Joshua Kelsey and Secretary, Department of Social Services
[2014] AATA 596
[2014] AATA 596
Division GENERAL ADMINISTRATIVE DIVISION File Number
2014/1574
Re
Joshua Kelsey
APPLICANT
And
Secretary, Department of Social Services
RESPONDENT
DECISION
Tribunal Professor R McCallum, Member
Date 25 August 2014 Place Sydney The Tribunal affirms the decision under review.
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Professor R McCallum, Member
CATCHWORDS
SOCIAL SECURITY – Youth Allowance – meaning of income - meaning of ordinary income - whether deferred annuity payments compensation - meaning of compensation - decision under review affirmed
LEGISLATION
Social Security Act 1991 (Cth), ss 8, 9, 9(1B), 9(1C), 17(2), 556, 1067G, 1172, 1176
CASES
Re Drake and Minister for Immigration and Ethnic Affairs (No.2) (1979) 2 ALD 634
Durant and Secretary, Department of Family and Community Services [1999] AATA 382
Re Secretary, Department of Families, Housing, Community Services and Indigenous Affairs and Haywood [2010] AATA 641
SECONDARY MATERIALS
Guide to Social Security Law, 4.13.1.20
REASONS FOR DECISION
Professor R McCallum, Member
25 August 2014
BACKGROUND
The Applicant, Mr Joshua Kelsey, is a twenty-one year old student. He was born in the State of Florida, United States of America in November 1992. He gave evidence on affirmation in these proceedings and I find that he was a truthful witness.
Mr Joshua Kelsey is studying website development, and has been receiving youth allowance since 14 March 2013.
In 2006 when he was thirteen years old, and when he was residing in the United States, Joshua Kelsey suffered an accident. When riding his bicycle down a lane way, he was struck by a vehicle. He gave evidence that his right leg was broken in several places, that he was in hospital for several weeks, and that his right leg is still slightly shorter than his left leg.
The legal issues which arose in the United States following on from this accident need not be examined in detail, however, it is necessary to give a brief summary in order to comprehend Mr Kelsey’s circumstances. It appears that after the accident, Mr Kelsey’s parents commenced legal proceedings on his behalf, presumably in tort, against Ralph's Grocery Company. A compromise of action settlement was approved by a Californian court on 24 November 2010. It may have been necessary to obtain court approval as Mr Kelsey was still a minor at that date. Mr Kelsey’s claim against Ralph's Grocery Co was settled by the payment of a sum of money. There is no amount of economic loss specified in the settlement, presumably because of his age when the accident occurred. The settlement included attorney’s fees and medical expenses. The gross amount was $US217,000, with the balance to Mr Kelsey being US$133,645.37, plus a $2,000 gift card. The order required US$100,000 of this money to be invested into a deferred annuity fund for Mr Kelsey until he turned 21, which he did in November 2013. In other words the deferred annuity fund meant that Mr Kelsey would not receive any payments until he reached his legal majority. The US$100,000 was invested with Pacific Life and Annuity Company. The annuity was structured in the following manner. Mr Kelsey would commence receiving US$2,000 per month in November 2013, that is on his twenty-first birthday. These payments were to subsist for four years and five months, with the last payment occurring in March 2018.
After Mr Kelsey turned eighteen, when in the United States, he ransacked the house of Mr Morgan and stole various items. Mr Kelsey was obliged to pay to Mr Morgan US$55,751.91 as reparation pursuant to a Californian victims compensation scheme. Mr Kelsey gave evidence that if he did not pay the reparation he would be liable to be sentenced to six years in a correctional institution. Therefore, in August 2013 when he was still under twenty-one years of age, Mr Kelsey entered into an arrangement with Catalina Structured Funding Inc (Catalina) under which Catalina paid Mr Kelsey US$55,751.91. Mr Kelsey then used this money to pay the reparation to Mr Morgan.
Under the arrangement with Catalina, Mr Kelsey instructed the Pacific Life and Annuity Company to pay Catalina US$1,400 per month as payment for Catalina’s loan to him of US$55,751.91. This meant that instead of receiving US$2,000 per month which was due to commence in November 2013, Mr Kelsey would only receive US$600 per month because US$1,400 per month was being paid to Catalina. Under Californian law, the agreement between Mr Kelsey and Catalina had to be approved by a court to be valid. I surmise this was because the agreement altered a Transfer of Structured Settlement Payments.
A court approved this alteration to the Transfer of Structured Settlement Payments on 30 October 2013. Therefore, ever since the commencement of the annuity payments in November 2013, Mr Kelsey has only ever received $600 US per month.
Mr Kelsey notified Centrelink of his annuity payments. On 13 January 2014, a decision was made by Centrelink to significantly reduce Mr Kelsey’s youth allowance. This was because Centrelink decided that the monthly payments of US$2,000 under the annuity was income of Mr Kelsey pursuant to relevant provisions of the Social Security Act 1991. This decision was affirmed by a Centrelink authorised review officer on 10 February 2014. Mr Kelsey appealed this decision to the Social Security Appeals Tribunal (SSAT), however, on 21 March 2014 the SSAT affirmed the decision of the authorised review officer.
Mr Kelsey asserts that as he only receives US$600 per month from the annuity, Centrelink should recognise that the only income which he receives from the annuity is US$600. He further asserts that it is unfair for Centrelink to hold that he receives US$2,000 income per month. Mr Kelsey says that he was obliged to enter into the arrangement with Catalina to pay the reparation, and so the US$1,400 per month should not be regarded as income for the purposes of assessing the amount of his youth allowance.
THE ISSUE FOR DECISION
The issue before me is whether Centrelink was correct to reduce Mr Kelsey’s youth allowance because the US$2,000 per month was income of Mr Kelsey.
THE LEGISLATION
To determine whether or not Centrelink was correct to reduce Mr Kelsey’s youth allowance payments, requires me to examine the relevant provisions of the Social Security Act 1991. These provisions are complex, and hence it is necessary to set out the exact wording of many of them.
Pursuant to section 556 of the Act, a person’s rate of youth allowance is to be worked out in accordance with the Youth Allowance Rate Calculator in section 1067G of the Act. Module H of section 1067G explains how to calculate the effect of a person’s ordinary income on the person’s maximum payment rate. It has not been suggested that Centrelink has erred in its calculations: rather, the question is what ordinary income of Mr Kelsey should be used when calculating his youth allowance. Therefore, it is not necessary to reproduce or to further analyse section 556 or Module H of section 1067G.
The starting point is section 1072 of the Act which is headed “General meaning of ordinary income”. It provides:
A reference in this 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, other than a reduction under Division 1A.
Division 1A is irrelevant for present purposes as it covers trading stock and the expenses of carrying on a business. Thus when referring to ordinary income, section 1072 means with respect to Mr Kelsey, to his gross ordinary income without any deductions. Ordinary income is further defined in section 8 as follows:
“ordinary income” means income that is not maintenance income or an exempt lump sum.
THE FOUR QUESTIONS
To determine the correctness of Centrelink’s decision, I am required to answer four questions. They are:
(i)Was the US$100,000 which was invested in the deferred annuity, a payment of compensation under the Act?
(ii)If the money was a payment of compensation, did it lose its characterisation as a payment of compensation because it was invested in a deferred annuity?
(iii)Are the payments of US$2,000 per month income for Mr Kelsey’s “own use or benefit”?
(iv)May Mr Kelsey utilise the deeming rules?
I shall answer these questions in turn.
Was the US$100,000 which was invested in the deferred annuity, a payment of compensation under the Act?
If the US$100,000 is an award of compensation, then without more, this income is to be disregarded for the purposes of calculating the amount of his youth allowance. This is because section 1172 provides:
If an amount of a compensation affected payment is not payable to a person under section 1169 because the person has received a lump sum compensation payment, that lump sum compensation payment is not to be regarded as ordinary income of either the person or the person’s partner (if any) for the purposes of a provision of this Act, other than point 1071A4.
Further, s 1176 provides:
If an instalment of a compensation affected payment payable to a person is reduced under section 1173 because of the receipt of periodic compensation payments, those payments are not to be regarded as ordinary income of the person for the purposes of a provision of this Act, other than point 1071A-4.
Section 17(2) of the Act defines compensation as follows. It relevantly provides:
...[F]or the purposes of this Act, compensation means:
(a) a payment of damages; or
(b) a payment under a scheme of insurance or compensation under a Commonwealth, State or Territory law, including a payment under a contract entered into under such a scheme; or
(c) a payment (with or without admission of liability) in settlement of a claim for damages or a claim under such an insurance scheme; or
(d) any other compensation or damages payment;
(whether the payment is in the form of a lump sum or in the form of a series of periodic payments and whether it is made within or outside Australia) that is made wholly or partly in respect of lost earnings or lost capacity to earn resulting from personal injury.
The question here is whether the moneys springing from the compromise of action settlement which was approved by a Californian court in November 2010 was a payment of compensation to Mr Kelsey within the meaning of section 17(2) of the Act. It does appear that the structured settlement would come within section 17(2)(c). However, the four paragraphs in section 17(2) are qualified by the proviso which appears at the end of section 17(2). It states: “(whether the payment is in the form of a lump sum or in the form of a series of periodic payments and whether it is made within or outside Australia) that is made wholly or partly in respect of lost earnings or lost capacity to earn resulting from personal injury.” There is nothing in the compromise of action settlement document to show that portion of the moneys related to Mr Kelsey’s lost earnings or to his future capacity to earn income.
In his evidence, Mr Kelsey was unable to show that any of the settlement moneys related to any incapacity with respect to his future earnings. Without any further evidence, I am unable to find that the settlement money, in whole or in part, amounted to compensation within the meaning of the Act.
If the money was a payment of compensation, did it lose its characterisation as a payment of compensation because it was invested in a deferred annuity?
I have found that the money was not compensation, and so it is strictly unnecessary for me to decide question 2. However, this matter was argued before me and so I shall answer it. On the assumption that the money amounted to compensation, did the purchase of a deferred annuity for Mr Kelsey alter the characterisation of the money? In other words, can the monthly payments to Mr Kelsey from the annuity be characterised as compensation for the purposes of the Act?
Here, I am required to seek guidance from Centrelink’s policy guide, Guide to Social Security Law (Re Drake and Minister for Immigration and Ethnic Affairs (No.2) (1979) 2 ALD 634).Section 4.13.1.20 relevantly provides:
Note: The initial treatment of a compensation lump sum does NOT affect the treatment of any on-going income generated by the lump sum. The initial treatment of this lump sum does not make this an exempt lump sum. The continuing assets and income tests treatment will be determined by how a person makes use of the funds. The funds may be used to obtain additional assets such as a car. For a purchase such as this the assets test would apply. Or, the funds may be invested with a financial institution. The funds have then become a financial asset, assessable as an asset and subject to the income test deeming rules.
The Guide regards the purchase of an annuity as being the creation of a financial asset. However, its key words are: “The continuing assets and income tests treatment will be determined by how a person makes use of the funds. ... [T]he funds may be invested with a financial institution. The funds have then become a financial asset...” Does the characterisation of a compensation lump sum only alter when the recipient of the lump sum invests it into a financial institution? Put another way, does the fact that the deferred annuity was created by an order of the compromise of action settlement which was approved by a court, mean that the annuity should still be regarded as a compensation lump sum? If so, then the annuity and its monthly income would be disregarded in assessing the amount of Mr Kelsey’s youth allowance.
The Respondent agreed that the policy guide did not expressly deal with the situation where a settlement order created a deferred annuity. However, the Respondent further argued, using the words of the Guide, that the words “person makes use of the funds” also cover the situation where the funds are invested on behalf of that person.
In my view, the fact that the annuity was established pursuant to a compromise of action settlement does not mean that the money retains its characteristic as lump sum compensation. In truth, the annuity is a financial asset investment.
Are the payments of US$2,000 per month income for Mr Kelsey’s own use or benefit?
Section 8 of the Act defines “income” as follows.
income, in relation to a person, means:
(a) an income amount earned, derived or received by the person for the person’s own use or benefit; or
(b) a periodical payment by way of gift or allowance; or
(c) a periodical benefit by way of gift or allowance;
but does not include an amount that is excluded under subsection (4), (5) or (8).
The qualifications in subsection (4)(5) and (8) are irrelevant to Mr Kelsey.
The relevant portion of this definition is paragraph (a) which states: “...an income amount earned, derived or received by the person for the person’s own use or benefit.” Given the above definition, can the annuity payments to Mr Kelsey be described as being for his “own use or benefit”? If so then the annuity payments are income. If not, then these payments may be disregarded when calculating the amount of Mr Kelsey’s youth allowance.
Here, case law is relevant. The most significant precedent is Durant and Secretary, Department of Family and Community Services [1999] AATA 382. The question before the Administrative Appeals Tribunal was whether in assessing the Applicant’s rate of mature Age allowance, under the Social Security Act 1991, the Department was correct to include in his income his Canadian pension before the deduction of Canadian taxation. Portion of the Canadian Pension was withheld for taxation purposes, However, it was open to the Applicant to make a taxation return to the Canadian Government. The question was whether the gross amount of his Canadian pension was for his own use or benefit within the meaning of paragraph (a) of the definition of income in section 8 of the Act. Forgie DP answered this question in the affirmative. After examining the case law, Forgie DP said:
23. I have concluded that I am not considering a case in which it can be said that Mr Durant did not earn, derive or receive the pension payments from Revenue Canada for his own benefit. It is not a case in which it can be said that he did not earn, derive or receive the whole amount of the pension (including that part withheld for taxation) for his own use and benefit....Payment of tax from money which Mr Durant earns, derives or receives is part of the money for his own use or benefit. It is for his own use or benefit that he pay his taxation obligations whether those obligations arise in Canada or Australia. The fact that he is not called upon to meet those obligations from the pensions moneys he actually receives and that the money is deducted before the balance is sent to him is of no consequence.
Forges DP later said:
26. Finally, I refer to section 1072. That section clearly provides that a reference in the SS 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 and that his or her ordinary income is to be calculated without any reduction, other than a reduction under Division 1A.
The reasoning of this decision has been applied in the Administrative Appeals Tribunal, with the latest decision being Re Secretary, Department of Families, Housing, Community Services and Indigenous Affairs and Haywood [2010] AATA 641. In this decision, it was held that the gross amounts of United Kingdom pensions were to be taken into account when calculating debts to the Commonwealth. The fact that Mr and Mrs Haywood agreed to pay their national insurance contributions from their pension arrears was irrelevant.
In my view, the monthly payments of US$2,000 are assessable income for the purposes of calculating Mr Kelsey’s youth allowance. He chose to structure the repayments of his loan from Catalina by arranging for Catalina to be paid US1,400 per month thus reducing the income which he receives from the annuity to US$600 per month. I appreciate that on his own evidence, Mr Kelsey made this choice to avoid imprisonment, but he clearly chose to structure his affairs in this manner.
May Mr Kelsey utilise the deeming rules?
Finally, I am required to decide whether the whole of Mr Kelsey’s income is assessable, or may he rely upon the deeming rules? It is not necessary to examine the deeming rules and relevant provisions in any detail. This is because of the clear words of sections 9(1B) and 9(1C) of the Act. These provisions relevantly provide:
Section 9(1B) ...[T]he following are managed investments for the purposes of this Act:
...
(f) an investment in a deferred annuity
Section 9(1C) The following are not managed investments for the purposes of this Act:
...
(c) an investment in a deferred annuity if the investor has not yet reached pension age.
While section 9(1B)(f) provides that a deferred annuity is a managed investment, section 9(1C)(c) makes it clear that a deferred annuity will not be regarded as a managed investment where the investor - that is Mr Kelsey - has not reached pension age. Mr Kelsey has not reached pension age and therefore he cannot take advantage of the deeming rules.
DECISION
I affirm the decision under review.
I certify that the preceding 36 (thirty -six) paragraphs are a true copy of the reasons for the decision herein of Professor R McCallum, Member. .......[Sgd].................................................................
Associate
Dated 25 August 2014
Date of hearing 20 August 2014 Applicant In person Solicitors for the Respondent Mr S Misrachi, DHS Program Litigation Review Branch
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