Leahy and Department of Family and Community Services - [2000] AATA 847

DECISION AND REASONS FOR DECISION [2000] AATA 847

ADMINISTRATIVE APPEALS TRIBUNAL )

) No W2000/58-59

General Administrative DIVISION      )
           Re      George Bruce Leahey and Joan Charlotte Leahey
  Applicants
           And    Secretary, Department of Family and Community Services
  Respondent

DECISION

Tribunal Mr R D Fayle, Senior Member

Date22 September 2000
PlacePerth

Decision      The decision under review is affirmed.
  ...........(sgd RD Fayle)..............
  Senior Member
CATCHWORDS
Social Security Act 1991, section 1119, assets test – value of income stream; 10 year fixed annuity; - Social Security and Veterans' Affairs Legislation Amendment (Budget and Other Measures) Act 1998, Clause 110 – binding arrangement; declaration by Minister.

REASONS FOR DECISION

22 September 2000 Mr R D Fayle, Senior Member

These are applications to review a decision of the Social Security Appeals Tribunal ("the SSAT") of 7 February 2000, which affirmed the decision of the respondent's Authorised Review Officer of 5 October 1999. Pursuant to s34B of the Administrative Appeals Tribunal Act 1975, the parties consented to the review being determined without a hearing and the decision to be reviewed could be determined in the absence of parties and by consideration of the documents lodged with the Tribunal.
The Tribunal had before it documents filed by the respondent pursuant to s37 of the Administrative Appeals Tribunal Act 1975 and written submissions provided by each party (taking for convenience Mr and Mrs Leahey as the one party ('the applicants") since their interests in this matter are identical). In addition the Tribunal had before it the following documents:
Letter and attachments of 13 June 2000 from the applicants to Mr Antonio Gonzales; and
Letter of 21 July 2000 from AMP Life Limited to Centrelink.
The issue in this matter is whether the provisions of section 1119 of the Social Security Act 1991 ("the Act"), as that provision was amended from 20 September 1998, apply to the applicants in valuing their entitlement to receive a fixed annuity from the AMP. That question, as has been painstakingly pointed out by the applicants, requires consideration of Clause 110 in the Social Security and Veterans' Affairs Legislation Amendment (Budget and Other Measures) Act 1998, to decide whether the applicants' circumstances provide for an exemption from the amendments. For if the latter provisions provide for exemption from the effects of the amendments of 20 September 1998, the value of the annuity for determining the applicants' entitlement to Age Pension will be lower. That would result in a higher entitlement to Age Pension for each applicant. It is the Tribunal's understanding that that would obtain is agreed by the respondent.
Relevant legislative provisions & Discussion
Section 1119 of the Act, as is relevant to these proceedings, states:
1119 Value of asset-tested income streams that are not defined benefit income steams
1119(1)          This section applies to a person's asset-tested income stream if it is not a defined benefit income stream.
1119(2)          The value of the income stream is, for the purposes of the assets test, worked out:
(a)       if the person receives payments from the income stream 2 or more times a year – in relation to each 6 month period of the income stream's term; and
(b)       if the person receives a payment from the income stream only once a year – in relation to each 12 month period of the income stream's term.
1119(3)          If the income stream has an account balance, the value of the income stream, for the purposes of the asset test, is the value of the account balance at the beginning of the 6 month or 12 month period (as the case requires) referred to in subsection (2).
1119(4)          (provides the formula for calculating the value of the income stream)
The reason why the applicants requested that their annuity be valued according to the pre-20 September 1998 amendment to section 1119 of the Act is neatly encapsulated in the ARO's letter of 5 October 1999 (T16):
Pre 20 September 1998
Section 1119 provided, before 20 September 1998, that the value of a person's immediate annuity was worked out once a year, effective from the day the annuity was purchased. The formula in section 1119 (pre 20 September 1998) effectively deducted an amount from the value of the annuity before the value of the annuity had in fact reduced to the amount assessed by Centrelink. …
From 20 September 1998 onwards
From 20 September 1998, the Act changed. Section 1119 now provides that an annuity such as your AMP annuity is to have its value assessed at six monthly intervals. However, the new formula in section 1119 essentially provides that the asset value reduction calculation are undertaken at the end of every six months rather that at the beginning of every twelve months.
As mentioned, Clause 110, of the Social Security and Veterans' Affairs Legislation Amendment (Budget and Other Measures) Act 1998 ("the Amending Act") provided a basis on which certain annuity recipients might be exempted from the amendment provisions and have the value of their annuity assessed as before the change. That provision relevantly provides:
Clause 110 Amendments relating to treatment of income streams
(1)       If:
(a)       a person who had entered into a binding arrangement for the provision to the person of an income stream was, on 19 September 1998, receiving a social security payment; and
(b)       the Minister declares, in writing, that the Minister is satisfied that the application of this Act (as amended by the amending Act) would cause the person significant disadvantage in relation to the treatment of the person's income stream;
this Act applies to the person in relation to the income stream as if the amendments made by Part 1 of Schedule 3 to the amending Act had not been made.
(2)       not relevant.
(3)       not relevant.
(4)       In this clause:
amending Act means the Social Security and Veterans' Affairs Legislation Amendment (Budget and Other Measures) Act 1998.
binding arrangement, in relation to a person, includes an arrangement that may only be terminated on terms that are, in the opinion of the Secretary, likely to cause severe detriment to the person.
Clause 110 is remarkable, in the context of this case, for two obvious reasons. The first is that subclause (1)(b) depends, for its application, for the Minister to make a declaration in writing in relation to "the person" therein mentioned. That person, in the present context must be the applicants. Evidence before the Tribunal is that the applicants have appealed to their member of parliament, the Honourable Daryl Williams QC, Attorney-General, in this respect. That provision of Clause 110 effectively takes the operation of the Clause outside the Tribunal's jurisdiction.
The other matter of relevance on which the Tribunal should remark relates to subparagraph (1)(a) of Clause 110. By reason of the definition of "binding arrangement" provided in subclause (4), the Secretary must form the relevant opinion. An opinion affirming that a "binding arrangement" existed would be a necessary precursor to the Minister making a declaration pursuant to subclause (1)(b).
The applicants have vigorously argued that their annuity contract with AMP is a "binding arrangement". They say that it is binding in the sense that its terms are clearly contractual and understood by both parties and unless they exercise the right to commute pursuant to clause 5 of the policy (T4, p.63), it would not be commuted. However, the difficulty with that proposition is, with respect, that it ignores the definition of "binding arrangement" in subclause (4) above. That is an "includes" definition and therefore goes beyond what might be the ordinary lexical definition of the term, which appears to be the interpretation preferred by the applicants. The Tribunal cannot ignore the fact that the definition is expanded by the inclusion in the term "an arrangement that may only be terminated on terms that are, in the opinion of the Secretary, likely to cause severe detriment to the person".
Since the annuity arrangement may be terminated at the option of the applicants then the only relevant question is whether if it was terminated, that is, commuted, would that be likely to cause the applicants severe detriment?
The evidence before the Tribunal is that should the applicants exercise their right to commute the outstanding balance of the annuity at any time, the commuted lump sum amount will be less than the then sum of the remaining income payments should the annuity run its full term. That much is clear from the evidence. The evidence is that at the relevant time, when the 10 year annuity had about 5 years to run, that nominal opportunity cost to commute was estimated by AMP, the grantor of the annuity, to be about $2,950. That is, in nominal dollars, what would be received is that much less that what would be received should the annuity run its full term. The evidence also is that there would be some transaction costs associated with the commutation but there is no evidence to quantify those costs that may take the form of fees, stamp duty and possibly income tax. In the absence of any evidence but having due regard to the nature of those transaction costs, the Tribunal concludes that it is unlikely that they would be significant. In relative terms the estimated "cost" to commute of $2,950, when compared with the then sum of future payments for the remainder of the term, amounts to approximately 6 percent thereof. The further evidence received by the Tribunal, the letter of 21 July 2000 from AMP Life Limited, indicates that as time passes the cost to commute becomes an even greater proportion of the then sum of future payments for the remainder of the term. That letter implies that as at 19 July 2000 if the annuity policy was to be commuted it would realise $3,639.76 less than the cumulative nominal income stream payable should it instead be allowed to run its full term, being $43,197.20. That equates to a discount of approximately 8 percent without adjusting for the depreciating value of money.
Clearly, by opting to commute, the applicants would suffer a financial detriment of at least the transaction costs to be incurred to reinvest the lump sum. But more than likely that detriment would include a real cost (as distinct from a nominal cost) when the present value of the future income stream was properly calculated and that result compared with the commuted amount. In that event the "cost" would be less than the above amount of $2,950, but as to how much less no evidence was adduced in that regard. However, in the opinion of the Tribunal and in the context of the facts before it, that detriment cannot be "severe". The Macquarie Dictionary defines "severe" as:
Severe … 1. Harsh, harshly extreme: … 2. Serious, stern … 6. Hard to endure, perform, fulfil …
There is evidence before the Tribunal that when their annuity income stream is taken into account together with their other income including their part Age Pension, the applicants receive jointly more than they would if they were in receipt of the full Age Pensions only. For that reason alone, in the opinion of the Tribunal, the cost to commute referred to above would not be likely to cause severe, harsh or extreme detriment to the applicants. For that reason the annuity contract which the applicants have with AMP is not a "binding arrangement" as that term is defined in Clause 110(4) above.
For those reasons Clause 110 of the Amending Act can have no application to the applicants because the prerequisite condition of Clause 110(1) is not satisfied. With respect, therefore, it is not open to the applicants to seek a remedy in terms of subclause 110(1).
Before concluding these reasons it is appropriate for the Tribunal to make some relevant observations. It is apparent that to their detriment the applicants have been inadvertently caught up in a change to the Act. The evidence is that the applicants are at least in a significant part, self-funded retirees. Also, it is apparent that the applicants carefully and thoughtfully reached decisions about how they would manage their financial assets in their retirement. That decision, which included the decision to invest in a 10 year annuity with AMP, was made in 1993 having regard to the then Social Security law. The applicants now find that they have suffered a financial detriment (in the form of a reduced Age Pension) as a result of amendments to that law in September 1998, which they could not have foreshadowed. To that extent they are innocent victims of amendments apparently designed to put a stop to perceived abuses of the system. Even acknowledging that apparent unfairness, the Tribunal is not in a position to make any other finding than that which it has in this case.
Decision
For reasons above and pursuant to section 43 of the Administrative Appeals Tribunal Act 1975, the decision under review is affirmed.
I certify that the 16 preceding paragraphs are a true copy of the reasons for the decision herein of Mr R D Fayle, Senior Member
Signed:
…….......(sgd W. Treasure)..................
Associate
Date/s of Hearing Matter reviewed pursuant to s34B of the Administrative Appeals Tribunal Act 1975.
Date of Decision   22 September 2000
Counsel for the Applicant        Mr A Gonzalez, Community Legal & Advocacy Centre
Solicitor for the Applicant         none
Counsel for the Respondent    Mr A Jones, Advocacy & Administrative Law Team, Centrelink
Solicitor for the Respondent    none