Reiter and Secretary, Department of Social Services (Social services second review)

[2020] AATA 2212

Reiter and Secretary, Department of Social Services (Social services second review) [2020] AATA 2212 (15 July 2020)

Division:GENERAL DIVISION

File Number:          2019/8190

Re:David Reiter

APPLICANT

AndSecretary, Department of Social Services

RESPONDENT

DECISION

Tribunal:Deputy President J Sosso

Date:15 July 2020

Place:Brisbane

The Tribunal affirms the decision under review.

.....................[SGD].............................................

Deputy President J Sosso

CATCHWORDS

SOCIAL SECURITY – seniors health card – whether the applicant purchased a new pension account – whether the deeming provisions apply - cancellation of card where applicant does not meet income test – decision affirmed

LEGISLATION

Administrative Appeals Tribunal Act 1975

Social Security Act 1991

Social Security (Administration) Act 1999

Social Services and Other Legislation Amendment (2014 Budget Measures No 6) Act 2014

Superannuation Industry (Supervision) Act 1993

Superannuation Industry (Supervision) Regulations 1994

SECONDARY MATERIALS

Explanatory Memorandum, Social Services and Other Legislation Amendment (2014 Budget Measures No. 6) Bill 2014

REASONS FOR DECISION

Deputy President J Sosso

15 July 2020

INTRODUCTION

1. Dr David Reiter (the Applicant) seeks a review of a decision of the Social Services and Child Support Division of the Administrative Appeals Tribunal (AAT1) of 22 November 2019 (Exhibit 1 T2 pp. 5 – 9) which affirmed a decision of Services Australia (the Agency) to cancel the Applicant’s Seniors Health Card from 23 January 2019.

2. The Applicant was granted a Seniors Health Card from 31 January 2012 – Exhibit 1 T15 p. 149.

3. The issue to be determined is whether the Applicant has ceased to be eligible to have the benefit of a Seniors Health Card because he does not satisfy the Seniors Health Card income test as prescribed by the Social Security Act 1991 (the Act).

4. By consent it was agreed that this matter could be adequately determined in the absence of the parties, and the Tribunal agreed to review the reviewable decision in accordance with s 34J of the Administrative Appeals Tribunal Act 1975 by considering the documents lodged.

   THE FACTS

5. On 14 November 2014 the Applicant transferred $358,364 from his MLC MasterKey Superannuation Account (the Superannuation Account) to his Masterkey Pension Fundamentals Account (the Pension Account) – Exhibit 1 T14 p. 134.

6. The Applicant informed AAT1 that in 2017 he wished to add extra funds to his Pension Account, which extra funds came from his deceased father-in-law’s estate. The Applicant also claimed that MLC advised him that in order to effect that result he was required to transfer the balance of his Pension Account into his Superannuation Account and then top-up the Superannuation Account balance with the estate monies. Only after this was effected could the funds then be transferred back into the Pension Account – Exhibit 1 T2 p.8 para 15.

7. On 17 April 2017 the Applicant transferred the balance of his Pension Account into his Superannuation Account and then supplemented the Pension Account with the inheritance money from his deceased father-in-law’s estate. On the following day the Applicant transferred the balance of the Superannuation Account into the Pension Account – Exhibit 1 T5 p. 42, T11 p. 103.

8. The Applicant claimed an age pension on 23 January 2019 and provided a Centrelink Schedule prepared by MLC – Exhibit 1 T5 p. 42. MLC noted that the Applicant had purchased an account-based income stream account (the Pension Account) on 18 April 2017 and that the original purchase price was $546,759.64. The gross nominated account payment was stated to be $28,090.00 and the balance as at 1 July 2018 was $561,700.96.

9. On 15 April 2019 the Applicant’s age pension claim was rejected and, in addition, his Seniors Health Card was cancelled from 23 January 2019 – Exhibit 1 T7 p.96. The reason given for the cancellation of the Seniors Health Card was as follows:

   “Our records show that your and your partner’s income is now too high for you to be eligible for the card.”

10. The Applicant sought a review of this decision, but on 29 July 2019 the Authorised Review Officer (ARO) found that the decision was correct – Exhibit 1 T12 pp. 104 – 106. The reasons given by the ARO were clear and well-reasoned, and are set out below – Exhibit 1 T12 pp. 105 – 106:

    “The income test for the Commonwealth Seniors Health Card (CSHC) is based on adjusted taxable income (ATI) of the customer (and their partner if applicable) plus a deemed amount of income from account-based income streams for the applicable financial year.

    Adjusted taxable income is the sum of –

    ·taxable income

    ·total net investment losses

    ·target foreign income on which Australian income tax is not paid

    ·reportable superannuation contributions

    ·employer provided fringe benefits in excess of $1000

    The deemed income is calculated based on the amount held in the income stream and is added to the ATI amount, which is the combined total used in the CSHS income test. Deeming will only be applied to account-based income stream(s) and not any other financial assets.

    A person who is an owner of an account-based pension purchased before 1 January 2015 and the holder of a CSHC on 31 December 2014, will not have their account-based pension included in the income test as long as they:

    ·continue to hold a CSHC, and

    ·retain the same account-based pension.

    If the person ceases to be the holder of a CSHC for any period of time, their account-based pension will be subject to the income test if they become a CSHC holder again.

    If they purchase a new account-based pension after 31 December 2014 or roll over an existing account-based pension into a new account-based pension after 31 December 2014, their new account-based pension will be subject to the income test.

    The reference tax year is usually the tax year immediately preceding the current year. If the applicant has not received a Tax Notice of Assessment for the reference tax year, the tax year immediately preceding will be the reference tax year.”

11. The ARO then set out the income for the Applicant and his wife for the 2017-2018 financial year, and considered whether the Applicant’s Pension Account should be “grandfathered” and thereby exempt from the deeming provisions for CSHC purposes. The ARO concluded – Exhibit 1 T12 p. 106:

    “According to an MLC Masterkey publication –

    ‘You can’t add further contributions or other amounts directly to your pension account after it has started. However, you can transfer your pension account balance back to your MLC super account, add more money (if eligible) and then recommence your pension.’

    I have therefore decided your current MLC pension account is a new product established after 1 January 2015 and is subject to the deeming provisions for CSHC purposes. I have further decided the decision to cancel your CSHC due to income was correct.”

12. The Applicant sought review of the ARO’s decision by AAT1. In affirming the ARO’s decision, Member Brakespeare provided the following reasons – Exhibit 1 T2 p. 9:

    “18. The tribunal takes the view that when Dr Reiter transferred all of his funds out of his allocated pension account back to his super account on 17 April 2017, the allocated pension fund ceased to exist in its original form. The following day he transferred a much larger sum of money back to an allocated pension fund.  Whilst the fund retains the same name and the same account number the tribunal takes the view that Dr Reiter was purchasing a new product and the allocated pension lost its preserved (or grandfathered) status at that time.  In the tribunal’s view the reason for Schedule 7 is to preserve what was already in place prior to the change in the Calculator from 1 January 2015 so as not to disadvantage decisions made by people in respect of their allocated pension prior to the legislative change.  Its purpose was not to allow someone to significantly change the nature of the allocated pension fund, in particular to avoid deeming on new funds used to purchase allocated pensions post 1 January 2015.

    19. The tribunal therefore finds that Dr Reiter purchase a new long-term financial asset on 18 April 2017 which is subject to the deeming provisions in Step 1A of the method statement…”

    THE LAW

13. Subsection 1061ZG(1)(d) of the Act provides that a person is qualified for a Seniors Health Card if the person satisfies the Seniors Health Card income test. Cancellation of a Seniors Health Card occurs if the person subsequently fails to be qualified – s 86 Social Security (Administration) Act 1999.

14. The Act prescribes an income limit which is worked out using the Seniors Health Card Income Tax Calculator – s 1071-1 of the Act. The “Method Statement” prescribed by s 1071-1 contains the following Steps that are to be followed:

    “Step 1. Work out the amount of the person’s adjusted taxable income for the reference tax year.

    Step 1A. If, at the test time, the person, or the person’s partner (if any), has at least one long-term financial asset (see point 1071-13), work out the person’s deemed income amount under:

    …

    (b) if, at the test time, the person is a member of couple – point 1071-11B.

    Step 1B. Work out the sum of the amounts at step 1 and step 1A (if any).

    Step 2. Work out the person’s senior health card income limit using point 1071-12.

    Step 3. Work out whether the amount in step 1B exceeds the seniors health card income limit.

    …

    Step 5. If the amount at step 1B is equal to or exceeds the person’s senior health card income limit, the person does not satisfy the seniors health card income test.”

15. The Applicant is married, and therefore is a member of a couple and has a partner for the purposes of Step 1A.

16. It is not disputed that as the date of cancellation of the Seniors Health Card (23 January 2019), the income limit for a partnered person was $87,884. It is also not disputed that the Applicant’s partnered income was $100,973 of which $16,318 was deemed income. The inclusion of the deemed income resulted in the Applicant no longer meeting the prescribed income limit.

17. Step 1A provides for the calculation of a deemed income amount for person (and/or their partner) holding a long-term financial asset or assets. Section 1071-13 defines that term as follows:

    “For the purposes of this Part, a long-term financial asset is:

    (a) financial investment within the meaning of paragraph (i) of the definition of financial investment in subsection 9(1)……”

18. Paragraph 9(1)(i) of the Act defines a “financial investment” to include “an asset-tested income stream (long term) that is an account-based pension within the meaning of the Superannuation Industry (Supervision) Regulations 1994.”

19. It is not disputed that the Pension Account falls within the definition of “financial investment” in s 9(1)(i).

20. What is in dispute is whether the Pension Account as reconstituted with the “top up” income is subject to the deeming provisions that apply since 1 January 2015, or, in contradistinction, the reconstituted Pension Account continues to be protected by the preservation principles provided for in Schedule 7 of the Social Services and Other Legislation Amendment (2014 Budget Measures No 6) Act 2014 (the Amendment Act).

21. Schedule 7 provides for the inclusion of untaxed superannuation income in the assessment for the Seniors Health Card, but exempts products purchased prior to 1 January 2015 by existing cardholders.

22. The Explanatory Memorandum circulated by the then Minister for Social Services, the Honourable Kevin Andrews MP, contained the following information about the rationale for the legislation:

    “The Schedule will include tax-free superannuation income in the assessment of income for qualification for the seniors health card, ensuring people on similar incomes will be treated the same for concession card purposes. The income will be calculated using the same method as for income support payments from 1 January 2015, using income deemed to be generated by various account-based superannuation income streams, regarding them as financial investments.

    From 1 January 2015, various long-term financial assets which produce an income stream will be counted as financial investments, and subject to the deemed income rules. The products to be treated in this way are an asset-tested income stream (long term) that is an account-based pension within the meaning of the Superannuation Industry (Supervision) Regulations 1994, and an asset-tested income stream (long term) that is an annuity (within the meaning of the Superannuation Industry (Supervision) Act 1993) provided under a contract that meets the standards, if any, determined under subsection 9(1EA).

    Holders of a seniors health card immediately before commencement of this measure will not have the deemed rate of their tax-free superannuation income for products held prior to the commencement counted in the income test from commencement, unless they cease to be the holder of a card after this time.  However, if they have a partner who does not hold a seniors health card, then their partner’s income from a superannuation product will be counted from commencement. Income from superannuation products cardholders purchase following commencement will be included in the test….”

    CONSIDERATION

    Introduction

23. The key issue to be determined is whether the Applicant purchased a new pension account in April 2017 and is subject to the previously discussed deeming provisions.

    Applicant’s submissions

24. The Applicant makes the following submissions – Exhibit 3:

    “3. Under Point 16 of the AAT’s decision, the Member acknowledges MLC provisions that allow a person to ‘refresh’ an existing pension fund by transferring money between the pension and the superannuation account.  The alternative process allowed by MLC is to ‘start a separate Pension’; however, I did not start a ‘separate Pension’ on 18 April 2017: I only ‘refreshed’ the existing pension account. Had I started a ‘separate’ pension account, the account number would have changed. It remained the same.

    4. MLC’s Portfolio Review on 19.09.2019. covering the period 12.11.2014 through 19.09.2014 refers only to account number 004916295; therefore, MLC acknowledges the continuation of the existing pension and super accounts through that period.”

25. The Applicant also made the following submissions – Exhibit 3:

    “1. I can find no legislative provision as provided by the Department or through my own research that removes a person’s exemption from the deeming provisions for the Seniors Health Card simply through a change in that person’s existing pension and superannuation account, or even through the purchase of a new account absorbing funds from an account existing before 1 January 2015.

    2. While the Department relies on Schedule 7, Part 1 of the Social Services Amendment Act 2014, 15.51.46 only requires a person to have held the Seniors Health Card and an ‘asset-tested income stream’ prior to 1 January 2015.

    3. Section 118ZZA (at the end of the Seniors Health Card Income Test simply refers under 118ZZA – 12 (b) to a person holding a ‘certain kind of long-term financial asset’ and the Seniors Health Card on or before 1 January 2015. It does not refer to a ‘change’ in that asset as grounds for disqualification.

    4. In the absence of legislation enabling the Department to remove an individual’s exemption from deeming provisions in the qualification test for the Seniors Health Care if that individual makes changes to an existing long-term asset stream, I contend that MLC’s issuance of the Centrelink schedule on 23 January 2019 was in error and that the Department did not have the authority to cancel my Seniors Health Card on 15 April 2019.”

    Respondent’s submissions

26. The Respondent’s submissions are contained in the Secretary’s Statement of Facts & Contentions dated 20 May 2020 – Exhibit 4.

27. The Respondent made the following key submissions:

    “24. The Applicant argues that the pension account did not change and remained the same account that was purchased on 14 November 2014. The Applicant told the AAT1 that his wife received funds from a deceased estate. He was advised by MLC that he could not deposit these funds into his pension account but he could transfer the pension account funds to his superannuation account. He could then top up his superannuation account with the additional funds and then transfer all of the funds to a pension account.

    25. The Secretary contends that the MLC Centrelink Schedule and the operation of the superannuation legislation show that a new account was purchased on 17 April 2017.  The new pension account did not meet the requirements of Schedule 7 of the Amendment Act and the deeming rules that applied after 1 January 2015 apply to the pension account. Therefore the deemed income must be included in the Applicant’s Seniors Health Card income test.

    26. The Secretary contends that the reason the Applicant was advised to transfer the funds was that it was a requirement under the superannuation legislation. One of the requirements for an account to continue to be treated as superannuation income stream for taxation purposes is that the capital supporting the income stream can’t be added to by way of contribution or rollover once the income stream has started (reg 1.06(1)(a)(ii) of the Superannuation Industry (Supervision) Regulations 1994). Therefore MLC correctly advised the Applicant that the funds could not be deposited into the pension account. MLC was not able to lawfully accept any new capital in to the pension account and still call it a superannuation income stream. MLC therefore opened a new pension account which would allow the Applicant to transfer all of the funds plus the additional capital into a new superannuation income stream.

    27. The Applicant has provided statements from MLC which show transactions from 2014 to 2019 for the pension account that all appear to be in the one account and using the same account number. The Secretary contends that this does not prove that anew account was not created.  MLC has kept the appearance of there being one account for the customer’s benefit.  However, it has clearly stated in the MLC Centrelink Schedule that a new pension account was purchased on 18 April 2017”

    (footnotes omitted)

    Analysis

28. The resolution of this matter requires an analysis of the interaction between the superannuation legislative regime and the social security legislative regime.

29. When a person who has been accumulating retirement savings moves from the accumulation phase to the benefit payment phase important retirement planning decisions have to be made. Such a person may determine to take their superannuation retirement benefits in one or more lump sums, in one or more income streams (whether in the form of a pension or an annuity) or a combination of lump sums and income streams.

30. The superannuation legislative regime allows persons to make conscious decisions as to the best options for their particular circumstances. For example, lump sum withdrawals may be the appropriate vehicle for capital purchases or significant debt reductions.

31. There are a number of advantages for those persons who access a superannuation income stream. Whilst, as a general rule, all superannuation withdrawals are tax free once a person is 60 years or older, the superannuation fund’s investment income and capital gains on the income stream are also tax-free for the fund. It is partly for this reason that there is a transfer balance cap of $1.6 million on the amount a person can transfer at the retirement phase to support superannuation pension income streams.

32. It is important to understand that a person who has established a superannuation pension income stream is in an advantageous financial position vis-à-vis other persons who seek to draw down superannuation assets in particular or other financial assets in general.

33. As previously explained, Step 1A requires the calculation of a person’s deemed income amount by reference to any long term financial asset held by the person and their partner. The term “long-term financial asset” is defined by s 9(1)(i) of the Act to mean an account-based pension with the meaning of the Superannuation Industry (Supervision) Regulations 1994 (the Superannuation Regulations).

1. There is, consequently, a linkage between the two legislative regimes. In order to understand what a “long term financial asset” is for the purposes of the social security regime, consideration must be given to the operation of the superannuation legislative regime.

2. The term “pension” is defined in s 10(1) of the Superannuation Industry (Supervision) Act 1993 (the Superannuation Act), except for an old age pension, to include “a benefit provided by a fund, if the benefit is taken, under the regulations, to be a pension for the purposes of this Act.”

3. Subregulation 1.06(1) of the Superannuation Regulations defines a pension for the purposes of s 10 of the Superannuation Act as follows:

   “(1) A benefit is taken to be a pension for the purposes of the Act if:

   (a)it is provided under the rules of the superannuation fund that:

   (i)     meet the standards of subregulation (9A) or 1.06A(2); and

   (ii)    do not permit the capital supporting the pension to be added to by way contribution or rollover after the pension has commenced…”

4. It is tolerably clear, then, that for a benefit to taken to be a pension for the purposes of the Superannuation Act, the capital supporting the pension cannot be added to by either a contribution or contributions or rollover once the pension has commenced.

5. The Respondent correctly contended that MLC was not lawfully able to accept new capital contributions to the Pension Account after it was established. The only lawful means open to MLC to effect the Applicant’s wish to add inheritance funds to the Pension Account balance was either the stratagem adopted of transferring the money into the Superannuation Account, topping it up, and then transferring it back to the Pension Account or opening a totally new account.

6. However, for the purposes of the Act either stratagem had the same effect. The Pension Account established in November 2014 ceased to exist on 17 April 2017 when all the funds were transferred into the Superannuation Account. The nomenclature adopted by MLC for the Pension Account is, with respect, irrelevant for the purposes of ascertaining if a new account was established. In short, the fact that MLC ascribed to the Pension Account before and after the transfer in and out the same account number and name is not determinative of whether the obligation imposed by subregulation 1.06(1)(a)(ii) has been met.

7. In any event, MLC in the Centrelink Schedule previously discussed stated that the purchase date of the topped up Pension Account was 18 April 2017 – Exhibit 1 T5 p. 42. This is in accord with the advice that MLC has provided to its pension account holders, namely – Exhibit 1 T2 p. 8:

   “You can’t add further contributions or other amounts directly to your Pension account after it has started.”

8. This advice is consistent with the clear wording of subregulation 1.06(1)(a) of the Superannuation Regulations quoted above.

9. The Applicant’s submissions have, on their face, much to commend them if regard was had to the Act alone. If not for the specific provisions in the Superannuation Act and Superannuation Regulations, there is an inherent logic in what the Applicant contended. Unfortunately, for the Applicant, the superannuation legislative regime contains clear guidelines on how a superannuation pension income stream has to operate. Specifically, such an income stream cannot be added to or be subject to rollover once it is commenced.

10. It is not disputed that the Pension Account was added to by means of being “topped up” by inheritance moneys. For this reason, the Pension Account operating before 1 January 2015 ceased to operate and a new Pension Account was established. The new Pension Account was subject to the deeming rules established after 1 January 2015.

    DECISION

11. The Decision under review is affirmed.

I certify that the preceding 44 (forty-four) paragraphs are a true copy of the reasons for the decision herein of Deputy President J Sosso.

....................[SGD].................................

Associate

Dated: 15 July 2020

Hearing:	Heard on the papers
Decision Reserved	11 June 2020
Applicant:	Dr David Reiter
Advocate for the Respondent:	Ms Donna Smith
Solicitor for the Respondent:	Services Australia