Cremer; Department of Family and Community Services
[2001] AATA 509
•8 June 2001
DECISION AND REASONS FOR DECISION [2001] aata 509
ADMINISTRATIVE APPEALS TRIBUNAL )
) No Q2000/488
GENERAL ADMINISTRATIVE DIVISION )
Re SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES
Applicant
And PAUL CREMER
Respondent
DECISION
Tribunal Dr EK Christie, Member
Date8 June 2001
PlaceBrisbane
Decision The Tribunal sets aside the decision under review and in substitution therefor decides that the gross amount of Mr Cremer's United States pension should be used in calculating the rate of his Australian age pension.
(Sgd) EK CHRISTIE
MEMBER
CATCHWORDS
SOCIAL SECURITY - age pension - definition of "income" - applicant in receipt of pension from USA - whether amount deducted in USA as Federal tax should be included as "income" for the purposes of the Social Security Act 1991.
Social Security Act 1991 ss 8, 1064, 1072
Durant v Secretary, Department of Family and Community Services (1999) 57 ALD 211
REASONS FOR DECISION
8 June 2001 Dr EK Christie, Member
This is an application by the Secretary, Department of Family and Community Services ("the Department") for a review of a decision of the Social Security Appeals Tribunal ("the SSAT") made on 3 May 2000 that the net amount, rather than the gross amount, of Mr Cremer's United States ("US") social security pension should be used in calculating the rate of his Australian age pension. The SSAT decision set aside the decision of an Authorised Review Officer made on 24 February 2000 that the gross amount of Mr Cremer's US social security pension, rather than the net amount, should be used in calculating the rate of his Australian age pension.
The Department's reasons for this application for review were:
"The SSAT erred by failing to have regard to the clear intention of the Social Security Act 1991 to assess gross income in the absence of a permissible reduction pursuant to Division 1A of Part 3.10 of the Act". (T1, Folio 1).
The Department was represented by Mr P Kanowski, a Departmental Advocate. Mr Cremer was represented by Mr A McLean Williams of Counsel, instructed by Welfare Rights Centre Inc.
At the hearing, the Department had in evidence before it documents lodged pursuant to Section 37 of the Administrative Appeals Tribunal Act 1975 – the "T" Documents (Exhibit 1).
Issues before the TribunalThe only issue for the Tribunal to decide was whether the gross amount or net amount of Mr Cremer's US pension should be used in calculating the rate of his Australian age pension.
FactsThe following findings of fact made by the SSAT were not in dispute by the parties:
"(i) Mr Cremer is in receipt of an Australian age pension.
(ii) He is also in receipt of a Social Security pension from the United States.
(iii) The amount of his US pension is $US427.00 gross per month.
(iv)A US Federal tax of 25.5% in the amount of $US108.90 per month is deducted from Mr Cremer's US pension.
(v)Mr Cremer is unable to recover the tax amounts which have already been withheld, and is unable to recover any future withholding tax unless he becomes a US citizen, or lives in the United States or in other nominated countries not including Australia." (T2 Folios 4 and 5)
Statutory Framework
The relevant legislation is contained in the Social Security Act 1991 ("the Act"). The method of calculating the rate of age pension is set out in Section 1064 of the Act. Module E of Section 1064 contained the "ordinary income" test. Section 1072A of the Act sets out how income is calculated and defines income as generally being total gross income. Section 1072 defines the meaning of "ordinary income" for the purposes of the Act:
"1072. 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 of the period calculated without any reduction, other than a reduction under Division 1A".
Section 8(1) defines "income":
"'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), (7A) or (8);
Note 1:See also sections 1074 and 1075 (business income), sections 1076-1084 (deemed income from financial assets), sections 1095-1099D (income from income streams), section 1099F (exempt bond amount does not count as income) and section 1099K (refunded amount does not count as income).
Note 2:where a person or a person's partner has disposed of income, the person's income may be taken to include the amount which has been disposed of – see sections 1106-1112.
Note 3:income is equivalent to ordinary income plus maintenance income.
'income amount' means:
(a)valuable consideration; or
(b)personal earnings; or
(c)moneys; or
(d)profits;
(whether of a capital nature or not);
'income from personal exertion' means an income amount that is earned, derived or received by a person by way of payment for personal exertion by the person but does not include an income amount received as compensation for the person's inability to earn, derive or receive income through personal exertion;
'ordinary income' means income that is not maintenance income or an exempt lump sum.
Note 1: for 'maintenance income' see subsection 10(1).Note 2:amounts received as a series of periodic compensation payments may result in reduction of the person's rate of social security pension or benefit under Part 3.14: if this happens the amounts are not counted as ordinary income (see section 1171).
Note 3:For provisions affecting the amount of a person's ordinary income see sections 1072 and 1073 (ordinary income concept), sections 1074 and 1075 (business income), sections 1076-1084 (deemed income from financial assets) and sections 1095-1099D (income from income streams).
Note 4:Point 1068B-D3 varies the definition of 'ordinary income'. This varied definition applies only to Module D of the Parenting Allowance Rate Calculator."
Section 8(2) of the Act defines the meaning of "earned, derived or received" income:
"8.(2) 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)."
Contentions and Submissions of the Parties
Counsel for each party addressed the following three issues central to better-informed decision-making by the Tribunal:
whether the amount of US Federal tax withheld was "income";
the application of Section 1072 to the calculation of age pension entitlements; and
the precedent value of Durant v Secretary, Department of Family and Community Services (1999) 57 ALD 211.
Each of these issues are considered in turn.
The statutory meaning of "income"
Mr Kanowski submitted that by applying subsection 8(1) and 8(2) of the Act, the US pension was derived by Mr Cremer for his own use or benefit and therefore it was "income".
Mr Kanowski contended that, with respect to the proportion of US pension withheld as US Federal tax from him, Mr Cremer was able to obtain the important benefit of having his taxation liability discharged. In these circumstances, he contended that it would be sufficient to meet the purposes of the statutory meaning of "income" (Section 8 of the Act).
Mr McLean Williams contended that Mr Cremer had not earned his US pension – notwithstanding that he may have "derived" or "received" it for his own use or benefit. Mr McLean Williams acknowledged that Mr Cremer's US pension was a periodic payment and was "derived" income.
However, Mr McLean Williams submitted that applying the meaning of "income" provided in subsection 8(1) of the Act, an amount was not "income" unless it was "derived for the person's own use or benefit". That is, that benefit must attach personally.
It was Mr McLean Williams' contention that the prospects of Mr Cremer ever receiving the personal benefit of the amount of US tax withheld, such that he received the "own use or benefit" of the gross amount of his US pension, were exceedingly remote. Such a step would only be possible if Mr Cremer became a US citizen or left Australia altogether. However, such steps to obtain the benefit, he contended, would be "unreasonable and absurd".
Mr McLean Williams submitted that the only benefit that Mr Cremer "derived" from his US pension was the net amount of that pension. Consequently, only the net amount of US pension satisfied the meaning of "income" provided in subsection 8(1) of the Act.
The application of Section 1072 of the Social Security Act
Mr Kanowski submitted that as the US pension was derived by Mr Cremer for his own use and benefit, it was "income". Moreover, by applying Section 1072 of the Act, a reference to "income" in the Act was an express reference to "gross income" (not "net income") from all sources.
Mr McLean Williams submitted that all income components notionally ascribed to the benefit of Mr Cremer must be categorised as "income" before Section 1072 had any application.
Mr McLean Williams contended that Section 8 of the Act defined "ordinary income" as "income that was not maintenance income or an exempt sum". Accordingly, it was his contention that until a sum was categorised as income it was not "ordinary income" of the kind to which Section 1072 referred.
The precedent value of Durant's case
Mr Kanowski referred to the reasoning of Deputy President Forgie in Durant's case where the issue for the Tribunal to decide was whether the gross or net amount of Canadian pension should be taken into account as income in calculating mature age allowance entitlements.
Mr Kanowski stated that in Durant's case the Tribunal decided that the whole of Mr Durant's Canadian pension, including the part withheld for taxation, had been earned, derived or received for his own use or benefit. Additionally, it had been for Mr Durant's use or benefit that he pay his taxation obligations.
Mr McLean Williams contended that Durant's case had been wrongly decided by the Tribunal as it appeared to be based on a misconception of when in time a taxation obligation was raised and then discharged.
It was Mr McLean Williams' contention that the decision in Durant was contingent upon acceptance of the view that compulsory withholding of portions of a foreign pension before it came to the hand of a recipient was nonetheless income, as it was an income amount that had been derived for the own use or benefit of the recipient.
Mr McLean Williams submitted that in Mr Cremer's case, tax had been withheld by a foreign government instrumentality pursuant to an obligation imposed by national law. However, he contended that the obligation upon Mr Cremer did not arise until Mr Cremer lodged a tax return and that a taxation obligation had not yet arisen. Furthermore, it was incorrect to assert that it was "to that person's benefit" that an obligation be met when it had not yet arisen.
Mr McLean Williams contended that until such time as the precise extent of a taxation obligation had been specified, a foreign withholding tax may only be categorised as:
(a) an impost raised by law (whether foreign law or local) on the taxpayer; and
(b)the fulfilment of a legal obligation imposed on the entity responsible for that withholding (and thus a benefit to that entity).
Finally, Mr McLean Williams submitted that Durant's case could be distinguished from Mr Cremer's circumstances because Mr Durant was able to send a tax return to Canada, the non-resident withholding tax would be counted as a tax credit, thereby enabling Mr Durant to obtain "benefit" of that credit. However, such a situation did not exist for Mr Cremer.
Consideration of the IssuesThe objective of the Tribunal is to review administrative decisions, not only on the merits but in accordance with the law at all times. The relevant legislation is the Social Security Act 1991.
In applying the statutory framework in Mr Cremer's case, the Tribunal must firstly decide whether the amount of US Federal tax deducted from Mr Cremer's US pension was an amount "earned, derived or received" by Mr Cremer for his "own use or benefit".
Deputy President Forgie in Durant and Secretary, Department of Family and Community Services (1999) 57 ALD 211 carefully considered relevant authorities on the statutory meaning [Social Security Act Section 8] of "income". The Tribunal agrees with the reasoning and conclusions of Deputy President Forgie in Durant's case at 217:
"Payment of tax from money which Mr Durant earns, derives or receives is part of the money for his own use or benefit. It is for his own use or benefit that he pay his taxation obligations whether those obligations arise in Canada or Australia. The fact that he is not called upon to meet those obligations from the pensions moneys he actually receives and that the money is deducted before the balance is sent to him is of no consequence. The analogy lies in the PAYE system used in Australia. The fact that the Income Tax Assessment Act 1997 (Cth) requires an employer to deduct instalments of income tax from an employee's salary before paying the employee his or her salary does not mean that the payment of income taxation is not the employee's obligation. The employer has an additional obligation imposed upon it in relation to the salary it pays to its employee and that additional obligation is owed to the commissioner of taxation."
Furthermore, the Tribunal agrees with the SSAT dissenting decision, in applying the reasoning of Deputy President Forgie in Durant's case to the circumstances of Mr Cremer's case:
"Mr Cremer may well accrue no direct benefits as a result of payment of his US taxation liability. However, it can equally be argued that a person in Australia accrues no direct benefits from payment of their Australian taxation liability; an individual's entitlements to services and facilities is not dependent on whether or not they pay taxes. It is however clear that a detriment will ensue if a person has a taxation liability and does not pay it. This is true whether the taxation liability arises in the person's country of residence or elsewhere. Therefore, it is to the person's benefit that his or her taxation liability be paid. The payment of the US Federal withholding tax is to Mr Cremer's benefit. When this conclusion is reached, the mechanism by which that payment is made is irrelevant." (T2, Folio 9)
Deputy President Forgie also considered the application of Section 1072 of the Act (at 217) in Durant's case:
"That section clearly provides that a reference in the SS 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 and that his or her ordinary income is to be calculated without any reduction, other than a reduction under Div 1A. The ordinary meaning of the word 'gross' is, in so far as it is relevant (Macquarie Dictionary, 1981):
…-adj. 1. Whole, entire, or total, esp. without having been subjected to deduction, as for charges, loss, etc.: gross profits….(27) It seems to me that the clear intention of the SS Act is that, provided money can be said to be earned, derived or received for a person's use or benefit, no deductions are to be made unless they are permitted under Div 1A of Pt 3.10 Compulsory deduction of taxation before it comes into the hands of the recipient does not make the money deducted any less a payment in satisfaction of a person's obligations and so a payment for the person's use or benefit."
For all of the above reasons, the Tribunal is satisfied that the amount of Federal tax withheld from the US pension paid to Mr Cremer is "income" within the meaning of Section 8 of the Act as it is earned, derived or received by Mr Cremer for his own use or benefit.
Furthermore, the Tribunal concludes that the gross amount of Mr Cremer's US pension (i.e. before deduction of the Federal tax) should be included in Mr Cremer's income for the purposes of the Social Security Act 1991.
The Tribunal sets aside the decision under review and in substitution therefor decides that the gross amount of Mr Cremer's United States pension should be used in calculating the rate of his Australian age pension.
I certify that the 34 preceding paragraphs are a true copy of the reasons for the decision herein of Dr EK Christie, Member
Signed: Emma Oettinger
AssociateDate/s of Hearing 9.3.01
Date of Decision 8.6.01
Solicitor for the Applicant Mr P Kanowski, Departmental Advocate
Counsel for the Respondent Mr A McLean Williams
Solicitor for the Respondent Ms G Bolton, Welfare Rights Centre Inc
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