Underhill and Secretary, Department of Families, Housing, Community Services and Indigenous Affairs
[2010] AATA 532
•16 July 2010
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2010] AATA 532
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2009/4382
GENERAL ADMINISTRATIVE DIVISION ) Re KAREN UNDERHILL Applicant
And
SECRETARY, DEPARTMENT OF FAMILIES, HOUSING, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS
Respondent
DECISION
Tribunal Dr P McDermott RFD, Senior Member Date16 July 2010
PlaceBrisbane
Decision The Tribunal sets aside the decision under review and remits the matter to the Secretary to assess the entitlement of the applicant to be paid disability support pension in accordance with these reasons.
...................[Sgd]...................
Senior Member
CATCHWORDS
SOCIAL SECURITY – Disability support pension – Appropriate rate of pension – Controlled private trust – Income of trust assessed on an accruals instead of a cash basis- Further information required in order to determine rate – Matter remitted back to have income assessed by the Secretary.
Income Tax Assessment Act 1997 (Cth) ss 6-5, 995
Social Security Act 1991 (Cth) Pt 3.18, ss 98, 1064, 1207P, 1207V, 1207Y, 1209Y
Tax Laws Amendment (2006) Measures No 1) Act 2006 (Cth)
REASONS FOR DECISION
16 July 2010 Dr P McDermott RFD, Senior Member INTRODUCTION
1. I have to determine whether Ms Karen Underhill (the applicant) has an entitlement to be paid disability support pension.
RELEVANT LEGISLATION
2. The entitlement of the applicant to receive disability support pension is governed by the Social Security Act 1991 (Cth) (‘the Act’).
PRIOR DECISIONS
3. On 1 December 2008 the applicant signed the claim form for disability support pension. That application was lodged on 9 December 2008.
4. On 28 May 2009 her claim was rejected on the ground that the combined income of the applicant and her partner exceeded the allowable threshold for payment. She was then accordingly assessed as having a rate of disability support pension of nil. Subsection 98(1) of the Act provides that disability support pension is not payable to a person if that person’s disability support pension rate would be nil.
5. On 1 June 2009 an Authorised Review Officer affirmed the original Centrelink decision. On 20 August 2009 the Social Security Appeals Tribunal affirmed the original decision.
QUALIFICATION TO RECEIVE DISABILITY SUPPORT PENSION
6. A person is qualified to receive disability support pension if that person satisfies the requirements of s 98 of the Act. The Secretary has conceded that the applicant satisfies the requirements of s 98 of the Act. I consider that this concession of the Secretary is properly made having regard to a job capacity assessment report dated 24 December 2008 which has been admitted into evidence.[1] I have decided not to disclose the nature of the impairment of the applicant in these reasons which are a matter of public record.
[1] Exhibit B
CALCULATION OF RATE OF DISABILITY SUPPORT PENSION
7. The only issue that is before me is to ascertain the appropriate rate of disability support pension that the applicant is entitled to be paid. The rate of disability support pension is determined by an income and assets test in accordance with the Modules of s 1064 of the Act. Module A of s 1064 provides details of the overall rate calculation process. Section 1064-A2 provides, for the purposes of Module A, that members of a couple will be treated as pooling their resources.
STRUCTURE OF BUSINESS
8. The reasons of the Authorised Review Officer and the Social Security Appeals Tribunal proceeded on the assumption that in August 2007 P & B Projects was incorporated and commenced trading as P & B Projects Pty Ltd. That assumption may have been based on the balance sheets of P & B Projects Pty Ltd[2] which are in evidence before me. However, it now appears that the company is not involved.
[2] T 20/195-196
9. In evidence is a Discretionary Trust Deed for the “Ibbotson Family Trust” which was executed on 2 July 2007.[3] Jane Amedee is the settlor of this deed. The trustee of the trust is BNTIBB Pty Ltd, ACN 126 329 977.
[3] Exhibit L
10. Clause 2 of the deed provides that the beneficiaries of the trust are the persons named in the Schedule of the deed as beneficiaries and the persons who are members of any of the classes of eligible beneficiaries specified in the Schedule. The applicant and her partner (Benjamin Walter Ibbotson) are “named beneficiaries” in the Schedule. The Schedule also provides that the beneficiaries are the children of the named beneficiaries.
11. BNTIBB Pty Ltd and Kedar Pete Pty Ltd are partners in a building partnership known as P & B Projects, ABN 17 039 620 349. Kedar Pete Pty Ltd is a trustee of the Syle Family Trust.
12. This partnership has been referred to as a “partnership of trusts”. However, as a trust of itself is not a legal entity but is a description of a legal relationship it might, perhaps, be preferable to describe P & B Projects as “a partnership of trustees”.
INCOME OF PARTNERSHIP
13. In evidence before me is a Partnership tax return for the 2008 income year of the Ibbotson Family Trust and Syle Family Trust.[4] That return discloses net income of $108,322.00.
[4] Exhibit B
INCOME OF IBBOTSON FAMILY TRUST
14. In evidence are the financial statements of the Ibbotson Family Trust for the year ending 30 June 2008.[5] In giving evidence Ms Amedee remarked that these financial statements are prepared on an accruals basis. Those statements disclose the beneficiaries’ share of profit as follows:
Benjamin Walter Ibbotson $63,294.50
Karen Louise Underhill 4,000.00
Taylor Ibbotson 1,667.00
Brandon Ibbotson 1,667.00
Total Profit $70,628.50
[5] Ibid
Those financial statements were relied upon in making the original assessment of income to be attributed to Mr Ibbotson under Part 3.18 of the Act.
15. Also in evidence is the trust tax return of the Ibbotson Family Trust for the year ended 30 June 2008.[6] Ms Amadee in giving evidence remarked that the trust tax return was prepared on a cash basis. That return discloses that the net income of the trust to be $53,781.00. The statement of distribution of that tax return discloses the following distributions:
Benjamin Walter Ibbotson $46,447.00
Karen Louise Underhill 4,000.00
Taylor Ibbotson 1,667.00
Brandon Ibbotson 1,667.00
Total Distributions $52,781.00.
[6] Exhibit B
APPLICATION OF PART 3.18
16. This is a matter that concerns the application of Part 3.18 of the Act. This Part establishes a scheme for the attribution to individuals of the income of certain private trusts. Part 3.18 of the Act provides for the attribution of income where the trust is a controlled private trust (s 1207V).
17. The Secretary contends that the Ibbotson Family Trust is a designated private trust.[7] After examining the deed that creates the Ibbotson Family Trust, I accept that the trust is a designated private trust as all of the conditions in s 1207P(1)(a) are not satisfied. It is sufficient, in my view, to refer to the first condition in that paragraph which requires that the trust be a fixed trust.
[7] Statement of Facts and Contentions, 13 May 2010, [13]
18. The term “fixed trust” is not defined in the Act and should, in my view, be understood having regard to general law concepts. In the case of a fixed trust the beneficiaries of the trust as well as their entitlements in equity must be ascertained in accordance with the terms of the trust: GE Dal Port & R C Chalmers, Equity and Trusts in Australia (4th ed, 2007), 430 [16.15]. The “trust loss” provisions in income tax legislation appear to have been drafted having regard to general law concepts, an example is s 995 of the Income Tax Assessment Act 1997 (Cth) which provides that a trust is a “fixed trust” if entities have fixed entitlements to all of the income and capital of the trust.
19. I consider that the first condition in s 1207P(1)(a) of the Act cannot be satisfied as the trust is not a fixed trust. This is because the various beneficiaries do not have any fixed entitlement to either capital or income. This is apparent from clause 6 of the deed which provides that until the vesting day, the trustee has absolute discretion to distribute income in any proportions that the trustee decides. This trust rather than being a fixed trust is a discretionary trust.
20. I should mention, for the sake of completeness, that there is no evidence before me that the Ibbotson Family Trust has been declared to be an excluded trust under s 1209P(4) of the Act.
21. Having found that the Ibbotson Family Trust is, for the purposes of Part 3.18, a “designated private trust”, it is now necessary to consider whether the trust is a “controlled private trust” as defined in s 1207V of the Act. Subsection (1) of that provision provides that a trust is a “controlled private trust” in relation to an individual if the trust is a designated private trust and the individual passes the “control test” set out in subsection (2) or the individual passes the source test set out in subsection (2).
22. What is material for the purposes of the “control test” in subsection (2)(b) of s 1207V of the Act is the fact that the individual Mr Ibbotson has the power to appoint or remove the trustee. This power is conferred by clauses 45 and 46 of the trust deed for the Ibbotson Family Trust. I accordingly find that the Ibbotson Family Trust is (and was at the relevant time) a “designated private trust” in relation to Mr Ibbotson. At the hearing there was no issue concerning the fact that the Ibbotson Family Trust is (and was at the relevant time) a “designated private trust”.
23. In my opinion, another basis for the application of the “control test” is provided by subsection (2)(ca) of s 1207V of the Act as it could be reasonably expected that the trustee of the trust would make an application of the corpus or income of the trust to the individual if the individual could not meet his or her reasonable costs of living. This is because the sole director of the trustee is Mr Ibbotson,[8] and, as mentioned earlier, he is a “named beneficiary” in the Schedule to the deed which creates the trust. In my view it could be reasonably expected that the trustee of the trust would make an application of the corpus or income of the trust to Mr Ibbotson if he individually could not meet his reasonable costs of living
[8] Exhibit F (BNTIBB PTY LTD, Consent to Act as Director)
INCOME OF TRUST
24. The Secretary has submitted that s 1207Y of the Act should apply in this instance to determine the income of the trust for the purposes of Part 3.18 of the Act.
25. I am satisfied that s 1207Y has relevance to the determination of this application as the Ibbotson Family Trust is, as I have earlier found, a “designated private trust” in relation to Mr Ibbotson. That provision provides that the “ordinary income” of the trust is to be attributable to the individual, Mr Ibbotson in accordance with the formula in s 1207Y(1) of the Act.
26. There is evidence before me that the income tax return of the trust was compiled on a cash basis. For the purposes of the application of Part 3.18 of the Act, s 1209Y(6) provides that if the income of a trust is accounted for on a cash basis for the purposes of s 6-5 of the Income Tax Assessment Act 1997 (Cth), the “ordinary income” of the trust is to be accounted for on a cash basis for the purposes of s 1209Y. The “ordinary income” of the trust should therefore, in my view, to be accounted for on a cash basis.
27. The trust was constituted on 2 July 2007. The sum of $53,781.00 appears to be the ordinary income of the trust. I have assessed this amount as the ordinary income of the trust on the basis that the “number of days in the derivation period” for the purposes of the formula in s 1207Y(1)(e) of the Act is 365 in view of the fact that 2008 was a leap year.
28. The tax return of the trust reveals an amortization expense of $350.00 which would have formerly been treated as capital but which is a “black-hole” deduction which may be allowable as a business-related cost.[9]
[9] Tax Laws Amendment (2006 Measures No 1) Act 2006 (Cth).
29. The Australian Taxation Office (“ATO”) notice of assessment of the Ibbotson Family Trust for the 2007-2008 financial year is not in evidence before me. In the absence of that notice of assessment I am not prepared to make a finding that the “ordinary income” of that trust for the 2007-2008 financial year is $53,781.00.
INCOME OF COUPLE
30. I must next consider what is the income of the couple for the 2007-2008 financial year. The applicant gave unchallenged evidence, which I accept, that at the relevant time she was a member of a couple with Mr Ibbotson.
31. I am required to apply the pension rate calculator found at s 1064 of the Act. The calculator provides that where two people are members of a couple they will be treated as pooling their resources.
32. Subject to the ATO notice of assessment of the Ibbotson Family Trust for the 2007-2008 financial year, the income of the couple would appear to be as follows:
$53,781.00Amount attributable to the individual, Mr Ibbotson under Part 3.18 of the Act.
$ 7,023.00 Other income received by applicant.
To these amounts must be added other income of Mr Ibbotson. On the material before me it is not possible to properly assess this income. On the material before me there is an observation that allowance has been made for “Ben’s share of a partnership loss of $29,862.00”.[10] However, there is no evidence that Ben himself is a member of a partnership and, as such, it is not apparent why he has to contribute to the loss. There is also material which suggests that there are distributions from the company, P & B Projects Pty Ltd.[11] The income tax return of Mr Ibbotson discloses a different amount of income than in the notice of assessment. On the material before me it is not possible to finally determine his income. The appropriate course of action would be to allow Centrelink to investigate this matter. This procedure would be fair to the applicant who could make submissions on the issue of why Mr. Ibbotson is required to contribute to a partnership loss.
[10] T26/210
[11] Ibid
33. There is also an investment made by Mr Ibbotson in the form of a loan to the trust which may be the subject of the deeming rules. The Secretary should have the opportunity to investigate this matter, and the applicant should, if necessary, have the opportunity to make submissions.
DEDUCTIONS
34. At the hearing, Mr Hamilton for the Secretary quite properly raised for consideration whether various deductions may be made from what I have referred to as the total gross income of the applicant. These possible items of deduction are: $20,265.00 (share of partnership expenses); $1,323.00 (accident insurance); $5,569.00 (ATO, General Interest Charge) and $233.00 (donation).
35. I accept the submission of the Secretary that the donation of $233.00 could not be deductible as it does not relate to the carrying on of a business. I have also taken the view that the deduction of $5569.00 for the ATO General Interest Charge cannot be deducted as it also does not relate to the carrying on of a business.
36. This raises for consideration the deductibility of items of expenditure that have been claimed by Mr Ibbotson that mainly relate to the partnership. The state of the evidence before me does not reveal the nature of this expenditure. However, apart from this I consider that there is a more fundamental reason why these items may not be deductible and that is that there is evidence before me that the net profit from the partnership on a cash basis is distributed to the partners who are the corporate trustees[12]. The applicant should have the opportunity to make submissions to the Secretary on this matter.
[12] Exhibit B
ASSESSMENT OF INCOME
37. In my view the Secretary should request that the applicant provide the ATO Notice of Assessment of the Ibbotson Family Trust for the 2007-2008 financial year before making any assessment of the income of the applicant.
38. The applicable income test for the initial instalments of disability support pension are the rates which are valid from 20 September 2008 to 31 December 2008.[13] There are two children of the couple who should be taken into account in assessing the entitlement of the applicant for disability support pension (applicable allowance is increased by up to $24.60 per fortnight for each dependant child of the couple).
[13] Exhibit D
39. I wish to acknowledge my appreciation to Mr Hamilton for ensuring that Ms Amadee was available to give evidence of matters relating to the Ibbotson Family Trust. Ms Amadee provided useful information relating to the structure of the business that the Authorised Review Officer and Social Security Appeals Tribunal would not have been aware.
40. I also consider that the applicant should have the opportunity to make any further submissions to Centrelink before any final assessment of the income of the applicant is made.
41. The Secretary should also have the opportunity to make any further investigations into whether the company P & B Projects Pty Ltd, has any relevance at all to this application.
42. There was some delay in the processing of the applicant’s claim as she had not initially provided the Mod F questionnaire relating to business details and financial statements. When the Mod F questionnaire was provided the applicant did not answer question 5 relating to business details and financial statements.[14] In my view all questions on the Mod F questionnaire should be completed by the applicant.
[14] T20/190
43. As the tax return income of the Ibbotson Family Trust for the income year ended 30 June 2008 was compiled on a cash basis, any assessment of income of the trust must, in accordance with s 1207Y(6) of the Act, be made on a cash basis. I have set aside the decision under review which assessed the income of the trust on an accruals basis.
DECISION
44. I set aside the decision under review and remit the matter to the Secretary to assess the entitlement of the applicant to be paid disability support pension in accordance with these reasons.
I certify that the 44 preceding paragraphs are a true copy of the reasons for the decision herein of Dr P McDermott RFD, Senior Member
Signed: ..........................[Sgd]...............................................
Kate Slack, Research AssociateDate/s of Hearing 24 May 2010
Date of Decision 16 July 2010
For the Applicant Mr Ben Ibbotson
For the Respondent Mr Bob Hamilton, departmental advocate
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