Sullivan and Secretary, Department of Social Services (Social services second review)
[2022] AATA 2890
•8 September 2022
Sullivan and Secretary, Department of Social Services (Social services second review) [2022] AATA 2890 (8 September 2022)
Division:GENERAL DIVISION
File Number(s):2020/7925 & 2020/7927
Re:John Sullivan and Sheila Sullivan
APPLICANTS
AndSecretary, Department of Social Services
RESPONDENT
Decision
Tribunal:Senior Member A Poljak
Date:8 September 2022
Place:Sydney
The decision under review is set aside and remitted with directions that Mr and Mrs Sullivan’s age pension be assessed and calculated on the basis that:
(a)during the period from 24 May 2016 to 13 March 2018, Mr Sullivan is attributed with 35% of the income and assets of Tech Knowledges; and
(b)during the period from 14 March 2018 to 15 April 2019, Mr Sullivan is attributed with 0% of the income and 50% of the assets of Tech Knowledges.
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Senior Member A Poljak
Catchwords
SOCIAL SECURITY – age pension – calculation of rate of age pension – attribution of income and assets – decision under review set aside and remitted.
Legislation
Social Security Act 1991 (Cth)
Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2017 (Cth)REASONS FOR DECISION
Senior Member A Poljak
8 September 2022
On 23 April 2014, the applicants, Mr and Mrs Sullivan, lodged their claims for age pension. In reviewing the claims, Services Australia (the Agency) assessed Tech Knowledges Pty Ltd (Tech Knowledges) on 12 May 2014 in relation to the 2013 financial year and decided to attribute 35% of the income and assets from Tech Knowledges to Mr Sullivan. On 16 June 2014, the Agency granted Mr and Mrs Sullivan’s claim for age pension from 10 April 2014.
Over the years, the Agency conducted an assessment of Tech Knowledges and adjusted Mr and Mrs Sullivan’s age pension fortnightly payments accordingly.
On 12 October 2018, in relation to the 2015, 2016 and 2017 financial years, the Agency decided to:
(a)continue to attribute 35% of the income and assets of Tech Knowledges to Mr Sullivan from 24 May 2016; and
(b)attribute 50% of the income and assets of Tech Knowledges to Mr Sullivan from 14 March 2018.
On 17 September 2019, an Authorised Review Officer (ARO) affirmed the decision made on 12 October 2018 and on 7 August 2020, an ARO affirmed the decision to calculate Mr and Mrs Sullivan’s rate of age pension based on assessing their combined income as $13,298.19 from 24 May 2016; and $107,850.44 from 14 March 2018.
On 5 November 2020, the Social Services and Child Support Division of the Administrative Appeals Tribunal affirmed the decisions of the ARO. This is the decision under review in these proceedings.
Issues
The issues to be determined in this matter are whether Mr and Mrs Sullivan have been paid the correct rate of age pension. This requires consideration of whether:
(a)Tech Knowledges is a controlled private company in relation to Mr Sullivan;
(b)Mr Sullivan is an attributable stakeholder of Tech Knowledges; and
(c)Mr Sullivan should be attributed with less than 100% of the income and assets of Tech Knowledges and if so, what percentage should be attributed.
Relevant Legislative Provisions
7. Section 55 of the Social Security Act 1991 (Cth) (the Act) provides that if a person is not permanently blind, their rate of age pension is to be worked out using Pension Rate Calculator A at the end of section 1064. Pension Rate Calculator A at the end of section 1064 of the Act provides that a person’s rate must take into account their assets and ordinary income.
Part 3.18 of the Act provides for the attribution to individuals of the assets and income
of private companies. For assets or income to be attributable to an individual, the
following must be satisfied:(a)the company or trust must be a designated private company or designated private trust in accordance with sections 1207N and 1207P of the Act; and
(b)the company or trust must be a controlled private company or private trust in relation to the individual in accordance with sections 1207Q and 1207V of the Act; and
(c) the individual must be an attributable stakeholder of the company or trust in accordance with section 1207X of the Act.
Section 1207N of the Act, which relates to determining whether a company is a ‘designated private company’, states:
(1) For the purposes of this Part, a company is a designated private company at a particular time if:
(a) the company satisfies at least 2 of the following conditions in relation to the last financial year that ended before that time:
(i) the consolidated revenue for the financial year of the company and its subsidiaries is less than $25 million, or any other amount prescribed by regulations made for the purposes of paragraph 45A(2)(a) of the Corporations Act 2001;
(ii) the value of the consolidated gross assets at the end of the financial year of the company and its subsidiaries is less than $12.5 million, or any other amount prescribed by regulations made for the purposes of paragraph 45A(2)(b) of the Corporations Act 2001;
(iii) the company and its subsidiaries have fewer than 50, or any other number prescribed by regulations made for the purposes of paragraph 45A(2)(c) of the Corporations Act 2001, employees at the end of the financial year; or(b) the company came into existence after the end of the last financial year that ended before that time; or
(c) the company is a declared private company (see subsection (2));
and the company is not an excluded company (see subsection (5)).Pursuant to section 1207Q of the Act, a company is a ‘controlled private company’ in relation
to an individual if the company is a designated private company and the individual
passes the control or source test.The control test is set out in subsection 1207Q(2) of the Act which provides:
Control test
(2) For the purposes of this section, an individual passes the control test in relation to a company if:
(a) the aggregate of:
(i) the direct voting interests in the company that the individual holds; and
(ii) the direct voting interests in the company held by associates of the individual;
is 50% or more; or(b) the aggregate of:
(i) the direct control interests in the company that the individual holds; and
(ii) the direct control interests in the company held by associates of the individual;
is 15% or more; or(c) the company is sufficiently influenced by:
(i) the individual; or
(ii) an associate of the individual; or
(iii) 2 or more entities covered by the preceding subparagraphs; or(d) the individual (either alone or together with associates) is in a position to exercise control over the company.
‘Control’ is defined in section 1207A of the Act which states, “control includes control as a result of, or by any 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.”
13. Section 1207T of the Act sets out the meaning of ‘direct control interest’ in a company and relevantly provides that “[a]n entity holds a direct control interest in a company at a particular time equal to the percentage of the total paid-up share capital of the company in which the entity holds an interest at that time.”
Consideration
Tech Knowledges has at all relevant times been a designated private company as it meets the criteria set out in subsection 1207N(1) of the Act as the consolidated revenue has not exceeded $25 million in a financial year, and the value of Tech Knowledges’ gross assets is less than $12.5 million.
Martin Cowper, managing director of Tech Knowledges, said in an undated letter that Mr Sullivan was a technical director of the company until his retirement in 2008. Since then, he has been a ‘silent shareholder’. He said that Mr Sullivan had no control or influence as a shareholder or for running the business.
The share structure of Tech Knowledges share structure has consisted of 100 ‘A’ class
shares and 100 ‘J’ class shares. The ‘A’ class shares confer voting rights, whereas the ‘J’ class shares confer rights to the payment of dividends and return of capital if the company is wound up. As of 24 May 2016, Mr Sullivan held 35 ‘A’ class shares and Knoledge Pty Ltd held on trust 35 ‘J’ class shares. As of 14 March 2018, Mr Sullivan held 50 ‘A’ class shares and Knoledge Pty Ltd held on trust 50 ‘J’ class shares.
Knoledge Trust Pty Ltd is a designated private trust under section 1207P of the Act. It does not appear to be in dispute that 100% of the income and assets of Knoeldge Trust can be attributed to Mr and Mrs Sullivan.
Accordingly, as of 24 May 2016, Mr Sullivan held 35% of the ‘A’ class shares and could be attributed with 35% of the ‘J’ class shares. Pursuant to section 1207T of Act, Mr Sullivan held a direct control interest of 35% of Tech Knowledges. As this is more than 15%, he therefore passes the control test in accordance with paragraph 1207Q(2)(b) of the Act.
As of 14 March 2018, Mr Sullivan held 50% of the voting interests and 50% of the direct control interest. The Secretary contends he therefore passes the control test in accordance with both paragraphs 1207Q(2)(a) and 1207Q(2)(b) of the Act. I note however, that although from 14 March 2018, Mr Sullivan now holds 50% of the ‘A’ and ‘J’ class shares, the effect of Tech Knowledges’ constitution means despite the equal voting interests, the chairman, who is elected by the director, Martin Cowper, has the casting vote.
At all relevant times, Tech Knowledges was a controlled private company in relation to Mr Sullivan.
Section 1207X of the Act sets out how to determine whether a person is an attributable stakeholder. The Secretary’s exercise of discretion is governed by the principles set out in the Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2017 (Cth) (the Principles). The Principles are formulated under section 1209E of the Act, and amongst other things set out the decision-making principles with which the Secretary must comply in making a determination under section 1207X of the Act.
Clause 7 of the Principles requires the Secretary to consider whether there are relevant circumstances which make it inappropriate for the individual to be an attributable stakeholder of the company or trust. Clause 7(2) of the Principles directs attention not only to the legal structure, but to its administrative arrangements and whether the individual can reasonably be expected to exercise effective control in relation to the company or trust.
In relation to the period from 24 May 2016 to the 13 March 2018, Mr Sullivan was not a director, but held 35% of ‘A’ class shares and could be attributed with 35% of the ‘J’ class shares. During this period, no shareholders demonstrated unilateral control.
In relation to the period from 14 March 2018 to the 15 April 2019, Mr Sullivan was not a director, but held 50% of ‘A’ class shares and could be attributed with 50% of the ‘J’ class shares. Martin Cowper as director elected himself chairman and noted that the chairman would have the casting vote in accordance with the Tech Knowledges Company Constitution. As such, Mr Cowper had effective control of all decisions concerning Tech Knowledges during this period. Mr Sullivan should be attributed with an income attribution percentage of 0% from 14 March 2018 to 15 April 2019. However, Mr Sullivan is still entitled to 50% of Tech Knowledges’ capital on wind up as a result of his 50% of the ‘J’ class shares.
Clauses 8, 17 and 26 of the Principles require the Tribunal to consider any contribution Mr Sullivan made to Tech Knowledges. There is no evidence regarding any contributions relevant to assessing whether Mr Sullivan should be assessed as an attributable stakeholder or in relation to his income and asset percentage.
26. Clauses 9, 18 and 27 of the Principles require the Tribunal to consider whether Mr Sullivan received a past benefit from a distribution from Tech Knowledges and if so, the value of the benefit. If Mr Sullivan has received more than one distribution, the Tribunal must also consider the frequency of the distributions.
Mr Sullivan received franking credits and dividends in the financial years 2014 to 2017. He received no franking credits or dividends during the 2018 financial year. The amounts received by Mr Sullivan support a finding that he was an attributable stakeholder and should be assigned an income and asset attribution percentage of 35% during the period from 24 May 2016 to 13 March 2018.
It appears that since the change in shareholdings on 14 March 2018, no franking credits or dividends were paid in 2018 and 2019 financial years. This supports a finding that the income attribution percentage should be 0% during the period from 14 March 2018 to 15 April 2019.
Clauses 10, 19 and 28 of the Principles require the Tribunal to consider whether Mr Sullivan may benefit from future distributions of Tech Knowledges. As already noted, Mr Sullivan is attributed with 50% of the ‘J’ class shares during the period 14 March 2018 to 15 April 2019. He therefore holds 50% of the rights the payment of dividends and return of capital if the company is wound up and should be attributed with 50% of the assets from Tech Knowledges.
There is no evidence indicating Mr Sullivan received any other non-monetary benefit from Tech Knowledges during the relevant period. Therefore clauses 11, 20 and 29 of the Principles do not require further consideration.
Clauses 12, 21 and 30 of the Principles require the Tribunal to consider the existing attribution to Mr Sullivan of any other company or trust. As already discussed, Mr and Mrs Sullivan hold 100% of the beneficial interests in the Knoledge Trust, and all the share in its corporate trustee Knoledge Pty Ltd.
As previously noted, Mr Cowper has the casting vote and effective control of Tech Knowledges. This plainly affects Mr and Mrs Sullivan’s involvement with the activities and administration of the company (clauses 13, 22 and 31 of the Principles).
Decision
For these reasons, the decision under review is set aside and remitted with directions that Mr and Mrs Sullivan’s age pension be assessed and calculated on the basis that:
(a)during the period from 24 May 2016 to 13 March 2018, Mr Sullivan is attributed with 35% of the income and assets of Tech Knowledges; and
(b)during the period from 14 March 2018 to 15 April 2019, Mr Sullivan is attributed with 0% of the income and 50% of the assets of Tech Knowledges.
I certify that the preceding 33 (thirty-three) paragraphs are a true copy of the reasons for the decision herein of Senior Member A Poljak
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Associate
Dated: 8 September 2022
Date(s) of hearing: 25 January 2022 Applicants: Self-Represented Solicitor for the Respondent: Ms E Ulrick, Services Australia
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