Clark and Secretary, Department of Family and Community Services
[2003] AATA 1291
•17 December 2003
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2003] AATA 1291
ADMINISTRATIVE APPEALS TRIBUNAL )
) No Q2002/1083
GENERAL ADMINISTRATIVE DIVISION ) Re KENNETH and NOLA CLARK Applicants
And
SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES
Respondent
DECISION
Tribunal Deputy President Don Muller Date17 December 2003
PlaceBrisbane
Decision The Tribunal:
1. Varies the decision under review by determining that the portion of the lump sum received by Kenneth Clark from AMP in August 2002 which represents bonuses accumulated prior to the receipt of the disability pension by Kenneth Clark and Nola Clark in August 2001, is not “income” within the meaning of that term in subsection 8(1) of the Social Security Act 1991.
2. Remits the matter to the Respondent for re-calculation of disability pensions payable to Kenneth Clark and Nola Clark during the relevant period.
...............SIGNED................................
D.W. MULLER
DEPUTY PRESIDENT
CATCHWORDS
SOCIAL SECURITY – disability pension – bonuses on an endowment policy which accrued before receipt of social security benefits not income
Social Security Act 1991: s8(1), (2), (11)(d), 1072, 1073, 39(1A)
Secretary, Department of Social Security v Garvey (1989) 91 ALR 245
REASONS FOR DECISION
Deputy President Don Muller 1. Kenneth Clark and his wife Nola seek review of a decision that the total of accumulated bonuses received by them as a lump sum upon the maturing of an insurance policy, be regarded as “income” for the year in which the lump sum was received, for the purpose of calculating their pensions.
2. The effect of the decision under review was to reduce the fortnightly benefits payable to Mr. and Mrs. Clark by approximately $54 (Kenneth Clark) and $110 (Nola Clark) for 12 months.
3. At the hearing Mr. and Mrs. Clark were represented by Ms. Heyworth-Smith of Counsel and Mr. Derrington of Counsel represented the Respondent.
4. The background to this matter is not in dispute and the Tribunal finds as follows:
(a)Kenneth Clark began a life assurance endowment plan with AMP on 15 August 1960.
(b)The Policy provided for a payment of a lump sum on the maturity date, 15 August 2002. If the assured life terminated prior to that date a lesser sum would have been paid to the trustees of the estate of the assured.
(c)The structure of the plan was such that Kenneth Clark would pay an annual premium and, in the absence of a contingent event, bonuses would be calculated over the term of the plan, such that on maturity, the amount to be paid to Mr. Clark would be a combination of premiums plus bonuses.
(d)Although bonuses were allocated to the policy over the years, the bonuses were not payable when allocated and were not declared as income in the years in which they notionally accrued.
(e)Kenneth Clark was in receipt of the disability support pension from August 2001 and Nola Clark was granted a wife pension at the same time.
(f)On 15 August 2002 the Policy matured and Kenneth Clark was paid a total amount of $11,814.31 on 21 August 2002. The lump sum was made up of $1,965.60 (total premiums paid), plus $9,848.71 (total accumulated bonuses over 42 years).
(g)In August 2002, an officer of Centrelink determined, pursuant to ss.1072 and 1073 of the Social Security Act 1991 (the Act), that the accumulated bonuses (that is $9,848.71) be “income” for 12 months from August 2002. This resulted in reductions of benefits payable to Kenneth Clark and his wife Nola Clark for the ensuing 12 months.
(h)On appeal to the Social Security Appeals Tribunal, the decision was affirmed.
5. In the case of Mr. and Mrs. Clark, the manner in which the rate of payment of their disability pensions are calculated is covered by sub-section 117(a) of the Act. That is, by using Pension Rate Calculator A at the end of s.1064 of the Act. In general terms the rate at which pension is payable is reduced if the pensioner receives income from a source other than the social security benefit. The greater the income the lower the rate of payment of pension. It is not necessary here to go into the detail of the calculations. However, it is necessary to determine one of the essential elements of the calculation, namely “ordinary income”.
6. The Act contains the following definitions which are relevant to this review:
Section 8(1):
“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).
Ordinary income means income that is not maintenance income or an exempt lump sum.
8(2) Earned, derived or received. A reference in this Act to an income amount earned, derived or received is a reference to:
(a) an income amount earned, derived or received by any means; and
(b) an income amount earned, derived or received from any source (whether within or outside Australia).
Section 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 of 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.
Section 1072 General meaning of ordinary income
A reference in this Act to a person’s ordinary income for a period is a reference to the person’s gross ordinary income from all sources for the period calculated without any reduction, other than a reduction under Division 2 or 3.
Note 1: For ordinary income see subsection 8(1)
Section 1073
Certain amounts taken to be received over 12 months can, if a person receives, whether before or after the commencement of this section, an amount that:
(a) is not income in the form of periodic payments; or
(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
Section 39(1A)
For the purposes of this Act, a Note is taken to be part of:
(a)if the Note immediately follows a section that does not contain subsections – the section; or
(b)if the Note immediately follows a subsection – the subsection.”
7. There are two issues which are raised in this matter:
(a)Whether the lump sum representing the bonuses accumulated by Mr. Clark in the years before he became a recipient of social security benefits, is “income” during a period when he receives social security benefits; and
(b)If the said lump sum is “income”, whether it should be determined to be an exempt lump sum under subsection 8(11)(d) of the Act.
8. The combination of the definitions of “income”, “income amount” and “ordinary income” is extremely wide and covers almost all money received, or gained in assets, except those amounts which are obviously not income and/or which have been clarified by specific exclusion under subsection 8(4), 8(5), 8(8) and 8(11). Those subsections encompass a lengthy list of categories of money received which are not to be regarded as income.
9. In the case of the receipt of a lump sum on the maturing of a conventional life insurance policy it is probably obvious that the component which represents the total premiums paid by the investor would not be income, even allowing for the width of the “income” definitions. Indeed, in this case the lump sum representing the total of premiums paid has not been treated as income.
10. As for the lump sum representing accumulated bonuses, the position is not so clear. The Guide to Social Security Law directs that officers entrusted with decision making in this area adopt the following approach.
“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”
11. There is no dispute between the parties that the approach directed by the Guide is appropriate for bonuses accumulated during a period when the investor is a recipient of social security benefits. However, the parties do not agree on the method of assessing pensions in relation to bonuses accrued before the investor became a pensioner.
12. The case for Mr. and Mrs. Clark is that the matter should be approached in exactly the same way as it would have been if Mr. Clark had opened an interest bearing bank account and made periodic payments into that account. In such a case his balance at the bank, upon first applying for social security benefits, would have been treated as part of his assets. Any interest earned thereafter, that is while receiving a pension, would have been assessed as "income" for the purposes of calculating the rate of pension.
13. It was submitted by Mr. Derrington, for the Secretary, that:
(a)There is a public policy requirement that public expenditure is directed to those who stand in actual need of the periodic support which income-related pensions provide or to maintain a basic level of income for those who are unable to receive sufficient income to provide for themselves: and
(b)There is no point in comparing the bonuses to interest on bank accounts as such amounts are taxed in the year in which they accrue, but bonuses are not so treated.
14. Whilst the Tribunal accepts that people should use their own resources before they call on public expenditure, the provisions of the social security legislation do not require them to be totally destitute before they get a benefit. The rate of payment of benefits is governed by an assets test and an income test. Those tests allow pensioners to have a certain amount by way of assets without affecting the rate of payments. The income test only relates to income received during the period when the pensioner is receiving a pension, not to income that was received when the pensioner was not receiving a pension. As noted above, not all monies received are treated as income for the purposes of calculating pensions.
15. The fact that bonuses which accrue on an endowment policy are not declared as income, and no tax is payable on them, is irrelevant so far as this review is concerned. There are numerous examples of situations where people may increase their assets without paying tax on the increase. It depends on the way in which the increase is achieved, income tax thresholds and allowable deductions (among a host of other matters). It has been said on numerous occasions that the way in which the income tax legislation treats income for the purposes of assessable income may have very little bearing on the way in which the social security legislation treats income. (See for example Secretary, Department of Social Security v Garvey (1989) 91 ALR 245).
16. It is the view of the Tribunal that in the case of Mr. and Mrs. Clark, that part of the lump sum which Mr. Clark received on the maturity of his insurance policy, which represented premiums plus bonuses accrued up until they began to receive social security benefits, represented part of his assets at that date and none of it was “income” for the purposes of the Act. Consequently, the bonuses accrued prior to receipt of benefits in August 2001 was not “ordinary income” for the purposes of calculating the rate of payment of pensions.
17. The Tribunal has no problem with the direction in the Guide, set out in paragraph 10 above, as to the approach to be taken in relation to bonuses which accrue during a period when the policy holder is a recipient of social security benefits. However, the Tribunal takes the view that the Guide should have differentiated between financial gain accrued before receiving the pension and financial gain accrued after.
18. The Tribunal does not find it necessary to consider whether the lump sum under consideration should be determined to be an exempt lump sum under subsections 8(11) of the Act.
19. The Tribunal varies the decision under review and remits the matter to the Respondent for re-calculation in the light of this decision.
I certify that the 19 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President Don Muller
Signed: .......................................................................................
C. O’Donovan, AssociateDate/s of Hearing 30 June 2003
Date of Decision 17 December 2003
Counsel for the Applicant Mr. K. Heyworth-Smith
Solicitor for the Applicant Welfare Rights Centre
Counsel for the Respondent Mr. R. Derrington
Solicitor for the Respondent Australian Government Solicitor
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