Wahlsten and Secretary, Department of Social Services (Social services second review)
[2015] AATA 517
•16 July 2015
Wahlsten and Secretary, Department of Social Services (Social services second review) [2015] AATA 517 (16 July 2015)
Division GENERAL DIVISION File Number(s)
2014/6240
Re
Alex Wahlsten
APPLICANT
And
Secretary, Department of Social Services
RESPONDENT
DECISION
Tribunal Mr S. Webb, Member
Date 16 July 2015 Place Perth The decision under review is set aside. The matter is remitted to the Secretary to determine Mr Wahlsten’s entitlement to payment of age pension in accordance with this decision.
.
...(Sgd) S. Webb.....................................................................
Mr S. Webb, Member
CATCHWORDS
SOCIAL SECURITY- age pension – assets – farming family trusts – farming partnership – trust assets used as security for failed partnership property development ventures – assets sold under foreclosure - partnership loans written off on winding up trusts – trust asset attribution rules - unrealisable asset rules – deprivation rules – decision set aside and remitted
LEGISLATION
Social Security Act 1991 (Cth) ss 9, 11, 55, 1064, 1122, 1123, 1124, 1126AA, 1207C, 1207P, 1207V, 1207X, 1208E, 1208F, 1208L
Partnership Act 1895 (WA) ss 16, 49
Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2000 (Cth)
Social Security (Attribution of Assets) Principles 2001 (Cth)Social Security (Modification of Asset Deprivation Rules) Principles 2002 (Cth)
CASES
Re Hanrick and Secretary, Department of Social Security [2003] AATA 549
Repatriation Commission v Harrison (1997) 46 ALD 193.
Repatriation Commission v Kimpton [2006] FCA 1120
REASONS FOR DECISION
Mr S. Webb, Member
16 July 2015
For many years Alex Wahlsten farmed on a number of properties. He formed a partnership with family members to operate the farming business. The farm properties were held in trusts established for that purpose. Things did not go well. The properties were used as security for debts run up by the partnership. When the debts were called in, the properties were sold. Unfortunately, the proceeds were not sufficient to pay out partnership debts to the trusts. When the trusts were wound up the debts were written off. Mr Wahlsten applied for the age pension, but his claims have been rejected as successive decision makers determined that the written off debts are a ‘deprived asset’ of Mr Wahlsten’s, rendering his assets above the threshold for payment of the pension. Mr Wahlsten has applied for review.
Facts
In 1974, Mr Wahlsten and his former wife, Kathleen Wahlsten, formed two trusts – the Peter Wahlsten Trust (the PW Trust) and the Kathleen Wahlsten Trust (the KW Trust). They contributed farming properties they had accumulated over years into the holdings of each Trust, in equal proportion.[1]
[1] T32, ST6 and ST16 refer.
Mr Wahlsten was the sole trustee of the PW Trust[2] and Kathleen Wahlsten was the sole trustee of the KW Trust.[3] As spouse and husband, each was included in a class of beneficiaries.
[2] ST5 folio 373.
[3] ST15 folio 445.
This arrangement supported the farming business of the AP Wahlsten & Sons Partnership (the Partnership). The Partnership was formed in or about 1978 and it was expanded to include eight family members as partners.
The deeds for each Trust were varied over time. On 29 August 2000, three children of Mr Wahlsten and Kathleen Wahlsten, Ross, Gregory and Vanessa, were appointed as additional trustees of the PW Trust.[4] Under clauses 1 and 2 of the Deed of Appointment, the Additional Trustees were appointed (and consented to act) ‘jointly with the Trustee’.
[4] Exhibit
On 12 July 2004, the children entered into a Deed concerning the future of the PW Trust and the KW Trust in respect of a ‘Succession Event’. Clause 4 of this Deed refers to termination arrangements of the Trusts. Mr Wahlsten told me that he was not aware of the contents of these arrangements and he had not agreed to them. It is notable that this Deed was made without the inclusion of Mr Wahlsten in respect of the PW Trust or Mrs Wahlsten in respect of the KW Trust.
Mr Wahlsten withdrew from active decision-making in the Partnership in or about 2004. He retired from farming activities in or about 2007, but he retained a 12.5 percent stake in the Partnership.
In or about May 2008, on receipt of legal advice which is not presently disputed, [5] Deed variations to the Beneficiaries of each Trust in 1981[6] were found to be a nullity.
[5] ST12.
[6] ST8 and ST18.
Thereafter, the Partnership determined to take on a high level of indebtedness to undertake property development ventures, using equity in Trust assets as security.
Ultimately, when the property developments encountered difficulties and the lenders foreclosed, the assets of the Partnership and of each Trust were forcibly sold in 2011.
On the evidence of N W Hooper, an accountant, it appears that the $488,000 net return from sale of the Trust and Partnership assets was retained by the Partnership.[7] Mr Hooper was not called to give evidence, so anomalies in the Trust accounts, to which I will return, have not been explained.
[7] T32 folio 156.
Variations to the Deeds of each Trust on 5 March 2011 do not record Mr Wahlsten and Kathleen Wahlsten as Beneficiaries.[8] Mr Wahlsten told me that he remembers someone explaining this to him at the time, but he was not able to explain it to me and, importantly, he said that he did not agree with such a change. Even so, I note that Mr Wahlsten and Kathleen Wahlsten signed the variations as Trustees of the respective Trusts. Why Mr Wahlsten and Kathleen Wahlsten were not recorded as Beneficiaries has not been adequately explained.
[8] See ST13 folio 409 and ST22 folio 478.
The Partnership was wound up as of 30 June 2012. At that time there were six remaining partners.
On 28 March 2013 the PW Trust and the KW Trust were wound up following a resolution of the Trustees at that time. The Trustees were Mr Wahlsten (in respect of the PW Trust), Kathleen Wahlsten (in respect of the KW Trust), Gregory and Vanessa – Ross having died on 5 September 2012.[9]
[9] ST 14 and ST 23.
Mr Wahlsten told me that he intended that he and his then wife would benefit from the value of their farming properties, held in the Trusts, in retirement. But this did not occur and each received no consideration for their contribution when the Trusts were wound up.
The 2011 and 2012 accounts for each Trust reveal ‘Beneficiary Entitlements’ in favour of Mr Wahlsten in the amount of $2,408,840 and Kathleen Wahlsten in the amount of $2,520,300.[10] Mr Hooper’s written explanation is that these amounts arose from capital gains tax payable on the sale of the Trust assets. Examination of the 2012 accounts for each Trust reveals that each ‘entitlement’ includes amounts of ‘Capital and Non Assessable Gains’, as well as ‘Net Profit Distribution’ and ‘Advances’. The explanation and factual basis of these accounting treatments and specific ‘entitlement’ amounts is not clear on the present evidence. Furthermore, it is not clear whether the ‘entitlement’ amounts are in respect of Mr Wahlsten and Kathleen Wahlsten, personally, or in respect of the PW Trust and the KW Trust, respectively.
[10] See ST2 folio 342, ST3 folio 351 and T32 folio 157.
The matter is confused further by the exclusion of Mr Wahlsten and Kathleen Wahlsten as beneficiaries of the Trusts in the Deed variations of 5 March 2011. If Mr Wahlsten was not a Beneficiary of the KW Trust thereafter, it is difficult to see how he would have any entitlement as a beneficiary in the 2011 and 2012 Trust accounts.
If Mr Hooper’s explanation is accepted, and the bulk of the ‘entitlement’ amounts arise from capital gains in respect of the farm properties, the gains would lie against each Trust and not against Mr Wahlsten and Kathleen Wahlsten, personally, as the Trust accounts for 2012 suggest. Nevertheless, Mr Hooper stated –
“Much of this farmland had been owned for a long period of time and therefore there was considerable gains in value over the period of ownership, with these “profits” being distributed to Kathleen and Peter [Mr Wahlsten] in the books of the Peter Wahlsten Trust and Kathleen Wahlsten Trust respectively.”[11]
“The correct accounting treatment for the sale of the farmland was to realise a profit on the sale of the farmland in the books of the Kathleen Wahlsten Trust. This profit was then allocated to Peter who was the beneficiary presently entitled to receive that income from that trust.
This trust distribution represents Peter’s “unpaid present trust entitlement” of $2,408,840… It should be clear that neither trust in fact received any sale proceeds from the sale of the farmland in order for the trustees to pay any amount to Peter. Further, his unpaid present entitlement amount should be treated as a bad debt as there is no means available for the trustees to pay them.”[12]
[11] T32 folio 156 – letter dated 6 March 2014.
[12] Exhibit A4, letter dated 16 July 2014, page 2.
This explanation raises some vexing issues. The evidence before me does not establish that the Trustees of the KW Trust resolved to authorise a ‘present entitlement’ or a disbursement of $2,408,840 to Mr Wahlsten. Why Mr Hooper thought Mr Wahlsten was ‘the beneficiary presently entitled to receive that income’ when he was not included as a beneficiary in the 5 March 2011 Deed variations is very far from clear. The same can be said in respect of Mr Hooper’s accounting treatment of the recorded liability of the PW Trust to pay KM Wahlsten a ‘Beneficiary Entitlement’ of $2,520,302. The basis for these Trust liabilities is very uncertain, as from 1974 the farm properties were owned by each Trust and not by Mr Wahlsten and Kathleen Wahlsten.
To my mind, these ‘beneficiary entitlement’ liabilities in favour of Mr Wahlsten and Kathleen Wahlsten may lack a proper basis. On the material before me, and without going behind the Trust accounts, it is difficult to see how any action could be successfully commenced to recover these amounts and I am unable to determine that these are assets of Mr Wahlsten or of Kathleen Wahlsten in any meaningful sense for present purposes.
The Secretary says that liabilities appearing in the Trust accounts in respect of ‘Beneficiary Entitlements’ of Mr Wahlsten and Kathleen Wahlsten are each adequate consideration in respect of the other. In the circumstances, that may be appropriate.
I note that it was open for the Secretary to require Mr Hooper, who prepared the Trust accounts, for cross-examination. But this was not required. And it was not advanced when I invited the parties to call further and better evidence from Mr Hooper during the hearing.
As regards the ‘loan’ amounts recorded in the assets of each Trust to the AP Wahlsten & Sons Partnership - $2,725,310 in respect of the PW Trust and $2,736,250 in respect of the KW Trust – the present evidence is not sufficient for me to determine the precise nature of these loans and the manner in which they were raised. I have seen no resolution of Trustees addressing or authorising such loans. Mr Wahlsten could not explain this aspect of the Trust accounts. He suggested that the loan amounts might reflect the value of properties owned by each Trust against which Partnership debts were secured. On Mr Wahlsten’s unchallenged evidence, the loans existed on paper only, without any real value in fact, and without any money going out of or coming into each Trust. He acknowledged that the farm lands held by each Trust were used to secure debts raised by the Partnership, and that he had been party to making some of those decisions. But he was at a loss to explain how this circumstance was reflected in the Trust accounts.
It is probable that when the farm properties held by each Trust were sold under foreclosure in 2011, the sale values were recorded, proportionally, as debts due to each Trust for which the Partnership was liable.
I will proceed on that basis.
There is no evidence that these debts were paid out before the Trusts were vested on 28 March 2013. For vesting to occur, the outstanding debts must have been dealt with.
Mr Hooper’s explanation is that these amounts “were written off on the basis that there was no source of funds available to pay them out” when the Trusts were wound up.[13] A short letter by Richard Moore, Mr Wahlsten’s financial planner, is in similar terms - each loan to the AP Wahlsten & Sons Partnership ceased to exist when the Partnership was wound up in 2012 and any related debt was not able to be realised because the partners of the Partnership had no assets.[14] This evidence was not challenged at hearing. Mr Moore was not called to give oral evidence.
[13] T32 folio 156.
[14] Exhibit A2.
On Mr Hooper’s assessment there was an amount of $488,000 retained by the Partnership following the sale of assets in 2011, with an amount of $430,000 remaining after payment of tax liabilities. This amount could have been applied to reduce the outstanding debt amount owing to each Trust had the Partnership resolved to do so. But that did not occur. On Mr Wahlsten’s evidence, his suggestions for disbursement of the remaining monies were rejected, he was “out-voted”, and the amount was distributed to Gregory and Vanessa to pay for the education of their school-age children.
Issues
There is no dispute that Mr Wahlsten meets the qualification requirements for the age pension.
The sole issue for determination, therefore, is whether the value of his assets exceeds the upper threshold for payment of age pension under the Pension Rate Calculator A following s 1064 of the Social Security Act 1991 (the Act).
For this purpose it is necessary to determine
(a)whether Mr Wahlsten is an ‘attributable stakeholder’ of a ‘controlled private trust’ and if so
(i)the asset attribution percentage that applies to him; and
(b)whether trust loans to the farming partnership, in whole or in part, are assets attributable to Mr Wahlsten and, if so
(ii)the value of the attributable assets; and
(c)whether there are grounds to exercise discretion to exclude any part of the attributable assets; and
(d)whether the attributable assets are ‘unrealisable assets’; and
(e)whether the attributable assets are ‘deprived assets’.
Attributable stakeholder of a controlled private trust
The Secretary asserts that Mr Wahlsten was an attributable stakeholder of the PW Trust and the KW Trust when they were wound up, and that both Trusts were ‘controlled private trusts’ in relation to Mr Wahlsten.
Mr Wahlsten says that it is inappropriate to treat him as an attributable stakeholder in the circumstances. He has received no monetary consideration from the winding up of the Partnership or the Trusts, and there is nothing left. He says that pursuing recovery of outstanding debts from partners in the former Partnership, individually, would be costly and futile, as none of the partners have sufficient assets to make such action worthwhile.
The issue is to be decided under Part 3.18 of the Act.
It is quite clear that each Trust is a ‘designated private trust’ for the purposes of s 1207P as the specified exclusions are not presently established.
Furthermore, the PW Trust is a ‘controlled private trust’ under s 1207V as Mr Wahlsten satisfies the ‘control test’ set out in s 1207V(2) – he was a trustee of that Trust. Having regard to the meaning of ‘associate’ under s 1207C, Mr Wahlsten satisfies the control test in respect of the KW Trust – his son Gregory was a trustee of that Trust when it was wound up.
As to whether Mr Wahlsten is an ‘attributable stakeholder’ of each Trust, s 1207X applies.
The present evidence does not establish that the PW Trust or the KW Trust were concessional primary production trusts in respect of Mr Wahlsten for the purposes of s 1208U. At the ‘test time’, no primary production was being carried on by a related entity.
It follows that Mr Wahlsten is an attributable stakeholder of each Trust unless the Secretary, or in those shoes this Tribunal, determines otherwise.
A determination of that kind is to be made having regard to decision-making principles set out in the Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2000 (Cth) (the Attribution Principles). The principles require consideration of the relationship between the individual and the trust having regard to why, but for a contrary determination, the individual would be an attributable stakeholder and to the circumstances set out in Part 2.
As regards circumstances arising from the legal structure and administrative arrangements of the Trusts, it is quite clear that Mr Wahlsten was a joint Trustee of the PW Trust from August 2000. Whether or not his exclusion as a Beneficiary of the KW Trust in March 2011 was lawful, I have seen no evidence that the Trustees of that Trust passed a resolution to exclude him or that a resolution was passed authorising a ‘Beneficial Entitlement’ liability of $2,408,840 that was payable to him. There is a real question whether such a liability existed and whether action could realistically be taken to recover it as a debt against the KW Trust.
I am satisfied that Mr Wahlsten did not exercise sole effective control of the PW trust after August 2000 – he exercised control jointly with other Trustees. I accept his evidence that, in practice, rightly or wrongly, the Trustees operated on a majority rules basis, and that he was “out-voted” from time to time on matters of some present relevance – relating to the sale of farm properties and the distribution of the sale proceeds, for example. There is some doubt about the weight given to his opinions by other Trustees. The Deed in Exhibit A7, to which Mr Wahlsten was not a party, requires ‘the consent of the other Trustees’ in respect of distributions under cl 4 on termination of the Trust. Other Trustees were not called to give evidence, so this point could not be clarified.
The contribution of Mr Wahlsten and Kathleen Wahlsten to the Trusts is significant, being the farm lands held by each Trust from 1974. No consideration was received for these contributions when the Trusts were wound up. It is possible that Mr Wahlsten received distributions from the KW Trust in the past, but the present materials shed no light on this.
As to the benefit of future distributions, there is no prospect of this occurring after the Trusts were vested on 28 March 2013. Prior to this event, future distribution benefits to Mr Wahlsten were uncertain. The Deed in Exhibit A7 deals with distributions but makes no provision for distributions to Mr Wahlsten or to Kathleen Wahlsten. This document is not a resolution of Trustees, and it does not represent a variation of the Deed of either Trust. The Trust Deed variations on 5 March 2011 did not expressly nominate Mr Wahlsten as a Beneficiary of the KW Trust. Mr Wahlsten’s evidence is that tensions existed between family members involved in the Trusts and in the Partnership from in or about 2007. These circumstances suggest that future distributions to Mr Wahlsten were not secure. And no further distributions to him were made once the farm properties were sold.
Mr Wahlsten received no benefit from the assets of the Trusts after they were sold in 2011.
On the materials before me, he is not an attributable stakeholder of another company or trust.
Mr Wahlsten told me that the intention of the Trust arrangements was to provide he and Kathleen some financial benefit in retirement, while allowing the next generation to farm the lands held by the Trusts. Circumstances ran against this being realised, including a run of drought years, and heavily leveraged property development ventures that did not go well. He told me that at the age of 80, he is left with very little in the wash up of all of this, with the Trusts wound up, the money gone and the Partnership ended, and he is not in a position to support himself for very long, before his remaining monies run out.
This notwithstanding, considering all of these circumstances, on balance, I am satisfied that Mr Wahlsten is an attributable stakeholder of the PW Trust and the KW Trust.
Asset attribution percentage
Under s 1207X, Mr Wahlsten’s asset attribution percentage is 100 percent unless the Secretary, or this Tribunal, makes a determination otherwise, having regard to the applicable decision-making principles.
In view of the circumstances I have discussed above, I am satisfied that it is inappropriate for Mr Wahlsten to have an asset attribution percentage of 100 percent in the PW Trust or the KW Trust.
To my mind, his asset attribution percentage in respect of the PW Trust should reflect the number of trustees of that Trust prior to vesting on 28 March 2013. At that time, he was one of three Trustees, so his asset attribution percentage is 33.33 percent.
As regards the KW Trust, it appears that as of 5 May 2011 he was not recorded as a Beneficiary of this Trust, and he was not a Trustee. He had separated from Kathleen. Gregory and Vanessa had interests that were substantially different than those of Mr Wahlsten.
I am satisfied that Mr Wahlsten’s asset attribution percentage in respect of the KW Trust is 0 percent.
Attributable assets
The attributable asset of the PW Trust at 30 June 2012 that is presently in contention is the loan to the Partnership, recorded in the amount of $2,725,310.
Under s 1208E, applying Mr Wahlsten’s asset attribution percentage, 33.33 percent of the attributable asset value ($908,346) is to be included when assessing the value of Mr Wahlsten’s assets unless the asset is an ‘excluded asset’ or it is to be disregarded by express provision of the Act – if it is an ‘unrealisable asset’ or it is to be treated as an exempt deprived asset, for example.
Excluded asset
Neither party raised any issue in respect of the excluded asset provision under s 1208E. And for this reason I will not dwell on this point – as will appear, the case turns on other points under the deprivation rules.
Had that not been so, I would have recalled the parties to address this point as, to my mind, the particular circumstances are sufficient to raise the possibility that the otherwise attributable asset may be excluded. And it is necessary to make a positive finding on this point under s 1208E.
I note in passing that the particular circumstances of this case are not expressly and directly covered in the decision-making principles determined for the purposes of s 1208E(4) - Part 2 of the Social Security (Attribution of Assets) Principles 2001. It is perhaps for this reason that the matter was not raised or addressed.
The Principles are delegated legislation that set out matter to which regard must be had when determining whether as asset is to be treated as an ‘excluded asset’. It does limit the range of cases that may be considered for the purpose of determining whether an attributable asset is excluded.[15]
[15] Repatriation Commission v Kimpton [2006] FCA 1120 at [47].
As I have said, as the parties have not been heard about these matters, I will move on without making a determination on this point.
Unrealisable asset
For the purposes of s 1208F, an asset is an unrealisable asset of a person, and hence of a trust, if it satisfies the tests set out in s 11(12) or (13) of the Act –
(12) An asset of a person is an unrealisable asset if:
(a) the person cannot sell or realise the asset; and
(b) the person cannot use the asset as a security for borrowing.
(13) For the purposes of the application of this Act to a social security pension (other than a pension PP (single)), an asset of a person is also an unrealisable asset if:
(a) the person could not reasonably be expected to sell or realise the asset; and
(b) the person could not reasonably be expected to use the asset as a security for borrowing.
The asset in question is a loan to the Partnership that, in all likelihood, reflected the value of Trust farm properties sold under foreclosure.
The weight of the evidence is that, following the winding up of the Partnership, the partners had insufficient assets to justify action to recover the debt from them individually or severally. I note that the personally liability of the partners is established under s 16 and 49 of the Partnership Act 1895 (WA) and this did not end when the Partnership was wound up on 30 June 2012.
Immediately prior to vesting the PW Trust, Mr Wahlsten was one of three Trustees acting jointly. On his evidence, the writing off of the Partnership debt was recommended by Mr Hooper, the Trust accountant. There is no documentary evidence of a resolution of Trustees to this effect. Nonetheless, it is likely that a decision was taken to forgive the debt, or to write it off as a bad debt.
To my mind, in the circumstances, the PW Trust could not reasonably be expected to commence legal action to realise the debt. Doing so would have required legal action against family members with insufficient assets to meet the debt. Action of that kind in a farming family such as the Wahlsten’s is not action that could reasonably be expected, even in the presence of tensions between some family members. Furthermore, considering the options facing Trustees at the time, in order to attempt recovery of the outstanding debt, it would have been necessary for the Trustees, who were also members of the former Partnership, to agree to a joint resolution to commence legal action against individual members of the Partnership. I do not think that they could reasonably have been expected to make a resolution of that kind in circumstances where the former partners did not have sufficient assets to render such action worthwhile.
To my mind, the debt as it stood before the PW Trust was vested might be appropriately treated as an unrealisable asset for the purposes of s 1208F and for the purposes of means testing Mr Wahlsten’s assets for the purposes of s 1064 in respect of the age pension.
Once the asset was disposed of by writing off the debt, it ceased to exist and the PW Trust was vested. Thereafter, it cannot be treated as an ‘unrealisable asset’. All that remains is the value of the asset that previously existed. And it is this value that must be addressed in Mr Wahlsten’s case.
Deprived asset
The term ‘deprived asset’ is defined in s 9(4) of the Act.
Under s 1208L if a person is an attributable stakeholder of a trust, and the trust ‘disposes’ of an asset for no consideration or an inadequate consideration in respect of the value of the asset, Part 3.12 of the Act applies as if the disposal was by an individual and the value of the disposal is the individual’s attribution percentage of the asset value. The meaning of ‘disposes’ is set out in s 1208L(6).
When the PW Trust ‘loan’ to the Partnership was written off, the Trust disposed of that asset for no consideration. As a Trustee of the PW Trust and one of the former partners in the Partnership, Mr Wahlsten may be taken to have received some consideration for the asset disposed – when the Partnership debt was written off, Mr Wahlsten’s personal liability in respect of it was extinguished. Proceeding under s 49 of the Partnership Act on the basis that each of the previous six partners was equally liable for the debt of the former Partnership, the value of the benefit Mr Wahlsten received when the Partnership debt was written off is one sixth of the total amount owing: one sixth of $2,725,310, being an amount of $454,218.
The Secretary says that as the debt to the Partnership was written off by the PW Trust Trustees, the deprived asset rules are engaged in respect of Mr Wahlsten. The value of the deprived asset is the original value of the asset as shown in the Trust accounts, less the amount of any consideration Mr Wahlsten received in respect of it. Initially, the Secretary asserted that the value of Mr Wahlsten’s deprived asset is $518,899, but it was accepted during the hearing that this is not correct.
Mr Wahlsten’s attributable percentage of the asset disposed of by the PW Trust is $908,346. Against this, the beneficial consideration he received as one of six partners in the Partnership when the debt to the PW Trust was written off must be taken into account. His share of this benefit is $454,218. Taking this amount into account, it follows that the value of his deprived asset is $454,128.
Under s 1208L(3), there is discretion vested in the Secretary, and presently this Tribunal –
(3) The Secretary may, by writing:
(a) determine that the disposal of a specified asset is exempt from subsection (1); or
(b) determine that subsection (1) has effect, in relation to the disposal of a specified asset, as if the reference in paragraph (1)(d) to the individual's asset attribution percentage were a reference to such lower percentage as is specified in the determination.
When considering exercise of the discretion, it is necessary to have regard to the Social Security (Modification of Asset Deprivation Rules) Principles 2002. The Principles apply tests of reasonable value to disposal of an asset by a trust to an individual or to a genuine investor, by way of a distribution or a dividend. None of these circumstances arise in the present case, in which an asset in the form of a debt owed by a Partnership was written off. The Principles do not squarely address the particular circumstances of Mr Wahlsten’s case. But this does not preclude exercise of the discretion conferred by s 1208L(3) if, having regard to all of the relevant circumstances, doing so is consistent with the objects and purposes of the Act. The Principles are a form of delegated legislation that does not operate to fetter the broad discretion conferred by Parliament to limit it to a particular kind of case.[16]
[16] Repatriation Commission v Kimpton [2006] FCA 1120 at [47].
The Act is beneficial in nature. The purposes of the provisions presently under consideration are to provide for the proper means testing of assets when calculating the rate of Mr Wahlsten’s age pension. The asset deprivation rules provide for the value of assets disposed of for a lesser consideration or for no consideration at all to apply for five years after disposal. The conferral of broad discretion serves to address unfairness or unintended consequences that may arise from a strict application of these rules in the particular circumstances of a case.
Having regard to Mr Wahlsten’s asset attribution percentage and his relationship to the PW Trust, I am satisfied that the disposal of the asset by the PW Trust writing off the Partnership debt was reasonable in the particular circumstances. I would say the same about the KW Trust writing off the Partnership debt. As I have said, the Partnership debt was not an asset that could reasonably be expected to be realised by the PW Trust (or the KW Trust) once the property assets of the Trust and the assets of the Partnership were disposed of in 2011 and the Partnership was dissolved on 30 June 2012.
To my mind, the purposes of the legislation are not served by treating a past financial asset in the form of a debt as a deprived asset, when the debt could not reasonably be realised when it existed and, in all likelihood, it was an unrealisable asset at that time.
While there may be concerns about the close familial relationships between those involved in the Trust and in the Partnership, where Trustees were also partners, arrangements of this kind are not unusual in farming families who seek to utilise complex financial arrangements, involving different legal entities. Without traversing the separate entity doctrine that was dealt with in Repatriation Commission v Harrison[17], the legal consequences of the arrangement of the Trusts and the Partnership, and the financial arrangements entered into by those entities and members of the Wahlsten family, cannot simply be ignored. The observation of the Tribunal in Re Hanrick and Secretary, Department of Social Security[18] is apposite –
[20] … If one is to make use of complicated structures in the course of managing one’s affairs in order to take advantage of the legal consequences of those structures, one cannot ignore the structure and its consequences when it suits one to do so.
[17] (1997) 46 ALD 193.
[18] [2003] AATA 549.
But this is not such a case. Unlike Hanrick’s case, the present case turns on the consequences of failure, where assets placed in Trusts were sold under threat of foreclosure to repay Partnership debts run up in failed property development ventures, and where those legal entities have been wound up. And where nothing remains but the previous value of Trust assets in the form of debts that were written off on the advice of an accountant who considered that there was no reasonable prospect of recovery.
I am satisfied that the disposal was not undertaken for the purpose of gaining a benefit under the Act. Before the disposal took place, the Partnership was wound up and all remaining assets were disposed of. On the evidence of Mr Hooper and Mr Wahlsten, the partners had no significant assets that would justify action to recover the remaining debt to the PW Trust. The disposal occurred in the context of vesting the Trust. Mr Hooper says the debt was written off as it was not feasible to attempt recovery from partners with insufficient assets or no assets, although what became of the $430,000 distributed to Gregory and Vanessa is not at all clear. This is consistent with Mr Wahlsten’s evidence that the costs of doing so were likely to outweigh the possible returns.
Once the debt was written off and the Trust was wound up, in Mr Wahlsten’s words, ‘there was nothing left’.
Considering all of the relevant circumstances, I am satisfied that it is appropriate to determine that the disposal of the PW Trust asset, the loan to the Partnership last recorded in the Trust accounts in the amount of $2,725,310, is exempt from operation of s 1208L(1) of the Act.
Conclusion and decision
This means that the value of Mr Wahlsten’s assets for the purposes of calculating the rate of age pension to which he may be entitled does not include any part of Partnership debt asset disposed of by the PW Trust. Mr Wahlsten’s attributable percentage in respect of the KW Trust is 0 percent, and so no part of the debt written off by that Trust is applicable to him as an asset.
The decision under review is set aside. The matter is remitted to the Secretary to determine Mr Wahlsten’s entitlement to payment of age pension in accordance with these reasons.
I certify that the preceding 84 (eighty - four) paragraphs are a true copy of the reasons for the decision herein of Mr S. Webb, Member ..(Sgd) A Tran......................................................................
Administrative Assistant
Dated 16 July 2015
Date of hearing
Applicant
Representative for
the Applicant7 July 2015
In person
Dr C Back
Representative for the Respondent
Mr D Carroll Solicitors for the Respondent Australian Government Solicitor
0