Davies and Secretary, Department of Family and Community Services - [2002] AATA 904

DECISION AND REASONS FOR DECISION [2002] AATA 904

ADMINISTRATIVE APPEALS TRIBUNAL )

) No S2001/355

GENERAL ADMINISTRATIVE DIVISION       )
           Re      JOHN DAVIES
  Applicant
           And    SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES
  Respondent

DECISION

Tribunal Senior Member WJF Purcell

Date3 October 2002
PlaceAdelaide

Decision      The Tribunal affirms the decision under review.
  (Signed)
  WJF PURCELL
  (Senior Member)
CATCHWORDS
SOCIAL SECURITY – pensions, benefits and allowances – Age Pension – income test – whether capital growth on life assurance policy should be assessed as income or an exempt lump sum
Social Security Act 1991 sections 8, 9, 1073
Re Saundry and Secretary, Department of Social Security (1988) 16 ALD 200
Varcoe and Secretary, Department of Family and Community Services [2000] AATA 1002

REASONS FOR DECISION

3 October 2002 Senior Member WJF Purcell

This is an application for review of a decision of the Social Security Appeals Tribunal (the SSAT) of 15 August 2001, which varied the decision of a delegate of 10 April 2001, as affirmed by an Authorised Review Officer of 15 May 2001, to maintain the sum of $15,772 as income, for a 12 month period from 10 April 2001. The decision was in accordance with section 1073 of the Social Security Act 1991 (the Act). The SSAT varied the decision by taking into consideration the transfer of bonus additions amounting to $2,164.91 to the applicant's life assurance policy, thus reducing the sum to be maintained as income to $13,607.09.
The evidence before the Tribunal comprised the documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (the T Documents). The applicant appeared on his own behalf, and gave oral evidence. Mr Underwood represented the respondent (the Department).
On 18 February 1985, the applicant, who was changing employers, requested, among other matters, that a non-exempt policy (a superannuation policy) be reassigned to him as an endowment policy, maturing on his 65th birthday and with annual premiums of $1,200. In accordance with these instructions, The Colonial Life Mutual Life Assurance Society Limited issued life assurance policy number 1941136. Premiums were set at $1,200 per year, and the policy was payable on 28 March 2001, the applicant's 65th birthday, or on his death.
On 29 January 2001 the applicant, who was at that time in receipt of Carer Payment, had an interview with an officer in the Department's Financial Information Services section. The record of interview reads, in part:
"…
You have an endowment policy currently worth approx $36,000. Your premiums have been $1,200 pa x 16 years approx $19,200. Under income test, we assess the profit as your income for 12 months - $36,000 - $19,200 = $16,800. It is assessed as income for 12 months from date paid out – you need to notify Centrelink within 14 days of receiving the payout.
…
It has been suggested you put the $18,800, the $36,000 ie $54,800 into a complying annuity which is exempt from the assets test.
This would reduce your assets to approx $255,200.
This would give you pension under assets test of approx $467.30 ft combined.
Pension would then be paid under income test at approx $350 to $360 ft (depending on the actual income from the immediate annuity) until the 12 months had passed for the growth on the endowment policy. Then you would come under the asset test at approx $467.30 ft.
…"
On 28 March 2001, the applicant became eligible for Age Pension, and on 10 April 2001 he advised of surrender of the policy. A delegate assessed the sum of $15,772 as income for a period of 12 months, commencing on 10 April 2001. The assessment of the sum as income had no effect upon the rate of payment of pension, as the applicant was subject, at that time, to the assets test and not the income test. On 15 May 2001 an Authorised Review Officer affirmed the decision, and on 15 August 2001 the Social Security Appeals Tribunal varied the decision by the decision under review.
Section 8 of the Act, as far as is relevant, provides:
"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);
…
(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 1073 (1) of the Act provides
(1)       Subject to points 1067G-H5 to 1067G-H20 (inclusive), 1067L-D4 to 1067L-D16 (inclusive), 1068-G7AA to 1068-G7AR (inclusive), 1068A-E2 to 1068A-E12 (inclusive) and 1068B-D7 to 1068B-D18 (inclusive), if a person receives, whether before or after the commencement of this section, an amount that:
          (a)       is not income within the meaning of Division 1B or 1C of this Part; and
          (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".
Life insurance policies do not fit neatly within the definitions of financial assets and income streams. The relevant Departmental Policy Guidelines, prior to 21 July 1997, read:
"Conventional life insurance policies
27.9410Conventional life insurance policies are distinguished from insurance bonds. They should also be distinguished from unbundled life insurance policies which combine elements of conventional life insurance and investment similar to insurance bonds.
The main purpose of conventional life insurance policies is to provide death cover, although some policies also mature if the insured becomes totally disabled. Some kinds of conventional insurance also include an investment element. Bonuses on these policies are not assessed as income either during the term of the policy or on maturity."
The relevant Departmental Policy Guidelines, post July 1997, read:
"27.9411The main purpose of conventional life insurance policies is to provide death cover, although some policies also mature if the insured becomes totally disabled. Some kinds of conventional insurance also include an investment element.
27.9412Bonuses on these policies are not assessed as ongoing income during the term of the policy, however, on maturity, the difference between the maturity payment and the sum of the purchase price and premiums paid by the investor should be assessed as income for 12 months under section 1073. This applies for both pension and benefit purposes."
On 1 August 2001, when the matter came before the SSAT, the applicant was still subject to the assets test; but on 26 July 2001, he had advised the Department of changes to his and his wife's assets, and with effect from 10 August 2001 his pension became subject to the income test. At the date of the Hearing before this Tribunal, the applicant and his wife were each in receipt of pension at the reduced rate of $261.90 per fortnight.
The applicant made oral submissions and provided also lengthy written submissions, with attachments. The submissions are too detailed and voluminous to outline in detail, but I have taken them into account in my deliberations, and for the purposes of these Reasons I will outline only his major arguments.
The applicant submits that a distinguishing feature of endowment insurance is its similarity to superannuation insurance. His endowment policy, he maintains, operated during its term of 16 years, in the same way as a superannuation insurance policy, ie premiums were paid annually, bonuses were derived annually (albeit less than superannuation policy bonuses due to income tax breaks), and the policy was allowed to mature at age 65 (retirement). The end benefit of this policy provided for retirement, in exactly the same manner a superannuation policy would. The old Social Security Act (until 1 November 1983) treated endowment insurance and superannuation insurance as exempt lump sums. Under the current Act (Social Security Act 1991), there never has been any mention of endowment insurance, requiring a guideline interpretation which recognised endowment insurance (and superannuation insurance) as exempt lump sums.
The Departmental Guidelines changed from 21 July 1997 to treat bonuses under section 1073 as income for a period of 12 months, thereby discriminating in favour of superannuation. This change was prompted by various forms of "rorting", but caught all long-term endowment insurance policy holders as well. The applicant contends that the current guideline is harsh, unjust, inequitable, discriminatory and inconsistent with history, the correct amount to be assessed as income should be nil.
The applicant seeks a special individual determination in accordance with section 8(11)(d) of the Act, to exempt all bonuses ($15,772), for the same logic and reasons that applied prior to 21 July 1997, also due to the retrospective effects of the 1997 change (backdated 12 years to 1985), and due to the impossibly short 2 months notice of this guideline impost to allow him to surrender the policy. He relies on ReSaundry and Secretary, Department of Social Security (1988) 16 ALD 200. He submits also that Re Saundry indicates that there is a legal entitlement to pro-rata bonuses before maturity (ie at surrender), not the full accumulated amounts declared, but a reduced amount scaled down according to the shortened life of the policy. Accordingly, in the alternative, he seeks a special individual determination to exempt bonuses accrued prior to the change in guidelines, between 18 February 1985 and 21 July 1997, of $12,513.
The applicant relies also on the matter of Varcoe and Secretary, Department of Family and Community Services [2000] AATA 1002, which he submits treated the maturity proceeds for the policy as an exempt lump sum, except for the net earnings after 21 July 1997, on the basis that it was "unfair, unjust and inequitable" to treat the whole of the proceeds as lump sum income in one year. In that matter the Tribunal used its unfettered power under section 8(11)(d) of the Act to split the total bonuses. Accordingly, in the alternative, he seeks a special individual determination under section 8(11)(d) of the Act to exempt all bonuses, except those applicable to the period from commencement of pension to maturity (ie between 6 January 2001 and 28 March 2001), calculated as in Varcoe.
The Department maintains that section 8 of the Act defines "income". Section 9 of the Act defines "financial assets" and "income streams". The life insurance policy did not fit within any of those definitions, and could not be considered therefore to generate an income contemporaneous with the policy's existence, despite growth in the capital amount. Until its maturity, no consequent income was assessed against the applicant's pension. Section 1073 of the Act provides for the treatment of lump sum amounts as though received over a 12 month period. The section only applies where a sum of money first answers the description of income, and it applies to income received in a non-periodic or capital form. The mere return of capital would not be caught as "income". Accordingly, the applicant's contributions were excised in recognition that they were simply the return of his own moneys. In this way an amount akin to an accumulation of interest, is all that is assessed as income. Section 1073 of the Act therefore, operates to asses an income for a period of 12 months, equal to the amount received, less the applicant's contributions, unless it is determined that the amount is an exempt lump sum.
The Department argues that section 8(11)(d) of the Act is worded in such a way that it is an unfettered power. Nevertheless, it should be exercised in a manner consistent with the aims and purpose of the legislation. The Secretary is empowered to exempt a class of amounts, and in so doing takes into account the origins of the amount, and the purpose for which it is intended. In individual cases the Secretary considers the individual's circumstances, if an exemption of a class of amounts has otherwise proved inappropriate.
The Department maintains that in the matter of Varcoe, the Tribunal exercised the power in section 8(11)(d) of the Act incorrectly, insofar as it directed that the lump sum be dissected to assess only the income accrued during the period Mr Varcoe received a pension. The relevant definition of income in section 8 of the Act requires that the money be "earned, derived or received". This money was not earned or derived over the period it accrued, as there was no present legal entitlement to it. The money was however, received by the applicant and, by virtue of section 1073 of the Act, it is assessable as "income" from that date.
The Department submits finally that, in the alternative, this matter can be distinguished from Varcoe in that the applicant had prior warning of the effect of the treatment of the lump sum. He was aware of the effect of the income on his pension some 2 months prior to the amount being received. It was his actions in modifying his financial assets that resulted in his receiving a pension subject to the income test, and the amount effecting his pension rate. The applicant has financial assets in excess of $180,000 available for him to live on; there is no financial hardship evident; he received a substantial amount of money, and the expectation underlying section 1073 of the Act is that such funds be available as income for a 12 month period, unless there is good reason to justify it being treated differently from the receipt of other lump sums; and if the discretion available in section 8(11)(d) of the Act is exercised, it will result in an assessment of no income whatsoever.
I note that in the matter of Re Saundry the delegate had varied, on review, an original decision, by disregarding the bonuses received for the period before 1 November 1983, namely $1,804, on the basis that prior to that date such a bonus was one of the exclusions from the definition of "income" under the previous legislation. Under the current legislation, "income amount" defined as, inter alia, "profits (whether of a capital nature or not)" covers, in my view, a bonus under an insurance policy. In accordance with section 1073(1) of the Act, if the amount is not an "exempt lump sum" the person is taken to receive 1/52 of that amount as ordinary income during each week in the 12 months commencing on the day upon which the person becomes entitled to receive that amount. It follows that the total accumulated bonuses are assessed as income, irrespective of the period during which the bonuses were accumulated, or the person was a recipient of Social Security payments.
The documentary evidence discloses that unlike the situation on 1 November 1983, it was not a change of legislation, on 21 July 1997, that altered the Department's treatment of bonuses, but a clarification of policy. The Policy Document relating to the Assessment of Conventional Life Assurance Policies issued in March 2000 reads at Question 3:
"Q3 When did the income test assessment of conventional life insurance policies change?
A3 Prior to 21 July 1997 bonuses on conventional life assurance policies were not assessed as income. After 21 July 1997 the income testing of policies at surrender, or maturity, changed as a result of a clarification of policy to ensure that there was no misinterpretation of the Social Security Act."
In the matter of Varcoe, Senior Member Dwyer determined that the sum of $16,066.56, being the whole return on maturity, except the bonuses accrued from 21 July 1997 (the date of the change in Departmental policy) and 31 July 1999 (the date from which Mr Varcoe's policy matured) was an "exempt lump sum" under section 8(11)(d) of the Act. The Senior member said at paragraph 36:
"… I have formed the view that it was unfair, unjust and inequitable to treat all the return on Mr Varcoe's investment over the period of 43 years, excluding only the actual premiums paid, as income received in one year for the following reasons:
(i)        Mr Varcoe was only in receipt of Social Security payments for three and a half of the 43 years during which his investments were maturing.
(ii)       The approach required by Centrelink of its officers makes no allowance for inflation; the $78.76 paid as a premium in 1956 would be worth much more than that in "real money" terms today.
(iii)      Mr Varcoe could have arranged for his policies to mature prior to 21 July 1997, had he had reasonable advance warning of the proposed change in the practice of applying s 1073 of the Act.
(iv)      As Mr Varcoe demonstrated there is a stark inequality in the treatment of lump sum superannuation payments and lump sum payments on maturity of age insurance policies.
(v)       No reason has been advanced why those who took steps many years ago to make provision for their families or for their retirement by way of life/age insurance policy should be penalised for their saving when the policies mature at age 65. Had the money simply been banked in an interest bearing account, the accrued interest over the years 1956-1998 would have been treated as an asset for the assets test and subject to the deeming rules, but would not have been treated as income in the year 30 July 1999 – 30 July 2000.
(vi)      To treat all bonuses accrued from 1956 to 1999 as income received in 1999 gives 41 years of retrospective effect to a policy change which came in to operation in 1997."
I agree with Senior Member Dwyer that there is an inequality in the treatment of lump sum superannuation payments and lump sum payments on maturity of age insurance policies; but in my view, this has arisen in the historical context of the development over time of different superannuation schemes, investment products, and changes in Departmental policy in relation to these products. I disagree however, with the learned Senior Member's view that it was appropriate to treat as income, only those bonuses accrued after 21 July 1997. Section 8(11)(d) of the Act provides the Secretary, and hence this Tribunal, with a discretion to determine an amount, or class of amounts, to be "an exempt lump sum". The notes to the section set out some examples of the kinds of lump sums that the Secretary might determine to be exempt lump sums - such as a lottery win or other windfall, a legacy or bequest, or a one-off gift. These examples relate to unexpected, non-anticipated amounts. Such a description does not apply to the type of product, the insurance policy with bonuses, that the applicant held. I consider that it is not of the character contemplated by section 8(11)(d) of the Act. I am satisfied that it is not "an exempt lump sum" in accordance with the Act.

As to the question of financial hardship, the applicant was aware some 2 months beforehand, of the effect of the maturation of the policy. He had the advice of the Financial Information Services Section, as to the possible mix of investments, which would minimise his potential loss of benefit. He had forewarning, and could have modified his assets and maximised his use of that income over that following 12 month period. The applicant's income was reduced, but it could not be said, with assets in excess of $180,000, that he was suffering financial hardship over that 12 month period.
For these reasons the Tribunal affirms the decision under review.

I certify that the 25 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member WJF Purcell
Signed:         .....................................................................................
  Associate
Date of Hearing  7 March 2002
Date of Decision  3 October 2002
Counsel for the Applicant        In person
Solicitor for the Applicant         -
Counsel for the Respondent    Mr J Underwood
Solicitor for the Respondent    Centrelink