Hoefl and Secretary, Department of Social Services (Social services second review)
[2019] AATA 3758
•24 September 2019
Hoefl and Secretary, Department of Social Services (Social services second review) [2019] AATA 3758 (24 September 2019)
Division:GENERAL DIVISION
File Number: 2019/0695
Re:Johann Hoefl
APPLICANT
AndSecretary, Department of Social Services
RESPONDENT
DECISION
Tribunal:Member P Ranson
Date:24 September 2019
Place:Brisbane
The decision under review is set aside and remitted back to the Respondent for a calculation of any age pension the Applicant may have been entitled to from 25 November 2016.
...............................[SGD].......................................
Member P Ranson
Catchwords
SOCIAL SECURITY – age pension – personal assets – trusts – family company – assets test – asset threshold - designated private company – designated private trusts – attribution of assets – net assets – capital contribution - whether a 50% attribution applies – whether an alternative amount of attribution applies – asset upper limit threshold - whether applicant is entitled to age pension based on assets – decision under review set aside and remitted.
Legislation
Social Security Act 1991 (Cth)
Secondary Materials
Guides to Social Policy Law – Social Security Guide, version 1.256 - Released 17 July 2019
Explanatory Statement, Social Security (Attribution of Assets) Principles 2017 (Cth)
REASONS FOR DECISION
Member P Ranson
24 September 2019
INTRODUCTION
In November 2016 Mr Johann Georg Ferdinand Hoefl (the Applicant) applied for an age pension, which the Department of Social Services (the Respondent) refused on the basis that he failed to meet the assets test. The Respondent’s reasoning was that 50% of the assets of a family company, were attributed to the Applicant and when added to his personal assets the total exceeded the maximum allowed under the Social Security assets test.
The Applicant disagrees with that reasoning on the basis that he has no effective control of the assets of the family company and that even if he did, the loans made in 2016 by his two grandsons, who were and remain minors, should be allowed to reduce the company’s net assets. He contends that none of the assets of the family company are attributable to him and that his personal assets in November 2016 were at a level where he is entitled to an age pension from the date of application.
The application was rejected by Centrelink on 10 May 2017 on the basis of the Applicant’s assets and income. The application has been reviewed multiple times by the Respondent and heard twice by this Tribunal. Each time the answer has been that the application was refused because the net assets of the Applicant exceeded the maximum allowed under the Social Security assets test due to the attribution of the net assets of the family company.
The Applicant’s first review application before the Tribunal was decided on 16 January 2019 (the AAT1 Decision). That decision affirmed the decision of an Authorised Review Officer in Centrelink on 7 June 2018 that the application for review was not successful. On
11 February 2019 the Applicant applied again to the Tribunal for a second tier review of the AAT1 decision. The Applicant appeared unrepresented at a hearing in Brisbane on 27 May 2019 (the Hearing) and gave sworn evidence.BACKGROUND
A trust was established by way of deed of settlement on 19 October 1977 between Mark Lindberg as Settlor and Chilcotin Pty Ltd ACN 001 528 285 (Chilcotin) as trustee (the Deed) and is known as Chilcotin Trust (the Trust).[1] The Trust is a resident of Australia for the purposes of considering its assets under the Social Security assets test.
[1] Exhibit 1, T Documents, T14, pages 216 – 238, Deed of Trust.
The directors and secretaries of Chilcotin are the Applicant and Andrea Nicola Hoefl von Loehneysen (Andrea).
The persons named as beneficiaries in clause 3 the Deed include the Applicant, Yueing Hoefl, Andrea, Christopher Hoelf, and any other person or entity so named as a beneficiary by the trustee of the Trust. Yueing Hoefl (the spouse of the Applicant) died in 1990 and Christopher Hoefl (the son of the Applicant) died in 1982. Andrea is the daughter of the Applicant.
Andrea has four children viz. Isabella, Tao Hoefl (Tao), Hugo von Loehneysen (Hugo) and Oscar von Loehneysen (Oscar). Andrea’s children are beneficiaries of the trust by account of clause 3(e) of the Deed. At the time of the Applicant’s age pension application and in regards to the consideration of assets that may be attributed to the Applicant, Hugo and Oscar were, and remain, minors.
Both the Applicant and Andrea have contributed funds to the Trust over time. Andrea contributed funds from the sale of a property in her name to the Trust, of which $300,055 was transferred to Gemeden. The balance of that loan was $143,068 as at 30 June 2016. Andrea was one of six beneficiaries who received a distribution from the Trust in 2008 and as at 30 June 2016 the balance of funds so distributed to her was $230,681. Andrea’s combined loan balance in Gemeden as at 30 June 2016 was $374,739. These funds were contributed after 9 May 2000 and the significance of that date is discussed later.
Clause 11 of the Deed provides the powers of the trustee and clause 11 (xiv) provides the power to appoint a new trustee over the whole or any part of the trust fund:
“Without limiting or restricting in any way whatsoever the powers and discretions hereinbefore conferred upon the Trustee whether in respect of the investment management or administration of the Trust Fund or in any other respect it is hereby declared and agreed that the Trustee shall have the following powers and discretions:
…
(xiv) In any conditions or circumstances which the Trustee thinks expedient the Trustee may appoint either in respect of the whole of the Trust Fund or any part thereof a new Trustee in any part of the world and may transfer assign and set over the investments for the time being representing the Trust Fund or part thereof to any such new Trustee upon similar trusts and subject to similar terms and conditions to those declared in these presents and either subject to the control of the Trustee of these presents or to the exclusion of such control AND the Trustee of these presents shall be indemnified and held harmless against any loss which may arise from the exercise of this power.”
This power is further enhanced in clause 21 of the deed of the Trust, which states:
“The power of appointing a new Trustee in the place of the Trustee or in addition to any existing Trustee and also the power to remove any Trustee shall be vested in the Trustee of these presents for the time being and if a company such power may be exercised by a Resolution of the Directors of such company duly passed in accordance with the Articles of Association of the company from time to time in force. The Settlor shall not be capable at any time of being appointed Trustee hereof.”
Clause 23 of the Deed provides the power for the trustee from time to time to revoke, alter or vary the terms of the deed in any manner subject to certain limitations as set out in (i) to (iii). Subparagraph (iv) of clause 23 permits the trustee to revoke the power to change the Deed.
The directors of the trustee made a written Declaration dated 12 July 1988 (the Declaration) which states:[2]
[2] Exhibit 1, T Documents, T14, page 217, Declaration – Chilcotin Trust, dated 12 July 1988.
“The Directors of Chilcotin Pty Ltd in it’s [sic] capacity of Trustee of Chilcotin Trust, and vested with the power to do so under clause 23 of the Trust Deed do alter all trust clauses dealing with the Trustee’s discretion as to distribution of and entitlement to trust income and capital trust funds (including clauses 8, 9 and 10, but not restricted there to) so that as from today, and for as long as the trust shall exist, capital and net income entitlement and distribution sahll [sic] be as follows:
(a)All of the income of the trust of whatever nature shall be distributed at or within 6 months after the end of each financial year in equal shares among all living beneficiaries and each beneficiary shall be entitled absolutely to its share.
(b)All living beneficiaries shall be given an absolute entitlement in equal shares to the Trust Fund on the Distribution Date.
(c)The beneficiaries referred to in clause (a) and (b) above shall be the following persons only
Johann G. F. Hoefl
Yueng L. Hoefl
Andrea N.B. Hoefl
and all decendants [sic] of any of the above persons provided only that a beneficiary must be alive at the time of distribution
Persuant [sic] to clause 23 (iv) the Trustee hereby renounces the power of revocation of the declaration.”
The Declaration further relied on the powers in clause 23 to renounce the power of revocation. All previous decision makers have accepted that the Trust was validly converted from a discretionary trust to a fixed trust by the Declaration and so the validity of the Declaration is not a matter for consideration by the Tribunal now. The Trust was established in 1977 as a discretionary trust and since 12 July 1988 the beneficiaries have fixed entitlements.
Clause 27 of the Deed enables a corporate trustee to delegate any of its discretions or powers under the Deed to any one or more members of its board.
The Trust owned various properties all of which were sold over time with the last in 2008.
On 10 September 1991 a company called Gemeden Pty. Limited ACN 053 573 247 (Gemeden) was incorporated with two ordinary shares issued to Chilcotin as trustee of the Trust.[3] Gemeden remains wholly owned by the Trust. Gemeden is a resident of Australia for the purposes of considering its assets under the Social Security assets test.
[3] Exhibit 1, T Documents, T12, pages 203 – 207, Company Extract Current & Historical for Gemeden Pty. Limited.
On 7 March 2019 the Applicant sent a letter to the Tribunal in response to the AAT1 decision (the 7 March 2019 Letter).[4]
[4] Exhibit 7, Correspondence from the Applicant to the Tribunal, dated 7 March 2019.
The Applicant prepared and lodged a MOD PT dated 23 November 2016 in respect of the Trust (the MOD PT) as part of his application for an age pension under the Act.[5]
[5] Exhibit 1, T Documents, T6, pages 88 – 109, MODPT Private Trust and attachments.
The Applicant noted the name of the Settlor, Mark Lindberg, at item 27 in the MOD PT in answer to the question about the Appointor of the Trust. The Tribunal notes that the roles of Settlor and Appointor are quite different. The Settlor usually means the person who gives assets to the trustee to hold them for the benefit of the trust's beneficiaries on the terms and conditions set out in the trust deed. The Settlor executes the trust deed and then, generally, has no further involvement in the trust. By contrast, the Appointor is the person who has the power to remove a trustee and appoint a new one. The Deed does not name an Appointor and as set out earlier, it is the trustee from time to time which has the power to change the trustee.
Question 28 of the MOD PT asks for details of any other person who has the power to veto a trustee’s decision, replace the trustee, control of the trustee’s actions, or change the trust deed. These powers are those normally assigned to the appointor of a trust. As mentioned above, the Trust has no named Appointor and, in accordance with clause 21 of the Deed, the Settlor is precluded from ever being the trustee.
The purpose of question 28 is to identify if there is any other person who can exercise power in relation to the trust. As determined earlier, the trustee of the trust has the power to replace itself, change the deed and otherwise control the trust. The Applicant answered question 28 “no such persons”. As discussed later, the board of a company is appointed by its shareholders, who are the Applicant and Andrea, and so for all intents and purposes, they are the persons who ultimately control each of Chilcotin, the Trust and Gemeden. It is that control by them that gives rise to the attribution of the combined net assets of those entities. It appears to the Tribunal that the correct answer to question 28 is the Applicant and Andrea as the persons who have the controlling power of the Trust.
The directors of a company are appointed by the shareholders and can be replaced at any time by the shareholders. Therefore, the control of the board and with that the management of the company ultimately rests with the shareholders. Regardless of how many directors may be appointed, directors remain at the behest of the shareholders and at the time of the Applicant’s age pension application there were only two shareholders. The rationale for the attribution of assets to the Applicant is that as shareholders in Chilcotin, he and the other shareholder have the ability to direct the distribution policy of both Gemeden and the Trust. This goes to the level of control.
As the Member noted in the AAT1 Decision at paragraph 8:
“‘Control’ is for the purpose of social security law broader than what might be understood as actual proprietorship under general company or trust law. Income and assets can be attributed to a person, even though no income is received by them or no assets are held in their name.”
The Applicant was managing director and an employee of Gemeden from incorporation until June 2016. According to the MOD PC Private Company dated 23 November 2016 (the MOD PC), and lodged by the Applicant with his age pension application, his salary package for the year ended 30 June 2016 was $60,000 being cash salary of $25,000 and total superannuation of $35,000.[6]
[6] Exhibit 1, T Documents, T5, pages 57 – 87, MODPC Private Company, dated 23 November 2016.
ISSUES
The application was rejected by the Respondent on the basis that the Applicant did not pass the assets test because 50% of the assets of the Trust, which include the assets of Gemeden, are attributed to him. The Applicant mistakenly believes that the attribution to him is in his capacity as a director of Chilcotin and Gemeden. Whereas, it is in fact the attribution to him is in his capacity of a 50% shareholder in Chilcotin, which under Part 3.18 of the Social Security Act 1991 (Cth) (the Act) includes the assets of Gemeden as it is a wholly owned subsidiary.
The Tribunal considers the relevant issues to be decided by this Tribunal are:
(a)Whether attribution of assets applies to the Applicant;
(b)If so, what is the correct percentage of attribution that applies;
(c)What are the net assets of Gemeden that may affect the total attribution that applies to the Applicant;
(d)What are the net personal assets of the Applicant; and
(e)Which assets test limit applies to the Applicant to receive a part pension.
The answers to the issues listed above will determine whether the Applicant had net assets less than the upper limit threshold at the time he applied for the age pension.
ASSETS TEST APPLICABLE IN NOVEMBER 2016
The Applicant applied for the age pension on 25 November 2016 (the Application). The Centrelink publication “A guide to Australian Government payments” (the Guide) covering the period 20 September 2016 to 31 December 2016 outlines the assets test limits for pensions.[7] The assets test free area applicable at that time of the Application for a single home owner (for a full pension) was $209,000 and the upper limit (for a part pension) was $793,750 above which no pension is payable under the assets test. Previous decisions have sighted the upper limit as $701,500 which appears to be the limit for those under transitional arrangements who were receiving payments as at 19 September 2009.[8]
[7] Exhibit 3, vol. 2, A guide to Australian Government payments, 20 September -31 December 2016, page 33.
[8] Exhibit 3, vol. 2, A guide to Australian Government payments, 20 September -31 December 2016, page 13.
The Applicant previously received an age pension granted from 1 August 2003 until it was automatically cancelled on 3 March 2008 as his assets were over the threshold.[9] The Tribunal considers that the Applicant was not receiving a [part] pension as at 19 September 2009 when the transitional rates applied. Therefore, the Tribunal has determined that the upper limit for a part pension that applies in this decision as outlined by the Guide is $793,750.
[9] Exhibit 4, Respondent’s Statement of Facts and Contentions, dated 26 April 2019, Annexure 1.
However, it is important and relevant to note that a new Guide was published covering the period 1 January to 19 March 2017.[10] The assets threshold in this Guide for a single home owner (for a full pension) was $250,000 and the upper limit (for a part pension) was $542,500. There is a significant reduction in the total amount of assets for a part pension between the two Guides. This is relevant because should the Tribunal find the Applicant was entitled to a pension at the time of the Application, he may no longer be entitled to that pension from 1 January 2017 when the asset threshold changed.
[10] Exhibit 3, vol 1. A guide to Australian Government payments, 1 January – 19 March 2017.
Personal assets test of the applicant
On the Application, the personal assets were listed as:[11]
[11] Exhibit 1, T Documents, T8, pages 143 – 159, Centrelink Income and Assets form, dated 25 November 2016.
Item Current Market Value ($) Personal: Home contents 2,000 Ford Transit van 8,000 Financial: MLC Insurance Policy 55,203 Lincoln Finance Group (USA) 22,800 AMP 59,409 AMP Flexible Super (see Note 1) (25) Bank Accounts: ANZ Bank Overdraft (see Note 2) (67,222) Southern Cross Credit Union 2,564 Suncorp 0 Loans: Loan to Gemeden 89,659 Loan to L.T. Mortimer 45,585 Total $135,244
Notes:
1.Balance as at 30 June 2016 was $34,974.56.[12] A withdrawal of $35,000 was made on 24 August 2016.[13] The difference is the negative amount shown above. The Tribunal considers it unlikely that AMP would allow a negative balance and that the balance as at 24 August 2016 would have been more than $35,000 even if by a small amount. The effect on the net assets of the Applicant would be insignificant.
2.Personal overdrafts can’t be deducted from personal assets as discussed below. In any event, the overdraft was substantially reduced by way of transfer of $75,000 from Gemeden in 29 November 2016.[14]
[12] Exhibit 1, T Documents, T8, page 163, AMP Superannuation Statement, 5 August 2016.
[13] Exhibit 1, T Documents, T8, page 164, AMP Superannuation Withdrawal Statement, 24 August 2016.
[14] Exhibit 1, T Documents, T43, page 333, Copy of ANZ Bank Statement, November 2016 to January 2017.
Is the personal overdraft deductible from personal assets?
The ANZ overdraft is secured by a first mortgage over the Applicant’s residence. Section 1121 of the Act denies the balance of the overdrawn facility as a reduction in the value of the assets of the Applicant as it is secured over an excluded asset i.e. his residence. This is so, notwithstanding, that a limited number of the transactions in that overdraft account are in respect of Gemeden. Instead the bulk of the transactions appear to be private.
ATTRIBUTION OF INCOME AND ASSETS
The simplified outline of section 1207 of the Act states that Part 3.18 – Means Test Treatment of Private Companies and Private Trusts, sets up a system for the attribution of the assets and income of private companies and private trusts to individuals (sections 1207Y and 1208E). It also states that attribution starts on 1 January 2002.
The Explanatory Statement issued by the Minister for Social Services in relation to the Social Security (Attribution of Assets) Principles 2017, which commenced on 1 April 2017, states in the background that “The provisions of Part 3.18 aim to ensure that people who hold their assets in private companies or private trusts receive comparable treatment under the means test to those who hold their assets directly. The assets and income of the structure will be attributed to the person or persons who control the company or trust, or to the person or persons who were the source of the capital or corpus of the company or trust.”
The Applicant states at point 1 in the 7 March 2019 Letter that he has never read Part 3.18 so he could not possibly have misunderstood it, yet an understanding of Part 3.18 is fundamental to his circumstances and the decision to be made. He further states at point 7 in the 7 March 2019 Letter that the Member in the AAT1 Decision failed to address the question of equity and justice arising out of attributing assets and income to him. As set out in the previous paragraph, Part 3.18 is the relevant law and must be applied in cases such as this to ensure that all social security applicants are treated fairly and equitably under the law.
For an asset or income to be attributed to an individual:
(a)the company must be a designated private company or the trust must be a designated private trust (sections 1207N and 1207P of the Act respectively); and
(b)the company must be a controlled private company in relation to the individual or the trust must be a controlled private trust in relation to the individual (sections 1207Q and 1207V of the Act respectively); and
(c)the individual must be an attributable stakeholder of the company or trust (section 1207X of the Act).
A company or trust will be a controlled private trust or a controlled private company if the individual passes a control test or a source test.
An individual will not be an attributable stakeholder of a trust if the trust is a concessional primary production trust in relation to the individual, which is not applicable in this case.
The asset deprivation rules and the income deprivation rules are modified if attribution happens.
A designated private company has the meaning given by section 1207N and designated private trust has the meaning given by section 1207P of the Act.
LEGISLATIVE FRAMEWORK
Relevant definitions
Section 1207B – Relatives:
(1)For the purposes of this Part, a relative, in relation to a person (the first person), means any of the following:
(a)the spouse of the first person;
(b)a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, first cousin, second cousin or lineal descendant of the first person;
(c)the spouse of a person covered by paragraph (b);
(d)a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, first cousin, second cousin or lineal descendant of the spouse of the first person;
(e)the spouse of a person covered by paragraph (d);
(f)a child of a person covered by any of the preceding paragraphs.
(2)For the purposes of this section, if one person is the child of another person because of the definition of child in section 1207A relationships traced to or through the person are to be determined on the basis that the person is the child of the other person.
Section 1207A – Child:
Without limiting who is a child of a person for the purposes of this Part, each of the following is the child of a person
(a) an adopted child, step‑child or foster‑child of the person; or
(b) someone who is a child of the person within the meaning of the Family Law Act 1975.
Section 1207C – Associates:
(1)For the purposes of this Part, in determining:
(a)whether a trust is a designated private trust; or
(b)whether a company is a controlled private company in relation to an individual; or
(c)whether a trust is a controlled private trust in relation to an individual; or
(d)whether a trust is a concessional primary production trust in relation to an individual;
the following are associates of an individual:
(e)a relative of the individual;
(f)an entity who, in matters relating to the trust or company:
(i)acts, or is accustomed to act; or
(ii)under a contract or an arrangement or understanding (whether formal or informal), is intended or expected to act;
in accordance with the directions, instructions or wishes of:
(iii)the individual; or
(iv)the individual and another entity who is an associate of the individual because of another paragraph of this subsection;
(g)an entity that is a declared associate of the individual (see subsection (2));
(h)a business partner of the individual or a business partnership in which the individual is a business partner;
(i)if a business partner of the individual is an individual—the spouse or a child of that business partner;
(j)a trustee of a trust, where:
(i)the individual; or
(ii)another entity that is an associate of the individual because of another paragraph of this subsection;
benefits or is capable (whether by the exercise of a power of appointment or otherwise) of benefiting under the trust, either directly or through any interposed companies, business partnerships or trusts;
(k)a company, where the company is sufficiently influenced by:
(i)the individual; or
(ii)another entity that is an associate of the individual because of another paragraph of this subsection; or
(iii)another company that is an associate of the individual because of another application of this paragraph; or
(iv)2 or more entities covered by the preceding subparagraphs;
(l)a company, where a majority voting interest in the company is held by:
(i)the individual; or
(ii)the entities that are associates of the individual because of any of the preceding paragraphs of this subsection; or
(iii)the individual and the entities that are associates of the individual because of any of the preceding paragraphs of this subsection.
Declared associate
(2)The Secretary may, by legislative instrument, determine that each entity included in a specified class of entities is taken to be a declared associate of an individual for the purposes of this section.
(3)A determination under subsection (2) has effect accordingly.
Based on the above, Andrea is a relative of the Applicant and an associate of him because she is his daughter. Accordingly, Chilcotin and Gemeden are controlled private companies and the Trust is a controlled private trust.
Division 6 — Attributable Stakeholders and Attribution Percentages
1207X Attributable stakeholder, asset attribution percentage and income attribution percentage
Company
(1)For the purposes of this Part, if a company is a controlled private company in relation to an individual:
(a)the individual is an attributable stakeholder of the company unless the Secretary otherwise determines; and
(b)if the individual is an attributable stakeholder of the company—the individual’s asset attribution percentage in relation to the company is:
(i) 100%; or
(ii) if the Secretary determines a lower percentage in relation to the individual and the company—that lower percentage; and
(c) if the individual is an attributable stakeholder of the company—the individual’s income attribution percentage in relation to the company is:
(i) 100%; or
(ii) if the Secretary determines a lower percentage in relation to the individual and the company—that lower percentage.
Trust
(2)For the purposes of this Part, if:
(a)a trust is a controlled private trust in relation to an individual; and
(b)the trust is not a concessional primary production trust in relation to the individual (see section 1208U);
then:
(c)the individual is an attributable stakeholder of the trust unless the Secretary otherwise determines; and
(d)if the individual is an attributable stakeholder of the trust—the individual’s asset attribution percentage in relation to the trust is:
(i) 100%; or
(ii) if the Secretary determines a lower percentage in relation to the individual and the trust—that lower percentage; and
(e) if the individual is an attributable stakeholder of the trust—the individual’s income attribution percentage in relation to the trust is:
(i) 100%; or
(ii) if the Secretary determines a lower percentage in relation to the individual and the trust—that lower percentage.
(2A)The only attributable stakeholder of a special disability trust is the principal beneficiary of the trust.
Note 1: For special disability trust, see section 1209L.
Note 2: For principal beneficiary of a special disability trust, see subsection 1209M(1).
Determinations
(3)A determination under this section is to be in writing.
(4)A determination under this section has effect accordingly.
(5)In making a determination under this section, the Secretary must comply with any relevant decision-making principles.
Division 2 - Designated private companies
Section 1207N – Designated private companies
(1)For the purposes of this Part, a company is a designated private company at a particular time if:
(a)the company satisfies at least 2 of the following conditions in relation to the last financial year that ended before that time:
(i)the consolidated revenue for the financial year of the company and its subsidiaries is less than $25 million, or any other amount prescribed by regulations made for the purposes of paragraph 45A(2)(a) of the Corporations Act 2001;
(ii)the value of the consolidated gross assets at the end of the financial year of the company and its subsidiaries is less than $12.5 million, or any other amount prescribed by regulations made for the purposes of paragraph 45A(2)(b) of the Corporations Act 2001;
(iii)the company and its subsidiaries have fewer than 50, or any other number prescribed by regulations made for the purposes of paragraph 45A(2)(c) of the Corporations Act 2001, employees at the end of the financial year; or
(b)the company came into existence after the end of the last financial year that ended before that time; or
(c)the company is a declared private company (see subsection (2));
and the company is not an excluded company (see subsection (5)).
Declared private company
(2)The Secretary may, by legislative instrument, determine that each company included in a specified class of companies is a declared private company for the purposes of this section.
(3)A determination under subsection (2) has effect accordingly.
Excluded companies
(5)The Secretary may, by legislative instrument, declare that each company included in a specified class of companies is an excluded company for the purposes of this section.
(6)A declaration under subsection (5) has effect accordingly.
Definitions
(8)In this section:
“consolidated revenue” has the same meaning as in section 45A of the Corporations Act 2001.
“financial year”, in relation to a company, means:
(a) a period of 12 months beginning on 1 July; or
(b) if some other period is the company’s tax year—that other period.
“value of consolidated gross assets” has the same meaning as in section 45A of the Corporations Act 2001.
Chilcotin came into existence in 1977 and is not a declared private company or an excluded company under subsection 1207N(1)(c) of the Act. On the evidence before the Tribunal, Chilcotin has always been a trustee company and so any assets it holds or any income it derives it does so in its capacity as trustee and not in its own right. Accordingly, Chilcotin is a Designated Private Company (emphasis added) because it passes all three tests in subsection 1207N(1)(a) of the Act as outlined above.
Gemeden came into existence in 1991 and is not a declared private company or an excluded company under subsection 1207N(1)(c) of the Act. It holds assets and derives income in its own right. The evidence before the Tribunal is that its consolidated revenue is less than $25M, its consolidated gross assets are less than $12.5M and it has fewer than 50 employees. Accordingly, Gemeden is a Designated Private Company (emphasis added) because it passes all three tests in subsection 1207N(1)(a) of the Act as outlined above.
Division 3 - Designated Private Trusts
Section 1207P of the Act states:
(1)For the purposes of this Part, a trust is a designated private trust unless:
(a)all of the following conditions are satisfied:
(i)the trust is a fixed trust;
(ii)the units in the trust are held by 50 or more persons;
(iii)the trust was not created, continued in existence or operated under a scheme that was entered into or carried out for the sole or dominant purpose of enabling any individual or individuals to avoid the application of this Part and/or Division 11A of Part IIIB of the Veterans’ Entitlements Act; or
(b)the trust is a complying superannuation fund (see subsection (3)); or
(c)the trust is an excluded trust (see subsection (4)).
(2)For the purposes of subparagraph (1)(a)(ii), an individual and his or her associates are taken to be one person.
Complying superannuation funds
(3)For the purposes of this section, a fund is a complying superannuation fund at a particular time if:
(a)that time occurs during a particular tax year of the fund; and
(b)under section 45 of the Superannuation Industry (Supervision) Act 1993, the fund is a complying superannuation fund for the purposes of the Income Tax Assessment Act 1997 in relation to that tax year.
Excluded trusts
(4)The Secretary may, by legislative instrument, declare that each trust included in a specified class of trusts is an excluded trust for the purposes of this section.
(5)The declaration has effect accordingly.
Definitions
(7)In this section:
“fixed trust” means a trust where persons have fixed entitlements to all of the income and corpus of the trust.
“income” means income within the ordinary meaning of that expression.
“unit”, in relation to a trust, includes a beneficial interest, however described, in the property or income of the trust.
The Trust came into existence in 1977 and despite the Declaration dated 12 July 1988, which fixed the entitlements to given beneficiaries, it is not a fixed trust under section 1207P(1)(a) of the Act because:
(a)There are no units on issue by the Trust and in any case, the fixed entitlement are not held by 50 or more persons; and
(b)the trust was not created, continued in existence or operated under a scheme that was entered into or carried out for the sole or dominant purpose of enabling any individual or individuals to avoid the application of this Part and/or Division 11A of Part IIIB of the Veterans’ Entitlements Act.
(c)In paragraphs 30 to 33 of the Secretary’s Statement of Facts & Contentions the Respondent sets out the relevant parts of the Excluded Trust Declaration set out in Annexure 3. Without repeating the contents of these paragraphs in detail, the Tribunal agrees that the trust ceased to be an excluded trust because of the additional funds that were contributed to it after the relevant date by both the applicant and Andrea.[15]
[15] Exhibit 4 Secretary’s Statement of Facts & Contentions, dated 26 April 2019 including Annexure 3.
It is also not a complying superannuation fund nor is it an excluded trust. Accordingly, the Trust is a Designated Private Trust (emphasis added).
The Applicant stated many times at the Hearing and in correspondence before and since the application was lodged that it is nonsense to attribute to him any percentage of the net assets of Gemenden. For example, in his letter dated 20 June 2018 to the Appeals Branch of Centrelink, the Applicant states:[16]
“As to the attribution of 50% of income and assets of Gemeden P/L or the Chilcotin P/L As Trustee For the family trust, the SS law states that the assets of the company or trust shall be attributed to the person or persons who have effective control of the company or trust. Effective control of Gemeden and the Trust lies with their respective boards of directors. Only the boards can exercise control through the resolutions, board members cannot. I cannot effect a dividend payment that would force a distribution to the 6 beneficiaries of trust, I cannot force the trust to sell its 2 shares of Gemeden. There is no action I can take that would give me a financial benefit in my role as grandfather of Oscar and Hugo, as director of the two corporate entities, as beneficiary, or as holder of the 1 share in Chilcotin P/L that has a zero market value.”
[16] Exhibit 1, T Documents, T41, pages 324 – 325, Correspondence from the Applicant to Centrelink dated 20 June 2018.
However, as set out above, the relevant Social Security law, especially in Part 3.18 of the Act, specifically deems Chilcotin and Gemeden to be designated private companies and the Trust to be a designated private trust. The Applicant, with Andrea, own the two issued shares in Chilcotin. Andrea is the daughter of the Applicant so they are related. They cannot deal with each other at arm’s length. The shareholders appoint the directors of each company therefore they control the boards of those companies. Apart from the Applicant, the only other directors of Chilcotin and Gemeden reside overseas.
By the Applicant’s evidence given at Hearing, the day to day activities and investment decisions of Gemeden and Chilcotin are made by the Applicant in conjunction with advice from Morgans with minimal input from Andrea, other than the annual meeting held each December in Germany when the Applicant visits his family. The Applicant is the only resident Director in Australia and as stated above the Trust and Gemeden are also residents of Australia for the purposes of the Social Security laws. As such, the Tribunal finds the Applicant to be the person who is primarily in control of the affairs of both companies to a sufficient degree that both companies can fairly be said to think and act through him. That is, he is the controlling mind of the both companies.
The Applicant is ultimately the controlling mind of Chilcotin and therefore of the Trust and Gemeden. Accordingly, Chilcotin and Gemeden are controlled private companies under 1207C of the Act.
Notwithstanding the Declaration and its effect on the distribution of the income and capital of the Trust from 12 July 1988, the board of Gemeden could at any time declare a dividend to the Trust as its shareholder notwithstanding any tax payable as a result. The Trust would then be required by the Declaration to distribute its net income to the beneficiaries. Just because tax may or may not be payable as a result does not prevent that from occurring. A similar situation applies to the distribution of capital from Gemeden to the Trust and on to the beneficiaries. Such distributions of income and capital may not make economic sense to the beneficiaries because of the potential taxation consequences, yet no evidence has been presented to the Tribunal to suggest that there is any legal impediment to either of those situations occurring.
As the Member in the AAT1 Decision observed, the banking arrangements of the Applicant and Gemeden are significantly intertwined.[17] The Applicant advises in his letter to the Tribunal dated 5 February 2019 requesting a review of the AAT1 Decision that Gemeden was not able to obtain an overdraft facility in its own right and so it transacts with Morgans through his ANZ overdraft (ANZ #6916).[18] Whilst this may be convenient for the Applicant in managing the day to day activities of Gemeden, it also further entrenches his position as controller of Gemeden.
[17] Exhibit 1, T Documents, T 3, page 13, Decision of the Social Services & Child Support Division (AAT1), dated 16 January 2019, paragraph 50.
[18] Exhibit 1, T Documents, T47, page 343, Correspondence from the Applicant to AAT with attachment, datedIt is for these reasons that the Applicant and Andrea are deemed to be attributable stakeholders of Chilcotin, the Trust and Gemeden and accordingly attribution of assets applies to them both.
The Tribunal must decide the attribution percentage applicable to the Applicant and Andrea. Previous decisions have applied a 50% attribution to the Applicant on the basis that he holds 50% of the shares on Chilcotin and from that the Trust and Gemeden and has been the source of the majority of the capital now used in Gemeden. Andrea holds the other 50% of the shares on Chilcotin and whilst she adopts a passive role in the management of both companies, she could if she chose to do so exercise a greater level of control. This may occur if the Applicant was unwilling or unable to continue to do so.
While the evidence before the Tribunal is that the Applicant is the controlling mind of Chilcotin, the Trust and Gemeden, and that Andrea has minimal involvement in the management and day to day activities of Gemeden in particular, the Tribunal acknowledges that the Applicant is one of two shareholders and that over time both have contributed funds to the Trust and Gemeden. Accordingly, the Tribunal finds that 50% of the net assets of Gemeden should be ascribed to the Applicant and 50% to Andrea.
CAN THE LOANS FROM HUGO AND OSCAR BE RECOGNISED?
To determine the net assets of Gemeden, it is necessary to consider whether all of the loans that were made to the company from the distributions by the Trust in 2008 are to be recognised. Section 1208G of the Act deals with this matter as well as 4.12.5.10 - Recognised & Non-Recognised Liabilities of a Controlled Private Trust or Controlled Private Company - of the Social Security Guide (see Appendix B).
As shown below, loans were made by the Applicant’s grandchildren, Oscar and Hugo, to Gemeden and the balance as at 23 November 2016 is recorded as $315,132 each. This is the net amount of the distribution made in 2008 of $350,000, reduced by their personal income tax in respect of that distribution and other associated costs. At the time the loans were made, Oscar and Hugo were aged 12.
The Social Security Guide at 4.12.5.10 - Recognised & Non-Recognised Liabilities of a Controlled Private Trust or Controlled Private Company sets out the circumstances where a loan to or debts owed by an entity will not be recognised as a liability of that entity. Those circumstances are where no written agreement exists which is signed by all parties to the agreement and witnessed by a third party (associates are not considered to be third parties), and loans from, or debts owed to, a person who is under 18 years of age.
Notwithstanding that the Applicant has not been able to produce suitably written and witnessed loan agreements he has produced documents described as acknowledgements of the loans in question including those of Hugo and Oscar.[19]
[19] Exhibit 1, T Documents, T32, pages 288 - 289, various Acknowledgment of Loans between the beneficiaries and Gemeden.
The Applicant argues that the loans recorded in the names of Hugo and Oscar, who were and remain minors, are made in the names of their mother and so can be included in the determination of the net assets of Gemeden. However, the Declaration states inter alia that beneficiaries have an absolute entitlement to distributions. Therefore, Hugo and Oscar had an absolute entitlement to the funds distributed to them in 2008 and so the loans are made by them to Gemeden notwithstanding that those loans are recorded in the name of their mother.
Accordingly the loans from Hugo and Oscar cannot be recognised in determining the net assets of Gemeden because they were under age 18 at the time the loans were made and they were absolutely entitled to those funds which had been validly distributed to them.
NET ASSETS OF GEMEDEN
The Applicant has not provided externally prepared financial statements for Gemeden. The Tribunal has therefore had to rely on the various balance sheets and profit and loss accounts prepared by the Applicant. As noted in previous decisions, the balance of the Applicant’s loan account in Gemeden is recorded as different amounts on different schedules. For the purpose of this decision, the Tribunal has accepted that the loan balance at the time of the application was $89,660 as shown on the MOD PC and as set out below.
The MOD PC dated 23 November 2016 listed the Assets and Liabilities of Gemeden as follows:[20]
[20] Exhibit 1, T Documents, T5, pages 57 – 87, MODPC Private Company – Gemeden Pty. Limited and attachments, dated 23 November 2016.
$ $ Assets: Share Portfolio at market value as at 31 October 2016[21] 1,473,018 Mortgage loan as at 30 June 2016[22] (See Note 1) 150,000 Loan to Chilcotin Trust as at 30 June 2016[23] (See Note 1) 8,162 1,631,180 Liabilities: Loans Applicant 89,660 Tao 247,843 Andrea 374,739 Isabella 5,028 Oscar 315,132 Hugo 315,132 1,347,534 Trade payables 1,900 1,349,434 Excess of Assets over Liabilities $ 281,746 [21] Exhibit 1, T Documents, T5, pages 63-64, Share Portfolio Breakdown for Gemeden Pty. Limited, as at[22] Exhibit 1, T Documents, T5, page 81, Gemeden Pty. Limited Balance Sheet for 30 June 2016.
[23] Exhibit 1, T Documents, T5, page 81, Gemeden Pty. Limited Balance Sheet for 30 June 2016.
Note 1: These amounts were not included in the MOD PC at question 33. They appear on the balance sheet as at 30 June 2016 provided by the applicant.[24] Establishment costs have been ignored as having no realisable value.
[24] Exhibit 1, T Documents, T5, page 81, Gemeden Pty. Limited Balance Sheet for 30 June 2016.
Following the sale of all properties owned by the Trust, various distributions were made to the nominated beneficiaries over time in accordance with the fixed entitlements arising from the Declaration. The Applicant advises that distributions were made in June 2008 to each of the then six beneficiaries in two tranches being $300,054.97 and $50,000.00.[25] Sometime later the amount of income tax applicable to each distribution was deducted from the respective beneficiaries’ loan account. The Applicant advises that those funds were loaned by the beneficiaries to Gemeden as follows (the June 2008 Loans):
[25] Exhibit 1, T Documents, T34, page 295, Correspondence from the Applicant to Andrea re Notification of Trust Distribution, dated 21 November 2008.
Lender $ The Applicant 350,054.97 Andrea 350,054.97 Isabella 350,054.97 Tao 350,054.97 Andrea on behalf of Oscar 350,054.97 Andrea on behalf of Hugo 350,054.97 Total $2,100,329.82
No evidence has been provided by way of loan agreements or similar for the making of the original loans in June 2008. Acknowledgements dated 21 December 2017 of the loan balance as at 30 November 2016 were provided and the amounts are recorded as follows:[26]
[26] Exhibit 1, T Documents, T32, pages 286 – 291, various Acknowledgment of Loans between the beneficiaries and Gemeden.
Lender $ The Applicant 14,659.14 Andrea 374,739.43 Isabella 6,491.97 Tao 247,842.65 Andrea on behalf of Oscar 315,132.15 Andrea on behalf of Hugo 315,132.13 Total $1,273,997.47
The June 2008 Loans, being funds provided by beneficiaries of the Trust, are significant in that they amount to the transfer of property to the Trust. The importance of this was discussed in paragraph 48 (c).
The June 2008 Loans (and any other assets of Gemeden) were used and continue to be used for investment purposes by Gemeden. The Applicant has sought advice from Morgans as to the investment decisions and the Applicant gave oral evidence at the Hearing that Isabella wishes to transform Gemeden into an “investment bank”. This implies Gemeden either has or will have substantial net assets.
The Applicant states in his letter to the Tribunal dated 9 May 2019 at point 1.b. that the payment of a dividend by Gemeden to the Trust would “slow the recovery of Gemeden from near death.”[27] This appears to be contrary to the evidence provided by the Applicant at Hearing concerning the intention to transform Gemeden into an investment bank and also the partial loan repayments made to the Applicant on 29 November 2016 of $75,000, on 28 December 2016 of $20,000 and on 23 January 2017 of $28,000. The latter are clear evidence that the Applicant does have unfettered access to the financial resources of Gemeden, which has not suffered as a result of making those payments.
[27] Exhibit 2, Correspondence from the Applicant to the Tribunal dated 9 May 2019.
CONCLUSION
The Applicant is convinced that he is entitled to an age pension from 25 November 2016. In his mind, the assets of Gemeden are unavailable to him, despite evidence to the contrary. In any event, the Social Security laws in Australia are clear. If an applicant for benefits has a connection to an entity, which has assets that could be used for their benefit, the Social Security laws can attribute those assets, or some part of them, to the applicant.
Gemeden has substantial assets acquired by means of loans from the Applicant and his family. Gemeden is owned and controlled by Chilcotin Pty Ltd as trustee for Chilcotin Trust, which in turn is owned and controlled by the Applicant and his daughter, with the Applicant as the primary controlling mind of the combined group. There is no legal impediment to the Applicant accessing at least some part the income and assets of the group even though it may not make economic sense to the beneficiaries of Chilcotin Trust to do so.
If the combined value of the personal and attributed assets of the Applicant exceeds the relevant upper threshold then an application for an age pension will not succeed.
The Tribunal finds the net assets of the Applicant as at 25 November 2016 including those of Gemeden attributed to him, to be $738,095 as set out in Appendix A. This calculation excludes the loans from Oscar and Hugo and notionally adjusts the balance of the ANZ Bank account to allow for the transfer of $75,000 from Gemeden on 29 November 2016 i.e. shortly after the Application was lodged.
The upper limit of the assets test as 25 November 2016 was $793,750. At the time of the Application, the Applicant’s total assets attributed to him was less than this amount, noting the asset threshold then changed again on 1 January 2017.
The decision under review is set aside and remitted back to the Respondent for a calculation of any age pension the Applicant may have been entitled to from 25 November 2016.
I certify that the preceding 77 (seventy-seven) paragraphs are a true copy of the reasons for the decision herein of Member P Ranson
.........................[SGD].......................................
Associate
Dated: 24 September 2019
Date of hearing: 27 May 2019 Date reserved: 27 May 2019 Applicant: In person Solicitor for the Respondent: Mr Rick McQuinlan
Department of Human Services
Appendix A
The table below outlines the calculation of the net assets held by both the Applicant and Gemeden. This outlines the amounts provided by the Applicant in the Application. As discussed above, certain overdrafts are not allowed under the legislation to be deducted from assets, therefore an adjustment to the ANZ overdraft balance has been made.
$
Net Assets
Personal
Home contents
2,000
Ford Transit Van
8,000
Financial
MLC Insurance Policy
55,203
Lincoln Finance Group USA
22,800
AMP
59,409
AMP Flexible Super
0
Bank Accounts
ANZ Account #6916
0
Southern Cross Credit Union
2,564
Suncorp
0
Loans
Gemeden
89,660
L.T Mortimer
45,585
Personal Assets of the Applicant
$285,221
Gemeden
Assets
Share Portfolio
1,473,018
Mortgage Loan
150,000
1,623,018
Liabilities
Loan: Applicant
89,660
Loan: Andrea (combined)
374,739
Loan: Tao
247,843
Loan: Isabella
5,028
Loan: Oscar
0
Loan: Hugo
0
717,270
Net Assets of Gemeden
$905,748
Attribution
50%
452,874
Combined Personal & Attributed Assets
$738,095
Appendix B
4.12.5.10 Recognised & Non-Recognised Liabilities of a Controlled Private Trust or Controlled Private Company
Date of effect
This topic has effect to controlled private trusts and controlled private companies from 1 January 2002.
In this topic
This topic contains information on the following:
- when a liability is not recognised,
- when a liability is recognised,
- secured loans,
- unsecured loans and floating charges,
- rules for 100% attributable controllers, and
- loans from recognised financial institutions.
Non-recognised liabilities
Circumstances where a loan (1.1.L.65) to or debts owed by an entity will NOT be recognised as a liability of that entity are:
- where NO WRITTEN agreement exists which is signed by all parties to the agreement and witnessed by a third party (associates are not considered to be third parties), AND
- loans from, or debts owed to, a person who is under 18 years of age.
A loan that is not recognised as a liability of an entity will still be considered to be a personal financial asset of the person making the loan and is subject to deeming (4.4.1.30).
It is open to the assessor to determine that a loan DOES NOT exist and that it was instead a transfer or gift of assets (1.1.L.65) to the entity.
Example: If there was no intention to repay.
Of course, in such a situation the deprivation (1.1.D.110) provisions could apply.
Act reference: SSAct section 9(1) Financial assets and income streams definitions, section 1207C Associates, section 1208K Individual disposes of asset to company or trust
Policy reference: SS Guide 4.12.10.20 Disposal of Assets to a Private Trust or Private Company On or After 01/01/2002Recognised liabilities
Loans to or debts owed by an entity will be recognised as a genuine liability of the entity and therefore allowed as a genuine deduction from the gross asset value of the borrowing entity if:
- they appear on the balance sheet, and
- they are made under a written agreement signed by all parties to the agreement and witnessed by a third party (associates are not considered to be third parties), and
- they are not made by a person who is under 18 years of age, and
- considering the circumstances of, nature of and parties to the loan, the loan can be considered to be genuine and not created as part of a scheme to gain a social security advantage.
Note: Reasonable interest paid on loans will be accepted as a genuine deduction from the income of the entity, regardless of whether the loan is recognised or not, as long as the loan appears on the balance sheet.
Example: The current commercial interest rates would be reasonable for commercial loans. For non-commercial loans an interest rate of no more than 10% will be accepted as reasonable.
Note: Regardless of whether a loan is recognised as a liability of an entity or not, the value of the loan is considered to be a personal financial asset of the lender and is subject to deeming (4.4.1.30).
Secured loans
Loans secured against a specific asset/s (1.1.A.290) of an entity can only be offset in relation to the asset/s against which the loan is secured.
Example: A trust has assets totalling $580,000. The assets consist of a farm worth $500,000, which includes the principal home of the sole attributable stakeholder worth $100,000, and a holiday home worth $80,000. A liability of $100,000 is secured against the holiday home. Only $80,000 of the loan would be recognised as a liability. The excess $20,000 would not be recognised as a liability of the trust. Therefore the net attributable asset amount of the sole attributable stakeholder is $400,000 (total assets LESS the value of the principal home LESS the recognised liability).
Exception: If the $100,000 liability was a primary production (1.1.P.390) liability, the excess amount of $20,000 would be included when calculating the primary production aggregation amount.
Note: If the loan is secured against all the assets of the entity the loan must be apportioned before determining the net attributable asset amount.
Policy reference: SS Guide 4.12.5.20 Apportioning a Liability of a Controlled Private Company or Controlled Private Trust, 4.12.11.10 Aggregation Assessments of Controlled Primary Production Private Trusts & Private Companies
Unsecured loans & floating charges
Unsecured loans or loans secured by a 'floating charge' over all entity assets will be recognised as a liability of an entity if they are:
- made under a written agreement signed by all parties to the agreement and witnessed by a third party (associates are not considered to be third parties), and
- are NOT made by a person/s who is under 18 years of age.
Rules for 100% attributable controllers
Liabilities in respect of a person who is the '100%' controller of a private trust or private company will be allowed provided that they appear on the entity's balance sheet. Documentation of these loans is not required.
Recognised financial institutions
Liabilities in relation to financial institutions, banks and finance companies are to be allowed and will be considered adequately documented provided that the liability appears on the balance sheet. Further documentation such as a loan agreement or loan statement need only be requested if the assessor has doubts about the accuracy of the information provided on the balance sheet.
Act reference: SSAct section 1208E Attribution of assets, section 1208H Effect of unsecured loan on value of assets, section 1208J Value of company’s or trust’s assets etc
Policy reference: SS Guide 4.12.11.10 Aggregation Assessments of Controlled Primary Production Private Trusts & Private Companies, 4.12.7.20 Allowable & Non-allowable Deductions
5 February 2019.
31 October 2016.
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