Fogarty and Secretary, Department of Family and Community Services
[2005] AATA 846
•2 September 2005
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2005] AATA 846
ADMINISTRATIVE APPEALS TRIBUNAL )
) No Q2005/56
GENERAL ADMINISTRATIVE DIVISION )
Re ROSINA FOGARTY Applicant
And
SECRETARY, DEPARTMENT
OF FAMILY AND COMMUNITY SERVICESRespondent
DECISION
Tribunal Mr R G Kenny, Member Date2 September 2005
PlaceBrisbane
Decision The decision under review is affirmed.
...................[Sgd]......................
R G Kenny
Member
CATCHWORDS
SOCIAL SECURITY – determination in absence of the parties – age pension – income test – rental income from houses on farming property – losses from farming operation not set off against income from houses – decision affirmed
Administrative Appeals Tribunal Act 1975 s 34J
Social Security Act 1991(Com) s 8, 55, 1064, 1072, 1106
Social Security (Administration) Act 1991 (Com) Schedule 2Farm Household Support Act 1992 (Com)
Trustee Act 1925 (NSW) ss 14, 14C, 81, 82A
Allgood v Blake (1872) LR 8 Ex 339
Doe d Hiscocks v Hiscocks (1939) 5M+W 363 at 368; 151 ER 154
Re Hoppe [1961] VR 381
Equity Trustees Executors and Agency Co Ltd v Buckhurst [1907] VLR 252
Re Anderson [1920] 1 Ch 175
Thornley v Boyd (1925) 36 CLR 526Inguanti v Department of Social Security (1988) 80 ALR 307
Re Sas and Secretary, Department of Social Security (1987) 12 ALD 497Secretary, Department of Family and Community Services v Garvey (1989) 19 ALD 348
Re Donges and Secretary, Department of Family and Community Services (2003) 72 ALD 713
Rabbeth v Squire (1859) 4 De G and J 406; 45 ER 157
National trustees, Executors and Agency Co Ltd v Keast (1896) 22 VLR 447REASONS FOR DECISION
2 September 2005 Mr R G Kenny, Member Application
1. At the time of his death on 22 March 2003, John Fogarty owned a farming property on Settlement Road, Numinbah, in New South Wales. Built on the farm are four houses. Mr Fogarty’s widow, Rosina Fogerty (the applicant) lives in one of the houses. Her son lives in another of the houses and the remaining two houses are rented. Mrs Fogarty is in receipt of the age pension which is a form of income support payable in accordance with the terms of the Social Security Act 1991 (the Act). On 29 June 2004, a complex assessment officer with Centrelink, a statutory authority within the portfolio of the Department of Family and Community Services (the respondent), made a decision that Mrs Fogarty’s age pension was payable to her subject to the application of the income test which would take into account, as income, the rental payments from the two rented houses on the farm. That decision was affirmed by an authorised review officer with Centrelink on 12 August 2004. On 15 November 2004, the Social Security Appeals Tribunal affirmed the decision and, on 28 January 2005, an application for review of that decision was received by the Administrative Appeals Tribunal (the Tribunal).
Hearing
2. The Administrative Appeals Tribunal Act 1975 (the AAT Act) makes provision for a review to be conducted in the absence of the parties. In that regard, section 34J of the AAT Act reads:
“If:
(a) it appears to the Tribunal that the issues for determination on the review of a decision can be adequately determined in the absence of the parties; and
(b) the parties consent to the review being determined without a hearing;
the Tribunal may review the decision by considering the documents or other material lodged with or provided to the Tribunal and without holding a hearing.”
3. Mrs Fogarty and the respondent have consented to the matter being determined without a hearing and, in accordance with the terms of section 34J of the AAT Act, I am satisfied that it is appropriate to proceed in that manner.
4. Materials before the Tribunal comprised the documents prepared in accordance with section 37 of the AAT Act (the T documents T1-T25) as well as:
§ a letter, dated 22 March 2005 from Gerard Fogarty, the applicant’s son;
§ a letter, dated 14 January 2004, from Paul Brown, the applicant’s solicitor; and
§ submissions on behalf of the applicant and respondent.
Issues and Legislation
5. Mr Fogarty executed his will on 11 August 1987 and made a codicil to this will on 9 March 2001. In the will, he gifted certain items to his son, John Fogarty, and the purpose of the codicil was to revoke that gift. Mr Fogarty appointed his three children, Gerard Fogarty, John Fogarty and Christine Beirstaker as trustees of his estate. Probate of the will was granted to the trustees by the New South Wales Supreme Court on 29 September 2003. Various personal items were left to Mrs Fogarty and the will contained the following clauses:
“I GIVE AND DEVISE AND BEQUEATH all the rest and residue of my estate of whatkindsoever and wheresoever situate unto my trustees upon the following trusts, namely:
(a)As to any real estate owned by me to permit my wife ROSINA MARY FOGARTY to have the use and occupation thereof or the income therefrom during her lifetime and from and after the death of my said wife to hold the same upon trust for such of my children as shall survive me and if more than one in equal shares between them as owners and tenants in common AND I DECLARE that if any child of mine dies in my lifetime leaving a child or children who shall survive me such child or children shall take and if more than one equally between them the share that his her or their parent would have taken had he or she survived me
(b)As to any other assets owned by me at the date of my death upon trust for the said ROSINA MARY FOGARTY absolutely.”
6. The decision by Centrelink to include the rental income from two houses on the farm as income to Mrs Fogarty was based upon its interpretation of clause (a) of the will. This matter raises the question of whether the rent paid in relation to two houses comprises income as that term is defined in the Act and, if so, whether business losses from a farming operation can be set off against the income.
7. In so far as relevant, the definition of income in subsection 8(1) of the Act provides that income of a person includes an income amount earned, derived or received by the person for the person's own use or benefit.
(a)Section 55 of the Act provides that the rate of age pension of a person in Mrs Fogarty’s circumstances is worked out using Pension Rate Calculator A at the end of section 1064 of the Act.
8. Section 1072 of the Act relevantly provides that a reference in the 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……………..
Submissions
9. A written submission on behalf of the respondent was provided by Sarah Oliver, an advocate with the respondent’s Service Recovery Team. Ms Oliver submitted that, because of the terms of the will, Mrs Fogarty holds a life interest in the estate of her husband which allows her the use and occupation of the property. Ms Oliver submitted that Mrs Fogarty’s three children were bare trustees who hold the legal title of the land in order to permit her to use it and occupy it during her lifetime. She also submitted that the term “use and occupation” was a technical term which created the life interest in the property and the right to income. Ms Oliver submitted that, under the will, Mrs Fogarty had a choice either to reside on the property or, in the alternative, if she chose not to exercise her right to use and occupy the property, she had an entitlement to the income of the property during her lifetime.
10. Ms Oliver submitted that Mrs Fogarty’s life estate extended to all of the farm and not only the original homestead in which Mrs Fogarty now lives. She submitted that the will did not give the trustees the power to operate the farming or rental property businesses nor the power to determine how the income from these businesses is to be applied. She submitted that, whilst it may suit the members of the family for the farm to be operated by Mr and Mrs Fogarty’s children, it was, nevertheless, not provided for in the will.
11. Ms Oliver referred to material that had been provided by the applicant in order to ascertain what the true intention of the testator was. She submitted that the Tribunal was not a court of construction and was not able to rely on extrinsic material to give an interpretation to the terms of the will where such an interpretation was not apparent from the clear wording of the will itself.
12. Ms Oliver submitted that the rental payments from the two tenanted houses on the farm and any other income from the property constituted income to which Mrs Fogarty has a present legal entitlement and which satisfied the definition of income in subsection 8(1) of the Act. She noted that Mrs Fogarty may not have actually received the money but submitted that this did not mean that it had not been derived by her for the purposes of that provision. In the alternative, Ms Oliver referred to section 1106 of the Act as being applicable if Mrs Fogarty allowed the income from the property to go to the trust rather than to herself and, in that case, it was a disposal of income which was embraced by section 1106. In that case, she submitted, it still had to be regarded as income.
13. Ms Oliver noted the contentions of the applicant that the farm ran at a loss. She submitted that these losses could not be set off against the assessable income from the rental properties.
14. Mrs Fogarty’s son, Gerard Fogarty, completed a submission on behalf of his mother. There, he described his mother as being 81 years of age and as having lived on the farm, with his father, for over 50 years. He described his father as a sole trader who initially grew bananas and ran a dairy but, subsequently, converted to beef cattle and, about 15 years ago, found tenants for the houses on the farm to provide an additional source of income.
15. Gerard Fogarty said that, in his will, his father had left household and personal effects and various other items to his mother and the remainder of the estate to his trustees upon trusts as set out in the will. He submitted that his father’s intention had always been to provide Mrs Fogarty with a secure home on the farm for as long as she wanted without any concerns, financial or otherwise, associated with running a farm. He submitted that his mother, his siblings as well as his father’s solicitor were clear in what his father’s intentions were and this did not include his mother receiving the income from the property if she lived there. He said that, after probate was granted, the trustees were registered as the legal owners of the farm and since then have managed the business activities of farming and the rental of the houses. Gerard Fogarty said that his mother was not involved with any of the farm activities and this included both the farming business and the rental business.
16. Gerard Fogarty submitted that the words of the will were plain and clear on their face and should be given their plain meaning. He submitted that his mother had the choice of either the use and occupation of the property or the income therefrom. He submitted that these were clear alternatives and that his mother had chosen the former and that, therefore, she had chosen not to receive the income from the property. Gerard Fogarty submitted that, as a result of her choice, his mother had no legal entitlement whatsoever under the will to any income from the farm while she lives there.
17. An alternative submission by Gerard Fogarty was that, if there was an entitlement to income from the farm business activities, her entitlement was only the amount of net income derived by the trust allowing for any other necessary payments or distributions by the trustees. He also submitted that the farming business and the renting of the houses were effectively two limbs of a total business enterprise. He referred to taxation returns that demonstrated the farming business should be utilised to set off against profits of the rental business.
Consideration
18. It is not disputed in this case that, in executing his will, Mr Fogarty intended to make provision for his family and, in particular, for Mrs Fogarty. His intention and the means adopted by him to achieve that goal are to be ascertained from the words of his will. There are limited circumstances in which a court, charged with the responsibility of construing a will, may rely upon extrinsic evidence: see Allgood v Blake (1872) LR 8 Ex 339 at 341 and Doe d Hiscocks v Hiscocks (1939) 5M+W 363 at 368; 151 ER 154 at 156. The justification for relying upon extrinsic material is found where the words and terms in the will do not provide clarity as to the testator’s intentions. The rules applicable to a court of construction do not necessarily apply to the deliberations of an administrative tribunal and, in any event, I am satisfied that the terms of the will are not ambiguous such that reference need be had to the kinds of matters referred to on Mrs Fogarty’s behalf, namely, the understanding of what Mr Fogarty intended as expressed by his family and solicitor.
19. In his will, Mr Fogarty bequeathed his household and personal effects including any motor car of which he was possessed at the time of his death, monies and the proceeds of any insurance policies payable as a result of his death to Mrs Fogarty. He bequeathed all the rest of his estate to his three children as trustees and, in relation to all of his real estate, this was on trust that they permitted Mrs Fogarty to have the use and occupation thereof or the income therefrom during her lifetime. This was not the situation when the will was first executed. It then contained a clause which gave and bequeathed the following to Mr Fogarty’s son John: his farm machinery and vehicles including any Landrover or tractor, all of his livestock as well as certain shares. In the codicil to his will, dated 9 March 2001, Mr Fogarty revoked that gift by deleting the clause from the original will. No further provision was made for these items. They do not come within clause (a) of the will which, as set out above, relates to real estate. Accordingly, they must be included in clause (b) as part of “any other assets” owned by him at the date of his death. These were to be held on trust for Mrs Fogarty, absolutely.
20. Clause (a) of the will provides alternatives. These are that Mrs Fogarty has the option of the use and occupation of the real estate during her lifetime or, alternatively, the option not to do so but to take the income from it during her lifetime. In the event that the second of those alternatives was taken by Mrs Fogarty, the income would provide the means for her to obtain alternative accommodation and this would comprise any profit from the farm business as well as the rental income from all houses on the property. Elsewhere in the will, a further alternative is given and this supports the submission that it was Mr Fogarty’s intention to make provision for his wife’s accommodation. This further alternative is for all or any part of the farm property to be sold, with Mrs Fogarty’s consent, and for the proceeds to be utilised for the acquisition of a home for her. There is no provision in the will for the running of the farming business or the rental of the homes. However, this forms part of the trustees’ obligations exercised in accordance with sections 14, 14C, 81 and 82A of the Trustee Act 1925 (NSW).
21. In some cases, the bestowal of a right to occupy premises or land has been held to be a personal right only and not one which establishes a life interest. This will be so where the will specifically provides for a person to reside there: see Re Hoppe [1961] VR 381 at 387 and Equity Trustees Executors and Agency Co Ltd v Buckhurst [1907] VLR 252 at 257. Such a personal right may also arise where the testator utilises the formula “use and occupation” and this will be where other parts of the will demonstrate that the testator’s intention was to create a mere personal right: see Re Anderson [1920] 1 Ch 175 at 181. Where, on a reading of the will as a whole, there is nothing to limit the grant in that way, the words “use and occupation” will establish a life interest: see Rabbeth v Squire (1859) 4 De G and J 406; 45 ER 157 at 158 and National Trustees, Executors and Agency Co. Ltd v Keast (1896) 22 VLR 447 at 450-51. Many of the cases where a personal right was found relate to particular premises in which the beneficiary is able to reside. The reference in clause (a) in Mr Fogarty’s will is to the use and occupation of “any real estate” owned by him. That can only mean the entire farming property including all of the houses and that is not consistent with any limitation to mere personal use of the property by Mrs Fogarty. I am satisfied that the form of words in Mr Fogarty’s will has established a life interest in Mrs Fogarty rather than a mere personal one.
22. With a life interest in the property, Mrs Fogarty is entitled to the profits earned from both the farming business and from the rental of the tenanted houses: see Thornley v Boyd (1925) 36 CLR 526 at 536. It is common ground in this matter that the farming business is operated at a loss and, therefore, issues relating to the distribution of profits from that business do not arise. However, the rental payments from the tenanted houses constitute income as defined in subsection 8(1) of the Act. The evidence is that the rental payments from the houses have been applied by the trustees to the farming business generally. As noted above, income includes an amount which is earned, derived or received. Even though Mrs Fogarty may not have received those monies, they were still earned and derived by her: see Inguanti v Department of Social Security (1988) 15 ALD 348 at 350 and Re Sas and Secretary, Department of Social Security (1987) 12 ALD 497. In this case, I am satisfied that rental monies from the tenanted properties constitutes income of Mrs Fogarty under the definition in subsection 8(1) of the Act.
23. I have noted the submission on behalf of Mrs Fogarty that the farming business and the renting of the houses were effectively two limbs of a single business enterprise and have been treated in that manner for taxation purposes. The Act has its own definitions and structure which do not depend for their application on the legislation relevant to the assessment of liability for income tax. However, if there was a single business enterprise, as determined in accordance with the provisions of or decisions made under the Act, the income of Mrs Fogarty would be the sum of the profits from rentals and the losses from the farming operations. That approach was taken by the Tribunal in Re Donges and Secretary, Department of Family and Community Services (2003) 72 ALD 713. There, the Tribunal accepted that farming losses could be offset against income from a pump business which was carried out on the farm. However, in that case, the Tribunal made two significant qualifications which are not applicable in Mrs Fogarty’s case.
24. One reason given by the Tribunal for its decision in that case related to the nature of the legislation which was in issue. This was the Farm Household Support Act 1992 which, the Tribunal found, had the purpose of assisting drought-affected farmers to remain on their properties. That is not the situation in Mrs Fogarty’s case.
25. The other significant matter relied on in Re Donges was that Mr Donges’ pump business and farm business constituted a total business enterprise with two limbs and with each limb dependant on the operation of the other. This was because the pump business utilised the farm tools, equipment, truck and personnel in its operations and the Tribunal found that the farm could not have survived without the pump business and that the pump business used the farm as its base. Whilst it was argued for Mrs Fogarty that the houses on the property are covered by the same council rates and insurance policy and are maintained using the tools, equipment, vehicles and personnel of the farm, I am satisfied that this does not enable them to be characterised as having the degree of interdependence with the farming operations which was manifest between the two businesses in Re Donges. The farm equipment would only be required for infrequent maintenance of the houses which happen to be located on the farm. I am satisfied that the renting of the two houses is an activity separate from the farming operations carried out on the property and, accordingly, the approach adopted in Re Donges is not open in this matter.
26. In circumstances where there are two separate sources of income as in Mrs Fogarty’s case, the process of setting off one income against another is not available under the Act. In Secretary, Department of Family and Community Services v Garvey (1989) 19 ALD 348 at 352, the Federal Court put it in the following way:
“…we are of the view that the definition of ‘income’ in the Act does not permit the ‘negative yield’ of one source of income to be off-set against the yield from other sources. In truth, a ‘negative yield’ is no more than a demonstration of the lack of a source of income. The loss sustained by the failure of that source to provide an excess of income over the expenditure incurred in that activity has no relevance to any other source of income.”
27. I am satisfied that this is applicable in Mrs Fogarty’s case. The Act, in subsection 1075(1), makes provision for certain losses and outgoings associated with the farming activities to be deducted from the farming income. In subsection 1075(3), it makes provision for certain losses and outgoings associated with the rented houses to be deducted from the rental income. However, the losses of the former cannot be set off against the income of the latter.
Decision
28. The decision under review relates only to the two rented houses and I am satisfied that the income generated by them constitutes part of Mrs Fogarty’s income for the purposes of section 8 of the Act. The decision under review is affirmed.
I certify that the 28 preceding paragraphs are a true copy of the reasons for the decision herein of Mr R G Kenny, Member
Signed: Jeff Mills
Legal Research Officer
This matter was heard on the papers
Date of Decision 2 September 2005
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