HXCC and Secretary, Department of Families, Community Services and Indigenous Affairs

[2007] AATA 1510

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2007] AATA 1510

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No V200601062

GENERAL ADMINISTRATIVE   DIVISION		)
Re		HXCC

Applicant

And SECREATRY, DEPARTMENT OF FAMILIES, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS  

Respondent

DECISION

Tribunal B.H. Pascoe, Senior Member

Date5 July 2007

PlaceMelbourne

Decision The Tribunal affirms the decision under review.  

(sgd) Mr B. H. Pascoe

Senior Member

SOCIAL SECURITY – Life tenant of estate of former husband – whether asset – value of asset

Social Security Act 1991

REASONS FOR DECISION

5 July 2007 B.H. Pascoe, Senior Member       

1.      This is an application to review a decision of the respondent to reduce the rate of age pension payable to the applicant due to the value of an asset being a life interest in the estate of her late husband.  This decision was affirmed by the Social Security Appeals Tribunal (SSAT) on 21 September 2006.

2. At the hearing, the applicant was represented by her current husband. The respondent was represented by Mr T. Noonan, an advocate with the Legal Services Branch of Centrelink. There was no dispute as to the facts of this case with both parties making submissions as to the effect of the law on those facts. At the request of the applicant and for reasons accepted by the Tribunal, an order under s 35 of the Administrative Appeals Tribunal Act 1975 for the hearing to be in private and the name of the applicant to be confidential was made.

3.      The applicant’s former husband died in June 2001.  Under his will the trustees were directed: 

…to hold the whole of my real estate including all my household chattels, save as aforesaid, in my real estate on trust for my wife for life, she being responsible for paying all rates and taxes and keeping the properties comprising my real estate and such household chattels insured against loss and damage, storm and tempest, in an amount and in an insurance office approved by my Executors and maintaining each of such properties in a condition similar to that in which it was at my death.

The solicitors for the estate advised that the estate owned three properties subject to the life interest.  Two were commercial properties in a country town and one was a residential unit in the metropolitan area.  These properties were valued by the Australian Valuation Office in September and October 2005 at a total of $475,000.  In addition the estate held a bank term deposit of $118,000 which the solicitors advised was subject to the same life tenancy.  On 16 January 2006 the Australian Government Actuary provided a valuation of the applicant’s life interest in the estate at $266,580.  In arriving at this valuation the actuary adopted the following assumptions:

·The applicant, who was born in February 1935, had a life expectancy according to the Australian Life Tables 2000-2002.

·The term deposit would generate a return of 3.9% p.a.

·The real estate would generate a return of 3.5% p.a.

·The value of the real estate would increase by 3% p.a.

·The value of the future income should be discounted at 5.4%.

4.      From 19 January 2006 the respondent determined that the asset test including the value of the life interest should be applied which produced a lower rate of pension than that which would be payable based on the income test.  The applicant sought a review of this decision which was affirmed by an Authorised Review Officer on 8 May 2006.

5.      It was submitted for the applicant that the use of the actuarial value produced an unfair result.  Primarily, the applicant had difficulty accepting that the life interest was an asset as it cannot be sold or borrowed against and cannot be dealt with in any way.  In addition it was argued that the level of assumed income was excessive and made no or inadequate allowance for the expenses relating to the real estate for which she is liable.  In particular, it was noted that the roof of one of the commercial properties requires to be replaced at a cost of $20,450.  The applicant does not have such funds available and cannot borrow against the properties to provide such funds.

6.      Section 11(1) of the Social Securities Act 1991 (the Act) defines asset to mean property or money.  It is clear at law that a life interest in the income of a deceased estate is property as a right to receive the income for life and an equitable interest in the assets of the estate.  Further support for the intention of the Act to include the value of a life interest as an asset can be found in s 1118(1) which states as far as is relevant to this matter:

In calculating the value of a person’s assets for the purposes of this Act …, disregard the following:

(a)       …

(b)       …

(c)       the value of any life interest of the person other than:

(i)        …

(ii)       …

(iii)      a life interest created on the death of the person’s partner;

Here the relevant life interest is precisely that referred to in s 1118(c)(iii) and cannot be disregarded.

7.      It is readily recognised that it is difficult for the applicant to regard an actuarial value of the life interest as an asset.  It can’t be seen, touched, sold or borrowed against.  It was difficult for the applicant to comprehend that the value is said to be equal to some 45% of the total value of the estate of $593,000 when each of the five residuary beneficiaries will receive significantly less on her death.  This difficulty is readily understandable.  Unfortunately, it is clear that a legal right to future income is and must be recognised as an asset.

8.      A difficulty for the Tribunal is to accept that the valuation of an asset being the right to receive future income produces a result of a lower rate of pension than that which would result from accounting for the income only.  It is recognised that the actuary has sought to calculate the net present value of the right to the future income by estimating the amount and future period of the income and arriving at a capital amount which, if invested at the Commonwealth long term bond rate of 5.4%, would produce an annuity equal to that estimated income for the life expectancy of the annuitant.  Variations in net income caused by any extraordinary expense, such as the roof replacement, are effectively spread over a period of years by this method.  Nevertheless, if the actuarial assumptions are reasonable, it would not be expected that such an asset included in an asset test would produce a significantly different outcome than the use of the income test on which the asset value is based.  One of the likely reasons for the apparent discrepancy is that the respondent used a figure of $7,538 as the income from the estate under the income test.  This was the net income shown in the income tax return of the estate.  At the request of the Tribunal, the applicant subsequently provided copies of the income tax returns for the estate and herself for the years ended 30 June 2004, 2005 and 2006.  These disclosed the following amounts.

Year ended 30 June 2004 Net income from estate Less related expenses incurred by applicant Capital gain by estate   43,132 Assessable amount	7,538 2,071	5,467 21,566
Year ended 30 June 2005 Net income from estate Less related expenses by applicant	25,840 _6,319_	19,521
Year ended 30 June 2006 Net income from estate Less related expenses by applicant	25,705 _8,415_	17,290

These Figures can be compared with an income estimated by the actuary in his calculation for the first year of:

3.5% of $475,000

3.9% of $118,000

16,625

_4,602_

21,227_

Given these figures, it is quite likely that the differential outcome between the asset test and the income test would not be as great as may have appeared.  It is possible, nevertheless, that the actuary has overestimated the net return on these particular properties.

9.      A further factor which must be recognised is that the value of the life tenancy asset will diminish annually as the remaining years of life expectancy diminish. It is assumed that an annual actuarial valuation will be required.

10.     The applicant’s concern at the fact that the asset cannot be sold or borrowed against is relevant only if the use of the assets test produces hardship.  It would appear clear that the asset is an unrealisable asset as defined in the Act.  As such it can be disregarded pursuant to the provisions of s 1129 and s 1130 of the Act.  However, these provisions apply only if a pensioner makes application and demonstrates that the inclusion of the asset would cause severe financial hardship.  No such application has been made and there was no clear evidence of severe financial hardship before the Tribunal.  It may be a matter which the applicant could consider.

11.     The result of the forgoing is that, with some reluctance, the decision under review should be affirmed.  No expert evidence conflicting with the valuation prepared by the Australian Government Actuary was provided and I am obliged to accept it as a valuation of an asset of the applicant.  It was implied by the applicant that the value should be reduced by the encumbrance of the liability for expenses relating to the estate property.  This is not an encumbrance within the meaning of the Act and, in any event, is expected to be recognised in the actuarial assessment of likely net income of 3.5% of the market value of the property.

I certify that the 11 preceding paragraphs are a true copy of the reasons for the decision herein of B.H. Pascoe, Senior Member

(sgd)    Lauren Spragg
  Clerk

Date/s of Hearing  29 May 2007
Date of Decision  5 July 2007
Advocate for the Applicant          Self-represented 
Advocate for the Respondent       Mr T. Noonan, Centrelink Legal Services Branch