Re Varcoe and Secretary, Department of Family and Community Services

[2000] AATA 1002

DECISION AND REASONS FOR DECISION [2000] AATA 1002

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No  V99/1479

GENERAL  ADMINISTRATIVE  DIVISION     )          
           Re      John VARCOE       
  Applicant
           And    SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES        
  Respondent

DECISION

Tribunal       Mrs Joan Dwyer,     Senior Member     

Date15 November 2000

PlaceArarat

Decision      1. The Tribunal sets aside the decision under review and in substitution determines under s 8(11)(d) of the Social Security Act 1991 ("the Act") that the sum of $16,066.56 is an "exempt lump sum", and that accordingly only the sum of $2051.04 is to be treated as income under s 1073(1) of the Act for the 12 months from 31 July 1999. 2. Liberty is reserved to the parties to apply if clarification is required for implementation of this decision.
  (Sgd) Joan Dwyer
  Senior Member
SOCIAL SECURITY – income test – age pension - insurance policies maturing at age 65 – whether total amount is to be treated as income under s 1073 of the Social Security Act 1991 – whether that amount or any part is an "exempt lump sum" under s 8(11)(d) – whether Tribunal has power to determine that any part of that amount is an exempt lump sum – determination made that part of the sum is an "exempt lump sum"
PRACTICE AND PROCEDURE – need to ensure that departmental practice accords with legislation – importance of making determinations under s 8(11)(d) where a sum is to be treated as an "exempt lump sum".

REASONS FOR DECISION

15 November 2000 Mrs Joan Dwyer, Senior Member             

1. This is an application for review of a decision of the Social Security Appeals Tribunal ("the SSAT") made 24 November 1999 which affirmed a decision of a Centrelink officer made on 31 August 1999 to assess an amount of $14,730.00 as income for Age Pension ("AP") purposes.  The decision under review dealt with the sum received by Mr Varcoe ($18,117.60) on maturity of insurance policies at age 65 by subtracting the sum paid as premiums over 43 years ($3,386.68) and treating the balance of $14,730.00 as income to be maintained for a 12 month period.  (There is an error in arithmetic which was made in the original decision and is not corrected in these reasons).  The Centrelink decision was affirmed by an Authorised Review Officer on 16 September 1999.

2. Mr Varcoe appeared and gave evidence. Mr T Baker from the Advocacy and Administrative Law Team, Centrelink, appeared for the Secretary, Department of Family and Community Services. The Tribunal had before it the documents ("the T documents") lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 together with the exhibits tendered by the applicant and the respondent. After the hearing the Tribunal at its request received two letters from Mr K Deeves, the Australian Government Actuary, dated 1June 2000 and 11 August 2000. They have been marked as exhibits R3 and R4.
   Background

3. In 1956 Mr Varcoe took out two life insurance policies with AMP.  Later he changed them to endowment policies to mature at age 65.  The issue in this matter concerns the treatment of the amounts paid to Mr Varcoe on maturity of the policies in calculating his rate of age pension.  Mr Varcoe was concerned that the proceeds of his policies were being treated in a manner which discriminated in favour of people receiving proceeds of superannuation schemes and against holders of insurance and endowment policies.  He pointed out that in 1956 when he took out his policies, "superannuation was hardly heard of".

4. The policies matured on 30 July 1999 and had a combined value of $18,117.60.  Mr Varcoe had paid $3,386.68 in contributions over the 43 years he had maintained the policies.  The balance of $14,730.00 was treated as a payment of income leading to a reduced rate of age pension.  He was granted age pension from 31 July 1999 at the part-rate of $97.40 per fortnight.  He could not manage on that amount.  On 1 September 1999 he requested a reconsideration by an Authorised Review Officer ("ARO") of the rate of pension payable to him.

5. There was no dispute on the facts. Mr Varcoe explained that he took out the policies to provide for his family if anything should happen to him.  He was at the time aged 21, and married with one baby.  He was a newly appointed Land Inspector with the Lands Department in Victoria and was worried about what would happen to his family if he had a car crash, or was killed.  He said (trans p22):

   …in 1956 when I started these, you know, if I had have been killed the next week, my wife would have got 2000 [pounds] - two pay outs on two insurance policies which, you know, 12 months' premium wouldn't have come anywhere near doing.

6. In 1994, when he was aged 60, Mr Varcoe converted the two life insurance policies to endowment policies to mature on his 65th birthday, 30 July 1999.  At that time his son was self-supporting.  Mr Varcoe was divorced and he and his wife had had a property settlement so his policies were no longer required for the support of his family.  Prior to his 65th birthday Mr Varcoe informed Centrelink about his two policies.    A Record of Interview dated 19 July 1999 with Mr Varcoe states (T4 p12):

   … he mentioned that he had 2 life policies maturing at 65 and he would use them to clear his debt which is about $15000.  At this stage he produced the amp [sic] letters re the maturing investments and I told him that the "profit" portions of the policies would be treated as income for 12 months thus significantly reducing his pension.  He was very upset, feels that it is unfair to assess 43 yrs worth of bonuses.  I suggested that I double check with policy but that at this stage he would need to be careful about "paying off all debt" as he will only be on a part pension for 12 months.

A Centrelink file note dated 19 July 1999 records:

…I have rechecked guidelines 4.3.9.20 and 4.4.4.10 and bonuses are income for 12 months,….

1. By letter dated 23 July 1999 (T12) Mr Varcoe was informed by Centrelink:

   As discussed at our interview your rate will be affected by the maturity of your two life insurance policies.  Our guidelines specify that the Maturity value less the premiums paid are to be assessed as income for a 12 month period.  In your case this equates to $14730 (based on your premiums being $78.76 per annum since 1956) to be assessed for the 12 months.
   This will affect your rate of pension in the following manner:
   If the funds are spent then your rate will be reduced to $101 per fortnight approximately.  If the funds are invested or placed in the bank your rate will be reduced to $88 per fortnight approximately.   The reason for the difference is that if funds are invested we also have to calculate deemed interest and add that to the assessment.

2. By letter dated 16 September 1999 the ARO advised Mr Varcoe that she affirmed the decision of the Horsham office.  She stated that she used the following facts/findings in making her decision:

• You were granted Age Pension (AP) FROM 31 July 1999;

• Your AMP endowment policies V0184698-F and V0184699-G matured on 30 July 1999;

• The net maturity value of each policy was $9,058.80 (combined value for both policies was $18,117.60);

• You advise that your yearly premium on each of these policies was $39.38 and you contributed for 43 years, that is from 1956;

• Centrelink has accepted that you contributed $3,386.68 in premiums towards the two insurance policies;

• The amount of $3,386.68 you contributed towards the policies is deducted from the total maturity value of the policies to determine the financial gain of $14,730.00

• In accordance with section 1073 of the Social Security Act the amount of $14,730.00 has [to] be maintained against your Age pension for 12 months at the rate of one fifty-second of that amount for each week in that period;

1. Mr Varcoe appealed to the SSAT.   On 24 November 1999 the SSAT decided to affirm the decision under review although it accepted Mr Varcoe's assertion that superannuation payments are treated far more favourably than insurance or endowment policies under the relevant legislation.  Mr Varcoe then lodged an application for review with this Tribunal. 

2. Mr Varcoe prepared a persuasive submission to the SSAT (T29 pp59-63 and applicant's exhibits).   He made two substantial points:

   1. Superannuation lump sum payments are treated in a different and far more beneficial manner than insurance and endowment policy payments. Superannuation amounts are treated as an "exempt lump sum" within the meaning of that term in s 8(11) of the Act. That seems to be an informal arrangement. There is no evidence that the Secretary has made a determination to that effect under s 8(11)(d) of the Act.

   2. His bonuses were earned over 43 years, so is it not appropriate to treat them as income received over 12 months.

3. The issue before the Tribunal is whether the Social Security Act 1991 ("the Act") requires that the amount of $14,730.00, being the total figure payable when the AMP policies matured, less premiums paid, be included as income for age pension purposes.
   legislative framework

4. The starting point is of course s 1073(1) of the Act. That section, so far as relevant applies if a person receives an amount that:

   (a)       is not income within the meaning of Division 1B or 1C of this Part; and
   (b)       is not:

   (i)        income in the form of periodic payments; or

   (ii)ordinary income from remunerative work undertaken by the person; or

   (iii)      an exempt lump sum.

In those circumstances the Act provides:

the person is, … taken to receive one fifty-second of that amount as ordinary income of the person during each week in the 12 months commencing on the day on which the person becomes entitled to receive that amount.

Section 8 of the Act contains the following income test definitions:

"income", in relation to a person, means:

(a)an income amount earned, derived or received by the person for the person's own use or benefit; or

(b)       a periodical payment by way of gift or allowance; or
(c)       a periodical benefit by way of gift or allowance;

but does not include an amount that is excluded under subsection (4), (5), (7A) or (8);
"income amount" means:

(a)       valuable consideration; or
(b)       personal earnings; or
(c)       moneys; or
(d)       profits;

(whether of a capital nature or not);
. . .

8 (11)   An amount received by a person is an exempt lump sum if:

(a)the amount is not a periodic amount (within the meaning of subsection 10(1A)); and

(b)the amount is not a leave payment within the meaning of points 1067G-H20, 1067L-D16 and 1068-G7AR; and

(c)the amount is not income from remunerative work undertaken by the person; and

(d)the amount is an amount, or class of amounts, determined by the Secretary to be an exempt lump sum.

Note:    Some examples of the kinds of lump sums that the Secretary may determine to be exempt lump sums include a lottery win or other windfall, a legacy or bequest, or a gift—if it is a one-off gift.

The definition of "income" in the Act thus treats a lump sum amount as income (even if it is "of a capital nature"), unless the amount is "an exempt lump sum".

1. The question is whether the sum of $18,117.60, or any part of it, is required to be treated as "ordinary income" under s 1073(1). As to sub-paragraph (a) that sum is not income within the meaning of Division 1B (deemed income) or Division 1C (income from an income stream) of Part 3.10 of the Act. As to paragraph (b) the amount is not:

   (i) income in the form of periodic payments,

   (ii)ordinary income from remunerative work.

That leaves the question whether it is "an exempt lump sum". That term is defined in s 8(11) of the Act which, as set out in paragraph 11, provides:

8 (11)   An amount received by a person is an exempt lump sum if:

(a)the amount is not a periodic amount (within the meaning of subsection 10(1A)); and

(b)the amount is not a leave payment within the meaning of points 1067G-H20, 1067L-D16 and 1068-G7AR; and

(c)the amount is not income from remunerative work undertaken by the person; and

(d)the amount is an amount, or class of amounts, determined by the Secretary to be an exempt lump sum.

Note:    Some examples of the kinds of lump sums that the Secretary may determine to be exempt lump sums include a lottery win or other windfall, a legacy or bequest, or a gift—if it is a one-off gift.

1. There are four criteria in s 8(11) which have to be satisfied before an amount is "an exempt lump sum".  No issue arises as to the criteria in paragraphs 8(11)(a)(b) and (c).  As to paragraph 8(11)(d) officers within Centrelink appear to have acted on the basis that the amount of $3,386.68 is "an exempt lump sum", although there is no formal determination by the Secretary to that effect.

2. The problem with there being no formal determination by the Secretary under s 8(11)(d) of the Act, and the possibility that the Tribunal may consider making such a determination had been foreseen by Mr Baker prior to the hearing of this matter. He produced a letter dated 15 February 1999 (should be 15 February 2000) (Ex R1) from the Director of Means Test Policy, Department of Family and Community Services ("DFACS") to the Manager, Advocacy and Administrative Law Services at Centrelink, in relation to Mr Varcoe. It sets out a list of lump sums "determined by the Secretary to be an exempt lump sum".   Those amounts do not include amounts received on maturity of an endowment or life insurance policy.  However the list of lump sums in that letter does include the possibility of individual determinations applying to insurance lump sums.  It provides:

   "other individual exempt payments, where customers will hold a s 8(11) Determination signed by the Secretary of the Department of Family and Community Services"

3. It appears from the DFACS letter that the Manager of the Centrelink Advocacy and Administrative Law Services had asked DFACS whether it was open to the SSAT or AAT to make a determination under s8(11)(d) of the Act, in respect of Mr Varcoe. Determinations as to whether an amount is an exempt lump sum are not described as non-reviewable decisions under s 1250 of the Act. Nor is the power to make such determinations excluded from the powers and discretions of the SSAT and this Tribunal under s 1253(4) of the Act. The response in the letter from DFACS was:

   Answer 3d): It is our understanding that the SSAT and the AAT can make determinations under subsection 8(11).   However, we have sought legal advice on this issue and will contact you again as soon as we receive that advice.

4. In a subsequent E-mail (R2) DFACS provided legal advice that the SSAT and AAT do have power to determine that an amount is an exempt lump sum under s 8(11) of the Act. The E-mail read in part:

   The SSAT and/or the AAT do not need to ask the delegate to reconsider a determination. They can, in my view and particularly in the circumstances described about the effect of s 1073 of the Act in Mr Grecl's memo, make their own determination. In some circumstances the SSAT and/or the AAT might remit the matter back to the Secretary with directions because they may be unwilling to make their own determination (it could be a case where the SSATs (or AATs) determination would be tantamount to the making of a primary decision in which case they would be precluded under the law from doing this because their function is a review mechanism.

5. Mr Varcoe pointed out that there appears to be no legislative provision stating that s 1073(1) is not to be applied to a lump sum superannuation payment on retirement after age 55. The letter from DFACS, (R1) supports his submission. I was not directed to any other sections of the Act specifically providing that lump sum superannuation payments are not to be taken as income under s 1073 of the Act. The letter from DFACS states at pp4–5:

   Although not specifically stated in the guide reference 1.1.T.180 Exempt Lump Sums (Age), the exempt superannuation lump sums referred to in this definition are . . .

• Ex gratia superannuation payments eg. bona fide redundancy payments or the lump sum payment of a superannuation invalidity benefit; and

• Ex gratia superannuation amounts eg. a commutation of a superannuation pension or the payment of arrears at the time of commencing a superannuation pension.

Those are said to be specified as "Exempt Lump Sums" in Reference Update CB980090 but there appears to be no formal determination by the Secretary to that effect.  The letter (R1) explained that lump sums are stated in an internal advice, used as a guideline by a delegate in determining what is an exempt lump sum, to be an amount that "…cannot reasonably be expected to be received or anticipated".    That is given as a reason why the amount received by Mr Varcoe should not be "an exempt lump sum".  However the letter does not explain why lump sum superannuation payments after age 55 are treated as exempt lump sums in spite of the facts that there is no determination of the Secretary to that effect and that they are of course "reasonably . . . expected to be received". It seems that as a matter of good administration there should be a formal determination under s 8(11)(d) as to superannuation lump sums, or else an amendment to the legislation to ensure that the legislation and the practice are in conformity with each other.
application of the legislation

1. Mr Varcoe considers it unfair that the whole of his accumulated bonuses over the 43 years he maintained his policies should be treated under s 1073 of the Act as "ordinary income" during his first twelve months in receipt of age pension. He pointed out that these bonuses had been earned over 43 years, not just at maturity on his 65th birthday and that until 21 July 1997 they would not have been treated as income for social security purposes.

2. Mr Varcoe said that the Centrelink officers with whom he dealt had all been helpful and sympathetic, but had concluded that s 1073 of the Act and departmental policy obliged them to treat the whole of the bonus payments on each policy as if they were "ordinary income" received on 30 July 1999.  Mr Varcoe has been pursuing this matter since July 1999 and it was not until the hearing on 28 April 2000 that he learnt that it was possible for a determination to be made that part of the amount he received was "an exempt lump sum". 

3. The T documents, at T5 p15, contain a Minute from Ms Merryn Barnett, a Centrelink officer putting Mr Varcoe's situation to an advisory office seeking clarification.  She put Mr Varcoe's case persuasively:

   Once again I am having difficulty with the treatment of life insurance surrenders.  This is something that has caused distress to clients ever since the rules were amended approx 18 months ago.   However in the last month I have had a bit of a run on these so I wish to double check the guidelines.  The guide rewrite section 4.3.9.20 and 4.4.4.10 deals with the assessment of income on ordinary life policies.  It basically states that if a policy matures or is surrendered then the payout value less actual premiums paid is to be assessed as income for a 12 month period.   Obviously my problem with this is that the bonuses have often been accumulated over many years and we treat them as income even [if] client only on payment for a short time.   One case I have now is a man who turns 65 next week, he has 2 life policies that mature on his 65th birthday.   He is on NMA at present.  He has had the policies for 43 years but only been on payment with us for three and a half years.  Next week we are going to start assessing $15,559 as income for 12 months, total pay out amount was $18,117.60.  Obviously this man is not happy.  I would like to double check that there has been no change to the treatment.  When these changes were 1st made I was under the impression that there was a chance that the assessment would be amended to be similar to super w/d ie we would only look at accumulated bonuses for the period on payment not the entire policy period.  Has this occurred?  (emphasis added)

1. The T documents, at T10 pp22 and 23, include extracts from the Guide to the Social Security Act 1991 ("the Guide"). It is a Statement of Departmental Policy as to the application of the Act, which must be complied with by officers of Centrelink. That extract states:

   Conventional life insurance policies - bonuses
   Bonuses on conventional life insurance policies are NOT assessed as ongoing income during the term of the policy.  On maturity, the difference between the maturity payment and the sum of the purchase price and premiums paid by the investor IS assessed as income for 12 months.  This applies for both pension and benefit.
   Act reference:  SS Act section 1073 Certain amounts taken to be received over 12 months
   Policy reference:  The Guide, 4.4.4.20 Deemed Income from Life Insurance Products - Managed Investments, 4.4.4.10 Deemed Income from Life Insurance Products - Conventional Policies

At point 4.4.4.10 the Guide states that term insurance policies and endowment insurance and pure endowment policies are "a conventional life insurance policy".  

1. Mr Varcoe referred in his submission to the SSAT (T29 p61) to an extract, PS28 of the Taxpack 99 Supplement (T30 p75).  It states that bonuses from insurance policies taken out before 28 August 1982 are not required to be declared in income tax returns.  Mr Varcoe questioned why DFACS should be less generous than the Tax Department or Australian Taxation Office, as it is now called.

2. Mr Varcoe produced (JV6) extracts from 1996 Department of Social Security Manuals showing that at that time bonuses on insurance policies were not assessed as income either during the term of the policy or on maturity, (27.9411 of Guide Issue No 792G, and 30.4 400 of Guide Issue 691G questions 2 and 3). It is apparent from exhibit JV12, a Centrelink publication called "Questions and Answers, Social Security Income and Assets Tests – Assessment of Conventional Life Insurance Policies", that the policy changed from 21 July 1997.

3. Mr Varcoe pointed out that there was no general notification to the community prior to 21 July 1997, or even to Centrelink recipients who had notified Centrelink that they were holders of life insurance or endowment policies, that bonuses on such policies were in future to be less favourably treated.  Had there been such notice at that time, he could have taken steps, such as selling, surrendering or extending one policy, so as to reduce the impact of the payment on maturity on his pension entitlements.

4. Mr Varcoe relied on the High Court decision of Perre v Apland Pty Ltd [1999] HCA 36, 12 August 1999 A27/1998, as authority for the view that DFACS owed a duty of care to holders of insurance policies to advise them of the changes to the treatment of insurance policy bonuses at a time when they could reduce the disadvantageous impact of such changes on them. Gleeson CJ said at paragraph 42:

   In my view, where a person knows or ought to know that his or her acts or omissions may cause the loss or impairment of legal rights possessed, enjoyed or exercised by another, whether as an individual or as a member of a class, and that that latter person is in no position to protect his or her own interests, there is a relationship such that the law should impose a duty of care on the former to take reasonable steps to avoid a foreseeable risk of economic loss resulting from the loss or impairment of those rights.

That passage does indicate that there could be a duty of care on the Commonwealth of Australia, when it knows that its acts in changing the law will operate disadvantageously for some people, to take reasonable steps to advise those people of the proposed change in time for them to rearrange their affairs so as to avoid or reduce the loss resulting from the change.  There is of course a question whether the Commonwealth of Australia is subject to such a duty of care in the same way that individuals or companies would be (see paragraph 100 in the reasons for decision of McHugh J).However, more significantly that is not a matter this Tribunal can itself decide. The Tribunal must apply the Act and has no jurisdiction to award damages for a breach of a duty of care whether or not one exists. Nor can it take any action in respect of alleged breaches of s 52A(1) or s 52 of the Trade Practices Act 1994 as suggested by Mr Varcoe.

1. In his submission to this Tribunal, Mr Varcoe compared the treatment by Centrelink of a superannuation lump sum payment of $14,730.00, and a payment of the same amount as bonuses received on maturity of endowment policies.  He provided the following table:

   To put this in to figures, compare the effect on pension between insurance bonuses and superannuation with deeming of 3.5% and based on assessed bonuses of $14730.

   [Insurance] Bonuses      Superannuation
   Gross income for  $14,730  3.5% of $14,730
   12 months  $ 515
   Assessed[per week]                   $   283  $9.90
   Loss of Pension  $   116  p/w  NIL
   With superannuation, an additional income of $41.10 per week could be earned from casual work before age pension would be affected. 

The figure of $41.10 was provided by Mr Varcoe in a letter to the Tribunal dated 5 May 2000, correcting the figure he had given earlier of $20.10.

1. Mr Varcoe, at the hearing, was obviously very aggrieved by the disadvantage imposed on him due to him having made provision for his retirement by way of an endowment policy, rather than by way of superannuation, which was not available to him in 1956.    He was also aggrieved that the Centrelink Publication "Questions and Answers - Social Security Income and Assets Tests - Assessment of Conventional Life Insurance Policies" (Ex. JV12 at p1) purports to justify the discriminatory treatment of insurance policy holders on the ground that "A person who invests in such a life insurance policy is seen as deriving income from a profit making transaction".   The document states that to ignore the income from life insurance policies would be:

   ·     Inequitable compared with the treatment of other products; and

   ·     Inconsistent with the intention of the Social Security Act to assess income from all sources, with very limited exemptions. The income test is used to target income support to people at times of financial need while ensuring that the social security safety net remains sustainable for Australian taxpayers.

2. Mr Varcoe concluded his submission with suggestions as to how holders of insurance policies could be more fairly treated.  He wrote:

   Suggestions
   How can this situation be rectified in a fair and equitable manner.
   1. Mrs Meryn Barnett in exhibit JV/3 suggests that bonuses should be treated the same as superannuation; i.e. bonuses are only assessed as income for the period while on benefits.
   2.  Add the total insurance payout to the Assets and if they exceed the $127,750 limit, then benefits will be affected.
   After all, if assets and insurance payout do not exceed the limit, then isn't that person amongst the more needy in our society.
   3.  Assess bonuses on a pro rata basis according to length of the policy
   Policy length
   1 to 10 years, bonuses as income over 12 months
   11 to 15 "           "        "     "       "       2 years
   16 to 20 "           "        "     "       "       3     "
   21 to 25 "            "        "     "       "       4     "
   and policies over say 26 or 30 years exempt.
   There are no doubt people more intelligent than me who could come up with other methods which are far more equitable and do not discriminate as the current policies do.  (emphasis added)

3. Mr Baker relied on a decision of Truscott and Secretary, Department of Social Security, unreported 24 October 1989.  In that matter the Tribunal was dealing with a different sort of investment. Deputy President McDonald rejected an argument that profits received on surrender of the policy should be apportioned over the life of the policy.  He treated the whole amount as income to be maintained for 12 months.   The applicable legislative provisions at that time were similar but not identical to those relied on in this matter.

4. The decision in Truscott is of interest because both the Tribunal and Ms Seghezzi, the co-ordinator of the Pension Income Advisory Service of the Department of Social Security, recognised that it was advisable that people who would be disadvantaged by changes in legislation or in policy be notified in advance of those changes.  The Tribunal said in its reasons:

   Miss Seghezzi who is the coordinator of the Pension Income Advisory Service for the respondent and was previously an auditor involved with policy issues with respect to departmental payments including pensions, told the Tribunal that at the time S3A came into effect, since it had been the Department's approach not to regard funds such as that in which the applicant was involved as being income producing, there was no ready record in the respondent's computer system which would allow people such as the applicant to be identified and for them to be notified of the change of legislation.  She said the Department had followed the policy of informing recipients of the legislative change at the time when their pensions were reviewed or in cases such as that of the applicant when an approach was made to the Department for information.
   The applicant and no doubt others in a similar position to the applicant being unaware of the legislative change are placed in a disadvantageous position.  Had the applicant known of the legislative change he may well have opted to surrender his policy and take his entitlement prior to the amending legislation taking effect.  He may then have chosen to reinvest his lump sum in some other way which may have resulted in a less dramatic effect on both the income adjustment and the resultant health care benefit card loss.  The applicant does not dispute, and has never disputed, that interest received from the investment funds should be treated as income and as such lead to a reduction in the amount of pension received – what disturbs the applicant is that the "policy" in force at the time the applicant initially invested the funds was superseded by the change in legislation and it was not until the applicant wrote to the Department on the 12 September 1988 with a number of questions with respect to the investment that he became aware of the retrospective effect of those changes.  Even then it is not the retrospective effect of the legislation per se which is of such concern but rather the respondent's approach to the earlier existing legislation which has lulled the applicant into a false sense of security.  It is unfortunate in circumstances in which the Department took an approach to a legislative requirement which in effect "reinterpreted" the statutory obligation placed on the Department so that people such as the applicant were misled and that subsequently when the legislation was changed there was no means of notifying those people that the Department would be taking a different approach in accordance with the legislation from a set date so that people could organise their affairs accordingly.
   I am satisfied that the applicant's investment falls within the terms of the amending legislation.  However sympathetically one may view his circumstances there is no discretion which can be called in aid to ameliorate his position.

5. That decision is distinguishable in three ways.  First, as Mr Varcoe pointed out there was a record in the Department's computer system of him having a current insurance policy because he had declared it as an asset in relation to Mature Age Allowance which he had been receiving in 1997.  He and others in a similar position could have been notified of the change in the approach to the treatment of bonuses payable on the maturing of a policy.  Secondly, in Re Truscott, the profit had accumulated over three years only, here there are 43 years of saving which makes the problem greater. Thirdly, as discussed in paragraphs 12–18 of these reasons, there is a discretion which can be called in aid to ameliorate Mr Varcoe's position. Under s 8(11)(d) of the Act the Tribunal has a discretion to determine that all or part of the sum received by Mr Varcoe on maturity of his policies "be an exempt lump sum".  The respondent did not challenge the Tribunal's power to make such a determination.  In fact, as set out above, Mr Baker produced a letter and legal advice from DFACS to the effect that this Tribunal does have power to make such determinations.

6. During the hearing I questioned whether Mr Varcoe had in fact made any profit beyond savings bank interest on his premiums of $78.76 which he had paid for 43 years.  I asked whether the maturity value of $18,117.60 was in fact more than he would have received if he had simply banked those amounts in a savings bank each year for 43 years.  Mr Baker agreed to ask the Australian Government Actuary for advice on that matter.  A report from the actuary was received by the Tribunal on 5 June 2000 and sent to Mr Varcoe.  It has been marked Ex R3 together with Mr Baker's letter to the Australian Government Actuary of 31 May 2000.  Unfortunately Mr Deeves of the Australian Government Actuary somehow misunderstood the request made of him.  He replied:

   With regard to your question "are you able to advise a more exact figure as the customer contribution", I think taking the balance of $18117.60 less total contributions of $3389.68 (should be $3386.68) all as income in the year of maturity is rather harsh.
   I think it would be more appropriate to look upon the accumulating contributions in a manner consistent with the accrual of a bank account.  That is, the interest earned each year would be treated as income in the year it is credited.  A reasonable rate of interest to assume in the final years would be the long-term bond rate as at the anniversary date of the policy.  This is only a rough guide since the insurance company would have a wide range of investments that should earn more than the long-term bond rate but would have taxes and expenses to deduct.
   I do not know the maturity date of the policy, but if the long-term bond rate were 6% on the anniversary before maturity, the income for the last year using this method would be:

   6% x $18,117.60        = $1025.52

   1.06

   In providing this advice, I have looked towards identifying an amount that I feel can 'reasonably' be regarded as 'income' in the final year.  I am not familiar enough with the legislation to know whether or not my approach is permissible under law.  (emphasis added)

7. Mr Varcoe made a submission dated 19 June 2000 in which he stated that the actuary's report did not address the issues raised by the Tribunal at the hearing.  The Tribunal agreed and asked Mr Baker to request a further report from the Australian Government Actuary.  A copy of that report of 11 August 2000 has been marked as exhibit R4.  The report sets out the question asked by the Tribunal and answers as follows:

   I have now calculated values using this approach except that, instead of using a Bank rate of interest I have used the long term (10 year) bond rate published in Reserve Bank Bulletins over the period.  This latter rate is readily available and represents a more reasonable rate for Life Office investment that a Bank rate.  It should be noted that the Life Office will have invested over a much wider range of assets than this and its investment policy will have changed from time to time.
   The question of the "value" of premiums is not a straightforward one.  In total the value could be seen as including the value of providing for the risk of early death and the value of administration expenses.  This is all met from the premium.  However, if we are looking at the value that should be remaining at the maturity date, the values of risk and of expenses should, quite obviously, be deducted.
   I have carried out several calculations so that the Tribunal can gauge the effect of various costs on the residual value that might apply at the maturity date.  In doing this I have also allowed for the likelihood of taxation at a couple of net rates.
   The following Table sets out the value at maturity based on the various assumptions set out in the Table.

VALUE at MATURITY of PREMIUMS PAID
Case   Average Expense Rate % of Premium      Average Tax and Risk Cost % of interest in year          Value 
A        Nil      Nil      $40,786         
B        5%      30%     $17,521         
C        5%      20%     $22,758         
D        10%     20%     $21,560         

I do not know the actual average tax or expense rates of the Life Office or the cost of risk over the period.  However, the maturity value of the policies of $18,117.60 is consistent with earnings and costs (plus some profits) of the order demonstrated in B, C and D above.
The difference between the maturity value of $18,117.60 and the total premiums paid ($3,386.68) effectively represents the total net (after expenses, risk cost and taxation) interest earned on the premiums over the 43 years since the policy was taken out.

1. Once again the actuary has had some difficulty addressing the issue raised by the Tribunal from the point of view of Mr Varcoe rather than of the insurer.  From his report it seems that as far as Mr Varcoe is concerned he would have been much better off at age 65 if he had simply invested $78.76 per year at a long term bond rate.  The actuary advises that such an investment would have realised $40,786 over the 43 years, if no tax were deducted.  It seems that Mr Varcoe has made no profit as a result of investing $78.76 in premiums each year for 43 years.  He has in fact received less than he would have earned had he simply banked the money and paid tax on the income earned each year.  That shows how unfair it is to treat the whole sum, except the actual premiums paid, as income earned in the 12 months following Mr Vacoe's 65th birthday.

2. On the evidence of Mr Varcoe and the opinion of the actuary, I have formed the view that it was unfair, unjust and inequitable to treat all the return on Mr Varcoe's investment over the period of 43 years, excluding only the actual premiums paid, as income received in one year for the following reasons:

   (i)Mr Varcoe was only in receipt of Social Security payments for three and a half of the 43 years during which his investments were maturing.

   (ii)The approach required by Centrelink of its officers makes no allowance for inflation; the $78.76 paid as a premium in 1956 would be worth much more than that in "real money" terms today.

   (iii)Mr Varcoe could have arranged for his policies to mature prior to 21 July 1997, had he had reasonable advance warning of the proposed change in the practice of applying s 1073 of the Act.

   (iv)As Mr Varcoe demonstrated there, is a stark inequality in the treatment of lump sum superannuation payments and lump sum payments on maturity of age insurance policies.

   (v)No reason has been advanced why those who took steps many years ago to make provision for their families or for their retirement by way of life/age insurance policy should be penalised for their saving when the policies mature at age 65.  Had the money simply been banked in an interest bearing account, the accrued interest over the years 1956–1998 would have been treated as an asset for the assets test and subject to the deeming rules, but would not have been treated as income in the year 30 July 1999 – 30 July 2000.

   (vi)to treat all bonuses accrued from 1956 to 1999 as income received in 1999 gives 41 years of retrospective effect to a policy change which came in to operation in 1997.

3. I have decided to exercise the power in s8(11)(d) of the Act to determine that part of the proceeds is an exempt lump sum. I have considered whether I should remit the matter to the Secretary for the making of a determination under s 8(11)(d). I have decided against that course. The decision under review, in so far as it has reduced the total amount received by Mr Varcoe on maturity of the policy by deducting the sum of $3386.68, representing the total of the premiums paid, from the total proceeds of $18,117.60 seems to have assumed an exercise of the power to make a s8(11) determination, although no formal determination was made.

1. This issue may require further consideration under the Act, or the Secretary may decide to make a general s 8(11)(d) determination covering insurance policies. However, as exhibit R1 explains, there can also be private determinations relating to "a customer's specific case". In the absence of a general determination, specific determinations are a way to achieve a more equitable result in individual matters. The proposal which was made by Ms Barnett of Centrelink and adopted by Mr Varcoe in his submission to the SSAT (T29 at p63) appears to provide a fairer approach to the problem. She suggested that only bonuses accumulated during the period on social security payments should be treated as income under s 1073.

2. Ms Barnett in her Minute (T5 p15) dated 20 July 1999 wrote that Mr Varcoe had only been, "on payment with us for three and a half years". That would suggest that perhaps bonuses accumulated over three and a half years should be treated as income for 12 months from July 1999. However there is still a further inequity in that. The bonuses accrued prior to 21 July 1997, at the time they accrued, had no effect on either current or future income test calculations. They were not assessed as income either during the term of the policy or on maturity (Ex JV6). There are strict rules on when legislation is given a retrospective effect. It seems that an unadvertised change in policy should not lightly be given a retrospective effect. I consider that only bonuses accrued after 21 July 1997 should be treated as income under s 1073 so as to affect Mr Varcoe's entitlements after 31 July 1999.

3. I find on the basis of the actuary's advice that Mr Varcoe's investments over the years would have realised a sum of $40,786, if no discount is given in respect of tax and risk costs.  Thus he has certainly not derived any profits such as to justify discriminatory treatment of insurance policy holders, as discussed in the Centrelink Publication (JV12) referred to in paragraph 28 of these reasons. 

4. I have considered whether I should determine that the whole amount of the return, namely $18,117.60 should be declared an "exempt lump sum".  That possibility was not addressed by either of the parties.  However the proposal made by Ms Barnett and adopted by Mr Varcoe in his submissions was clearly before me and the respondent.  I consider that in this matter it achieves a fair result, so long as it only applies to bonuses accrued after 21 July 1997. 

5. Thus I will determine that the whole return on maturity, except the bonuses accrued from 21 July 1997 to 31 July 1999 is an exempt lump sum. There is no precise evidence as to the bonuses accrued over that period. The relevant period is approximately two years. The actuary, in exhibit R3, estimated the income earned over the last year as $1025.52. I propose to double that figure. I recognise that the interest in the preceding year would have been somewhat less than that in the last year, but on the other hand the period 21 July 1997 to 31 July 1999 is also somewhat longer than two years. I consider that substantial justice will be well served if I determine under s 8(11)(d) of the Act that the sum of $16,066.56 is an "exempt lump sum". I have calculated that amount as follows:

   $18,117.60 – ($1025.52 x 2) = $16,066.56

6. The decision under review will be set aside. In substitution I will determine under s 8(11)(d) of the Act that in this matter the sum of $16,066.56 is an "exempt lump sum" and that accordingly only the sum of $2051.04 is to be treated as income under s 1073(1) of the Act for the 12 months from 31 July 1999. I will reserve liberty to the parties to apply if clarification is required for implementation of this decision.

   I certify that the 43 preceding paragraphs are a true copy of the reasons for the decision herein of Mrs Joan Dwyer, Senior Member.

   Signed:         Anne O'Rourke
     Associate

   Date/s of Hearing  28 April
   Date of Decision  15 November 2000
   Counsel for the Applicant        Nil
   Solicitor for the Applicant         Nil - Self Represented
   Counsel for the Respondent    Nil
   Solicitor for the Respondent    Nil
   Departmental Representative  Mr T Baker