Duggan and Secretary, Department of Family and Community Services

[2005] AATA 863

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2005] AATA 863

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No N2005/744

GENERAL ADMINISTRATIVE  DIVISION		)
Re		MARGARET DUGGAN

Applicant

And SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES

Respondent

DECISION

Tribunal Senior Member Robin Hunt

Date5 September 2005  

PlaceSydney

Decision The Tribunal affirms the decision under review.

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

Ms R Hunt
  Senior Member

CATCHWORDS

SOCIAL SECURITY – Age pension – Lottery win – Applicant paid winnings in instalments – Not lump sum win – Periodic payments - Classed as income – Reduction of rate of age pension - Decision affirmed.

LEGISLATION

Social Security Act 1991

CASES

Re Hungerford and Repatriation Commission (1990) 21 ALD 568

Graham v Green (1925) 2 KB 37

Babka v Federal Commissioner of Taxation (1989) 89 ALR 373

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

Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540

SDSS v McLaughlin (1997) 81 FCR 35

REASONS FOR DECISION

5 September 2005  Senior Member Robin Hunt          

SUMMARY

1. The applicant, Mrs Margaret Duggan, was in receipt of age pension at the maximum rate when she won $300,000 in the lottery. The terms of the lottery win were that it would be paid to Mrs Duggan in instalments rather than in the form of a lump sum. Centrelink decided to treat the lottery winnings as income and reduced her rate of pension under section 1064 of the Social Security Act 1991 (the Act). This decision was affirmed by the Social Security Appeals Tribunal on the 17 May 2005. The Tribunal affirms the decision under review and finds that, as the lottery winnings are paid in instalments, the payments are correctly classed as income. The reasons for decision are set out below.

BACKGROUND

2.        Mrs Duggan is 78 years of age and has recently lost her husband of 54 years.  In late 2004, Mrs Duggan won $300,000 on a scratch lotto called a “Win for Life”, which meant that her winnings were paid to her in instalments of $5,000 every two months for 10 years.  The first payment of $5,000 was paid to Mrs Duggan on 28 December 2004 and is continuing. At the time of her lottery win, she was in receipt of age pension at the maximum rate, including rent assistance.

3. On 22 March 2005, Mrs Duggan advised Centrelink of her lottery win. Centrelink then made a determination to treat Mrs Duggan’s periodical payments from her lottery win as assessable income for social security purposes under section 8 of the Act. Mrs Duggan’s rate of age pension was reduced accordingly under section 1064 of the Act. Mrs Duggan sought a review of this decision, stating that officials from the taxation office and from the lottery office had told her that Centrelink would not assess the winnings as income. This decision was affirmed on 5 April 2005 by an Authorised Review Officer. The Social Security Appeals Tribunal affirmed this decision on 17 May 2005.

ISSUE

4.        The issue for the Tribunal is whether Mrs Margaret Duggan’s lottery winnings were correctly assessed as ‘income’ within the meaning of Section 8 of the Act

ANALYSIS

5.        Mrs Duggan told the Tribunal that she feels that the decision is unfair because if she had received her winnings in a lump sum, it would not have been assessed as income. As she has received periodic payments, she is unable to spend her winnings in the same way as a lump sum. She did the right thing by reporting her win to Centrelink and has approached the lotteries office and her local Member of Parliament to try to achieve a fairer outcome but has had no success. Mrs Duggan also said that her winnings were not a gift as she had paid for her lottery ticket. She argued that no legislative provision referred to lottery winnings and that the Centrelink approach was not justified. She gave oral evidence that she was not in difficult financial circumstances but was contesting the decision to reduce her pension as a matter of principle.

6. Section 1064 of the Act sets out the provisions dealing with the rate at which an age pension may be paid. The rate may be affected by the claimant’s income and assets. Section 8(1) of the Act provides the definition of income as follows:

““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).”

7.        Section 8(11) of the Act provides the definition of an amount received that is exempt for the purposes of determining a person’s rate of age pension (or exempt lump sum):

“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. “

8.        While the quoted legislation above contains a “note” about lottery wins, the note does not carry the force of law. It is what it says, simply a note or observation about the possible interpretation and application of the section. In addition, the note is expressed as examples of what the Secretary “may” determine to be an exempt sum. Generally, social security law does not treat a windfall gain, such as a lottery win, as income. This is because a windfall gain usually lacks regularity or periodicity, which is a feature of income. However, in Mrs Duggan’s case, her winnings have not been disbursed to her as a lump sum but are paid periodically at the rate of $5,000 every two months or $30,000 per annum.

9.        In Re Hungerford and Repatriation Commission (1990) 21 ALD 568, the Tribunal observed that a windfall gain, such as a lotto win, is a payment outside the concept of “income”. It was held at 575 that the definition of “income amount” in subsection 8(1) of the Act involved:

“gains derived by a person as a result of the provision by that person of consideration in the form of personal exertion or other services or the disposition of property”.

10.      This interpretation was overruled in SDSS v McLaughlin (1997) 81 FCR 35, where the court said that no connotation of “reward for personal exertion” should be read into the definition of “income amount”. In this case, French J took a broad approach to “income” in relation to the Social Security Act and held at 43:

“The definition of “income” extends to amounts “received by a person”. …They may therefore extend to gifts. This is reinforced by the extension of the definition of “income” to “a periodical payment by way of gift or allowance…..There is no requirement in the definition for the payment received to constitute a net gain. Absent such a requirement a payment of money received by a person for that person’s own use or benefit is a payment of an income amount. No doubt examples may be generated and multiplied of apparently startling or unfair results of this construction. The receipts of the proceeds of the sale of a house or a lottery win may constitute “income” for the purposes of the Act. Such debates, however, are best reserved for the legislature.” 

11.      Another example of treatment by the courts of periodic payments occurred in the Federal Court case of SDSS v Davies (1996), where Heerey J found that payments of a UK Housing Benefit were periodical “in the sense that they were regularly recurring and made by reference to periods of time.”  

12.      In the past, lottery wins were usually not assessable income for income tax purposes according to general principles. See, for example, Graham v Green (1925) 2 KB 37, Babka v Federal Commissioner of Taxation (1989) 89 ALR 373. Other gifts and windfall gains may not amount to income as well but there are incursions into this general principle depending on matters such as the contribution of the recipient to the arrangement and whether the receipt of the moneys involved is periodic. There are numerous examples of moneys which might otherwise have been treated as exempt from income tax that have been converted to income by the manner in which the moneys are received in the hands of the recipient. It is the character of the receipt in the hands of the recipient which determines whether it is income or capital. A lump sum received as such is generally capital, whereas periodic instalments are received in the manner of income and are treated as income for this reason.

13.      The general principle is that periodic payments are income. In Federal Commissioner of Taxation v Smith (1981) 147 CLR 578, the High Court unanimously held that monthly benefits from a policy of insurance bore the character of income. The Court compared the fruit to the tree. Further, a majority of the High Court found in Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540 that a voluntary payment by a former employer made to a former employee while serving in the Second World War, was taxable income. The voluntary payment made up the difference in his pre-war salary. Dixon CJ and Williams J, in finding it assessable income, held that the deciding factor was that the amounts given to the soldier were regular periodic payments. Fullagar J concurred, although setting out separate reasons. McTiernan and Webb JJ dissented.

14. In addition, Centrelink’s policy guidelines state that “periodical lottery winnings that are a series of payments under one contract are not exempt - each instalment is assessed as income over the period it represents” (T12, pg 36). As Mrs Duggan’s lottery winnings are paid to her in the form of instalments of $5,000 every two months over a ten year period, they are clearly “periodical payments” and fall within the definition of “income” set out in subsection 8(1) of the Act. The payments cannot be assessed as an exempt lump sum within the meaning of section 8(11) of the Act for the purposes of calculating Mrs Duggan’s rate of age pension. Consequently, Mrs Duggan’s rate of age pension is reduced under section 1064 of the Act. It follows that the decision under review is to be affirmed.

DECISION

15.      The Tribunal affirms the decision under review.

I certify that the 15 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member Robin Hunt

Signed:         .....................................................................................
Zoe McDonald
Associate

Date of Hearing: 1 September 2005         
Date of Decision: 5 September 2005          
Solicitor for the Applicant: Self 
Counsel for the Respondent: Mr Zhang
Solicitor for the Respondent: Centrelink Legal Services