Liu; Secretary, Department of Social Services and (Social services second review)
[2017] AATA 176
•10 February 2017
Liu; Secretary, Department of Social Services and (Social services second review) [2017] AATA 176 (10 February 2017)
Division:GENERAL DIVISION
File Number: 2015/3061
Re:Secretary, Department of Social Services
APPLICANT
AndHanmin Liu
RESPONDENT
DECISION
Tribunal:Miss E A Shanahan, Member
Date:10 February 2017
Place:Melbourne
The Tribunal affirms the decision under review.
[sgd]...............................................................
Miss E A Shanahan, Member
SOCIAL SECURITY – parenting payment partnered – overpayment claimed – attribution of assets from family trust to respondent’s trustee husband – whether determination to be made that trustee husband is not attributable stakeholder - whether relevant circumstances – whether effective control of the trust – contribution to the trust by the respondent’s husband zero – power of appointor overriding all other interests – bona fide loan to trust by appointor – husband not attributable stakeholder - no overpayment of parenting payment partnered – decision affirmed
Legislation
Social Security Act 1991
Social Security (Attribution Stakeholders and Attribution Percentages) Principles 2000Social Security (Attribution of Assets) Principles 2001
Cases
Angelakos v Secretary, Department of Employment and Workplace Relations [2007]
FCA 25
Elliot v Secretary, Department of Education, Employment and Workplace Relations [2008] FCA 1293
Re Anderson and Secretary, Department of Families and Community Services [2002] AATA 495
Re Davy and Secretary, Department of Employment and Workplace Relations [2007] AATA 1114
Re Secretary, Department of Family and Community Services and Cocks [2002] AATA 1179Secondary Materials
Macquarie Dictionary
The Australian Concise Oxford Dictionary
REASONS FOR DECISION
Miss E A Shanahan, Member
10 February 2017
On 14 May 2015 the Social Security Appeals Tribunal (SSAT) set aside the Applicant’s decision to raise and recover a debt of $58,453.10 on the basis that the Respondent’s husband had not benefited from the family trust in that he had not contributed to the assets of the trust.
The Secretary to the Department of Social Services (the Secretary) applied to the Administrative Appeals Tribunal (AAT) on 19 June 2015 requesting review of the SSAT decision on the grounds that their finding that the Respondent’s husband had a nought per cent attributable percentage from the family trust was incorrect.
At the hearing before the General Division of the AAT, the Secretary was represented by Mr Joshua Lessing, solicitor of Sparke Helmore, and the Respondent, Mrs Liu, was represented by her tax agent/accountant, Mr Tim Khor. The Secretary filed the T‑documents pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (Exhibit A1). Most of the documentation was filed by the Applicant, including various statements from witnesses, the Statutory Declarations of Shu Fen Huang and Ming Xing and Centrelink documentation. The Respondent filed two documents. A list of all tendered exhibits is appended to this decision.
Mrs Liu, her mother-in-law, Shu Fen Huang (Madam Huang), trustee and appointer of the family trust, Mrs Liu’s husband, Mu Hong Xing, also a trustee of the family trust, and Mrs Liu’s father-in-law, Ming Xing, gave evidence before the Tribunal. All required the assistance of a Mandarin interpreter. Mrs Liu’s tax agent (and representative) Mr Khor also gave evidence. His English is perfect.
BACKGROUND TO THE APPLICATION
Mrs Liu migrated to Australia, arriving on 20 March 2007, she having been sponsored by her husband Mu Hong Xing. Their first child was born on 29 December 2007, the second on 23 November 2009 and a third child was born in August 2016.
On 28 July 2009 Mrs Liu completed a declaration form pursuant to an application for parenting payment partnered (PPP). Her husband Mu Hong Xing completed his PPP declaration on the same date. In both of these documents their shared assets totalled approximately $20,000.00 to $21,000.00, they did not own a home, they did not pay rent and they did not have any income other than from Mu Hong Xing’s so called self‑employment.
Mrs Liu was granted PPP with effect from 23 July 2009. At that time Mrs Liu said she was totally unaware that there existed a trust known as the Ruixing Family Trust (the Trust), this having been created by Deed on 19 July 2009. In both her statement and oral evidence Mrs Liu confirmed that she subsequently became aware of the existence of the Trust and that all the funds to establish the Trust and purchase any of its assets had come from her mother-in-law, Madam Huang. Mrs Liu said that she, her husband and their children lived with her husband’s parents in the house owned by his mother, Madam Huang. To her knowledge, her husband worked in the family trust owned Foodmart in East Geelong (Foodmart) and was paid a wage of approximately $300.00 to $400.00 per week during the period from 2009 to 2014. Since resigning as a trustee of the family trust he has received a salary of $620.00 per week.
Mrs Liu claims she became aware of the existence of the Trust and that her husband was a trustee when the PPP was cancelled and the debt to the Commonwealth raised on 3 October 2014 for the period 23 July 2009 to 25 August 2014 (the relevant period).
Mrs Liu spent the vast majority of her time caring for her children during the relevant period. In her evidence she explained that she cannot read or speak English with any fluency whatsoever as she has not had the opportunity to attend language classes. She did not know what she received, if anything, in the way of financial benefit from the Trust. She did not believe that she had been paid for the occasional instances when she helped out at the Foodmart.
Mrs Liu denied having any knowledge whatsoever of tax returns of family members or the Trust. Her family lived with her parents-in-law and Madam Huang did most of the shopping and paid for what was bought. Thus Mrs Liu’s family expenses were moderate. In response to questions put by Mr Lessing, Mrs Liu frequently suggested that the questions be referred to her husband or her mother-in-law. Mrs Liu’s statement was to the same effect and had been prepared with the assistance of Mr Khor. The Tribunal did note that while all the evidence was obtained in Mandarin, Mrs Liu did occasionally use the English word company. She did not ever use the word Trust.
Since cessation of PPP, Mrs Liu says they have had trouble meeting their financial commitments with regard to everyday living costs. They have paid back $2,000.00 of the debt raised by the Commonwealth, these funds having been obtained from her parents in‑law.
Mr Khor gave evidence as to his role as the accountant to Madam Huang and her husband Ming Xing and that he had at Madam Huang’s request advised her and then established the family trust in 2009. He had been the family accountant since 2004 when Madam Huang bought a Brown Gouge dry-cleaning franchise (the dry-cleaning franchise) which she operated until 2008.
Madam Huang and her husband came to Australia in 1998 on business visas. In China she had been the manager of a factory with 100 employees. It would seem that the funds transferred to Australia were in the proximity of one million dollars. In 2004 she deposited money in New South Wales Treasury Bonds before purchasing the dry-cleaning franchise and a house in Maidstone. The Trust structure was determined to be the most effective way of protecting Madam Huang’s wealth and also providing her son with training in the running of a business.
Mr Khor later established a self-managed superannuation fund for the family and in his evidence agreed that the structure of the Trust did minimise tax despite that not being the reason for its establishment. While it was agreed that all the distributions from the Trust were, for example in 2013, below the tax free amount, Mu Hong Ming’s distribution was in effect his wages for working in the business.
Mr Khor informed the Tribunal that in 2015 the Australian Tax Office (ATO) had audited the Trust’s assets and the business records and all was in order. In preparing the tax documentation and returns Mr Khor had relied on information provided by Madam Huang who performed all the bookkeeping functions for the Foodmart, paid all the wages and undertook the GST quarterly payments. At the end of each financial year Mr Khor would be responsible for determining the distribution to the beneficiaries of the Trust as directed by Madam Huang.
Mr Khor had recommended that a solicitor be consulted both in establishing the Trust and to represent Mrs Liu at the AAT hearing. Apparently quotations were provided for legal services but at a rate they could not afford. Mr Khor had reluctantly agreed to assist.
EVIDENCE BEFORE THE TRIBUNAL
Mrs Liu and Mr Khor’s evidence has been summarised above at [5]-[16] under the background to the application.
Madam Shu Fen Huang
Madam Huang provided both a statement of evidence, prepared with the assistance of Mr Khor and a Statutory Declaration prepared with her husband Ming Xing. She confirmed that she had arrived in Australia in 1998 as a business migrant accompanied by her husband and her only child, Mu Hong Xing. In the Statutory Declaration (Exhibit A5) it was stated that they had migrated to Australia as business migrants in the year 2000, bought the (Brown Gouge) dry-cleaning franchise in May 2004 and deposited $750,000.00 into New South Wales Treasury Bonds on 8 September 2004. The same year they bought a residential property in Maidstone.
The dry-cleaning franchise was sold in 2008, following which Madam Huang and her husband looked for another business in which to invest, identifying the most suitable as a self-service grocery store being the Foodmart. They had experienced difficulties in running the dry-cleaning franchise, having to employ nine people and a manager as the running of the business was beyond Madam Huang. It is noted that in her statement of evidence and in other documentation throughout the file the family arrived in Australia in 1998. Mu Hong Xing then aged 15, apparently finished his secondary schooling in Australia and started a tertiary course from which he withdrew in about 2003. He then spent a considerable amount of time in China, met Hanmin Liu and determined to get married.
In 2008, Madam Huang accompanied by her son, started looking for a business that the son might be able to manage and acquire business skills. They identified the Foodmart in East Geelong as suitable. Having ascertained that this business was on the market, they consulted Mr Khor who advised that they establish a family trust rather than a company, as Madam Huang wished to retain control of her money.
The family trust was established in 2009, with Madam Huang as trustee and appointor and her son Mu Hong Xing as the second trustee. The Trust then purchased the Foodmart for a total outlay of $897,972.00 including goodwill, chattels, final adjustments and stock-in-hand. The entire sum came from Madam Huang’s Commonwealth Bank account, she having arranged a $300,000.00 loan secured by a mortgage over her house in Maidstone. While the bank had insisted that two trustees be signatories to the Business and Trust accounts, Mu Hong Xing has never signed a cheque. Madam Huang does all of the bookkeeping for the Foodmart, pays all the suppliers and employees wages and has provided her son with regular fortnightly payments for work undertaken in the grocery store. The money paid to Mu Hong as wages being included as a Trust distribution to him as a beneficiary in Profit and Loss Statements and Tax Returns. Madam Huang draws on the Trust account whenever she has need of money.
In her evidence before the Tribunal, Madam Huang confirmed the content of her statement of evidence and that she had provided all of the $897,972.00 and that a loan agreement had been executed in 2009 (15 September 2009). None of this loan has been repaid as all of the Trust’s income was distributed to beneficiaries to cover their expenses. Mrs Liu was unable to draw any funds from the Trust nor did she receive any payment in wages but she did get a Trust distribution but could not recall how often this had occurred. Madam Huang considered any distribution to Mrs Liu to be, in effect, a gift.
Madam Huang said that she was unaware that Mrs Liu had applied to Centrelink for the PPP nor was she aware that her husband Ming Xing had applied for a Newstart Allowance. She was under the impression that he was seeking a Seniors Card to enable him to obtain reduced transport fees on the trams and trains in Victoria. Ming Xing had filled out his applications and she had signed as his partner where indicated. She had not noted or corrected any errors made by her husband in answering questions relating to himself.
Madam Huang admitted that she told her husband very little regarding the operation of the Trust nor had she told her lawyer all of her family’s details as she regarded these as being personal information and private.
Madam Huang regarded the Foodmart in East Geelong as being her business and that the power to make decisions regarding it and the operation of the Trust rested in her hands alone. Most of the business activities in the Foodmart were effected by EFTPOS and as customers could not take out cash there was very little money in the form of cash on site. The checkout point tills were linked directly with the business’ computer and the data recorded in the computer was printed out and provided to Mr Khor for the purpose of completion of tax returns.
Madam Huang said she normally worked two days per week on site attending to bookkeeping matters. Mr Khor had said in evidence that Madam Huang was an accountant. She herself said her undergraduate degree had been in chemistry but did not elaborate further.
Mu Hong Xing (husband of Respondent)
Mu Hong Xing had provided a statement of evidence (Exhibit A8). In his statement he confirmed that he had arrived in Australia in 1998, had not taken to study nor had he helped his parents in the dry-cleaning business. He went to China in 2006, had worked part-time and met Hanmin Liu and they subsequently married in 2007. He and his wife lived with his parents.
Mu Hong Xing confirmed that on 19 July 2009, he had attended the accountant’s office with his parents and became a trustee of the family trust. This was in accordance with his parents’ wishes. He had no knowledge or understanding of the Trust’s structure or purpose.
He also confirmed that on 4 August 2009 he and his mother signed the contract to buy the Foodmart business. He did not contribute any money to the purchase. He was aware of the fact that a loan agreement had been signed and he had added his signature as directed by his parents. He had been told to work with his parents and to learn about the running of the business.
While the bank had insisted there be two trustees as signatories to the accounts, his mother was the only person who controlled the accounts and signed the cheques. Similarly the yearly distribution of Trust income was authorised by Madam Huang. Mu Hong Xing’s activities were limited to signing the yearly trustees’ declaration prepared by Mr Khor. He claimed that as a result of his ignorance of the structure and purpose of the family trust he had failed to provide this information in relation to Mrs Liu’s application for PPP in July 2009.
Mu Hong Xing had been expected to attend the hearing and give evidence before the Tribunal but as he had recently undergone minor surgery and was recovering at home he gave his evidence by telephone. He confirmed that his mother electronically transferred monies on a weekly to fortnightly basis to him but he was uncertain of the source of the funds. He had been receiving $300.00 to $400.00 per week up until the PPP ceased. Since resigning as a trustee in early 2015 he receives $620.00 per week in the form of wages. If he and his family run short of money he will ask his mother to provide extra funds. Mu Hong Xing’s activities at the Foodmart are mainly restocking shelves and cashier work. He will only sign for the receipt of goods delivered to the grocery store if his mother is not available.
Ming Xing (father-in-law of the Respondent)
Ming Xing is a co-signatory to the Statutory Declaration made by himself and his wife. This has been addressed above. Mr Xing confirmed the contents of his Statutory Declaration and stressed that while he had been involved in the establishment of the Trust and attended meetings with Mr Khor, he did not participate in the discussions to any degree particularly those involved in the decision to lend money to the Trust.
He denied Mr Khor had given him any assistance in the claim he had lodged with Centrelink in 2014 for what was said to be a Newstart Allowance. He agreed that some of the money lent to the Trust had been his. Later in cross-examination by Mr Khor, he recollected that the amount he had contributed was in the order of $80,000.00 loaned to the Trust as part of the $597,872.00 provided mainly from his wife’s funds. He could not recall the date of signing the loan agreement. He said that when documents arrive for his signature he just signs them.
Mr Xing was examined in detail by Mr Lessing regarding the application for Newstart Allowance and his completion of several forms. These were entitled MODPT (which relates to a private trust), MODPC (which relates to private companies) and a document entitled MODP (this was missing two pages). All of these were signed in August 2014. The MODPT document had attached to it the financial accounts of the Trust for the year ending 30 June 2013. This had been provided to Mr Xing by Mr Khor at Mr Xing’s request.
Mr Xing explained that he had wanted to obtain a Seniors Card in order to qualify for cheaper transport fares in the public transport system. His wife was opposed to his application. He had attended Centrelink and made enquiries accompanied by a friend, not his wife. The Tribunal considers that he was probably thinking of a Seniors Card for Victorian transport use and applied to the wrong government instrumentality. Mr Xing agreed that he had incorrectly answered several questions relating to the existence of companies or private trusts but he stated he did not fully understand the questions and in some instances where he had got the answer correct he was in fact guessing. He said he had thought they had established a company not a trust.
In relation to the Foodmart grocery store, Mr Xing said he occasionally helped out by performing sorting duties of expired vegetables. He had no contact with customers. He believed he was capable of working 15 hours a week but was uncertain if he had ever done so at the Foodmart.
DOCUMENTARY EVIDENCE BEFORE THE TRIBUNAL
Tax Returns
The T-documents (Exhibit A1) contained the tax returns for the Trust and the relevant beneficiaries from the year 2010 to the year ending 30 June 2014. These include the Deed of Settlement dated 19 July 2009 and the Loan Agreement dated 15 September 2009. The tax returns contain a profit and loss statement for the relevant year and a distribution of the Trust profit. The profit of the Trust over the four to five year period has remained relatively constant and of the order $53,000.00 to $59,000.00 per annum.
The major beneficiaries from the Trust were Mr Xing, Madam Huang and their son, Mu Hong Xing. Mu Hong Xing’s distribution included his salary. Lesser amounts were distributed to Mrs Liu and her children born in 2007 and 2009. The figures for 2011/2012 as provided by Mr Khor are Exhibit R1.
Mr Khor provided current market values for Independent Supermarkets in inner suburban Melbourne, namely in Fairfield and in Malvern. Both of these properties have a weekly taking of $45,000.00 and the asking price is $600,000.00. The Foodmart business when purchased by the Trust was taking $45,000.00 per week. This fell to $35,000.00 per week within two years when the car parking lot servicing the area was developed and built out. This fall in weekly takings forms the basis of Mr Khor’s contention that the value of the business reduced to the order of $600,000.00 as opposed to the purchase price of nearly $900,000.00.
The Loan Agreement between Madam Huang and her husband on the one part, and their son Mu Hong Xing as trustee of the Trust on the other part provided that:
A)The Lenders agreed to lender the sum of $ 897872 ... consisting of own fund of $ 597872 and the bank loan of $ 300,000 borrowed by the lenders under the name of Shufen Huang;
B)The loan is to be used for the purchase of the licensed Supermarket under the business name Foodmart East Geelong at 259 Myers Street, East Geelong in the State of Victoria consisting of chattels, business goodwill and stock on hand;
C)Apart from the interest payable from the bank loan, there is no interest payable of the portion of the loan of $ 597872;
D)The borrower shall undertake to pay off the bank loan and interest charges under the bank’s term and conditions;
E)The Lenders’ own fund of $ 597872 is to be paid back whenever the cash is available from the trust’s business; and
F)This agreement shall extend to bind the parties hereto and their respective heirs, Executors, Successors, Administrators and Legal Personal Representatives.
This agreement was executed on 15 September 2009 and carries the signatures of Madam Huang, her husband and their son. (Attachment to Exhibit R5 and also T12, page 101).
The profit and loss data relating to the Trust as of 30 June 2012 reveal a beneficiary account to Mu Hong Xing of $182,450.00. This is recorded as consisting of a loan to him from his mother of $148,853.00 and Trust distributions of $33,597.00 representing the Trust’s yearly distribution to Mu Hong Xing in 2011 and 2012. This amount was said to have been paid to Mu Hong Xing in the financial year of 1 July 2012 to 13 June 2013.
Madam Huang is recorded as having loaned him the sum of $128,573.00 in 2011 and in 2012 he owed his mother a further $20,280.00, giving a total of $148,853.00. This was later settled by ledger entry debited from Mu Hong Xing’s beneficiary account and accredited back to his mother’s beneficiary account with no cash outlay by either party. The transaction had no tax implications whatsoever, according to Mr Khor (Exhibit A9). Madam Huang had explained this so called loan as an attempt to encourage her son, to work better in the family trust. No loan agreement between the parties had been enacted. Madam Huang had declared in her statement of evidence that any distribution of income from the Family Trust to Mu Hong Xing and his family had been entirely at her discretion.
THE RUIXING FAMILY TRUST DEED
The Deed of Settlement is contained in the T-documents (T12) and has also been provided by Mr Khor as an attachment to MODPT (Exhibit A7).
In the Respondent’s Statement of Facts and Contentions, the relevant clauses of the Trust Deed have been identified, these being related to Madam Huang as the appointor of the Family Trust and one of two trustees, occupying a position where she was always able to outvote Mu Hong Xing in any decision making process. As the appointor she could consent to trustees handling other assets (clause 10). Subclause 13.3 of the Deed provided that any charge created under this clause to borrow or raise monies from any persons shall take priority in all respects over the rights of the Beneficiaries hereunder and all other persons whatsoever, the phrase for other persons whatsoever would include the trustees. This was reflected in the Loan Agreement of the 15 September 2009.
RELEVANT LEGISLATION
The rate of a person’s parenting payment is determined by either an income test or an assets test in accordance with s 1068B of the Social Security Act 1991 (the Act) which states:
1068B Rate of parenting payment—PP (partnered)
(1)If a person is a member of a couple, the person’s rate of parenting payment is the benefit PP (partnered) rate.
(2)The benefit PP (partnered) rate is worked out in accordance with the rate calculator at the end of this section.
…
Part 3.18 of the Act provides for the attribution of income and assets of private companies and private trusts to a person and as stated by the SSAT there are five steps to be taken, which are in part referred to in the outline provided in s 1207:
·Is the entity a designated private entity?
·Is it a controlled entity?
·Is the person an attributable stakeholder?
·Should the attribution percentage be less than 100%?
·What are the assets of the entity?
Section 1207A provides definitions. An entity is defined to include a trust and a trust means a person in the capacity of trustee or, as the case requires, a trust estate. A designated private trust has the meaning given by s 1207P. Under s 1207P a trust is a designated private trust unless it falls within certain exceptions which are not relevant here. It is accepted that the Trust is a designated private trust under s 1207P of the Act.
The second step is whether the Trust is a controlled entity. Section 1207A provides that a controlled private trust has the meaning given by s 1207V which states:
Division 5—Controlled private trusts
1207V Controlled private trusts
(1)For the purposes of this Part, a trust is a controlled private trust in relation to an individual if the trust is a designated private trust and:
(a)the individual passes the control test set out in subsection (2); or
…
Control test
(2)For the purposes of this section, the individual passes the control test in relation to a trust if:
(a)the individual, or an associate of the individual (other than an associate covered by paragraph 1207C(1)(j)), is the trustee, or any of the trustees, of the trust; or
...
An associate includes a relative of the individual (s 1207A and s 1207C(1)(e)) and a relative includes spouse and parent (as per ss 1207A and 1207B).
In determining what, if any, assets or income should be used in assessing any entitlement to PPP, it first needs to be considered whether there is an attributable stakeholder and if so what that person’s asset attribution percentage would be. As per s 1207A those terms are defined in s 1207X which provides:
Division 6—Attributable stakeholders and attribution percentages
1207X Attributable stakeholder, asset attribution percentage and income attribution percentage
...
Trust
(2)For the purposes of this Part, if:
(a)a trust is a controlled private trust in relation to an individual; …
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.
…
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.
Decision-making principles are defined in s 1207A by reference to s 1209E which provides that the Secretary may by legislative instrument formulate such principles under certain sections of the Act, including s 1207X.
Should there be an attributable stakeholder then that person’s asset attribution percentage is evaluated under s 1208E which states:
Division 8—Attribution of assets of controlled private companies and controlled private trusts
1208E Attribution of assets
(1)For the purposes of this Act, if:
(a)an individual is an attributable stakeholder of a company or trust at a particular time on or after 1 January 2002; and
(b)at that time, the company or trust owns a particular asset (whether alone or jointly or in common with another entity or entities); and
(c)if, at that time, that asset had been owned by the individual instead of by the company or trust, the value of the asset would not be required to be disregarded by any express provision of this Act; and
(d)at that time, the asset is not an excluded asset (see subsection (2));
there is to be included in the value of the individual’s assets an amount equal to the individual’s asset attribution percentage of the value of the asset referred to in paragraph (b).
Note: For attribution of the assets of a special disability trust, see section 1209Y.
Excluded assets
(2)The Secretary may, by writing, determine that, for the purposes of the application of subsection (1) to a specified individual and a particular company or trust, a specified asset is an excluded asset.
(3)A determination under subsection (2) has effect accordingly.
(4)In making a determination under subsection (2), the Secretary must comply with any relevant decision-making principles.
Section 1208H provides that:
1208H Effect of unsecured loan on value of assets
(1)For the purposes of the application of this Division to a particular individual and a particular company or trust, if:
(a)the company or trust is the borrower under a loan; and
(b)the loan is not secured by a charge or encumbrance over one or more of the assets of the company or trust;
the Secretary may, by writing, determine that the value of a specified asset of the company or trust is to be reduced by the whole, or a specified part, of the amount of the loan.
(2)A determination under subsection (1) has effect accordingly.
(3)In making a determination under subsection (1), the Secretary must comply with any relevant decision-making principles.
Both the Social Security (Attributable Stakeholders and Attribution Percentages) 2000 (the Principles 2000) and the Social Security (Attribution of Assets) Principles 2001 (the Principles 2001) provide guidance as to the interpretation of the Act. In particular Part 4 of the Principles 2001 provide matters the Secretary must take into account in making a determination under s 1208H, these being:
Part 4 Effect of loan not secured by charge or encumbrance over asset of company or trust
...
12Effect of unsecured loan on value of assets
In relation to an unsecured loan, the Secretary must take into account:
(a) whether a transaction that gave rise to the loan was an arm’s length transaction, having regard to the criteria described in section 13; and
(b) the matters referred to in section 14.
13Criteria for arm’s length transaction
(1) For paragraph 12 (a), a transaction is an arm’s length transaction if:
(a) the transaction is for the purposes of the business activities of the company or trust; and
(b) the transaction is made under a written agreement that is signed by each party to the agreement, and witnessed by an individual who is not a party to the transaction; and
(c) each party to the transaction is:
(i)at least 18 years old; or
(ii)at least 16 years old and engaged in a full-time occupation; or
(iii)at least 16 years old and receiving a social security entitlement; and
(d) the transaction is made for an arm’s length amount.
(2)For subparagraph (1) (c) (ii), a full-time occupation:
(a) includes any employment, trade, business, profession, vocation or calling; and
(b) does not include a course of education at a school, college, university or similar institution.
14Other matters
For paragraph 12 (b), the Secretary must also take into account, in relation to the transaction that gave rise to the charge or encumbrance:
(a)whether the individual is the sole attributable stakeholder, or a member of a couple both members of which are the only 2 attributable stakeholders of the company or trust; and
(b)whether the loan is secured by a charge or encumbrance over an asset other than an asset described in paragraph 1208H (1) (b) of the Act; and
(c)the commercial, social and familial relationships (if any) between the parties to the transaction; and
(d)the nature and circumstances of the transaction.
and the Principles 2000 which state:
Part 3 Determination of asset attribution percentage
...
16Circumstances affecting relationship with company or trust
(1)The Secretary must consider whether there are relevant circumstances that make it inappropriate for the individual to have an asset attribution percentage of 100%.
(2)For subsection (1), relevant circumstances include the extent to which the relationship between the individual and the company or trust is affected by any of the following circumstances:
(a) circumstances arising from the legal structure of the company or trust;
(b) circumstances arising from the administrative arrangements of the company or trust;
(c) whether, having regard to the relationship between the individual and the company or trust, the individual can reasonably be expected to exercise effective control in relation to the company or trust and, if so, the extent of that control.
17Contribution to company or trust
If the individual has made a contribution to the company or trust, the Secretary must consider the circumstances in which the contribution was made and, in particular:
(a) the value of the contribution; and
(b) the proportion that the value of the contribution has to the total assets of the company or trust at the time of the contribution; and
(c) the effect of the contribution on the financial position of the company or trust; and
(d) if the individual received consideration for the contribution, the amount of consideration.
18Past benefit from distributions by company or trust
(1)The Secretary must consider whether the individual has received a benefit from a distribution made by the company or trust.
(2)If an individual has received a benefit, the Secretary must also consider:
(a) the value of the benefit; and
(b) if the individual has received a benefit on more than 1 occasion, the frequency with which the individual has received benefits.
(3)For this section, a distribution includes distributions:
(a) in the case of a distribution by a company — of the capital or income, or both, of the company; and
(b) in the case of a distribution by a trust — of the corpus or income, or both, of the trust.
19Future benefit from distributions by company or trust
(1)The Secretary must consider whether it is reasonably foreseeable that the individual may receive a benefit from a future distribution by the company or trust.
(2)If subsection (1) applies, the Secretary must also consider the likely value of the benefit.
(3)For this section, the Secretary must have regard to:
(a) the constituent documents of the company; or
(b) documents, if any, establishing the terms of the trust.
(4)For this section, a distribution includes distributions:
(a) in the case of a distribution by a company — of the capital or income, or both, of the company; and
(b) in the case of a distribution by a trust — of the corpus or income, or both, of the trust.
For completeness’ sake the requirements of s 1223(1) and those relating to waiver of the debt in s 1237A are included. Section 1223 of the Act states:
1223 Debts arising from lack of qualification, overpayment etc.
(1)Subject to this section, if:
(a)a social security payment is made; and
(b)a person who obtains the benefit of the payment was not entitled for any reason to obtain that benefit;
the amount of the payment is a debt due to the Commonwealth by the person and the debt is taken to arise when the person obtains the benefit of the payment.
...
and s 1237A of the Act states:
1237A Waiver of debt arising from error
Administrative error
(1) Subject to subsection (1A), the Secretary must waive the right to recover the proportion of a debt that is attributable solely to an administrative error made by the Commonwealth if the debtor received in good faith the payment or payments that gave rise to that proportion of the debt.
Section 1237AAD confers a discretion to waive all or part of a debt on the basis that:
1237AAD Waiver in special circumstances
The Secretary may waive the right to recover all or part of a debt if the Secretary is satisfied that:
(a)the debt did not result wholly or partly from the debtor or another person knowingly:
(i)making a false statement or a false representation; or
(ii)failing or omitting to comply with a provision of this Act, the Administration Act or the 1947 Act; and
(b)there are special circumstances (other than financial hardship alone) that make it desirable to waive; and
(c)it is more appropriate to waive than to write off the debt or part of the debt. ...
SUBMISSIONS
Applicant’s submissions
The Applicant provided a detailed Statement of Facts, Issues and Contentions and addressed the case law in some detail. Mr Lessing spoke to these filed contentions.
It was contended that the Trust was a designated private trust as defined under s 1207P of the Act. It was also stated without dispute that Mu Hong Xing was a trustee during the relevant period and as a result 100 per cent of the Trust assets could be attributed to Mu Hong Xing, subject to the interpretation of the Principles 2000 and the discretion arising therefrom.
It was submitted that the Tribunal should be careful of accepting all of Mr Khor’s contentions as he had given evidence in relation to the drafting of the Trust Deed and the taxation statements not only in his evidence under affirmation but also from the bar table. Equally, the Tribunal should be careful in accepting that Madam Huang was ignorant of trust structures as she was clearly knowledgeable and shrewd and had avoided answering some questions in her evidence.
Mr Lessing argued that the Tribunal should prefer the documentary evidence before it to the oral evidence of the witnesses. It was agreed that the authorised review officer (ARO) had attributed 50 per cent of the Trust assets to Mu Hong Xing and therefore to his wife, the Respondent, Hanmin Liu. The Applicant contended however that the Tribunal had the discretion to determine the percentage attribution, although on their submission it should be 100 per cent of the Trust assets.
This argument was based on Mu Hong Xing having the same powers as a trustee and a beneficiary as his mother, Madam Huang and based on case law this equated to him having effective control. It was also contended that Mu Hong Xing’s powers in relation to the Trust were unfettered and on the Secretary’s interpretation of the Trust Deed it was optional for him to consult the appointor in relation to decision-making.
Mu Hong Xing was a co-signatory of the Trust account at the Commonwealth Bank and as he had not made any personal monetary contribution to the Trust, s 17 of the Principles 2000 was not relevant. As Mu Hong Xing and Mrs Liu benefited from the Trust it was argued that Principles 18 and 19 were attracted as both had received past benefits from distributions and were expected to continue to do so in the future. As the Trust assets were initially provided by Madam Huang as a loan, part of which was a bank loan executed by the Commonwealth Bank with her home being used as collateral security, Mr Lessing contended that s 13 of the Principles 2001 was not satisfied as these transactions were not at arm’s length raising the question of legitimacy of the Loan Agreement executed on 15 September 2009 between Madam Huang and her husband Ming Xing as the lenders and Mu Hong Xing as trustee for the Trust. Under this Loan Agreement the borrower undertook to pay off the bank loan interest charges and the lender’s fund of $597,872.00 when cash became available from the Trust business. As no repayments of the loans had been made the Secretary contended that the Agreement was not bona fide. It was also argued that the Trust had been established with a view to decreasing the tax payable by the beneficiaries and not entirely for the purpose of training Mu Hong Xing in business protocols.
Mr Lessing stressed the importance of the Centrelink documentation of the repeated requests that Mrs Liu and Mr Ming Xing provide information as to whether there was a trust or company from which they might derive income. Mrs Liu had never responded and in the case of Mr Ming Xing, the existence of the Trust had been provided in relation to his application for Newstart Allowance but he denied any understanding of the effects of the Trust.
Mr Lessing submitted that lack of knowledge or actual knowledge of obligations or the obtaining of such knowledge was not a valid argument (Re Anderson and Secretary, Department of Families and Community Services [2002] AATA 495 at [27]; Re Davy and Secretary, Department of Employment and Workplace Relations [2007] AATA 1114 at [74]). In relation to the question of special circumstances it was submitted that there was no evidence that special circumstances existed and no evidence that any administrative error had occurred (Angelakos v Secretary, Department of Employment and Workplace Relations [2007] FCA 25).
The Secretary requested that the Tribunal set aside the decision of the SSAT of 14 May 2015 and determine that Mrs Liu has a debt owing to the Commonwealth in the amount of $58,453.10, for the period 23 July 2009 to 25 August 2014, during which time she was overpaid PPP.
Respondent’s submissions
Mr Khor had outlined the respondent’s case in the Statement of Issues, Facts and Contentions (Exhibit R2). In his oral submissions he reiterated that the purpose of the Trust was to allow Madam Huang to control her money lent to the Trust and to provide a business opportunity for her son, her only child, to acquire skills and knowledge sufficient to enable him to eventually run a business of his own.
The documentary evidence clearly indicated that Mu Hong Xing the Respondent’s husband did not make any contribution to the assets of the Trust. It was submitted that Mu Hong Xing was appointed a trustee in the Trust as his mother sincerely hoped that by giving him such an interest it would encourage him to acquire the skills of business management. It was the bank that had required two signatories to the Trust bank account but Madam Huang was the only person controlling the cheque book and the bank account.
It was pointed out that Madam Huang was the appointor of the Trust with the absolute power to appoint and remove any trustee. Clause 16 of the Family Trust Deed required trustees to get the consent of the appointor in relation to dealing with trust assets. Mu Hong Xing had no power to control or dispose of the Trust’s assets in his own right. Mr Khor submitted that the Commonwealth bank records and Madam Huang’s own statements, confirmed that the money lent to the Trust was provided in its entirety by Madam Huang. Mr Ming Xing, father-in-law of the Respondent was uncertain of his original contribution to the funds but it would appear to be of the order of $80,000.00.
Mr Khor argued that the Loan Agreement executed in September 2009, complied with the requirements under s 13(1) of the Principles 2001 and s 1208H and the criteria for arm’s length transactions as delineated in s 13(1) and clearly provided in this Loan Agreement that the loan had priority over the rights of the beneficiaries and any other person.
In relation to the attribution of assets contended by the Secretary and based on the distribution of income from the Trust, Mr Khor contended that this had been estimated without acknowledgement that the distribution to Mu Hong Xing was being paid in lieu of his wages. Mr Khor provided the following table taking into account this contention.
(A) (B) (C) (D) (E) (F) (G) Year Total Distribution
$
Distribution to parents
$
Distribution to Respondent Family (RF) $
(A – B)
% of Dist. to (RF) BY Applicant %
(D) / (A)
Dist. to Mu Hong
$
Dist. To RF Less Wage of Mu Hong $
(C – E)
Adjust %
Res Family
%
2010 53,612 29,000 24,612 45.9% 18,612 6,000 11.19% 2011 59,812 35,000 24,812 41.5% 18,812 6,000 10.03% 2012 55,645 26,700 27,385 52.0% 20,785 6,600 11.86% 2013 52,905 32,905 20,000 39.3% 20,000 nil 0.00% 2014 56,962 34,230 22,732 39.9% 18,000 4,732 8.31% Please note :-
i)Colume [sic] (D) was the percentage of control worked out by the applicant based on the fact that the income distribution to Mu Hong Xing was not for his annual working wages ;
ii)Colume [sic] (F) was adjusted with MU [sic] Hong Xing’s income distribution treated as his wage instead of income distribution, as he did not receive wages for those year in spite of the fact that he had taken home around $ 400 weekly cash from the trust as his wages.
iii)Colume [sic] G was the adjusted % of control that we worked out if Mu Hong Xing’s income distribution was excluded from the distribution to the respondent family. This adjusted distribution to the Respondent family should now be in Colume [sic] (F)..
Mr Khor submitted that the total percentage of control over the five year period was 8.28 per cent which equated to an amount of $63,782.00 which was well below the assets limit of $381,500.00 pertaining at that time.
Mr Khor contended that as Madam Huang was appointor of the Trust, one of only two trustees and that as chairperson of the trustees’ meetings she was always able to outvote Mu Hong Xing, had that been necessary in any decision made for the Trust. Mr Khor requested that the Tribunal affirm the decision of the SSAT (now Social Security and Child Support Division of the AAT). He contended that the Respondent’s husband Mu Hong Xing had not made any contribution to the assets of the Trust; that the assets of the Trust are entirely those of Madam Huang; and as a result Mrs Liu was entitled to PPP based on her husband Mu Hong Xing’s income and very limited assets of $20,000.00.
The Trust profit and loss statement as at 30 June 2012 records that Mu Hong Xing was declared to have a beneficiary account in the Trust of $182,450.00 of which $33,597.00 were the Trust distributions for 2011/2012 arising from a loan from his mother. Mr Khor submitted that this loan, which was on paper only, without any cash outlay was made to further encourage Mu Hong Xing to increase his participation in the business and the acquisition of the necessary management skills. The so-called loan was credited back to Madam Huang’s beneficiary account again without any cash outlay at some time in 2013. (Exhibit A9).
TRIBUNAL’S DELIBERATIONS
The inclusion of the value of assets held by a private trust to which an applicant for social security benefits may have access and/or receive income was effected by the introduction of Part 3.18 of the Act on 13 November 2000. This part took effect as of 1 January 2002.
The Explanatory Memorandum stated that the assets and income of a private trust or company will be attributed to the person or persons who control the company or trust, or to the person or persons who were source of capital or corpus of the company or trust.
In Re Secretary, Department of Family and Community Services and Cocks [2002] AATA 1179 the Tribunal at [64] cited the Second Reading speech in describing the inclusion of Part 3.18 as:
the fundamental change being proposed under this measure is that when a private trust or private company is recognised as a designated private trust or company the assets and income of these private trusts and private companies may be attributed to a person who controls or has contributed to these structures….
The PPP is a Social Security benefit to which Part 3.18 is attracted.
It is not disputed by the parties as it is clear from the evidence before the Tribunal that the Trust is a designated private trust of a discretionary nature classified as non-exhaustive with a closed class of beneficiaries, as determined by the Federal Court in Elliot v Secretary, Department of Education, Employment and Workplace Relations [2008] FCA 1293; per Kenny J at [35]-[36].
The Tribunal determines that the Trust meets the requirement of a designated private trust (as per s 1207A and s 1207P). Section 1207V requires that the Trust must be a controlled private trust and s 1207X that the individual must be an attributable stakeholder of the trust.
Both the Respondent Mrs Liu and her husband Mu Hong Xing are discretionary beneficiaries of the Trust and Mu Hong Xing is an appointed trustee and has been since the Trust was established in 2009.
The evidence before the Tribunal, in particular the records of the Commonwealth Bank in relation to Madam Huang’s cash investment account and Certificate of Inscription of the New South Wales Treasury Bonds Corporation, confirms that the funding of the Trust was provided in total by Madam Huang. Mu Hong Xing did not make any contribution whatsoever.
The Tribunal determines that the so called loan of $148,853.00 from Madam Huang to Mu Hong Xing as recorded in the Trust profit and loss statement of 30 June 2012, the loan having been made in the year 2011, did not involve any transfer of money or other forms of consideration and were not covered by a loan agreement. This was merely a book entry, the purpose of which was to provide Mu Hong Xing with impetus to involve himself more in the business of the Trust and in the acquiring of business skills.
The Tribunal identifies the issues to be determined as:
·whether the Trust is a controlled private trust by virtue of Mu Hong Xing satisfying the control test as set out in s 1207V(2); and
·whether Mu Hong Xing is an attributable stakeholder of the Trust as provided by s1207X.
In determining these two issues the Tribunal is to take into account the guidance provided in the Principles 2000 and in the Principles 2001.
Section 1207V(2)(a) provides that an individual passes the control test if the individual or an associate of the individual is a trustee of the Trust. Clearly Mu Hong Xing was a trustee of the Trust during the relevant period and his wife Hanmin Liu would qualify as an associate.
Section 1207X relates to the individual being an attributable stakeholder of the Trust unless otherwise determined. Any such determinations are to comply with the relevant decision-making principles (s 1207X(5)).
The Principles 2000 set out the decision-making principles with which the Secretary must comply in determining that an individual is not an attributable stakeholder of a company or trust or that the specified percentage of assets attribution is less than 100 per cent. Part 2, s 7 of the Principles is entitled Circumstances affecting relationship with company or trust. The relevant circumstances which the Secretary must consider in determining whether it is inappropriate for the individual to be an attributable stakeholder in a trust are :
(a)circumstances arising from the legal structure of the trust;
(b)circumstances arising from the administrative arrangements of the trust;
(c)whether the individual can reasonably be expected to exercise effective control in relation to the trust.
In terms of the legal structure of the Trust there are two trustees Madam Huang, who is also chairperson in the trustee meetings and the appointor of the Trust, and her son Mu Hong Xing. As chairperson Madam Huang is able to outvote the other trustee and as appointor any trustee must seek consent in accordance with clause 16 of the Deed before exercising any action in relation to distribution of income or assets. All year-end distributions and who was to be a beneficiary was determined by Madam Huang.
It is clear from the evidence that Madam Huang deals with all record keeping of the Trust and the bookkeeping of the Trust’s sole business, the running of the Foodmart in East Geelong. She is responsible for the payment of salaries to staff, payment of suppliers and the overall supervision of the business. She completes all GST quarterly advices and payments. In accordance with the requirement of the Commonwealth Bank in relation to the Trust accounts, a second trustee’s signature can be required and Mu Hong Xing is a signatory to this account. He has never in the five years under review exercised this right as his mother signs all cheques and has in her possession the only cheque book for the Trust. Mu Hong Xing’s evidence was that his involvement was confined essentially to signing whatever his mother directs him to sign.
The question as to whether Mu Hong Xing can reasonably be expected to exercise effective control in relation to the Trust is the relevant test. The Act does not define control except to include structures such as trusts and companies and it does not define the term effective.
The Macquarie Dictionary provides several definitions of the adjective effective the most appropriate of which in the current setting is actually in effect; similarly The Australian Concise Oxford Dictionary defines effective as actual; existing in fact rather than officially or theoretically.
In his evidence before the Tribunal, Mu Hong Xing said he was completely ignorant of the legal structure of the Trust and any powers he had as a trustee. He stated his mother always does it, she does it all. His signing for the receipt of goods and supplies delivered to the Foodmart was limited to those occasions when his mother was not available. He was not aware of the source of the money that appeared each week to fortnight in his bank account but assumed that his mother had transferred it electronically. He himself in terms of the Foodmart business of the Trust is involved in restocking the shelves and to a lesser extent acting as a cashier.
Despite having attended secondary and tertiary schooling in Australia over a period of five years, Mu Hong Xing’s fluency in English was surprisingly poor and despite his mother’s best efforts to involve him both in the running of the business and in the Trust, Mu Hong Xing appears to have little knowledge as to the managing of a business and little interest in either the business or the running of the Trust.
In relation to s 9 and s 10 of the Principles it is clear that both Mrs Liu and her husband Mu Hong Xing have received distributions of income from the Trust, in the past these having varied in amount and in most years Mrs Liu has not received any distribution. It is also anticipated that there will be future distributions depending on income of the Trust although Mu Hong Xing is now purely a salaried employee.
The Tribunal has considered all of the authorities cited by the Secretary but none are on all fours with this matter. The questions of administrative error and waiver of debt do not arise in light of this decision.
Based on the evidence before it, the Tribunal determines that there is no expectation that Mrs Liu and/or her husband Mu Hong Xing could reasonably be expected to exercise effective control in relation to the Trust and therefore neither should be considered an attributable stakeholder. The remaining two questions outlined above at [45] concerning asset attribution percentage and assets of the entity are redundant as there is no attributable stakeholder. As a result, Mrs Liu’s PPP was incorrectly cancelled as she satisfies the criteria for PPP and thus she has not incurred a debt to the Commonwealth. The decision under review is affirmed but on the basis of the question of control having been addressed so that for the purposes of s 1207X(2)(c) there is no attributable stakeholder, and not on the basis of asset attribution percentage under s 1207X(2)(d).
96. I certify that the preceding 95 (ninety‑five) paragraphs are a true copy of the reasons for the decision herein of Miss E A Shanahan, Member
[sgd]........................................................................
Associate
Dated: 10 February 2017
Dates of hearing: 20 and 21 October 2016 Advocate for the Applicant: Mr Joshua Lessing Solicitors for the Applicant: Sparke Helmore Lawyers Advocate for the Respondent: Mr Tim Khor - Accountant Tax Agent APPLICANT
A1T-Documents
A2Statement of Facts and Conditions prepared by Mr Khor 11/7/2016
A3Mr Khor's statement 8 July 2016
A4Shu Fen Hoang’s statement undated
A5Stat Declaration of both parents Shufen Huang and Ming Xing and attachments dated 23 October 2015.
A6Letter from Commonwealth Bank dated 3 March 2016. Confirming signatories to the Ruixing Family Trust
A7MODPT, MODPC, MODP
A8Statement of Mu Hong Xing undated
A9Mr Khor's letter dated 17/4/2016
RESPONDENT
R1Corrected tax return
R2Examples of Supermarket Valuations
0
5
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