Harris and Repatriation Commission - [2001] AATA 905

DECISION AND REASONS FOR DECISION [2001] AATA 905

ADMINISTRATIVE APPEALS TRIBUNAL )

) No Q2000/1113

VETERANS' AFFAIRS DIVISION          )
           Re      LESLIE AND EMELINE HARRIS
  Applicants
           And    REPATRIATION COMMISSION
  Respondent

DECISION

Tribunal Mr K L Beddoe, Senior Member

Date1 November 2001
PlaceBrisbane

Decision      The Tribunal sets aside the decision under review and directs that the matter be remitted to the respondent to reassess the pension payable to the applicants in accordance with the reasons for decision.
  (Sgd) K L Beddoe
  Senior Member

Decision No: 905/2001
CATCHWORDS
Veterans' Affairs – age service pension – actual and deemed income from loans to trust – whether actual and deemed income from one financial asset should be included in assessment of pension

Veterans' Entitlements Act 1986 s 5, 38, 45, 46

REASONS FOR DECISION

1 November 2001 Mr K L Beddoe, Senior Member

By decision dated 19 April 2000, the respondent authorised a reduction in the applicant's age service pension with effect 18 April 2000 after including the deemed and actual income from a trust fund the applicants' had loaned money to, the LACH Management Services Trust ("the Trust"). On 30 June 2000, the respondent authorised a further reduction of the applicant's age service pension from 1 July 2000 after reducing the amount of deemed fortnightly income from the trust. On 8 August 2000, the respondent increased the applicants' age service pension by exempting the loans to the Trust from the deeming provisions and as a result, pension assessment changed from the income test to the assets test from 1 July 2000.
On 23 August 2000, the applicants lodged a request for review of the respondent's decisions of 30 June 2000 to 8 August 2000 inclusive.
The applicants received notice on 4 November 2000 of the decision of the respondent of 2 November 2000, that beneficiary loans by the applicants to the Trust were to be maintained in the assessment of the applicants' service pension. In addition, the respondent decided that the distribution from the Trust was to be maintained in the assessment of age service pension. The age service pension paid to the applicants was to be reassessed from a date to be determined maintaining deemed loans totalling $222,366.21 and combined income from the trust at $453.10 per fortnight.
The applicants applied to this Tribunal for a review of the respondent's decision of 8 August 2000 by application dated 28 November 2000.
Section 5H (1) of the "Veterans Entitlements Act 1986" ("the Act") defines "income" as:
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);
Note 1: See also sections 46B and 46C (business income), sections 46D to 46L (deemed income from financial assets) and sections 46Q to 46Y (income from income streams).
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 48-48E.
Note 3: amounts of maintenance income are not excluded amounts.
income amount means:
          (a)       valuable consideration; or
          (b)       personal earnings; or
          (c)       moneys; or
          (d)       profits;
(whether of a capital nature or not);

The definitions of "financial asset" and "loan" are set out in section 5J of the Act as follows:
financial asset means:
          (a)       a financial investment; or
          (b)       a deprived asset.
Note:   For deprived asset see subsection 5J (2B).
financial investment means:
          (a)       available money; or
          (b)       deposit money; or
          (c)       a managed investment; or
          (d)       a listed security; or
          (e)       a loan that has not been repaid in full; or
          (f)        an unlisted public security; or
          (g)       gold, silver or platinum bullion; or
          (h)       an asset-tested income stream (short term).
Note:   For loan see subsections (2) and (2A).
(2)       The following rules apply for the purposes of this Act:
          (a)       the acquisition by a person of debentures, bonds or other securities is treated as the making of a loan by the person;
          (b)       a person is not treated as having made a loan merely because:
(i)        the person has an account with a financial institution; or
(ii)       the person has paid an entry contribution.
Note:   For entry contribution see section 52M.
          (2A)     Subsection (2) does not limit the meaning of the word loan in this Act.

Section 46K of the Act states:
(1)Subject to subsection (2), any return on a financial asset that a person actually receives is taken for the purposes of this Act, not to be ordinary income of the person.
(2)…….
The issue in this matter is whether the deemed income on loans to the LACH Management Service Trust and/or the actual income earned by the Trust and distributed to the applicants for the financial year ending June 1999 should be included in the assessment of the age service pension payable to the applicants.
The parties agreed that the issues in this matter were questions of law, the matter should be dealt with "on the papers". The documents lodged in the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were before the Tribunal as the T documents and further documents filed in the Tribunal as the applicants' and respondent's "Statement of Facts and Contentions" were also taken into account. Neither party made submissions to the Tribunal.
The facts of this matter are not in dispute and are as follows. The husband applicant is a veteran within the definition of section 5C of the Act and is eligible for service pension under Part III of the Act. The applicant wife is eligible for a partner service pension under section 38 of the Act.
On 23 June 1993, the applicant applied for an age service pension which was granted from 9 December 1993. Included in the assessment of the age service pension was certain income and assets relating to the Trust.
The applicant husband is the owner of the two $1.00 shares in the company LACH Management Services Pty Ltd. LACH Management Services Pty Ltd is the trustee of the Trust. The applicant husband and wife are beneficiaries of the trust and also creditors because they both have current outstanding loans with the Trust. During the financial year ending June 1999, the Trust distributed income to the applicants. In so doing no allowance was made for interest on the loans owing to the applicants.
On 9 February 2000, the applicants attended the Southport Regional Office and provided an update of their financial assets, including the Beneficiaries Loan Accounts Summary for the Trust for the year ending 30 June 1999. As a result of the information provided, the respondent authorised, on 19 April 2000, a reduction in age service pension from 18 April 2000. Included in the assessment were deemed income from monies loaned to the trust and an amount of $453.10 distributed by the Trust. The total amount loaned to the Trust by the applicants was $222,366.00.
On 8 August 2000, another delegate of the respondent increased the age service pension payable to the applicants by exempting the loans to the trust from the deeming provisions and as a result, pension assessment changed from income test to the assets test from 1 July 2000.
It was submitted for the applicant that the same capital sum (that is the amount lent to the Trust by the applicants) has been used twice in the calculation of age service pension. It has been used once using the deeming principle under section 5J(1) and section 46E of the Act, and once using the actual income received under section 5H of the Act.
The contention by the applicants' representative is that the respondent can use either the deemed income or the actual income but not both. It is contended that section 46K prohibits such double counting.
It was also submitted that the respondent's decision disclosed no legislative basis for the decision made "in the particular terms" and that the decision was contrary to law and public policy.
The respondent contends that the issues in this matter are:
(a) whether loans to the LACH Management Service Trust are properly defined as a "financial asset" in accordance with section 5J of the Act and therefore subject to the deeming provisions of section 46E of the Act; and
(b) whether distribution of income earned by the Trust and distributed to the applicants for the financial year ending June 1999 is properly defined as "income" in accordance with section 5H of the Act and therefore maintained in the assessment of service pension according to section 46A of the Act.
The respondent submitted that LACH Management Service Trust is a separate entity to the applicants and therefore income from the Trust is not subject to the exemption under section 46K of the Act. In addition, the outstanding loans to the Trust from the applicants are properly defined as a "financial asset" as defined in section 5J(1) of the Act and therefore subject to the deeming provisions of section 46E.
Finally, it was contended by the respondent that the income distributed by the Trust to the applicants for the financial year ending June 1999 is properly defined as "income" in accordance with section 5H of the Act and therefore properly maintained in the assessment of service pension according to section 46A of the Act.
Consideration
Although not relevant to the Tribunal's decision, the Tribunal notes that the applicants are not the only beneficiaries under the Trust (T4, page 235). The Trust is essentially a family trust which is a discretionary trust. Whether there is more than one trust fund is something I do not need to explore. I have proceeded on the basis that the Fund may the subject of varying obligations in equity but that those obligations are all for the benefit of the general beneficiaries.
The balance sheets of the Trust satisfy me that it is an investment fund capitalised entirely by loans from beneficiaries. At 30 June 1999 the total of beneficiaries' loans was $250,020 of which $192,832 was owing to the first applicant and $29,534 owing to the second applicant. The balance of the loans ($27,654) was owing to the remaining beneficiaries, who I understand to be children of the applicants. Total liabilities of the Trust were shown as $265,012 but I am unable to reconcile that figure with the total of beneficiaries loan accounts (folios 129 and 219 of the T documents).
The total assets of the trust at 30 June 1999 was $265,037 (Folio 219).
It will be apparent that 72.75% of the Trust's assets are financed by the first applicant's loan to the Trust and 11.14% of the Trust's assets are financed by the second applicant's loan therefore approximately 84% of the assets were financed at 30 June 1999 by loans from the applicants.
Because the beneficiary loan accounts are interest free there is an assimilation of the beneficiaries in their capacity as creditors with their capacity as beneficiaries.
In these circumstances it would, in my view, be reasonable to characterise the beneficiary loan accounts as capital accounts so as to reflect the fact that the moneys described as loans are in fact more properly described as investment accounts. It is the "investment" of these moneys in the Trust that enables the derivation of the net income of the Trust. The loans are of the character of deposit moneys and should be defined as a financial investment and therefore a financial asset (S 5J(1)). Because the applicants have a beneficial interest in the assets of the trust so that they are the owners of the equitable rights in the assets they are not creditors per se and the loan accounts are in reality capital or deposit accounts albeit they are described as loan accounts.
The Tribunal also finds that the income derived from the Trust as a beneficiary is "income" as provided for in section 5H (1) of the Act as "(a) an income amount earned, derived or received by the person for the person's own use or benefit…", being "(a) valuable consideration; …or (c) moneys".
The question is whether the Act allows or requires that actual "income" and deemed "income" from the one source be counted in the same equation in the application of the income test.
It is apparent that the Act did not intend that the one asset or beneficial interest should, in effect, be the basis of double counting when calculating the rate of age service pension. Section 46K of the Act clearly states that any return on a financial asset actually received is not to be taken as ordinary income of the person. Section 46E states that if one or both members of a couple have financial assets, the members of the couple are taken or deemed to receive ordinary income on those assets in accordance with the calculation provided in section 46E.
The Tribunal interprets these sections together to mean that only the deemed income from a financial asset under section 46A is taken into consideration for the purpose of calculating eligibility for pension.
The Tribunal will set aside the decision under review and direct that the matter be remitted to the respondent to reassess, the applicants on the basis that only the deemed income from the financial assets (being the amounts described as loans to the Trust) is to be taken into account for the purposes of the income test.

I certify that the 31 preceding paragraphs are a true copy of the reasons for the decision herein of Mr K L Beddoe (Senior Member)
Signed:         .....................................................................................
  Associate
Date of Decision  1 November 2001
On the papers.