Craig Watson and Secretary, Department of Social Services

[2014] AATA 333

[2014] AATA 333 

Division	GENERAL ADMINISTRATIVE DIVISION
File Number	2011/4941
Re	Craig Watson
APPLICANT
And	Secretary, Department of Social Services
RESPONDENT

DECISION

Tribunal	Deputy President K Bean Senior Member N A Manetta
Date	29 May 2014
Place	Adelaide

The Tribunal:

(a)sets aside the decision under review; and

(b)remits the matter to the respondent for determination and calculation of Mr Watson’s entitlement to disability support pension (DSP) in the period 1 October 2009 to 10 June 2011 with directions that:

(i)consideration is to be given to the making of determinations pursuant to s 1207Y(2) of the Social Security Act 1991 (the Act), consistently with the concession made by the respondent at the hearing of this matter and with our Reasons for Decision; and

(ii)for the purposes of s 1207Y of the Act, the income received by SYP Financial Services Pty Ltd by way of income protection payments during the relevant period is the total or gross amount of those payments, without any deductions for the outgoings of the business.

..........  [Sgd]  ...........................

Deputy President K Bean

CATCHWORDS

SOCIAL SECURITY  - Pensions – Disability Support Pension – Attribution of income derived by applicant’s financial services company to applicant – Whether attributed income should be reduced by outgoings of company – Income protection payments derived by company not income “from the business” – Element of double counting in calculation of applicant’s ordinary income – Whether certain payments should be treated as “excluded income” under s 1207Y(2) – Decision under review set aside and remitted for reconsideration in accordance with directions.

LEGISLATION

Social Security Act 1991, ss 117, 1064, 1207Y(2), and 1208B

Administrative Appeals Tribunal Act 1975, ss 26, 42C and 42D

CASES

Commissioner of Taxation (Cth) v Smith (1981) 147 CLR 578

Lee v Lee's Air Farming Ltd [1961] AC 12
Salomon v Salomon [1897] AC 22
Re Watson v Secretary, Department of Family and Community Services (2003) 128 FCR 564

Re Strauss v Secretary, Department of Family and Community Services (2005) 88 ALD 176

REASONS FOR DECISION

Deputy President K Bean
Senior Member N A Manetta

29 May 2014

1. The applicant, Mr Watson, is now 55 years old.  In 1996 he was diagnosed with a brain tumour, from which he subsequently recovered.  However, the tumour has left him with some permanent effects that affect his ability to work.

2. Fortunately, at the time Mr Watson’s brain tumour was diagnosed, he was covered by an income protection policy with the National Mutual Life Association of Australasia, a member of the Global AXA Group (“AXA”).  Before his tumour, Mr Watson had operated a business as a sole trading financial adviser and between 1996 and April 2009, he continued operating that business.  During the same period, payments were made to Mr Watson personally under his income protection policy with AXA. 

3. In April 2009, Mr Watson incorporated his business.  He became the sole director and shareholder of a private corporation called “SYP Financial Services Pty Ltd” (SYP) and was engaged by it thereafter as an employee.  In October 2009, he assigned to SYP the benefit of the policy under which he was receiving periodic income protection payments.  From October 2009, policy payments were accordingly made direct to SYP, as the policy assignee, and not to Mr Watson personally.  We were informed the policy assignment was a gift from Mr Watson to SYP.

4. Given the effects of his injury and his income, in August 2001 Mr Watson also applied for Disability Support Pension (DSP), which was granted.  Since 2001, Mr Watson has continued to receive DSP, although the rate of his DSP has been affected both by income from his company and payments made under the insurance policy.

5. As Mr Watson contends that his income has not been properly assessed for the purposes of determining his entitlement to DSP, it is in effect that issue which is the subject of these proceedings.

   PROCEDURAL HISTORY

6. This matter commenced with a decision in April 2011 by a Centrelink Complex Assessment Officer.  That officer decided that, for the purposes of assessing his entitlement to DSP, Mr Watson’s income for the period 1 October 2009 to 10 June 2011 comprised:

   (a)attributed income of $32,032.00 per annum, being payments made by AXA under an income protection policy to SYP;

   (b)net rental income of $3,887.50 per annum which he received from SYP[1]; and

   (c)salary income of $3,302.00 per annum which he also received from SYP.[2]

   [1] $3,887.50 was also attributed to his wife: see exhibit R3, T6/73.

   [2] Exhibit R2.

7. That decision was subsequently affirmed by an Authorised Review Officer (ARO), and on 19 October 2011 the Social Security Appeals Tribunal (SSAT) also affirmed the ARO’s decision.

8. On 18 November 2011, Mr Watson applied to this Tribunal for review of the decision of the SSAT, giving rise to these proceedings, and an initial hearing took place in the matter on 27 November 2012 before former Deputy President Jarvis.

9. As a result of issues which emerged at that hearing, Deputy President Jarvis made an order on 1 February 2013, by consent, remitting the matter to the respondent for further consideration pursuant to s 42D of the Administrative Appeals Tribunal Act 1975 (the AAT Act). The terms of the Tribunal’s order were as follows:

   …

   2.The reviewable decision is remitted to the Respondent for reconsideration under section 42D(1) of the Administrative Appeals Tribunal Act 1975 (Cth) on the Respondent’s undertaking that:

   2.1  if any salary or rental income that may be assessed as being part of the Applicant's ordinary income was funded by income protection payments (AXA Payments) made by AXA to the Company during the Relevant Period, then an amount of the AXA Payments equivalent to the portion of the rental or salary income funded by the AXA Payments will be determined to be 'excluded income' for the purposes of s 1207Y(2) of the Social Security Act 1991 (Cth);

   2.2  the Respondent will consider any documents or information provided to it by the Applicant under paragraph 1 of this order when reconsidering the reviewable decision.

   …

10. On 1 May 2013, the Tribunal advised the respondent that, as the reviewable decision had not been reconsidered within the period specified by the Tribunal under s 42D(5) of the AAT Act, the decision was deemed to have been affirmed and the proceeding had resumed in the Tribunal pursuant to ss 42D(7) and (8). However, the Tribunal noted that the information which had been provided by Mr Watson could nevertheless be considered by a Centrelink Complex Assessment Officer, and the reviewable decision potentially altered pursuant to s 26 of the AAT Act, or an agreement reached under section 42C.

11. On 3 July 2013, the respondent’s representative, Mr Parker, advised the Tribunal that the matter had been reconsidered by a Complex Assessment Officer and that a copy of the resulting decision had been sent to Mr Watson.  In effect, the respondent’s position had not changed upon reconsideration of the reviewable decision.  Following advice from Mr Watson that it was still his intention to pursue the application for review, the matter was set down for a resumed hearing before us on 16 December 2013.  For completeness, we should also explain that the Tribunal was reconstituted by the President due to Deputy President Jarvis’ retirement on 31 May 2013.

12. Before identifying and addressing the issues which arise for our determination more directly, we propose to set out the most relevant aspects of the applicable statutory framework.

    THE STATUTORY FRAMEWORK

13. The rate at which DSP is to be paid is determined by s 117 of the Social Security Act 1991 (the Act) and the Rate Calculator in s 1064 of the Act, which contains an income test.

14. Also of relevance to this matter is s 1207Y of the Act, which attributes the income of a company to an individual in certain circumstances:

    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:

    Amount referred to in paragraph (a)     _{x 365}
    Number of days in the derivation period

    Note: For attribution of the income of a special disability trust, see section 1209V.

    However, subs (2) and subs (3) of s 1207Y allow for determinations to be made excluding particular income from the effect of subs (1):

    Excluded income

    (2) The Secretary may, by writing, determine that, for the purposes of the application of subsection (1) to a specified individual and a specified company or trust, a specified amount is excluded income.

    (3) A determination under subsection (2) has effect accordingly.

15. With respect to how the income of a business is determined, s 1208B also relevantly provides:

    1208B  Permissible reductions of business and investment income

    (1) For the purposes of this Division, if a company or trust carries on a business or holds an investment, the company's or trust's ordinary income from the business or investment is to be reduced by:

    (a) losses and outgoings that relate to the business or investment and are allowable deductions for the purposes of section 8-1 of the Income Tax Assessment Act 1997; and

    (b) amounts that relate to the business or investment and can be deducted in respect of plant (within the meaning of the Income Tax Assessment Act 1997) under Division 40 of that Act; and

    (c) amounts that relate to the business or investment and are allowable deductions under any other provision of the Income Tax Assessment Act 1936 or the Income Tax Assessment Act 1997.

    ISSUES

16. In broad terms, the issue for our determination is what Mr Watson’s income was, for the purposes of determining his rate of DSP, in the period 1 October 2009 to 10 June 2011.[3]  Having regard to the evidence before us and the arguments put by the parties, this in turn involves determination of two discrete questions, namely:

    (a)whether attributing the income protection payments received by SYP to Mr Watson, and also treating the rent and salary payments made to him by SYP as additional income, involves inappropriate “double counting”; and

    (b)whether the income protection payments received by SYP and attributed to Mr Watson should be reduced by the outgoings of the company and, if so, to what extent.

    We will address each of these issues in turn.

    [3] We are limited to considering this period as that is the period dealt with in the reviewable decision: see exhibit 3, T2/3.  Further, we understand that Mr Watson ceased working on 31 May 2011 and after that date the income protection payments reverted to being made to him personally.

    THE “DOUBLE COUNTING” ISSUE

17. At the outset of the hearing before us, Mr Parker for the respondent indicated that, having further reconsidered its position, the respondent now accepted that it was not appropriate to treat Mr Watson’s income as comprising both payments under the AXA policy and rent and salary paid by SYP to Mr Watson.  This was because the income protection payments in effect constituted a large proportion of the gross income of SYP.  Therefore attributing that income to Mr Watson together with rent and salary payments generated from that income involved an inappropriate double counting.

18. Accordingly, the respondent conceded that a portion of the income protection payments equivalent to the rent and salary paid to Mr Watson during each relevant year should be treated as “excluded income” for the purposes of s 1207Y(1).  The respondent also accepted that it was appropriate for the amount of the excluded salary and rent payments to be determined by reference to personal income tax returns lodged by Mr Watson for the relevant periods.

19. We should also note that, for his part, Mr Watson accepted that he was an “attributable stakeholder” of SYP during the relevant period and, subject to any determination made pursuant to s 1027Y(2), it was appropriate to attribute all of the income of SYP during the relevant period to him.

20. Having explained why this issue is no longer in dispute, we will return to the question of how we propose to dispose of it later in our Reasons.

    TREATMENT OF THE INCOME PROTECTION PAYMENTS

21. The issue which remains in dispute relates to the treatment of the income protection payments made to SYP and, in particular, whether it was appropriate for the respondent to have regard to the gross amount of those payments.

22. Mr Watson maintains that the amount of the income protection payments made to SYP which should be attributed to him is in fact not the “gross” amount of the income protection payments, but the “net” amount, that is, net of the outgoings incurred by SYP, and any permissible deductions.

23. We note that while Mr Watson was still practising on his own account, he put this very argument to the Tribunal in 2003 and then on appeal to the Federal Court.  His argument was rejected.  In Re Watson and Secretary, Department of Family and Community Services (2003) 73 ALD 88, the Tribunal decided that the income protection payments he received were not derived from his financial planning business and that in these circumstances, Mr Watson could not deduct from the payments the outgoings incurred in respect of his work as a financial adviser.  That is, the respondent was bound to take account of gross income protection payments, with no deduction, when calculating the pension rate.  The Tribunal held that this approach was required by the wording in s 1075 of the Act, which we need not set out, but which, crucially, permits only income “from the business” to be reduced by losses and outgoings that relate to that business.

24. The Federal Court[4] dismissed Mr Watson’s appeal and affirmed the Tribunal’s decision.

    [4] See Watson v Secretary, Department of Family and Community Services (2003) 128 FCR 564.

25. Mr Watson argued before us that these earlier decisions should not apply to his new situation as an employee of an incorporated entity undertaking a financial advising business.  His principal submission, as we understand it, was not that there had been a relevant change in circumstances, but that the earlier decisions are wrong in principle and should not be followed.  He strongly pressed us with a submission that both the Tribunal and the Federal Court had mistakenly overlooked the High Court’s decision in Commissioner of Taxation (Cth) v Smith (1981) 147 CLR 578, an authority to which he said he had referred them and which he submitted was decisive of the issue in his favour.

26. We consider that we are bound to follow the Federal Court’s decision (unless it is distinguishable in some way).  We would note, however, that we do not believe the Federal Court overlooked Smith’s case.  We do not believe, in fact, that Smith’s case is relevant.

27. Smith’s case stands for the proposition that periodic payments made under an income protection policy may qualify as “income” for the purposes of the Income Tax Assessment Act 1936.  In that case, the High Court accepted the Commissioner’s contention that payments under an income protection policy to a disabled medical practitioner were “in substitution for [his] income and therefore [took] the place of a revenue receipt”.[5]  The case does not stand for the proposition that income derived under such a policy is deemed in law to be derived from the insured person’s profession.  To hold, as the High Court held, that periodic payments made under an insurance policy are “income”, because they are a substitute for the revenue that the insured would otherwise have earned from his or her profession, says nothing about the source of the substitute income.  The Court had no need to consider the source of the substitute income because that issue did not arise under the legislative provisions the Court was considering. 

    [5] (1981) 147 CLR 578 at 583.

28. It is quite true, as Mr Watson submitted, that the High Court expressly accepted that the income under the policy was received “in substitution for” income lost by the incapacitated professional.  At the risk of labouring a point, however, we make clear that we do not accept his submission that the High Court impliedly decided that the policy income, because it was substitute income, came from the same source as the lost income.  That is not the case in our view.

29. The only relevant question for us, therefore, is whether the incorporation of Mr Watson’s business, which occurred after the Federal Court’s decision, requires a different legal conclusion.  We do not think that it does. 

30. We accept that, from the point of incorporation onwards, the business of financial advising formerly undertaken by Mr Watson in a personal capacity was offered to the public by a corporation, SYP, a separate legal person in the eyes of the law.[6]  Moreover, the law recognises Mr Watson’s engagement as an employee of the corporation he set up, although he is also its sole director and shareholder.[7]  We also accept that Mr Watson’s assignment of his income protection policy to SYP was effective in law. 

    [6] Salomon v Salomon [1897] AC 22.

    [7] See, for example, Lee v Lee’s Air Farming Ltd [1961] AC 12.

31. We conclude however, that the source of the income derived by SYP under the policy was not the financial advising business conducted by it.  The income was derived by SYP as a separate stream under the policy that Mr Watson had assigned to it. 

32. In this respect, the test to be applied under the relevant provision of the Act (s 1208B) is not materially different from the test in s 1075, which was considered by the Tribunal and Federal Court in 2003. Section 1208B provides, in effect, that business losses and outgoings can only be used to reduce the income derived from SYP’s business, not other income SYP might happen to receive. Accordingly, we do not think that losses and outgoings incurred in respect of SYP’s financial advising business can be used to reduce the income earned by it under the income protection policy. Income under the policy is not income earned “from” its financial advising business. It follows that, subject to any determination made under s 1207Y(2), we consider that the balance of the gross amount of the income protection payments made to SYP should be attributed to Mr Watson for the purpose of assessing his entitlement to DSP.

    CONCLUSION AND DISPOSITION

33. As noted above, the respondent concedes that it is appropriate for a determination to be made pursuant to s 1207Y(2), that some of the income of SYP which would otherwise be attributable to Mr Watson is “excluded income”. In particular, the respondent concedes that, for attribution purposes, the income protection payments paid to SYP during the relevant period should be reduced by the rent and salary also paid to Mr Watson during the same period and the amount of the reduction should therefore be treated as “excluded income”.

34. We have considered whether we should make a determination giving effect to the respondent’s concession.  However, we have concluded that there are a number of difficulties with us doing so:

    (a)it is not entirely clear to us that we have jurisdiction to make such a determination;[8]

    (b)it is not clear to us that the personal tax returns supplied by Mr Watson after the hearing have been lodged with the Australian Taxation Office;

    (c)having regard to the nature of the returns supplied by Mr Watson and the fact that the period involved does not precisely coincide with one or more financial years, it will not be a straightforward matter to determine what amounts should be treated as “excluded income”; and

    (d)we did not hear argument as to whether the income protection payments attributed to Mr Watson should be reduced by the rental payments attributed only to him or to both him and his wife[9].

    [8] Re Strauss and Secretary, Department of Family and Community Services (2005) 88 ALD 176, at [27] – [30].

    [9] See exhibit R3,T2/6.

1. In these circumstances, we have determined that the most appropriate course for us to adopt is to remit the matter to the respondent for the making of determinations consistent with the concessions made by the respondent during the hearing, which we consider to have been correctly made.

2. For the reasons we have given, we consider that, insofar as the decision under review treated the gross rather than net amount of the income protection payments made to SYP as attributable to Mr Watson, we consider it to have been correct. Accordingly, whilst we propose to set aside the decision under review to allow determinations to be made under s 1207Y(2), we intend these determinations to be made on the basis that the gross amount of the income protection payments constitutes relevant income of SYP. We also note that in determining Mr Watson’s entitlement to DSP, it will be necessary for the relevant decision-maker to also have regard to any income of SYP apart from payments under the income protection policy, which (providing it is income “from the business”) can be offset against outgoings of the business or other deductions pursuant to s 1208B.[10]

   [10] We note that according to the company tax returns supplied by Mr Watson at the hearing, in addition to the income protection payments, SYP had income of $9,488.00 in the 2010 financial year and $7,495.00 in the 2011 financial year: exhibits A7 and A8.  Mr Watson also filed an amended company return for the 2011 tax year after the hearing, showing some further additional income.

   DECISION

3. The Tribunal:

   (a)sets aside the decision under review; and

   (b)remits the matter to the respondent for determination and calculation of Mr Watson’s entitlement to DSP in the period 1 October 2009 to 10 June 2011 with directions that:

   (i)consideration is to be given to the making of determinations pursuant to s 1207Y(2) of the Act, consistently with the concession made by the respondent at the hearing of this matter and with our Reasons for Decision; and

   (ii)for the purposes of s 1207Y of the Act, the income received by SYP Financial Services by way of income protection payments during the relevant period is the total or gross amount of those payments, without any deductions for the outgoings of the business.

I certify that the preceding 37 (thirty -seven) paragraphs are a true copy of the reasons for the decision herein of Deputy President K Bean and Senior Member N A Manetta

..... [Sgd] ....

Associate

Dated 29 May 2014

Dates of hearing	27 November 2012 and 16 December 2013
Date final submissions received	5 February 2014
Applicant	In person
Advocate for the Respondent	Mr A Parker
Solicitors for the Respondent	Program Litigation Review Branch Department of Human Services