixed.  There is no provision in the Trust deed conferring power or authority on the trustees or any other person to vary or revoke the Trust terms or beneficiaries or their beneficial interests.  In those terms the Trust is fixed. The terms of Trust do not specify the time or method of distributions.  Those matters are within the discretion of the trustees.  The description ‘discretionary trust’ has been applied to trusts in which power is reserved to withhold income and capital.  However, as Gummow J observed in Vegners’ case (supra at ALR 522) a trust will not be purely discretionary “where the donee of the power of selection had a discretion only as to the time and method of making payments to beneficiaries”.  On that basis, despite the existence of that limited discretion (which may reflect imprecise drafting rather than the intention of the settlors) I am satisfied that the Trust was established as a fixed trust.

16.     Mr and Mrs Carugno contend that the variations to the Trust on 27 August 2003 are null and void because no power to vary the Trust vested in the trustees and the purported variations are without legal basis.  Nevertheless, in their submission, there is no legal bar to prevent the trustees “dealing with Trust property or adding thereto”, on which basis it is said that the “assets referred to are Trust assets”.

17.     Variation of the terms of a trust is not simply a matter within the discretion of the trustees.  Dispositions under a trust instrument are not revocable or subject to variation in the absence of a provision in the trust instrument for possible revocation or variation: Mallott v Wilson [1903] 2 Ch 494. The power to vary or revoke trust terms may be reserved by express intention. The terms of a trust may be varied by authority of a court, or with the consent or direction of all the beneficiaries, in limited circumstances in which it is expedient to do so. The powers of trustees are governed by applicable statutes (see Trustees Act 1925 (NSW), for example).  Variations that derive from expediency concerning the administration or management of the trust are one thing, variations that purport to diminish the interests of beneficiaries without agreement as a matter of expediency, especially in the case of a minor or unborn beneficiary who is incapable of lawful agreement, are another.  The task for a court when considering a proposal for variation is to consider the proposal for variation as a whole and to examine whether there is detriment to the interest of a beneficiary (see Muhling v Perpetual Trustees WA Ltd [2001] WASC 225). Proposed variations that are found to be productive of detriment to the interest of a beneficiary are unlikely to be authorised.

18.     In this case, the Trust deed did not make any provision for amendment or variation of its terms, and no powers in that regard were conferred upon the trustees or any other person.  There is no evidence before me that the settlors expressed any intention when establishing the Trust to reserve powers of variation or revocation.  If such powers had been reserved the Trust may better be described as discretionary rather than fixed.  In the circumstances I am satisfied that no such powers were reserved.

19.     Nevertheless Mr and Mrs Carugno, as trustees, acted to vary the Trust beneficiaries and the beneficial interests of those people on 27 July 1994 (Maria Carugno one third, her son Ben Miras one third plus one sixth, and one sixth to be divided in equal shares between each of Maria’s direct issue (including Ben Miras) as tenants in common) and on 27 August 2003 (“3/4 for… Maria for life and then to her children equally as tenants in common” and “1/4 for…Ben Theodore Miras”).   While the variation made on 27 July 1994 may be understood as expedient in result of the death of Nancy Carugno, the variations made on 27 August 2003 appear to be an exercise of mere discretion.  In both cases the variations were detrimental to the interests of certain beneficiaries.  There is no evidence before me that the beneficiaries, two of whom were under 18 on 27 August 2003, gave their fully informed consent to the variations by deed on that date. 

20.     It follows that if those variations were the subject of litigation before a court, in all likelihood, they may fail for want of proper authority and the purported detrimental variation of a beneficiary’s interests would be a nullity.  However, that is a matter for a court to determine if the variations are challenged.  There is no evidence before me that any challenge has been initiated or that any such judicial determination has been made.  Nor is there evidence that the trustees have made any effort to address any perceived deficiency in the deeds of variation or potential breach of their duties as trustees. Notwithstanding the case presented on their behalf in these proceedings, the evidence is that the trustees have acted on the basis that the variations made have practical effect (see 2003-2004 Taxation Returns at T10, T11 and T12). 

21.     In those circumstances it could be said that the Trust was varied by Mr and Mrs Carugno pursuant to their appointment as trustees under the Trust deed, even though the variations may subsequently be set aside or declared null by a court.  On that interpretation the variations would be within the terms contemplated by paragraph 7(2)(a) of the Declaration and the Trust would not be considered to be an ‘excluded trust’.  In the alternative it could be said, as Mr and Mrs Carugno contend, that the variations purportedly made to the detriment of the interests of Trust beneficiaries on 27 August 2003 were not variations made under the Trust deed.  On that interpretation the Trust would not have been varied in those terms for the purpose of paragraph 7(2)(a) of the Declaration.

22.     Considering s15AA and s25 of the Acts Interpretation Act 1901, whereby the Declaration (which is a legislative instrument) is to be interpreted in a manner that is consistent with its objects and purposes, and thereby in a manner that is consistent with the objects and purposes of the Amendments and the Act, I am satisfied that the former interpretation is to be preferred. The Amendments and the Declaration were made to prevent the manipulation of discretionary trusts to obtain social security benefits (see the Explanatory Memoranda for the Amendments). Specifically clause 7(2) of the Declaration is to prevent the manipulation of a fixed trust by discretionary variation or other means to obtain social security benefits. The latter interpretation would mean that a trust varied by trustees in a manner that may not be lawful, but which has not be tested at law and remains the subject of doubt, would be protected from the effects of the Amendments, whereas a trust varied by trustees in a manner that is not in legal doubt would be denied that benefit. Such an outcome is not consistent with the object and stated purpose of the Amendments and the Act.

23.     Furthermore, to accept Mr and Mrs Carugno’s submission would effectively place the Tribunal in the role of a court, determining the lawfulness, or otherwise, of the variations made by the trustees.  That is not within the power of the Tribunal.  The Tribunal does not exercise power at large and does not exercise the judicial power of the Commonwealth.  At the date of Mr and Mrs Carugno’s claim for Age Pension in 2004 and presently the deeds of variation of the Trust made by the trustees have not been challenged or found null by a court.  They stand therefore for present purposes even though it appears they may fail if challenged.  The law applies to the actions of the trustees as a fact and not to a hypothetical construction of untested legal potential.  The trustees in this case acted deliberately and with the benefit of legal advice (now claimed to be in error) when varying the terms of Trust by written deed.  Those variations have not been expressly withdrawn, or in any way challenged, assessed or determined at law.  The Tribunal does not have power to declare the variations null and void and must proceed on the basis of present fact.

24.     Nevertheless, even if I accepted that the variations on 27 August 2003 are presently a nullity, the matter would not resolve in favour of Mr and Mrs Carugno.  Paragraph 7(2)(b) of the Declaration concerning the transfer of property to the Trust after 9 May 2000 must be considered.

25.     On 27 August 2003 Mr and Mrs Carugno made trust arrangements in relation to “23 Varinga Avenue Lake,High” (which I understand is the property at 23 Weringa Avenue Lake Heights) and Unit 45/22 Mowatt Street Queanbeyan.  The property at 7 Gerard Street Queanbeyan remained in trust and the 1 Renwick Street Chifley was released from trust for Mr and Mrs Carugno’s “own use and benefit as their residence” (T6). 

26.     There is scant evidence before me concerning the arrangements made in relation to these properties.  I note the documents at T31.  At the date the properties were declared to be settled in the Trust on 27 August 2003, titles to both properties were held by Mr and Mrs Carugno.   There is no dispute that Mr and Mrs Carugno were the beneficial owners of the properties at that time.  Rental income derived from both properties was declared in their Taxation Returns for the 2003-2004 tax year (see T11 and T12).  After 27 August 2003 rental income derived from both properties was paid to the Trust (see the Trust 2003-2004 Taxation Return at T10). 

27.     There are a number of interpretations open on these facts.  One possibility is that Mr and Mrs Carugno settled the properties in the Trust or transferred their equitable and beneficial interests in the properties to the Trust beneficiaries, in which case there was a transfer of property to the Trust.  Another possibility is that the two properties were not validly settled in the Trust and no beneficial interests were transferred, whereby the beneficial interest in those properties rests with Mr and Mrs Carugno as owners. 

28.     Mr and Mrs Carugno assert that by the arrangements on 27 August 2003 they effected a swap of equivalent value in the properties in Trust and no ‘transfer’ of property was made as the quantum of value in the Trust properties did not change. 

29. There is insufficient evidence before me to properly assess the proposition concerning quantum value. I note, however, that the applicable test concerns the transfer of property, not variation in the quantum value of property in trust. Transfer of property is given definition at s1207A of the Act and means “dispose of (whether by assignment, declaration of trust or otherwise) or provide”.  Property includes an interest in equity or a beneficial interest that is transferable (s1207G refers).  Property is transferred to a trust if the property is applied for the benefit of the trust or at the direction of trustees.  Thus, property may be transferred by settlement in trust.  Settlement of property is indicated by a number of factors, including “the imposition of restriction of full enjoyment of the rights of ownership in the beneficial interests created or declared by the instrument” (Scott v Comptroller of Stamps [1967] VR 122 at 146; see also Commissioner of Stamp Duties (Qld) v Hopkins (1945) 71 CLR 351 at 378).

30.     No evidence of conveyance or payment of stamp duty was adduced in relation to the properties dealt with by Deed on 27 August 2003.  Nevertheless, it appears from the statements of Mrs Bruna Romano, solicitor for Mr and Mrs Carugno, that a search was conducted for records of conveyance or payment of stamp duty in relation to those properties, but no records could be found (T2 and T31).  Considering all of the facts I am satisfied that the declared ‘settling’ of properties by deed of Trust on 27 August 2003 constitutes a settlement of those properties in the Trust.  By that action the properties were transferred to the Trust.  Thereafter Mr and Mrs Carugno treated the properties as settled in the Trust.  The transfer was detrimental to their interests in the properties and they forgave rental income as a result.  Consistent with the law concerning the conveyance of property, the transfer is not revocable. 

31.     As the transfer occurred on 27 August 2003, after the reference time (9 May 2000), paragraph 7(2)(b) of the Declaration applies with the effect that the Trust is not an excluded trust pursuant to paragraph 1207P(1)(c).

32. That being so, the Trust is a ‘designated private trust’ pursuant to s1207P of the Act and is not immune from the effect of the Amendments.

Conclusion

33. In conclusion, I am satisfied that the Trust is not an excluded trust and is a designated private trust for the purposes of s1207P of the Act. No evidence has been tendered or submissions made by Mr and Mrs Carugno in relation to other issues relevant to the assessment of their claim for payment of Age Pension. That being so I will not proceed to consider other issues (pursuant to s1207V or s1207X of the Act, for example) which are not apparently controversial. On that basis I am reasonably satisfied on the materials before me that the correct or preferable decision is to affirm the decision under review.

I certify that the 33 preceding paragraphs are a true copy of the reasons for the decision herein of Mr S Webb, Member

Signed:Peter Edwards

Associate

Date of Hearing  31 July 2006
Date of Decision  9 August 2006
Counsel for the Applicant  D Romano (Romano Satsia Kordis)
Solicitor for the Applicant  B Romano (Romano Satsia Kordis)

Representative for the Respondent                Alan Duri (Centrelink Legal Services)