Hawkins and Secretary, Department of Family and Community Services [1999] AATA 34 (22 January 1999)

Last Updated: 1 December 2005

Administrative
Appeals
Tribunal

DECISION AND REASONS FOR DECISION [1999] AATA 34

ADMINISTRATIVE APPEALS TRIBUNAL )
) No Q98/622
GENERAL ADMINISTRATIVE DIVISION )

Re PETER and JUDITH HAWKINS

Applicant

And SECRETARY, DEPARTMENT OF FAMILY AND COMMUNITY SERVICES

Respondent

DECISION

Tribunal Dr EK Christie, Member
Date 22 January 1999
Place Brisbane
Decision The Tribunal affirms the decision under review.

(Sgd) EK CHRISTIE
MEMBER

CATCHWORDS

SOCIAL SECURITY - parenting allowance - annual distribution from a discretionary trust - not periodic income - not income from financial assets - distribution to be maintained over following 12 months.

Social Security Act 1991 ss 8, 1073, 1077(1),(2)

Re Drummond and Secretary, Department of Social Security (AAT Decision 13287 delivered 16 September 1998)

Re Duckworth and Secretary, Department of Social Security (1995) 39 ALD 674

REASONS FOR DECISION

22 January 1999 Dr EK Christie

1. This is an application by Peter and Judith Hawkins to review a decision of the Social Security Appeals Tribunal (SSAT) made on 23 June 1998. The SSAT affirmed the decision made by a Commonwealth Services Delivery Agency (Centrelink) delegate of the Secretary to the Department of Social Security on 9 March 1998:

•	to treat income from the family trust as income for a period of 12 months from the date of distribution; and
•	to not allow the payment of arrears of newstart allowance.

2. The evidence before the Tribunal comprised the documents lodged pursuant to Section 37 of the Administrative Appeals Tribunal Act 1975, the "T" Documents (Exhibit 1) and the following exhibits:

•	Exhibit 2 Letter dated 11 June 1998 from Mr and Mrs Hawkins to SSAT
•	Exhibit 3 Bundle of Financial Records of the applicants

3. At the hearing the applicants were represented by Mr P Hawkins and the Department of Family and Community Services ("the Department") by Mr J Walsh, a Departmental Advocate.

Issues before the Tribunal

4. The only issue for the Tribunal to decide was whether income from the family trust could be treated as income for a period of 12 months from the date of distribution and so taken into account in assessing the rate of parenting allowance (PgA).

Facts

5. The general facts were not in dispute and may be stated briefly. Mr and Mrs Hawkins’ family trust (the AnnSam Trust) purchased and operated a newsagency for 12 months, at Tweed Heads in partnership with another family. The newsagency was sold on 26 June 1997.

6. Mr and Mrs Hawkins adopted two Fijian children in 1997. Mrs Hawkins claimed PgA on 10 February 1998.

7. Mr and Mrs Hawkins were beneficiaries of the AnnSam Family Trust. The Trust made a distribution of $10822 each to Mr and Mrs Hawkins on 30 June 1997.

Contentions and Submissions of the Parties

8. The basis of Mr Hawkins’ submissions was that all of their income in the 1996/97 tax year was earned from the newsagency that they operated in a partnership. Drawings or wages from the business were their sole source of income.

9. When the newsagency was sold on 26 June 1997, the Hawkins had no further income. Apart from the payment of a few accounts, no income was earnt.

10. Mr Hawkins then referred to Section 1073 of the Act contending that "the income was really in the form of periodic payments because it was paid on a regular basis, every Friday". He stated that Exhibit 2 illustrated this point, viz. The regular weekly periodic payments made to them. Furthermore, he submitted that "it was ordinary income, as well, from remunerative work undertaken by myself and my wife".

11. Mr Hawkins submitted that the money passing through the trust was really their own funds. He contended that if their money had been paid by the business in the form of wages, and not passed through the trust, there would not have been any distribution to the trust at all.

12. Accordingly, it was Mr Hawkins’ contention that the Department had erred in treating the distribution from the Trust on 30 June 1997 as ordinary income during the 12 months commencing on that date. Rather, it was periodic payments made to them. It was his submission that they were entitled to the income, not from the date of appointment, but from the time the income arose.

13. Moreover, Mr Hawkins submitted that the payments of income were either periodic payments or income coming within the meaning of Division 1B of the Act. As far as is relevant for the purposes of this application, Section 1077 provides:

"DIVISION 1B - DEEMED INCOME FROM FINANCIAL ASSETS.
SECTION 1077 DEEMED INCOME FROM FINANCIAL ASSETS - MEMBERS OF PENSIONER COUPLES
1077(1) [Application] This section applies to the members of a pensioner couple.
1077(2) [Both members of couple taken to have received income] If one or both of the members of a couple have financial assets, the members of the couple are taken, for the purposes of this Act, to receive together ordinary income on those assets in accordance with this section.

14. Mr Hawkins concluded with the submission that the money was just passing through the trust; in reality, it was their own funds. He contended that "if this money had been paid by the business in the form of wages, and not passed through the trust, well there wouldn’t have been any distribution to the trust at all".

15. Mr Walsh, the Departmental Advocate, referred to Re Duckworth and Secretary, Department of Social Security (1995) 39 ALD 674, a case decided by this Tribunal. Mr Walsh focussed on some of the similarities between Duckworth’s case and this application. For example, both cases involved the use of a discretionary trust for the purpose of the operation of the business; also, the income producing activity, in both cases, had ceased before claims for social security entitlements were made.

16. Mr Walsh referred to the Tribunal’s findings in Duckworth’s case (at paragraph 15, page 677) that the income distributions at the end of the financial year were income derived by the beneficiaries, notwithstanding that it had not been physically paid over to them. In addition, that there was an accounting adjustment that reflected the derivation of that income.

17. Accordingly, it was Mr Walsh’s contention that the Tribunal’s findings in Duckworth’s case appears to be based on the view that where there is a discretionary trust, until such time that the trustee exercised the discretion to distribute income, there was no right or entitlement in any beneficiary to any of the income.

18. Mr Walsh further contended that if there were income to be distributed and the trustee exercised discretion to distribute income to particular beneficiaries, such payments could not be regarded as periodic payments because there was never any guarantee:

•	whether net income was available for distribution;
•	whether the trustee would choose to distribute; and
•	whether the trustee would distribute to the particular beneficiaries.

19. It was Mr Walsh’s submission that, notwithstanding the activity that generates the income, viz. the Hawkins’ newsagency business "no doubt has that character", the distributions themselves were entirely discretionary. Mr Walsh acknowledged that, because of their work in the newsagency, Mr and Mrs Hawkins had a right to share in the income that might be distributed. However, the trustees had the absolute discretion how, and in what manner, a distribution was to be made. He referred to the Trust Deed (Document T15), specifically Clause 6 (Folio 135) to indicate that a discretionary trust existed.

20. Mr Walsh referred to the following submissions of Mr Hawkins:

•	that the trust was a vehicle through which money just passed through and that they were the "true owners" of the income earned over the period; and
•	the income should be taken to be income earned by them over the 1996/97 financial year and not applied as income received in the 1997/98 financial year.

21. Mr Walsh submitted that such arguments ignored the position in trust law that a beneficiary under a discretionary trust has no proprietary interest in any of the property, the capital or income of the trust.

22. Mr Walsh submitted that what Mr and Mrs Hawkins regarded to be wages paid to them were not wages as such. Rather, they were drawings on the capital account. However, he contended that this distinction was not the issue. The issue was whether there was a profit, whether the trustee exercised the discretion to distribute and whether the distribution was made to the beneficiaries concerned.

23. Furthermore, Mr Walsh submitted that the approach taken by the Department in its assessment of income derived from a trust, with respect to PgA entitlement, was a function of Section 1073 of the Act; and that this section applied prospectively for 12 months. The application of this provision of the Act was such that there was no discretion for any decision-maker to fail to give effect to that provision.

24. In addition, he submitted that the operation of Section 1073 did not depend on continuation of the trading activity, "if it is a trading activity that, in reality, generates the income that is ultimately available, and is actually distributed, by a trustee". Mr Walsh submitted that the operation of Section 1073 simply depended on a distribution having been made.

25. Mr Hawkins, in reply, stated that he had difficulty on reconciling the decision under review with the circumstances of his case. The money had been drawn upon by them in the preceding 12 months yet the Department’s approach was to treat it as being distributed on 30 June 1997.

The Law

26. The relevant provisions of the Social Security Act 1991 to resolve the issue to be decided in this case are Sections 1073 and 1077. Subsections 1077(1) and (2) provisions have been set out in paragraph 13.

27. Section 1073 is one of the Act’s provisions which deals with the ordinary income concept.

"SECTION 1073 CERTAIN AMOUNTS TAKEN TO BE RECEIVED OVER 12 MONTHS
1073. If a person receives, whether before or after the commencement of this section, an amount of income that:

(a) is not income within the meaning of Division 1B or 1C of this part; and
(b) is not:

(i) income in the form of periodic payments; or
(ii) ordinary income from remunerative work undertaken by the person:

the person is, for the purposes of this Act, taken to receive one fifty-second of that amount as ordinary income of the person during each week in the 12 months commencing on the day on which the person becomes entitled to receive that amount."

Consideration of the Issues

28. The objective of the Tribunal is to review administrative decisions, not only on their merits, but in accordance with the law at all times.

29. Section 8 of the Act provides that moneys which a person earns, derived or received by any means, is income for the purposes of assessing entitlements to social security. Accordingly, the income from the family trust would be included as income.

30. The central issue becomes the year in which the income is held to be received by Mr and Mrs Hawkins - the 1996/97 financial year when Mr and Mrs Hawkins had made drawings throughout the year; or, alternatively, the 1997/98 financial year.

31. Because the income has been earned from a discretionary family trust, the issue in this case must be determined in accordance with the relevant provisions of the Social Security Act. The consequences of these provisions significantly differ from the Income Tax Assessment Act 1936.

32. In this regard, the findings of this Tribunal in Duckworth’s case (at 677), when the operation of Section 1073 of the Act and discretionary trusts are involved are particular relevant:

"(15) Upon the trustee declaring, pursuant to the terms of the discretionary trust, that the beneficiary be credited with a share of the trustee’s income for the year, that beneficiary then has an absolute, indefeasible and absolutely vested interest in that amount and is legally able to demand payment of that amount - it is a recoverable debt at that point in time; see for example Lathan CJ and Williams J in FCT v Whiting (1943) 68 CLR 199, 7 ATD 179 at 183 where their Honours speak of the right to demand payment of a vested right to income. As such the amount is income derived by the beneficiaries, even though it may not have been paid over to them. Support for this finding is found in decisions of this Tribunal in Re Secretary, Department of Social Security and Browne (AAT, 19 June 1992, V91/162, unreported) and Re Christensen and Secretary, Department of Social Security (1995) 37 ALD 795."

33. On analysis of the Trust Deed, particularly Clause 6 [Disposition of Income and Losses], the Tribunal concludes that a discretionary trust operated for the purpose of operation of the newsagency business ("The AnnSam Trust").

34. The Tribunal finds that the income received from the AnnSam Trust on 30 June 1997 is clearly "income" for the purposes of the Act. The Tribunal concludes that the reasoning and legal authorities in Duckworth’s case (see paragraph 32), apply in the circumstances of this application.

35. The income does not fall within any of the exclusions in subsections (a) and (b) of Section 1073. Neither is it "deemed income" within the meaning of Division 1B of the Act; nor is it "periodic payments" or "ordinary income" from remunerative work. Mr and Mrs Hawkins were beneficiaries of a discretionary trust and had no entitlement to the payment until the Trustee exercised discretion. A similar conclusion as Duckworth’s case was also made by this Tribunal in Re Drummond and Secretary, Department of Social Security (AAT Decision 13287 delivered 16 September 1998).

36. Accordingly, the Tribunal concludes that the wording and application of Section 1073 of the Act is clear in the circumstances of this application. In Mr and Mrs Hawkins’ case, they are taken to have received one fifty-second of the payment from the trust as ordinary income during each week in the 12 months, commencing on the date they became entitled to receive the payment viz. 30 June 1997.

37. The Tribunal notes Mr Hawkins’ concerns as to the financial year in which they received income. Clearly, the difficulty in this case arose because the money had been earned as a distribution from a family trust. Application of the law which relates to social security entitlements and to trusts, results in Mr and Mrs Hawkins not having any entitlement to the income until the actual distribution was made on 30 June 1997.

38. The Tribunal has no discretion other than to apply the clear intention of the Act. That is, the trust income must be included as income for the 52 weeks following the distribution on 30 June 1997 and so taken into account in assessing parenting allowance entitlements. Consequently, payment of arrears of parenting allowance are not allowed.

39. For the above reasons, the Tribunal affirms the decision under review.

I certify that this and the 9 preceding pages are a true copy of the decision and reasons for decision herein of Dr EK Christie, Member.

Signed: Denise Burton
Secretary

Date/s of Hearing 15.12.98
Date of Decision 22.1.99
Rep. for Applicant Mr P Hawkins
Solicitor for Applicant      
Counsel for the Respondent Mr J Walsh, Departmental Advocate

Solicitor for the Respondent