Sayer and Secretary, Department of Family and Community Services
[2003] AATA 891
•20 August 2003
Administrative
Appeals
Tribunal
DECISION AND ORAL REASONS FOR DECISION [2003] AATA 891
ADMINISTRATIVE APPEALS TRIBUNAL )
) Nos S2002/400 & S2002/401
GENERAL ADMINISTRATIVE DIVISION ) Re CLIFFORD SAYER AND DONNA SAYER Applicants
And
SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES
Respondent
DECISION
Tribunal Senior Member WJF Purcell Date20 August 2003
PlaceAdelaide
Decision For the reasons given orally at the Hearing of this matter, the Tribunal affirms the decisions under review.
(Signed)
WJF PURCELL
(Senior Member)
CATCHWORDS
SOCIAL SECURITY – pensions, benefits and allowances – Austudy – Parenting Payment Partnered – whether net profit of Family Trust should be attributed to applicant as income – whether prior tax year losses of Family Trust can be carried forward to reduce net income
Social Security Act 1991 sections 8, 11, 1207P, 1207V, 1207X, 1207Y, 1208, 1208A, 1208B
Income Tax Assessment Act 1997 section 36-15
ORAL REASONS FOR DECISION
20 August 2003 Senior Member WJF Purcell 1. These are applications for review of two decisions of the Social Security Appeals Tribunal (the SSAT) of 23 September 2002, which affirmed decisions of an Authorised Review Officer of 5 June 2002, not to allow prior year losses to reduce a Family Trust’s assessable income in relation to the rate of Austudy payments, and Parenting Payment Partnered payments.
2. The evidence before the Tribunal comprised the documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (the T Documents). The applicant, Mr Sayer, appeared on his own behalf, and on behalf of his wife. Ms Pugsley represented the respondent (the Department), which made available Mr Davies to assist the applicant and the Tribunal in relation to the relevant current legislative framework.
3. The Sayer Family Trust (the Trust) was set up some time in the mid 1990s. As from 19 March 2001, the applicant and his wife (the wife) commenced receiving Austudy and Parenting Payment Partnered (PPP) payments respectively. On 1 January 2000, legislation was introduced which determined that when a private trust or company is recognised as a designated private trust or company, its assets and income may be attributed to a person who controls, or has contributed to, these structures.
4. On 29 January 2002, the applicant advised, in response to a questionnaire, that the appointor of the Trust was himself; that the trustees were himself and the wife; that both he and the wife were beneficiaries under the Trust; and that he has the power to veto a trustee’s decision, replace a trustee, control a trustee’s actions or change the trust deed. On 12 February 2002, the delegate decided to attribute 100% control of the Trust to the applicant, and on 13 March 2002, the Department decided to attribute all net income from the Trust to the applicant, and not to allow previous year losses to be carried forward as allowable deductions against current year income.
5. An annual income figure of $11,806 from the Trust was used to assess the applicant’s rate of Austudy and his wife’s rate of PPP. This also had the effect of reducing his Austudy income bank to $0 as from 11 June 2002. On 5 June 2002 an Authorised Review Officer affirmed the decisions, and on 23 September 2002 the SSAT affirmed both decisions under review.
6. The applicant said in evidence that the business intermittently made and lost money. It was set up on an accrual accounting basis. More loans were made to the business to assist in its operation. As loans were made, the Department deemed the applicant and the wife to have a rate of return from these loans. Ultimately they sold their house, with a view to repurchasing, to pay debts to the Australian Tax Office (ATO) and creditors, including the bank.
7. The applicant argues that the Department has recognised the loans made to the business – they deem a rate of return from these loans, but appear to be unable to recognise these loans when they attribute the income immediately to him. By deeming and attributing a rate of return from the loans, and also attributing the income, the Department appears to be double counting.
8. The applicant submits that the loans were made to pay urgent requirements of some creditors and the ATO. These debts accrued in the past at various times, however they had to be paid from income that was coming in now. The income was attributable to the applicant, but not the business expenditure that incurred the loans which it had to pay. The Department recognises cash accounting and accrual accounting, but the applicant appears to be penalised for accrual accounting – the tax losses from before. If he had operated on a cash accounting basis, as the payments were made, they would have been recognised as a business expense, and would have legitimately reduced the attributable income.
9. The applicant maintains that the documentation provided by the Department referred to its discretion as to the attribution of income from a family trust, and that discretion would cover the appropriate deductibility of these legitimate losses. In addition, he understands the Department notified other trust beneficiaries who were recipients of Social Security benefits, some 8 months before the legislation came into effect. If he and his wife had known of the effects of the legislation they could have rearranged their affairs, and might not have sold their house, and been in the situation they find themselves. He maintains also that the written information provided by the Department made no mention of the ineligible deductions, and so he and his wife were taken by surprise - they still have the loans to repay, and are being greatly disadvantaged.
10. The Department contends that as from 1 January 2000, for the purposes of determining the income to be used when assessing a person’s entitlement to payments under the Social Security Act 1991 (the Act), where a private trust is recognised as a designated private trust, the assets and income of the trust may be attributed to the person who controls or has contributed to the Trust. Section 1207P of the Act sets out the test for a designated private trust as follows:
“(1) For the purposes of this Part, a trust is a designated private trust unless:
(a) all of the following conditions are satisfied:
(i) the trust is a fixed trust;
(ii) the units in the trust are held by 50 or more persons;
(iii)the trust was not created, continued in existence or operated under a scheme that was entered into or carried out for the sole or dominant purpose of enabling any individual or individuals to avoid the application of this Part and/or Division 11A of Part IIIB of the Veterans’ Entitlements Act; or
(b) the trust is a complying superannuation fund (see subsection (3)); or
(c) the trust is an excluded trust (see subsection (4)).
…”
11. The Department contends that the Trust is a designated private trust. In addition, to determine whether the assets or income of the Trust are to be attributed to a person, it is necessary to establish who is the ultimate or actual controller of the Trust. Once it has been established that a person passes the control test, the facts of that person’s case are examined closely, with a view to working out whether, and to what extent, the assets and income of the Trust will be attributed to the person.
12. Section 1207V of the Act sets out the conditions that must be met for an individual in relation to a trust to satisfy the control test, and as far as is relevant for the purposes of this review, provides:
“(1)For the purposes of this Part, a trust is a controlled private trust in relation to an individual if the trust is a designated private trust and:
(a) the individual passes the control test set out in subsection (2); or
(b) the individual passes the source test set out in subsection (3).
Control test
(2)For the purposes of this section, the individual passes the control test in relation to a trust if:
(a)the individual, or an associate of the individual (other than an associate covered by paragraph 1207C(1)(j)), is the trustee, or any of the trustees, of the trust; or
(b)a group in relation to the individual was able to remove or appoint the trustee, or any of the trustees, of the trust; or
(c)a group in relation to the individual was able to vary the trust deed or to veto the decisions of the trustee; or
…
(4)A reference in this section to a group in relation to an individual is a reference to:
(a) the individual acting alone; or
(b) an associate of the individual acting alone; or
(c)the individual and one or more associates of the individual acting together; or
(d) 2 or more associates of the individual acting together.
…”
13. The applicant is the appointor and a trustee of the Trust with the ability to remove or appoint any of the trustees. He also has the stated ability to vary the Trust deed to veto the decisions of the trustees, and to exercise these powers alone. In these circumstances, pursuant to section 1207V(2) of the Act, he is the controller of the Trust.
14. The attribution of assets and income of the Trust is determined under section 1207X(2) of the Act, which provides:
“…
Trust
(2) For the purposes of this Part, if:
(a) a trust is a controlled private trust in relation to an individual; and
(b)the trust is not a concessional primary production trust in relation to the individual (see section 1208U);
then:
(c)the individual is an attributable stakeholder of the trust unless the Secretary otherwise determines; and
(d)if the individual is an attributable stakeholder of the trust—the individual’s asset attribution percentage in relation to the trust is:
(i) 100%; or
(ii)if the Secretary determines a lower percentage in relation to the individual and the trust—that lower percentage; and
(e)if the individual is an attributable stakeholder of the trust—the individual’s income attribution percentage in relation to the trust is:
(i) 100%; or
(ii)if the Secretary determines a lower percentage in relation to the individual and the trust—that lower percentage.
Determinations
(3) A determination under this section is to be in writing.
(4) A determination under this section has effect accordingly.
(5)In making a determination under this section, the Secretary must comply with any relevant decision-making principles.”
15. The Department contends that the applicant is an attributable stakeholder and that there is no reason to determine that he be attributed with less than 100% of the Trust.
16. Section 1207Y of the Act sets out the manner in which income is to be attributed to a individual. It provides:
“(1) For the purposes of this Act, if:
(a)during a particular derivation period of a company or trust, the company or trust derives an amount that is ordinary income; and
(b)an individual is an attributable stakeholder of the company or a trust throughout the attribution period that relates to the derivation period of the company or trust; and
(c) the attribution period begins on or after 1 January 2002; and
(d) if that amount:
(i)had been derived by the individual instead of by the company or trust; and
(ii)in the case of income accounted for on an accrual basis as mentioned in subsection (5)—had been so derived by the individual on a cash basis;
that amount would have been ordinary income of the individual; and
(e) that amount is not excluded income (see subsection (2));
then, in addition to any other ordinary income of the individual, the individual is taken to receive, during that attribution period, ordinary income at an annual rate equal to the individual’s income attribution percentage of the amount worked out using the formula:
Amount referred to in paragraph (a) x 365
Number of days in the derivation period
Excluded income
(2)The Secretary may, by writing, determine that, for the purposes of the application of subsection (1) to a specified individual and a specified company or trust, a specified amount is excluded income.
(3) A determination under subsection (2) has effect accordingly.
(4)In making a determination under subsection (2), the Secretary must comply with any relevant decision-making principles.
Accrual v. cash accounting
(5)If the income of a company or trust is accounted for on an accrual basis for the purposes of section 6-5 of the Income Tax Assessment Act 1997, the ordinary income of the company or trust is accounted for on an accrual basis for the purposes of this section.
(6)If the income of a company or trust is accounted for on a cash basis for the purposes of section 6-5 of the Income Tax Assessment Act 1997, the ordinary income of the company or trust is accounted for on a cash basis for the purposes of this section.”
17. The Trust’s gross income to be taken into account is in accordance with sections 1208 and 1208B of the Act. Section 1208, as far as is relevant for the purposes of this review, provides:
“(1)For the purposes of this Division, the ordinary income of a company or trust is to be worked out as if:
(a)exempt lump sums were not excluded from the definition of ordinary income in subsection 8(1); and
(b)each reference in section 8 to a person included a reference to a company or trust; and
(c) the following provisions had not been enacted:
(i) subsection 8(7A);
(ii) subsection 8(8);
(iii) subsection 8(11);
(iv) Part 3.10.
(2) Paragraphs (1)(a) and (c) have effect subject to paragraph 1207Y(1)(d).
(3)A reference in this Division to the ordinary income of a company or trust is a reference to the company’s or trust’s gross ordinary income from all sources calculated without any reduction, other than a reduction under section 1208A or 1208B.”
18. Ordinary income is defined in section 8(1) of the Act as income that is not maintenance income or an exempt lump sum as described in section 11 of the Act. The Department contends that the gross income of the Trust for the 2000/2001 financial year is gross ordinary income for the purposes of the Act. Section 1208(3) provides that the gross ordinary income of a trust may be reduced only by a reduction allowed for under sections 1208A or 1208B of the Act. The Trust income tax return for the 2000/2001 financial year shows expenses of:
Depreciation expenses $849
Motor vehicle expenses $2,701All other expenses $3,075
The income tax return also shows tax losses carried forward of $201,265.
19. Section 1208B of the Act provides:
“(1)For the purposes of this Division, if a company or trust carries on a business or holds an investment, the company’s or trust’s ordinary income from the business or investment is to be reduced by:
(a)losses and outgoings that relate to the business or investment and are allowable deductions for the purposes of section 51 of the Income Tax Assessment Act 1936 or section 8-1 of the Income Tax Assessment Act 1997, as appropriate; and
(b)depreciation that relates to the business or investment and is an allowable deduction for the purposes of subsection 54(1) of the Income Tax Assessment Act 1936 or Division 42 of the Income Tax Assessment Act 1997; and
(ba)amounts that relate to the business or investment and can be deducted for the decline in value of depreciating assets under Subdivision 40-B of the Income Tax Assessment Act 1997; and
(c)amounts that relate to the business or investment and are allowable deductions under any other provision of the Income Tax Assessment Act 1936 or the Income Tax Assessment Act 1997.
(2) However, the rule in subsection (1) does not apply to:
(a) an ineligible deduction (see subsection (3)); or
(b) an ineligible amount (see subsection (4)); or
(c) an ineligible part of a deduction (see subsection (5)).
(3)The Secretary may, by writing, determine that a specified deduction is an ineligible deduction for the purposes of this section.
(4)The Secretary may, by writing, determine that a specified amount is an ineligible amount for the purposes of this section.
(5)The Secretary may, by writing, determine that a specified part of a specified deduction is an ineligible part of the deduction for the purposes of this section.
(6) A determination under subsection (3), (4) or (5) has effect accordingly.
(7)A determination under subsection (3), (4) or (5) is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901.”
20. The relevant disallowable instrument in this matter is The Social Security (Attribution of Income – Ineligible Deductions) Determination 2001, which provides for all ineligible deductions for the purposes of section 1208B of the Act, and reads, in part, as follows:
“Part 2 Ineligible deductions and ineligible parts of deductions
Division 2.1 Ineligible deductions
4 Ineligible deductions – ITAA 1936 and ITAA 1997
(1) For subsection 1208B(3) of the Act:
(a)an allowable deduction for the purposes of a provision of ITAA 1936 mentioned in an item in Part 1 of Schedule 1 is an ineligible deduction; and
(b)an allowable deduction for the purposes of a provision of ITAA 1997 mentioned in an item in Part 2 of Schedule 1 is an ineligible deduction.
(2) For subsection 1209C(3) of the Act:
(a)an allowable deduction for the purposes of a provision of ITAA 1936 mentioned in an item in Part 1 of Schedule 2 is an ineligible deduction; and
(b)an allowable deduction for the purposes of a provision of ITAA 1997.
Schedule 1Ineligible deductions for section 1208B of the Act
(subsection 4(1))
Part 2Ineligible deductions: ITAA 1997
Item Provision General description
206 Section 36-15 How to deduct tax losses of earlier income years”
21. Section 36-15 of the Income Tax Assessment Act 1997 provides:
“(1) A *tax loss for a *loss year is deducted in a later income year as follows.
If you have no net exempt income
(2)If your total assessable income for the later income year exceeds your total deductions (other than *tax losses), you deduct the tax loss from that excess.
If you have net exempt income
(3)If you have *net exempt income for the later income year and your total assessable income (if any) for the later income year exceeds your total deductions (except *tax losses), you deduct the tax loss:
(a) first, from your net exempt income; and
(b)secondly, from the part of your total assessable income that exceeds those deductions.
(4)However, if you have *net exempt income for the later income year and those deductions exceed your total assessable income, then:
(a) subtract that excess from your net exempt income; and
(b) deduct the tax loss from any net exempt income that remains.
To work out your net exempt income: see section 36-20.
General
(5)If you have 2 or more *tax losses, you deduct them in the order in which you incurred them.
(6)A *tax loss can be deducted only to the extent that it has not already been deducted.
(7)If you cannot deduct all or part of your *tax loss in an income year, you can carry forward to the next income year the undeducted amount. You then apply this Subdivision to work out if you can deduct the tax loss in that income year.
Note: Your tax losses under this Division may be reduced if any of your commercial debts have been forgiven in the income year: see Subdivision 245-E of Schedule 2C to the Income Tax Assessment Act 1936.”
22. The Department contends finally, that the earlier income year losses claimed by the Trust in its 2000/2001 tax return are ineligible deductions, and therefore do not operate to reduce the Trust’s gross ordinary income for the purposes of the Act. Therefore the Trust’s ordinary net income for that financial year, after allowable deductions, is $11,806, and this income is to be used in assessing the rate of Austudy for the applicant, and his wife's rate of PPP under the Act.
23. It is clear that the applicant considers that the Department is in effect "double dipping" by attributing income to the Trust, and refusing to recognise the genuine previous losses. In my view, these losses are properly deductible under the Income Tax Assessment Act 1997, but it is the intention of Parliament that in relation to the Social Security Act 1991, as and from 1 January 2000, these losses are to be ineligible deductions. As Mr Davies informed the Tribunal, this brings trusts into line with the Social Security Act's treatment of partnerships and sole traders. It in effect has "lifted the veil" of family trusts.
24. The applicant says that he thought the Department’s discretion to attribute the income should extend to cover allowability of the past losses. This submission cannot succeed. Whatever might be the Department's decision as to the attribution of the income, the assessment of the income cannot, under the current legislation take into account ineligible deductions.
25. I note the applicant's complaints about the lack of prior notice, and the paucity of information regarding ineligible deductions in the Department's handouts, but the legislation does not provide the discretion to the decision maker, and hence this Tribunal, to take these complaints into account in applying the legislation. The legislation is specific. Section 1208B(3) of the Act provides that the Secretary may determine a specified deduction as an “ineligible deduction”. Such a determination has been made, and tax losses of earlier income years are such an “ineligible deduction”. The decisions must be affirmed.
26. For these reasons the Tribunal affirms the decisions under review.
I certify that the 26 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member WJF Purcell
Signed: .......................................................................................
AssociateDate of Hearing 20 August 2003
Date of Decision 20 August 2003
Counsel for the Applicant In person
Solicitor for the Applicant -
Counsel for the Respondent Ms A Pugsley
Solicitor for the Respondent Service recovery Team
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