Szmerling and Secretary to the Department of Family and Community Services
[2003] AATA 661
•15 July 2003
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2003] AATA 661
ADMINISTRATIVE APPEALS TRIBUNAL Nº V2002/1379
Nº V2002/1380
GENERAL ADMINISTRATIVE DIVISION
Re: MENDLE SZMERLING AND
SANDRA SZMERLING
Applicants
And: SECRETARY TO THE
DEPARTMENT OF FAMILY AND
COMMUNITY SERVICES
Respondent
DECISION
Tribunal: Mr B.H. Pascoe, Senior Member
Date: 15 July 2003
Place: Melbourne
Decision:The Tribunal sets aside the decisions under review and in their stead decides that the applicants had no asset in the nature of a loan account to the Rossim‑Szmerling Family Trust since 1992 and, as a consequence, their combined assets did not exceed the asset limit since that date.
(sgd) B.H. Pascoe
Senior Member
SOCIAL SECURITY – combined assets – whether applicants had asset in nature of a loan to a trust – whether asset continued to exist – nature of trust – whether trust combined
Social Security Act 1991
REASONS FOR DECISION
15 July 2003 Mr B.H. Pascoe, Senior Member
These are applications to review decisions of the Social Security Appeals Tribunal (SSAT) dated 25 February 2002 on review of three decisions of the respondent dated 22 February 2001, 9 April 2001 and 7 June 2001. The decisions of the SSAT were to:
(a)affirm the decision of 22 February 2001 to reject the claim of the first applicant, Mr M. Szmerling, for age pension on the basis that the value of combined assets exceeded the asset limit;
(b)affirm the decision of 9 April 2001 to cancel the age pension of the second applicant, Mrs S. Szmerling, on the basis that the value of combined assets exceeded the asset limit; and
(c)set aside the decision of 7 June 2001 to raise and recover a debt of $34,133.44, being disability support pension and age pension paid to Mrs Szmerling in respect of the period 28 November 1996 to 27 March 2001 and remit the matter with a direction that the amount of the debt representing disability support pension paid in respect of the period 28 November 1996 to 15 November 1998 is to be waived due to special circumstances.
At the hearing, Mr and Mrs Szmerling were unrepresented and the respondent was represented by Mr M. Todd, a Centrelink advocate.
The reasons for the decision of the respondent were conveniently summarised in the SSAT decision as follows:
·Mr and Mrs Szmerling are beneficiaries of the Rossim‑Szmerling Family Trust.
·The Trust financial statements, as at 30 June 2000 show that Mr and Mrs Szmerling were owed $618,797 as at 30 June 2000. The balance sheet shows that $79,636 was drawn down from the loan during the period 30 June 1999 to 30 June 2000. The trust received gross income from business and distributions from other trusts of $123,104, with a net income of $69,551. No profit was distributed to beneficiaries as there was no taxable income, due to the substantial carried forward losses of the trust. On the basis of the income performance of the trust and historical drawings it should be regarded as an assessable asset. The trust is still in operation and no attempt has been made to have the moneys repaid. Therefore the loans cannot be considered to be unrealisable.
·Other assets include: A Commonwealth bank account $2,088
A National Australia bank account $3,457
Mitsubishi Magna $10,000
Mazda 626 $4,000
Household Contents $40,000
Shares $4,370
ANZ Funds Management $35,690
· This gives a combined asset value of $718,401. The asset cut off limit at the time of cancellation of Mrs Szmerling's age pension and rejection of Mr Szmerling's claim for age pension was $411,000.
· At the time Mrs Szmerling originally applied for disability support pension she did not advise that moneys had been loaned to the Rossim‑Szmerling Family Trust. Neither did she respond to a letter dated 12 December 1996 requiring her to advise Centrelink if financial investments, including loans, exceeded $30,614 or if combined assets exceeded $46,000.
· Because Mrs Szmerling did not advise of her involvement in the Trust she was overpaid disability support pension and age pension in the sum of $34,133.44. This amount is a debt pursuant to section 1224 of the Social Security Act 1991, and there are no grounds on which the debt could be waived.
Following receipt of evidence from Mr and Mrs Szmerling, the SSAT made the following findings of fact:
· Mr and Mrs Szmerling were involved in a business operated by Rossim Nominees as Trustee of the Rossim‑Szmerling Family Trust. In 1986 they borrowed $150,000 for the business, from the National Bank, secured by way of mortgage over their home. Rossim Nominees also borrowed $600,000 from Carrington Confirmers Pty Ltd. This loan was also secured by way of mortgage over Mr and Mrs Szmerling's home and personal guarantee.
· In 1990, following the collapse of the business, Mr and Mrs Szmerling sold their home for $440,000 to satisfy the debts to the National Bank and Carrington Confirmers Pty Ltd. National Bank was paid in full and the remainder was put towards satisfaction of the debt owed to Carrington Confirmers Pty Ltd by Rossim Nominees.
· An amount of approximately $708,433 was recorded as a loan made by the Szmerlings to the Rossim‑Szmerling Family Trust, following the sale of the Szmerling's home in 1990.
· Rossim Nominees was removed as Trustee of the Rossim‑Szmerling Family Trust, and replaced by Albert Shelling in 1993. From that time until Mendel's Commission Knitting became Trustee on 16 November 1998, the Trust was dormant and was not involved in the operation of any business.
· As at June 2000 the balance sheet of the Trust showed loans to Mr and Mrs Szmerling of $618,797. Other assets held in the first half of 2001 amounted to $90,605.
In arriving at its decision, the SSAT made two additional findings. The first was that of the $440,000 received as proceeds from the sale of the house, $150,000 was used to repay the debt due to Mr and Mrs Szmerling to the National Bank, leaving $290,000 for payment to Carrington Confirmers Pty Ltd (Carrington). The SSAT accepted that this latter amount was paid pursuant to the personal guarantee and was not an amount lent to the trust to operate its business or for any other purposes. As a consequence, the SSAT considered that the amount characterised as a loan in the books of the trust should be reduced by $290,000. However, this reduction did not reduce the amount characterised as a loan to an amount sufficient to be below the asset threshold of $411,000. The second finding was that there were special circumstances under s.1237AAD of the Social Security Act 1991 (the Act) to allow the waiver of the debt resulting from overpayment of a pension to Mrs Szmerling between 28 November 1996 and 15 November 1998. This period was selected as the Trust was not active or involved in any income producing activity during the period 28 November 1996 to 15 November 1998, from which Mr and Mrs Szmerling could hope to recover any monies. The 28 November 1996 was the date from which Mrs Szmerling had been in receipt of a disability support pension.
Subsequent to the SSAT decision, the accountants for the family prepared amended financial statements and income tax returns for the Rossim‑Szmerling Family Trust for the years ended 30 June 1991 to 30 June 2001 inclusive. These showed a loan account from Mr and Mrs Szmerling of $596,743 as at 30 June 1991, but nil at 30 June 1992, and no further loan account thereafter. These statements were prepared on the basis that Carrington as mortgagee in possession on 10 September 1991 took possession of all of the remaining assets of the trust leaving no funds for unsecured creditors. In addition, Mr and Mrs Szmerling entered into a Part X arrangements vesting their assets in a trustee pursuant to a composition with their creditors arising primarily from their personal guarantees. The view was taken that, as the trust had no assets, the loan from Mr and Mrs Szmerling was irrecoverable and, therefore, written off in the books of the trust. The accounts clearly show that the trust had no assets until 30 June 1997.
On 5 April 2002, Mr and Mrs Szmerling entered into a Deed of Forgiveness which recited that, as at 31 December 2001, they had advanced a total of $586,906 to the trust. Pursuant to the deed, they forgave the loan to the trustee. This deed was considered by the respondent as further evidence that the loan existed at that time. In evidence at the hearing, it was said that the Deed was entered into on the advice of Centrelink as, by that time, Mr and Mrs Szmerling were in a difficult financial position and understood that this was an option open to them. It was argued that, in fact, the Deed had no effect, as there was not, at 31 December 2001 any such loan to be forgiven.
Having considered the evidence in this case, it becomes apparent that the accountant for Mr and Mrs Szmerling has proceeded on an incorrect characterisation of the effect of events in 1991 and 1992. There has been an assumption that a trust was established in 1974 and that trust has continued on to this day as if that trust was a legal entity. This, of course, is not the case. An often quoted definition of a trust is that provided in Underhills Law Relating to Trusts (London: Butterworths, 12 Ed, 1970, p.3):
…
A trust is an equitable obligation, binding a person ("trustee") to deal with property over which he has control ("trust property") either for the benefit of persons ("beneficiaries") of whom he may be one, and any one of whom may enforce the obligation, or for the advancement of certain purposes.
In Jacobs' Law of Trusts in Australia, 6th Ed, pp.4‑6, the authors set out the four essential elements present in every form of trust. In summary, they are:
· a trustee who holds a legal or equitable interest in the trust property
· property capable of being held on trust
· a cestui que trust or beneficiary
· a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiary
In Principles of the Law of Trusts, Ford and Lee, 2nd Ed, at p.135, the authors state:
For a trust to be created, the obligation imposed on the trustee must relate to some specific property. The property may be real or personal, tangible or intangible, legal or equitable.
In simple terms, a trust is not a legal entity; it is a relationship between a trustee and property. As a general proposition of law, any liabilities incurred by a trustee in carrying out the terms of the trust are personal liabilities of the trustee with a right of recovery out of the assets held in trust. If there is no property, there is no trust.
From the evidence, which I accept, the business carried on by the trustee had ceased prior to 30 June 1992, all property held in trust by the trustee was seized by the mortgagee in possession leaving no property in which the then trustee had any obligation. The trustee, being a company, was wound up. It is clear, in my view, that the trust had ceased to exist by 30 June 1992. Some years later, when a new business was commenced, the accountant sought to have the benefit of the losses incurred by that former trust offset against profits of the new business by treating it as a continuation of the same trust under a new trustee. This was not legally possible. At best, the new trustee agreed to hold new assets on the same terms of trust as contained in the original trust deed. However, it was a new trust. It appears, also, that the same process occurred again when another business was commenced with a new trustee following the failure of the second business.
From the foregoing, the alleged loan account was, at least to the extent of monies advanced to the then trustee prior to September 1991, a loan to the then trustee. It could well be argued that, given the knowledge of and involvement in the trust by Mr and Mrs Szmerling, the right of recovery by them was limited to the property held in trust. However, the liability was that of the trustee company. The trustee ceased to hold any property in trust, was subsequently wound up, and the debt became irrecoverable by 30 June 1992. It was no longer an asset of Mr and Mrs Szmerling from that date. Even if an asset constituted by a loan to the trustee continued to exist after the mortgagee entered possession, which I am unable to accept, such an asset would have been disposed of under the Part X arrangement and, again ceased to be an asset of Mr and Mrs Szmerling. In any event, there could be no right of recovery from the present trustee who did not incur any liability to Mr and Mrs Szmerling and did not succeed in ownership of any property to which any such liability could be attached.
As a consequence of this finding, I am satisfied that, by 28 November 1996, Mr and Mrs Szmerling held no asset in the form of a loan account to the Rossim‑Szmerling Family Trust. Therefore, the decisions of the SSAT should be set aside and in their stead, the Tribunal decides that Mr and Mrs Szmerling had no asset in the form of a loan to a trust. Therefore, their combined assets did not exceed the asset limit.
I certify that the eleven [11] preceding paragraphs are a true copy of the reasons for the decision herein of
Mr B.H. Pascoe, Senior Member
(sgd) Catherine Thomas
Clerk
Date of Hearing: 3 June 2003
Date of Decision: 15 July 2003
Solicitor for the applicants: Nil — IN PERSONAdvocate for the respondent: Mr M. Todd, Centrelink
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