Pavlakis and Secretary, Department of Families, Community Services and Indigenous Affairs
[2006] AATA 233
•13 March 2006
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2006] AATA 233
ADMINISTRATIVE APPEALS TRIBUNAL )
) No Q2005/277
GENERAL ADMINISTRATIVE DIVISION )
Re JOHN PAVLAKIS Applicant
And
SECRETARY, DEPARTMENT OF FAMILIES, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS
Respondent
DECISION
Tribunal Ms M J Carstairs, Member Date13 March 2006
PlaceBrisbane
Decision The Tribunal sets aside the decision under review and remits the matter to the respondent to assess John Pavlakis’ claim for age pension in accordance with the direction that:
(1) under s1207X(2)(d)(ii) of the Social Security Act 1991 Mr Pavlakis’ asset attribution percentage is 0%; and
(2) under s1207X(2)(e)(i) of the Act, Mr Pavlakis’ income attribution percentage is 50%, and that of his wife Argira Pavlakis is 50%.
…………Sgn………
M J Carstairs
Member
CATCHWORDS
SOCIAL SECURITY – claim for age pension – shareholder of trustee company and income only beneficiary of private trust – consideration of factors in Principles – effective control – attributable assets – attributable income
Social Security Act 1991 ss 1207C, 1207P,1207V,1207X, point 1064-A2
Social Security (Attributable Stakeholders and Attribution Percentages) Principles
Sec Secretary Department of Family Services v Geeves (2004) 136 FCR 134
Re Major and Repatriation Commission [2003] AATA 826
Re Lymberopoulos and Secretary Department of Family and Community Services [2005] AATA 801
REASONS FOR DECISION
13 March 2006 Ms M J Carstairs, Member 1. This case raises a discrete question with regard to the application of the provisions in Part 3.18 of the Social Security Act 1991 which provides for the Means Test Treatment of Private Trusts and Private Companies. Those provisions, introduced into the Act with effect from 2002, allow the assets and income of private trusts and companies to be attributed to individuals who seek a social security payment. Anyone who applies for such a payment is means-tested, that is, assessed under income and assets tests, which determine the rate at which a person will be paid pension, if at all.
2. Under the Act before the introduction of these new measures, assets and income were only attributed to a person where the legal ownership or a fixed right of income was established. The new provisions introduced in Part 3.18 were intended to prevent people using private trusts and companies to remove their assets and income from the means-testing provisions for social security payments.
3. John Pavlakis became eligible for and applied for payment of age pension when he turned 65 in March 2004. Centrelink has refused Mr Pavlakis’ claim because his assets, consisting mainly of assets that were attributed to him under the new provisions because of his involvement with the Pavlakis Family Trust, exceeded the then pensions assets test limit of $466,500.
4. I have decided, by applying the discretionary provisions in the Social Security (Attributable Stakeholders and Attribution Percentages) Principles (the Principles) that it is incorrect to reject Mr Pavlakis’ claim on the basis of his assets. Under the Principles, by taking into account all relevant considerations, Mr Pavlakis should have 0% of trust assets attributed to him. However a person’s entitlement to pension rests on assessing both assets and income. Applying the Principles when considering whether the trust income should be attributed to Mr Pavlakis, I have decided that it should be and that the appropriate income attribution percentage is 50% to both Mr Pavlakis and his wife Mrs Argira Pavlakis.
BACKGROUND
5. The Pavlakis Family Trust was created in 1999 by deed of settlement. The trustee company for the family trust is Pavlakis Hania Pty Ltd (the trustee company) a private non-trading company. The trust is discretionary.
6. The main trust asset is a block of 4 flats at Annerley in Queensland, purchased by Mr and Mrs Pavlakis in 1987. The block of flats was transferred to the trust by deed of gift in 1999 not long after the trust was created. The block of flats was valued by the Australian Valuation Office in 2004 at $570,000, and in the financial year ended June 2003, the rental income from the flats was about $28,600 (gross). Mr Pavlakis does not dispute the overall valuation figure for the flats at $570,000, nor is there dispute about the amount of income which the flats generate. The figure of $570,000 is above the amount of assets that a person can have and be paid age pension.
7. When the trust came into existence in 1999, Mr and Mrs Pavlakis were the sole directors and shareholders of the trustee company. They are still the sole shareholders; however in 2003 they ceased being the directors of the trustee company. This responsibility was taken over by Mr and Mrs Pavlakis’ two sons, Stellios and Nectarios Pavlakis. At the same time, Stellios and Nectarios Pavlakis became the appointers for the trust, taking this role over from their parents who were named in the trust deed as appointers. The appointers were entitled to appoint or remove a trustee.
THE ISSUES
8. By the time of the Tribunal hearing, counsel for Mr Pavlakis had conceded a number of matters that were previously disputed. This meant that the questions before me were limited to:
§ a consideration of the application of s1207X of the Act, dealing with attributable stakeholders, and with asset attribution percentages and income attribution percentages; and,
§ (relatedly), the application of the Principles.
9. The concessions, which I accept were correctly made, are best understood by reference to s1207 of the Act, which is the Simplified Outline to Part 3.18 of the Act and explains the key steps when deciding whether the assets/income of trusts and companies will be treated as those of an individual. Those steps are (limiting the consideration to those applying to family trusts):
§ Is the trust a designated private trust? – s1207P of the Act. Mr Mathews conceded that it was.
§ Is the trust a controlled private trust in relation to the individual as provided for in s1207V of the Act? Mr Mathews conceded that it was.
I pause here to note that a trust will be a controlled private trust as a result of a wide range of direct and indirect relationships, including, as applies in this case, where an associate of the individual is the trustee of the trust. Associate is widely defined in s1207C(2) of the Act, and certainly captures the relationship where Mr Pavlakis and his wife are the sole shareholders of the trustee company (s1207V(2)(a)) and the arrangements would be covered also by s1207V(2)(b) and possibly also s1207(2)(h). In relation to s1207(2)(b), the trust is a controlled private trust because a group, defined in the Act to include associates, which in turn includes relatives (and therefore including Stellios and Nectarios Pavlakis, the appointers under the trust) were able to remove or appoint the trustee.
§ Is the individual an attributable stakeholder of the trust? – s1207X. This simply follows under the Act as a result of a trust being a controlled private trust in relation to an individual.
10. Section 1207X(1) of the Act provides that where a trust is a controlled private trust in relation to an individual then the individual is an attributable stakeholder of the trust unless the Secretary determines otherwise (by applying the Principles: s1207X(5)) and will have, in relation to the trust, an asset attribution percentage and an income attribution percentage of 100%, unless the Secretary determines otherwise (by applying the Principles).
11. It can be seen from this that the central issue in this case - should Mr Pavlakis be held to be an attributable stakeholder of 100% of the assets and income of the trust? - is confined to considering the discretions available under the Principles either to not regard him as an attributable stakeholder or to reduce the percentage of assets or income attributed to him.
APPLICATION OF THE PRINCIPLES
12. The Principles set out various factors or circumstances to be taken into account by decision‑makers in determining whether a person should not be held to be an attributable stakeholder and for determining a lesser asset attribution percentage than the 100% which is automatically applied under s1207X of the Act. Paragraph 7(1) of the Principles states that the respondent must consider whether there are relevant circumstances that make it inappropriate for the individual to be an attributable stakeholder. Paragraphs 16 and 25 of the Principles states that the respondent must consider whether there are circumstances that make it inappropriate for the individual to have an assets or income attribution percentage of 100%.
13. The factors under paragraphs 7 to 13 of the Principles (relating to deciding that it is inappropriate for an individual to be an attributable stakeholder) and paragraphs 16 to 22 (relating to the circumstances where it is inappropriate to attribute 100% of the assets to the individual) and paragraphs 25 to 31 (relating to the circumstances where it is inappropriate to attribute 100% of the income to the individual) include:
§circumstances arising from the legal structure and the administrative arrangements of the trust;
§whether the individual can reasonably be expected to exercise effective control in relation to the trust;
§whether the individual has made a contribution to the trust;
§past benefits from distributions and any foreseeable future benefit of capital income or both;
§whether the individual derives any other benefit from the trust;
§whether the individual is an attributable stakeholder of any other trust or company; and
§any other circumstances affecting their involvement with the activities or administration of the trust
14. I note that control is defined in s1207A of the Act as including
…control as a result of, or by means of, trusts, agreements, arrangements, understandings and practices, whether or not having legal or equitable force and whether or not based on legal or equitable rights
and it is in this sense that the word should be considered when it is used in the Principles. I note also that in applying the Principles the decision-maker may have regard to one or more of the factors (paragraphs 6(3), 15(3) and 24(3)) though it would be expected that most cases would involve weighing up several factors. I shall refer only to those factors that I see as relevant in Mr Pavlakis’ case.
§ circumstances arising from the legal structure and the administrative arrangements of the trust
15. The deed of settlement for the family trust provided that the beneficiaries of the trust were John and Argiro Pavlakis’ three children, Maria, Stellios and Nectarios, their spouses and their offspring. John Pavlakis and Argiro Pavlakis were income only beneficiaries as defined in clause 3(1)(f), which clause provided that they were not default beneficiaries but their right to share income was contingent upon the trustee’s exercise of the discretion to distribute trust income to either of them. It is worth stating in full the provisions of that clause:
“Income only beneficiaries” – JOHN PAVLAKIS and ARGIRO PAVLAKIS shall be income beneficiaries for the purposes of discretionary income distribution under the provisions of clause 4(c) hereof, and for the avoidance of doubt, it is expressly provided that the said income beneficiaries JOHN PAVLAKIS and ARGIRO PAVLAKIS shall not be default beneficiaries and shall have no right to share in income save to the extent that a discretion is positively exercised in favour of such income beneficiary…
16. The trust deed defined default beneficiary as being those persons identified in sub-clause 13(2)(d). Clause 13 dealt generally with the winding up of the trust and the distribution of capital. The class of default beneficiaries included those living of the children and grandchildren of John and Argiro Pavlakis, who would take in equal shares. Provision was also made in clause 13(2)(d) that if the trust failed to vest in any of the named beneficiaries, two identified charities would take the benefit. What was clear was that there was no circumstance, in accordance with the terms of the trust, in which John and Argiro Pavlakis would share in trust capital. This was reiterated in sub-clause 5(2) of the trust deed which provided:
Until the Trust is wound up, the trustee shall stand possessed of the capital of the Trust for the beneficiaries as follows:
(a)On or prior to the termination date the whole or any part of the capital …shall be held for such one or more of the beneficiaries (other than JOHN PAVLAKIS and ARGIRO PAVLAKIS the income only beneficiaries)….
17. The trust deed in clause 8(5) also recognised that the powers of the trustee might be exercised either by resolution of its members in general meeting, or by resolution of its board of directors or governing body.
18. Those were the main features of the trust deed as relevant for the questions of structure. In terms of the administration of the trust, significant changes took place in 2003 when Stellios and Nectarios took over as appointers from their parents, who were the named appointers under clause 7 in the original trust deed, and they took over as directors of the trustee company. This is discussed further below.
§ whether the individual can reasonably be expected to exercise effective control in relation to the trust
19. Mr Pavlakis was not present at the hearing for health reasons; he has not provided any written statements about his involvement with the trust. The evidence in regard to the trust, its creation and its operations was from statements and oral evidence from Mrs Pavlakis, Stellios Pavlakis and Nectarios Pavlakis as well as the evidence of Mr A Kassos, the accountant, and Mr S Comino the family solicitor who assisted Mr and Mrs Pavlakis when they set up the trust.
20. Both Mr Kassos and Mr Comino stated (exhibits A3 and A4) that they had discussions with Mr and Mrs Pavlakis in about 1999 concerning the flats and their desire to keep them in the family and for the future benefit of all offspring. Their evidence was that both Mr and Mrs Pavlakis told them that they did not want anyone in the family to force a sale of the flats and divide the proceeds. Mr Comino said that Mr and Mrs Pavlakis had told him that they did not want themselves to benefit from the property once it became trust property, apart from receiving a small share of income, if any, left after distributions to other beneficiaries.
21. Mr Comino said with these instructions he drew up the trust deed so that Mr and Mrs Pavlakis would not have an interest in the trust capital and would only have access to trust income if the trustee exercised the discretion to pay them. Mr Comino said that he made provision in the trust deed for Mr and Mrs Pavlakis as income-only beneficiaries not default beneficiaries, as a way of putting into effect their overall intentions in regard to the property and their family.
22. Mr Comino said that by 2003 Mr and Mrs Pavlakis were experiencing difficulties with the reporting obligations and other responsibilities of the trust and trustee company. He said that he had discussions with them about Stellios and Nectarios taking over from them, but Mrs Pavlakis was concerned about the potential impact of this for the trust property. Mr Comino said that he explained to Mr and Mrs Pavlakis that as shareholders of the trustee company, they retained the power to remove and replace directors, and he said he also told them that the directors would only deal with the trust property in accordance with the terms of the trust deed.
23. Mr Kassos also said that until 2003 when Stellios and Nectarios took over, his dealings were mainly with Mrs Pavlakis. Since then, Stellios and Nectarios are the ones who provide instructions, not Mr and Mrs Pavlakis.
24. Mrs Pavlakis’ evidence confirmed other evidence, particularly that of the accountant and her solicitor. She said that she and her husband wanted to keep the flats in the family. In her oral evidence she indicated that their concerns were not so much about their own children as possible problems with their partners. While her husband was working (which he did until he retired at age 65) Mrs Pavlakis seems to have been the one who was more involved with overseeing the flats; it was she who placed advertisements for tenants and dealt with such issues as repairs and maintenance. She said that even now she and Mr Pavlakis mow the lawns at the flats, do some cleaning and sometimes collect the rent. She said that when they are gathered as a family they would discuss the trust.
25. Stellios said that he consults Nectarios, for instance about decisions such as fixing rental amounts, but he said that they would let their parents know any decisions made. He said these might be mentioned over dinner with his parents. He also said that there was no real need to have extensive discussions, as the flats are an uncomplicated business.
§ whether the individual has made a contribution to the trust
26. This factor requires consideration of the value of the contribution and its proportion to the total assets of the trust. It is plainly the case that Mr and Mrs Pavlakis have been the main contributors to the trust. The flats comprise almost the whole of trust assets (T36).
§ past benefits from distributions and any foreseeable future benefit of capital income or both
27. Mr Pavlakis has never received a distribution of income from the trust. Mrs Pavlakis received distributions of $2,144, $5,906 and $9,679 respectively in the income years 1999-2001. Mrs Pavlakis told me that she has taken distributions from the trust in the past, but now her son Nectarios was the one who was in greater financial need. She said that the decisions about distributions were made by her sons. Mrs Pavlakis said that she might take money from the trust in the future if there was need for her to do so. She said that she also spoke for her husband on that point.
28. The trust tax returns in evidence went as far as the financial year 2002/2003. That year the trust distributed $1,800 each to two of the grandchildren and $11,782 to Nectarios Pavlakis. I note that until 2004 Mr Pavlakis was still in employment. I draw no inference from the pattern of distributions that Mr Pavlakis would not foreseeably be the recipient of distributions in the future. His circumstances have changed and he is no longer in employment. Having provided for his family in the past it is not unreasonable that he be provided retirement support.
29. I do not accept that his children would not consider Mr Pavlakis for a distribution. To do otherwise would be inconsistent with the closeness of this family and would be inconsistent with Mr and Mrs Pavlakis being income-only beneficiaries under the trust deed. The evidence was that tax-effectiveness was a key consideration when making decisions about who are recipients in any particular year. Nectarios Pavlakis said that he and Stellios consult with Mr Kassos to work out the most tax effective distributions from the trust. He said that if his parents pressed him for a distribution, he would probably say no, but he was at pains to point out that he did not think that his parents would ask for money.
30. I was satisfied that it is reasonably foreseeable that both Mr and Mrs Pavlakis will receive future benefits as distributions of income from the trust, particularly in view of the fact that Mr Pavlakis is retired and does not have the benefit of his regular salary.
APPLYING THE FACTORS IN MR PAVLAKIS’ CASE
31. Considering all these factors, it seems to me that there is no sufficient basis to determine that Mr Pavlakis is not an attributable stakeholder of the trust. Mr Pavlakis provided the main trust asset; he and his wife are the sole shareholders of the trustee company. While it is true that they are no longer appointers of the trust, on Mr Comino’s evidence which was confirmed by Mrs Pavlakis, it was made plain to Mr and Mrs Pavlakis when handing over greater powers and responsibilities to Stellios and Nectarios that the safeguard against the sons acting otherwise than in accordance with their parents wishes was that Mr and Mrs Pavlakis were the sole shareholders of the trustee company. I note also that clause 8(5) of the Trust deed provided that the powers and discretions of the deed might be exercised by resolution of its members in general meeting, not only by the directors.
32. I was mindful that the overall intention of Mr and Mrs Pavlakis to keep the property safe for the future for all their offspring was achieved by the creation of the trust itself in 1999. It seemed from the evidence there were discussions within the family when the flats were transferred to the trust in 1999. It was clear that against this background of shared knowledge, Stellios and Nectarios as directors of the trustee company are mindful of their parents’ wishes and carry out their parents’ intentions for the benefit of the family as a whole and without the need to refer to the parents on a day-to-day basis.
33. From the uncontested evidence from the family members, I accept that Mr and Mrs Pavlakis were struggling with the financial and other responsibilities of their role in the company because of the difficulties with reading English and their increasing age and ill-health. English is not spoken at home between the parents and children, only Greek. It seems that in 2003 Mr and Mrs Pavlakis were comfortable in reaching their decision to pass the company and trust responsibilities over to their sons who both appear to have readily acceded to their parents’ request.
34. The changes that took place in 2003 are best understood against this background. It seems that prior to then Stellios and Nectarios were involved with studies, but in 2003 they were in a better position to take over the more onerous aspects which Mr and Mrs Pavlakis were having difficulty with because of their limited English language skills. It was a natural progression as their parents became older. However I was satisfied that operating the trust and the flats is a family operation in which Mr and Mrs Pavlakis continue to be involved.
35. The evidence taken as a whole was that they are a close family who regularly discuss matters to do with the flats, albeit on an informal level, over shared family meals. Not everyone lives at home now, but all referred to discussing things regularly over meals. I noted also that the postal address for the directors of the trust company was Mr and Mrs Pavlakis’ home address (T13). I was not told of any disputes or discord in operating the flats or with running the trust or company.
36. I accept Stellios and Nectarios Pavlakis’ evidence that they have taken over from their parents in many respects and that they deal directly with the accountant and make the decisions as directors of the trustee company and appointers of the trust. However there was nothing in the evidence that suggested other than that this occurs within the setting of overall shared family values and sharing of information, however informally. There was no suggestion that Stellios and Nectarios would act contrary to the overall intentions of their parents, even though they did not need to consult them on a day-to-day basis and could carry out their responsibilities in the company and trust using their own judgement.
37. It seems to me that there is no basis for deciding other than that this is exactly the sort of arrangement contemplated by the new provisions for means testing of private trusts and that Mr Pavlakis is an attributable stakeholder.
38. In Secretary Department of Family Services v Geeves (2004) 136 FCR 134 Kiefel J, after referring to the Explanatory Memorandum to the Act introducing the changes said that the new provisions were to ensure that assets that are in truth available to a person are taken into account for the purposes of the Act. I was referred to that case as a basis for considering the position that Mr Pavlakis finds himself in, where there is no possibility of having access to the trust property because he is excluded under the terms of the trust deed. I agree with that submission; the Principles provide the basis for taking that matter into account in the particular circumstances of this case.
39. The proper place to consider this question about the assets of the trust being unavailable to Mr Pavlakis is under Part 3 of the Principles, determining asset attribution percentages. I have concluded that the asset attribution percentage for Mr Pavlakis should be 0%. A proper analysis of the trust deed leads to this outcome. It seems to me that the clear intention from the start was that Mr and Mrs Pavlakis would be income-only beneficiaries and the trust was set up excluding them from the capital. It would be a fraud on the trust to deal with the capital other than in accordance with the terms of the trust.
40. This leaves only the question of the appropriate income attribution percentage under Part 4 of the Principles. Taking all the factors discussed into account, it seems to me that there is no sufficient basis to determine a lower percentage than 100% as the overall income attribution percentage for Mr and Mrs Pavlakis. The matters already discussed under capital attribution also come into play here. I was satisfied that the fact that Mr and Mrs Pavlakis have divested themselves of any future interest in the trust capital has limited significance when considering the question of income attribution. The trust structure allows for Mr and Mrs Pavlakis to benefit from trust income. Mrs Pavlakis has benefited in the past and there is no reason both could not or would not benefit in the future. There is a clear pattern of a closely involved family operating in harmony with each other. There is no question in my mind that the trust operates to Mr and Mrs Pavlakis’ benefit, even if the benefit is ensuring their intentions for the future security of their family as a whole. In very real ways the trust remains under their control, through informal means and by strength of family ties.
41. As I noted in Re Major and Repatriation Commission [2003] AATA 826 (though under different legislation) the Principles allow for a husband and wife, to each of whom 100% may otherwise be attributed under 1207X, to be attributed 50% each to avoid double counting that may otherwise occur by applying s1207X on its own.
42. Whether Mr Pavlakis is attributed 100% of the trust income, or the attribution is 50% to each of Mr and Mrs Pavlakis, the effect on the assessment of Mr Pavlakis‘ rate of pension is the same. The applicant made submissions to the contrary, however the position is as correctly stated by Mr Howard in final submissions dated 23 December 2005, and as set out by the Tribunal in Re Lymberopoulos and Secretary, Department of Family and Community Services [2005] AATA 801: the Act provides in point 1064-A2 that members of a couple are treated as pooling their resources (income and assets) and sharing them on a 50/50 basis. For pension purposes, the income of people who are married is combined and then apportioned equally to each partner. All (net) trust income must be taken into account when assessing Mr Pavlakis’ claim for age pension.
DECISION
43. The Tribunal sets aside the decision under review and remits the matter to the respondent to assess John Pavlakis’ claim for age pension in accordance with the direction that:
(1)under s1207X(2)(d)(ii) of the Social Security Act 1991 Mr Pavlakis’ asset attribution percentage is 0%; and
(2)under s1207X(2)(e)(i) of the Act, Mr Pavlakis’ income attribution percentage is 50%, and that of his wife Argira Pavlakis is 50%.
I certify that the 43 preceding paragraphs are a true copy of the reasons for the decision herein of Ms M J Carstairs, Member
Signed: Mr Robert Hayes
AssociateDate of Hearing 30 September 2005
Written Submissions received 23 December 2005
Date of Decision 13 March 2006
For the Applicant Mr MC Mathews, of Counsel
Mr S Comino, Solicitor
For the Respondent Mr J Howard, Departmental Advocate
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