Social Security Act 1991 Part 3.18

1. Mr John Edstein and his wife are in receipt of the Aged Pension from Centrelink. Centrelink says the Edsteins are not entitled to the highest rate of pension because it has attributed income from a family trust to Mr and Mrs Edstein. The Social Security Appeals Tribunal (the SSAT) affirmed the decision on 13 May 2003. The Edsteins responded by changing aspects of the trust arrangement. They say they should be treated differently in light of those changes. The respondent says the changes make no difference. The SSAT agreed on appeal. The applicant has now approached this Tribunal for relief.

2. This case requires consideration of Part 3.18 of the Social Security Act 1991. In particular, it is necessary to decide whether the applicant is an attributable stakeholder in the Edstein Family Trust within the meaning of s 1207X. If he is an attributable stakeholder, a share of the trust income may be attributable to him when applying the income test under the Act.

3. The Tribunal was provided with the documents required under s 37 of the Administrative Appeals Tribunal Act 1975 (the T documents). Both parties provided written submissions, and I was shown correspondence between the applicant and the respondent. Mr Edstein gave evidence in person, as did Mrs Edstein and their accountant, Coral Wilson. Mr and Mrs Edstein and Mrs Wilson gave evidence together because Mr Edstein has a serious speech impediment as a result of illness. Mrs Wilson, a trusted professional adviser of the applicant, did most of the talking. Mr Ffrench represented the respondent.

4. Mr and Mrs Edstein established a family trust by deed on 29 May 1994. Under the terms of the deed, the Edsteins were the trustees, principals and primary beneficiaries. Their children and grandchildren were also nominated as beneficiaries, as were a number of charities.

5. The applicant says he was motivated by a desire to avoid stamp duty and other transaction costs that might be imposed on a transfer of assets. He had cash on hand and agreed to loan the money in varying amounts to his children on condition that they loaned the money to the trust. Those monies are the only asset of the trust. The funds are invested by a management company controlled by the applicant and his wife. The company pays a dividend to the trust, which the trust then distributes. Over the last few years, most of the money available for distribution has been directed to one of the applicant's grandchildren. The little boy is severely handicapped. The applicant and Mrs Wilson emphasised he has never received any money from the trust, and has no plans to seek a distribution. He says - and I accept - he wants the money to be available for members of his family and others who need it. I accept his goals are genuinely charitable, although I note some members of his family take a different view: there is correspondence in the T documents from the applicant's daughter questioning the motivation of the applicant in establishing the trust (T13). Some of Mr Edstein's children have attempted to get access to the trust funds in the past. I do not think anything turns on that evidence.

6. Centrelink said 50% of the income of the trust should be attributed to the applicant. Mr Edstein disagreed and appealed to the SSAT. The SSAT affirmed the decision on 13 May 2003. In the month that followed, the applicant spoke with his accountant and a lawyer. They decided to amend the trust documents. In a deed of amendment dated 2 June 2003, the applicant and his wife were removed as principals and beneficiaries of the trust. They remained as trustees. Their accountants, Mr and Mrs Wilson, were appointed as principals. The document purports to exclude the applicant from ever again becoming a principal or beneficiary, or from ever receiving any funds from the trust by way of remuneration or otherwise. Mrs Wilson says the applicant has clearly instructed her to block any attempt by the applicant to amend the trust so that he would be returned to a position where he was able to receive income from the trust. Mr and Mrs Wilson noted in a letter to Centrelink dated 23 June 2003 that they would be prepared to exercise their power to remove the trustees if it became necessary to do so. Mrs Wilson acknowledged she would be in a difficult position if it came to that as she was a professional adviser to the Edsteins, and was accustomed to acting on their directions.

7. The applicant told Centrelink of the changes, but the respondent says Mr Edstein is still an attributable stakeholder and insists on attributing 50% of the income of the trust to him.

8. The applicant is unhappy with this decision. He says he cannot relinquish control of the trust. A trustee who is not familiar with his wishes would not use the money appropriately. An outside trustee would also be expensive.

9. The law regulating attribution of income for the purposes of the income test is found in Part 3.18 of the Act. Section 1207 outlines the operation of the provisions. The section says income can be attributed to an individual where:

* there is a designated private trust within the meaning of s 1207P;

* the trust is a controlled private trust in relation to the individual within the meaning of s 1207V; and

* the individual is an attributable stakeholder in the trust within the meaning of s 1207X.

10. There is no dispute that the Edstein Family Trust is a designated private trust for the purposes of the Act. The SSAT was also clearly correct in finding the trust is a controlled private trust given Mr Edstein is a trustee: s 1207V(2)(a). In those circumstances, the applicant is necessarily an attributable stakeholder in the trust unless the Secretary determines otherwise - and he has not: s 1207X(2)(c).

11. Should the Secretary have determined that he was not an attributable stakeholder? The decision-maker (the Secretary at first instance, and the Tribunal in due course) must apply the Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2000 that were formulated pursuant to s 1209E of the Act. Part 2 of those principles require the decision-maker to consider whether Mr Edstein received any benefits from the trust in the past (he has not) or is likely to receive any in the future (he says not, and I believe him), or derives any other benefit from his association with the trust (he does not, apart from the satisfaction that might come from exercising control).

12. If the Secretary accepts the individual is an attributable stakeholder, he is required under s 1207X(2)(e) to determine an income attribution percentage - in other words, he is to decide how much of the trust income is to be attributed to the applicant as opposed to other attributable stakeholders, including (in this case) Mrs Edstein. Attributing 50% of the income to each seems a sensible enough result at first glance. But is that the correct and preferable decision? That depends in part on the application of Part 3 of the Principles.

13. Mr Edstein says if he is an attributable stakeholder, then he should not have any income attributed to him because he does not intend taking any money out of the trust by way of distribution or otherwise. He has not taken money in the past, and does not derive any benefits other than the gratification that might accompany control.

14. After having regard to the Principles, one is compelled to ask the question: if Mr Edstein is not in practice taking any money out of the trust, why not effectively ignore the income derived by the trust when calculating his entitlements to an Aged Pension?

15. I think the answer lies in the policy underlying the Act. That policy was explained in the second reading speech of the Minister when the amendments to the Act incorporating the provisions dealing with trusts were introduced to parliament (Commonwealth, Hansard, House of Representatives, 17 August 2000, at p. 19226). The Act and the extrinsic material make it clear the social security system is intended to provide relief to those genuinely in need. If one does not need help - if one is able to look after one's self out of one's own resources - one must not look to the taxpayer for assistance. One should provide for one's self as far as possible. The system is designed to assist the hungry, not provide everyone with a free lunch.

16. Articulating the policy in those terms might seem harsh in so far as Mr and Mrs Edstein are concerned. Their intentions are admirable. The trust income is being used at their direction to assist family members in need. But they are consciously refraining from using funds that might otherwise be available for their own maintenance. To that extent, the taxpayer is subsidising their charitable activities. That is inconsistent with the policy and scheme of the Act. I think the Secretary is right to determine the applicant is an attributable stakeholder. The respondent is also right not to reduce the amount of income that is attributed to Mr Edstein.

I certify that the 17 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member B J McCabe

Signed: .......................................................................................

For the Respondent Mr Ffrench, Departmental Advocate