SOCIAL SECURITY - pensions, benefits and allowances - Age Pension - attribution of value of assets - control of Estate's assets - circumstances to vary asset attribution percentage - special circumstances - decision affirmed

Social Security Act 1991 ss 1207C, 1207P, 1207V, 1207X, 1208E, 1129, 1130

Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2000

Re Edstein and Secretary, Department of Family and Community Services [2004] AATA 68; (2004) 79 ALD 88

Re Secretary, Department of Family and Community Services and Cocks [2002] AATA 1179

Re Drake and Minister for Immigration and Ethnic Affairs (No 2) [1979] AATA 179; (1979) 2 ALD 634

The applicant's husband, Peter Haldane Ragless, died on 29 March 2003. In his will he left his entire estate to his trustees to be held in a testamentary discretionary trust (the Trust) during the lifetime of his wife Gladys Ragless (the applicant), with the applicant, his six children and his grandchildren comprising the range of potential beneficiaries under the Trust.

On 5 November 2004 the respondent (the Department) determined that the assets of the Estate of the late Peter Haldane Ragless (the Estate) should be attributed to the applicant. This resulted in her Age Pension being cancelled as her assets then exceeded the allowable level.

On 5 November 2004 the Department decided to raise and recover an Age Pension debt of $12,383.33 for the period 26 September 2003 to 2 November 2004. The Authorized Review Officer affirmed both decisions on 13 January 2005.

Mr Lester Ragless, the applicant's son and attorney and one of the executors of the Estate, sought a review of that decision to the SSAT. On 3 March 2005 the SSAT affirmed the decision under review. The applicant has sought a review of that decision to this Tribunal.

The applicant raises no dispute as to the value of the assets of the Estate that have been attributed to her. Through her representative she accepted the affirmation of the Department's decision. She sought a review with respect to that decision applying to a holiday home in which the Estate presently owns a one seventh share. The applicant's six children each own a one seventh share as tenants-in-common with the Estate. In a letter the executor then requested that the Tribunal re-examine the decision generally.

The issues in this matter are:

•

Is it a correct decision to attribute the value of the assets of the Estate to the applicant?

•

Whether the applicant has control of the Estate's assets as defined in the Social Security Act 1991 (the Act) such that the attribution principles apply to her?

•

Are there any circumstances that would allow the Tribunal to vary the asset attribution percentage that has been applied in this case?

•

If the decision to attribute assets to the applicant was a correct decision, should there be an exclusion of the value of the Estate's interest in the holiday home on the basis that it is not a realisable asset and not an asset that can be enjoyed by the applicant?

•

Are there any special circumstances that would justify a waiver of some or all of the debt raised as a result of the decision to attribute the assets of the Estate to the applicant?

For the assets of a trust to be attributed to an individual, that trust must come within the definition of a "designated private trust" within the Act_._ Section 1207P(1) of the Act provides as follows:

"(1) For the purposes of this Part, a trust is a designated private trust unless:

(a) all of the following conditions are satisfied:

(i) the trust is a fixed trust;

(ii) the units in the trust are held by 50 or more persons;

(iii) the trust was not created, continued in existence or operated under a scheme that was entered into or carried out for the sole or dominant purpose of enabling any individual or individuals to avoid the application of this Part and/or Division 11A of Part IIIB of the Veterans' Entitlements Act; or

(b) the trust is a complying superannuation fund (see subsection (3)); or

(c) the trust is an excluded trust (see subsection (4))."

If a trust is a designated private trust, then the next step is to determine whether the trust is a controlled trust. Section 1207V of the Act provides that a trust is a controlled private trust if the trust is a designated private trust and the individual passes either the control test or the source test. Those tests are set out in s 1207V(2) as follows:

"(2) For the purposes of this section, the individual passes the control test in relation to a trust if:

(a) the individual, or an associate of the individual (other than an associate covered by paragraph 1207C(1)(j)), is the trustee, or any of the trustees, of the trust; or

(b) a group in relation to the individual was able to remove or appoint the trustee, or any of the trustees, of the trust; or

(c) a group in relation to the individual was able to vary the trust deed or to veto the decisions of the trustee; or

(i) the beneficial interests in the corpus or income of the trust held by the individual (whether directly or indirectly); and

(ii) the beneficial interests in the corpus or income of the trust held by associates of the individual (whether directly or indirectly);

(e) a group in relation to the individual had the power (by means of the exercise by the group of any power of appointment or revocation or otherwise) to obtain, with or without the consent of any other entity, the beneficial enjoyment of the corpus or income of the trust; or

(f) a group in relation to the individual was able in any manner whatsoever, whether directly or indirectly, to control the application of the corpus or income of the trust; or

(g) a group in relation to the individual was capable under a scheme of gaining the enjoyment or the control referred to in paragraph (e) or (f); or

(h) a trustee of the trust was accustomed or under an obligation (whether formally or informally) or might reasonably be expected to act in accordance with the directions, instructions or wishes of a group in relation to the individual.

(3) For the purposes of this section, an individual passes the source test in relation to a trust if:

(a) the individual has transferred property or services to the trust after 7.30 pm, by standard time in the Australian Capital Territory, on 9 May 2000; and

(b) the underlying transfer was made for no consideration or for a consideration less than the arm's length amount in relation to the underlying transfer.

Group

(4) A reference in this section to a group in relation to an individual is a reference to:

(a) the individual acting alone; or

(b) an associate of the individual acting alone; or

(c) the individual and one or more associates of the individual acting together; or

(d) 2 or more associates of the individual acting together."

9. Section 1207C of the Act sets out the categories of persons who are associates of an individual as follows:

"(1) For the purposes of this Part, in determining:

(a) whether a trust is a designated private trust; or

(b) whether a company is a controlled private company in relation to an individual; or

(c) whether a trust is a controlled private trust in relation to an individual; or

...

the following are associates of an individual:

(e) a relative of the individual;

..."

10. If the applicant passes the control test then s 1207X(2) of the Act provides:

(a) a trust is a controlled private trust in relation to an individual; and

(b) the trust is not a concessional primary production trust in relation to the individual (see section 1208U);

(c) the individual is an attributable stakeholder of the trust unless the Secretary otherwise determines; and

(d) if the individual is an attributable stakeholder of the trust--the individual's asset attribution percentage in relation to the trust is:

(ii) if the Secretary determines a lower percentage in relation to the individual and the trust--that lower percentage; and

(e) if the individual is an attributable stakeholder of the trust--the individual's income attribution percentage in relation to the trust is:

(ii) if the Secretary determines a lower percentage in relation to the individual and the trust--that lower percentage."

Section 1207X(5) of the Act provides that in making a determination the Secretary must comply with any relevant decision making principles. Principles are established in the Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2000 (the Principles), Parts 2 and 3 of which set out the circumstances that the Secretary must consider in determining whether in any given case a person can be determined not to be an attributable stakeholder or whether if they are a stakeholder, an attributable percentage of less than 100 percent can apply.

Parts 2 and 3 of the Principles set out the circumstances that the Secretary must consider in determining either that an individual is not an attributable stakeholder or, even if they are, that their asset attribution should be less than 100 percent. The provisions are as follows:

_"_7 Circumstances affecting relationship with company or trust

(1) The Secretary must consider whether there are relevant circumstances that make it inappropriate for the individual to be an attributable stakeholder of the company or trust.

(2) For subsection (1), relevant circumstances include the extent to which the relationship between the individual and the company or trust is affected by any of the following circumstances:

(a) circumstances arising from the legal structure of the company or trust;

(b) circumstances arising from the administrative arrangements of the company or trust;

(c) whether, having regard to the relationship between the individual and the company or trust, the individual can reasonably be expected to exercise effective control in relation to the company or trust.

If the individual has made a contribution to the company or trust, the Secretary must consider the circumstances in which the contribution was made and, in particular:

(b) the proportion that the value of the contribution has to the total assets of the company or trust at the time of the contribution; and

(c) the effect of the contribution on the financial position of the company or trust; and

(d) if the individual received consideration for the contribution, the amount of consideration.

9 Past benefit from distributions by company or trust

(1) The Secretary must consider whether the individual has received a benefit from a distribution made by the company or trust.

(2) If an individual has received a benefit, the Secretary must also consider:

(b) if the individual has received a benefit on more than 1 occasion, the frequency with which the individual has received benefits.

(3) For this section, a distribution includes distributions:

(a) in the case of a distribution by a company -- of the capital or income, or both, of the company; and

(b) in the case of a distribution by a trust -- of the corpus or income, or both, of the trust.

10 Future benefit from distributions by company or trust

(1) The Secretary must consider whether it is reasonably foreseeable that the individual may receive a benefit from a future distribution by the company or trust.

(2) If subsection (1) applies, the Secretary must also consider the likely value of the benefit.

(3) For this section, the Secretary must have regard to:

(a) the constituent documents of the company; or

(b) documents, if any, establishing the terms of the trust.

(4) For this section, a distribution includes distributions:

(a) in the case of a distribution by a company -- of the capital or income, or both, of the company; and

(b) in the case of a distribution by a trust -- of the corpus or income, or both, of the trust.

11 Benefit from assets and income of company or trust

(1) The Secretary must consider whether the individual receives or derives any kind of benefit (other than a benefit mentioned in section 9 or 10) from the assets or income, or both, of the company or trust.

(a) is not limited to a benefit to which the individual has a legal or equitable entitlement; and

(b) includes benefits received or derived in the form of property or services.

12 Existing attribution to individual

(1) The Secretary must consider whether the individual is:

(a) under the Act -- an attributable stakeholder of any other company or trust; or

(b) under the Veterans' Entitlements Act 1986 -- an attributable stakeholder of the company or trust, or of any other company or trust.

(2) If subsection (1) applies, the Secretary must also consider:

(a) the asset attribution percentage attributed to the individual, if any; and

(b) the income attribution percentage attributed to the individual, if any.

The Secretary must consider any other circumstance that affects the involvement of the individual with the activities or the administration of the company or trust.

...

16 Circumstances affecting relationship with company or trust

(1) The Secretary must consider whether there are relevant circumstances that make it inappropriate for the individual to have an asset attribution percentage of 100%.

(2) For subsection (1), relevant circumstances include the extent to which the relationship between the individual and the company or trust is affected by any of the following circumstances:

(a) circumstances arising from the legal structure of the company or trust;

(b) circumstances arising from the administrative arrangements of the company or trust;

(c) whether, having regard to the relationship between the individual and the company or trust, the individual can reasonably be expected to exercise effective control in relation to the company or trust and, if so, the extent of that control.

If the individual has made a contribution to the company or trust, the Secretary must consider the circumstances in which the contribution was made and, in particular:

(b) the proportion that the value of the contribution has to the total assets of the company or trust at the time of the contribution; and

(c) the effect of the contribution on the financial position of the company or trust; and

(d) if the individual received consideration for the contribution, the amount of consideration.

18 Past benefit from distributions by company or trust

(1) The Secretary must consider whether the individual has received a benefit from a distribution made by the company or trust.

(2) If an individual has received a benefit, the Secretary must also consider:

(b) if the individual has received a benefit on more than 1 occasion, the frequency with which the individual has received benefits.

(3) For this section, a distribution includes distributions:

(a) in the case of a distribution by a company -- of the capital or income, or both, of the company; and

(b) in the case of a distribution by a trust -- of the corpus or income, or both, of the trust.

19 Future benefit from distributions by company or trust

(1) The Secretary must consider whether it is reasonably foreseeable that the individual may receive a benefit from a future distribution by the company or trust.

(2) If subsection (1) applies, the Secretary must also consider the likely value of the benefit.

(3) For this section, the Secretary must have regard to:

(a) the constituent documents of the company; or

(b) documents, if any, establishing the terms of the trust.

(4) For this section, a distribution includes distributions:

(a) in the case of a distribution by a company -- of the capital or income, or both, of the company; and

(b) in the case of a distribution by a trust -- of the corpus or income, or both, of the trust.

20 Benefit from assets and income of company or trust

(1) The Secretary must consider whether the individual receives or derives any kind of benefit (other than a benefit mentioned in section 18 or 19) from the assets or income, or both, of the company or trust.

(a) is not limited to a benefit to which the individual has a legal or equitable entitlement; and

(b) includes benefits received or derived in the form of property or services.

21 Existing attribution to individual

(1) The Secretary must consider whether the individual is:

(a) under the Act -- an attributable stakeholder of any other company or trust; or

(b) under the Veterans' Entitlements Act 1986 -- an attributable stakeholder of the company or trust, or of any other company or trust.

(2) If subsection (1) applies, the Secretary must also consider:

(a) the asset attribution percentage attributed to the individual, if any; and

(b) the income attribution percentage attributed to the individual, if any.

The Secretary must consider any other circumstance that affects the involvement of the individual with the activities or the administration of the company or trust.

Mr Lester Ragless appeared on the applicant's behalf. The applicant is now elderly and resides in a nursing home. Mr Ragless advised that he had been present when his father attended at a solicitor's office in the year 2000 to redo his will. His father had expressed a wish to alter his will such that only his children would be beneficiaries. His reason for doing so was that his wife (the applicant) had sufficient individual assets in her own name and would be well able to provide for herself without contribution from his Estate.

The solicitor suggested that rather than exclude his wife from the will, he set up a discretionary trust in his will, making his wife one of the range of potential beneficiaries under the testamentary trust. The will was drafted accordingly.

Mr Ragless expressed concern that the solicitor did not advise of the possible Social Security implications of such a structure. He conceded that the amendments to the legislation which put in place the "attribution principles" were not on the public record or before Parliament at that point in time.

Mr Ragless' position is that the attribution of assets to the applicant is unfair. She has diminished capacity and was in a nursing home prior to her husband's death. She is elderly and has no capacity to enjoy the assets of her husband's Estate. She is one of a range of beneficiaries. While she was living on the Age Pension things were working out well in terms of her own finances. She did not require any income from the Estate and there has never been any need for a distribution to her.

The existence of the Trust assets came to the attention of the Department because one of the other beneficiaries was exploring their entitlement to benefits. The Department then attributed 100 percent of the value of the assets of the Trust to the applicant once they became aware of the existence of the testamentary Trust and its terms.

Mr Ragless submitted that the holiday home was an unrealisable asset. There were seven separate owners of the property, and no one party would be willing to buy out another. Nor could they necessarily afford to do so. The applicant receives no enjoyment from the holiday home as she is not well enough to travel there. In his submission that asset should be excluded from the attribution of assets to the applicant.

A result of the attribution of assets to the applicant has been that her Age Pension has been cancelled. Her nursing home fees have increased, and there is now a significant shortfall between her current income from her own investments and her annual living costs, hence capital is required to support her.

Mr Ragless' preferred outcome was that the applicant be attributed with a percentage interest in the assets of the Trust equivalent to her position as a beneficiary, but that 100 percent attribution is unreasonable in all the circumstances.

The Tribunal made the following findings of fact:

•

Peter Ragless died on 29 March 2003. In his will (T7) he directed that his assets be retained in a discretionary testamentary Trust with his six children, his grandchildren and his wife as the beneficiaries of the income of the Trust during what is known as "the period of discretion", being the life of his wife (the applicant). Upon the death of his wife the Estate is to be distributed among his six surviving children in equal shares (or among the survivors of them or their surviving children).

•

The executors of the will are three of the applicant's children. They are also the trustees of the testamentary Trust set up under the will.

•

At the date of her husband's death Mrs Ragless was residing in a nursing home and was in receipt of Age Pension.

•

Probate with respect to the Estate was granted on 26 September 2003.

•

At that date a person who owned assessable assets over $406,500.00 had no entitlement to an Age Pension.

•

The net value of the Estate disclosed in the grant of probate (T7) was $305,239.68. It is agreed that as at 1 July 2004 the Trust's financial statements showed a value of the Estate of $300,222.00

•

At the date of probate being granted the applicant had personal assets comprising financial investments of $131,706.00 and a nursing home bond of $64,800.00.

•

Between 26 September 2003 when probate was granted on her husband's Estate and 2 November 2004 when the applicant's Age Pension was cancelled, she received Age Pension payments totalling $12,383.33.

•

One of the assets of the Estate comprises a holiday home at Point Turton. The Estate holds a one seventh share in that property as a tenant-in-common with the six children of the applicant who each hold a one seventh share in turn.

•

In the first full financial year after the death of Peter Ragless, the Trust income was distributed, but the applicant did not receive any distribution.

The facts in this case are straight forward and there are no issues of credibility or disputed facts for the Tribunal to deal with.

If the Department's position is correct, then on the relevant date of 26 September 2003, being the date that probate was granted, the value of the assets of the Estate combined with the value of the assets of the applicant exceeded the allowable asset limit for payment of Age Pension. An overpayment has thereby occurred and there is no dispute raised with the quantum of the overpayment.

The rationale behind the establishment of the Social Security Trust and Company legislation is set out both in the SSAT decision and in the Authorised Review Officer's decision. It is to prevent individuals distancing themselves from assets to which they have access, directly or indirectly, while at the same time receiving Social Security benefits. The attribution legislation was enacted in 2002 at a time well after the will of Peter Haldane Ragless was signed, but it has application to the applicant and to the assets of the Estate as it was the law in force when he died.

The Trust set up under the will does not come within any of the exceptions set out in s 1207P(1) of the Act. It is not a fixed Trust, and it does not come within any of the categories set out in ss 1207P(1)(a)(ii) and (iii), (b) and (c) of the Act. It is therefore a designated private trust within the meaning of the Act.

The next issue to determine is whether the Trust is a "controlled trust" in relation to the applicant. The applicant in this case passes the control test. Section 1207V(2)(a) of the Act needs to be read in conjunction with the definition of "associates" as set out in s 1207C(1) of the Act. An associate of an individual includes a relative of the individual and s 1207V(2) of the Act provides that an individual passes the control test if:

"(a) the individual, or an associate of the individual (other than an associate covered by paragraph 1207C(1)(j)), is the trustee, or any of the trustees, of the trust;"

It is quite clear that the applicant's children who are her executors and "associates" have control over the distribution of income under the Trust and also the distribution of capital during her lifetime.

The next issue is to determine whether the applicant is an attributable stakeholder of the Trust. It has been established that the Trust is a controlled private Trust in relation to the applicant and s 1207X(2)(c) of the Act determines that she therefore becomes an attributable stakeholder of the Trust, "unless the Secretary otherwise determines". Section 1207X(2)(d) of the Act determines the asset attribution percentage as being 100 percent or such lower percentage as the Secretary determines.

In making that determination the Secretary must have regard to the Principles. The Principles set out a number of criteria for the Secretary to consider in determining either that a person should not be treated as an attributable stakeholder or should not be attributed with 100 percent of the assets. To determine if an individual is not an attributable stakeholder the Secretary must consider Part 2 of the Principles paragraphs 7 to 13, and to vary an asset attribution percentage Part 3 paragraphs 16 to 22 are relevant.

The Tribunal has considered the various criteria that the Secretary should consider.

The Tribunal is satisfied that the legal structure of the Trust was set up to ensure that during the lifetime of the applicant she would be well provided for if her own resources were not sufficient to cover her needs. It was possibly also set up to ensure her entitlement to Age Pension and other Government benefits would be maximised.

During her lifetime and the lifetime of Peter Ragless, the applicant would have contributed to the assets that are now held by the Trust. All the evidence suggests that she and her husband built those assets up over the course of their marriage.

The Trust has not had to provide benefits to the applicant until such time as her Age Pension was taken away because her assets exceeded the allowable asset level as a result of the asset attribution.

Hereafter the Trust will probably need to provide income and will sell down either her capital or the capital of the Trust to support her until such time as she dies, or becomes eligible once more for a pension because of reduction in assets.

Although the applicant has no direct control of the Trust assets or income in that she is elderly and in a nursing home, her children, who are trustees, operate the Trust for her benefit during her lifetime and they will then benefit from the residue of the assets after her death.

The Tribunal had regard to Re Edstein and Secretary, Department of Family and Community Services [2004] AATA 68; (2004) 79 ALD 88 and also to comments made by Senior Member Handley in Re Secretary, Department of Family and Community Services and Cocks [2002] AATA 1179.

in considering how the Principles should be applied. Both cases place emphasis on the policy underlining the attribution legislation. At paragraphs 63 and 64 of Re Cox (supra) Senior Member Handley commented as follows:

"63. The Amending Act represents a significant policy change by the Federal government regarding the assets and income of welfare recipients. By attributing assets and income to persons who benefit from trusts and companies, it is the stated intention of government that "income support entitlements are based on a persons level of resources not on the way in which he/she holds those resources" (refer Second Reading Speech Hansard/House of Representatives 17 August 2000 page 19226.

64. Additionally "the fundamental change being proposed under this measure is that when a private trust or private company is recognised as a designated private trust or company the assets and income of these private trusts and private companies may be attributed to a person who controls or has contributed to these structures" (refer Second Reading Speech Hansard/Senate 3 October 2000 at page 17711)."

In Re Drake and Minister for Immigration and Ethnic Affairs (No 2) [1979] AATA 179; (1979) 2 ALD 634 Brennan J commented about the application and relevance of the policy of government. At 645 His Honour said:

"When the Tribunal is reviewing the exercise of a discretionary power reposed in a Minister, and the Minister has adopted a general policy to guide him in the exercise of the power, the Tribunal will ordinarily apply that policy in reviewing the decision, unless the policy is unlawful or unless its application tends to produce an unjust decision in the circumstances of the particular case. Where the policy would ordinarily be applied, an argument against the policy itself or against its application in the particular case will be considered, but cogent reasons will have to be shown against its application, especially if the policy is shown to have been exposed to parliamentary scrutiny."

The Tribunal agrees that it must have regard to the underlying policy in exercising its discretion. The applicant has not demonstrated anything that would justify a departure from that policy.

The Tribunal is satisfied, after consideration of the Principles, that it remains appropriate that 100 percent of the assets be attributed to the applicant and that the applicant be considered an attributable stakeholder within the meaning of the Act.

The further issue for the Tribunal to determine is whether a one seventh share of the holiday home can be treated as an unrealisable asset, and therefore excluded from consideration as an asset of the Estate. In that regard the Tribunal needs to consider the provisions of ss 1129 and 1130 of the Act. These provisions provide that if a pensioner's rate of pension is affected by the assets test, then it is possible to disregard the value of a particular asset (including an attributed asset) if that asset is unrealisable.

Section 1129(1)(e) of the Act provides that a determination that the value of an asset is unrealisable is dependent on being satisfied that the person would suffer severe financial hardship if that section did not apply.

The applicant does not suffer severe financial hardship. She has assets in her name alone, and is also a beneficiary under a testamentary Trust that is able to distribute capital and income to her during her lifetime. That Trust also holds substantial assets. Section 1129 of the Act cannot be used in this instance to benefit the applicant.

In the circumstances the Tribunal affirms the decision under review.

I certify that the 44 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member L Hastwell

Signed: .............J Coulthard........................................

Associate

Date of Hearing 26 September 2005

Date of Decision 22 December 2005

Counsel for the Applicant Mr L Ragless (son)

Solicitor for the Applicant -

Counsel for the Respondent Mr A Goldie

Solicitor for the Respondent Centrelink Legal Services Branch