Gale and Secretary, Department of Education, Employment and Workplace Relations [2010] AATA 17 (13 January 2010)

Last Updated: 5 February 2010

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 17

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2009/2868; 2009/2871

GENERAL ADMINISTRATIVE DIVISION		)
	Re		DAVID GALE and SEDA GALE

Applicants

And

SECRETARY, DEPARTMENT OF EDUCATION, EMPLOYMENT AND WORKPLACE RELATIONS

Respondent

DECISION

Tribunal

Mr S E Frost, Senior Member

Date 13 January 2010

Place Sydney

Decision

The decision under review is affirmed

...................[sgd]...........................
S E Frost
Senior Member

CATCHWORDS

SOCIAL SECURITY : Newstart Allowance – entitlement – assessment of ordinary income - attribution of income and assets from trust – calculation of deemed income – decision affirmed.

LEGISLATION

Social Security Act 1991; ss 8, 9, 1207, 1207C, 1207P, 1207V, 1207X, 1207Y, 1208B

Income Tax Assessment Act 1997: s 8-1

OTHER AUTHORITIES

Social Security (Means Test Treatment of Private Trusts – Excluded Trusts) (DEEWR) Declaration 2008,

REASONS FOR DECISION

13 January 2010

Mr S E Frost, Senior Member

INTRODUCTION

1. David and Seda Gale disagree with the way in which Centrelink has assessed their entitlement to newstart allowance.
2. At the heart of the dispute is the way in which Centrelink has treated Mr and Mrs Gale’s relationship with a family trust which is, for practical purposes, controlled by them. Income of the trust has been attributed to the Gales personally, and loans they have made to the trust continue to be treated as their assets and subject to “deeming”.
3. The Gales have applied to the Tribunal for a review of this assessment methodology.

THE ISSUE

4. The issue is whether the Gales’ entitlement to newstart allowance has been calculated correctly. The resolution of the issue depends on whether the income of the family trust in the 2007/2008 income year should be attributed to Mr and Mrs Gale.

THE FACTS

5. In 2004, Mr and Mrs Gale established a company called Com-Lan (Australia) Pty Ltd (Com-Lan). Mr Gale is its sole director, and Mr and Mrs Gale are its only shareholders. Com-Lan is the trustee of the Gale Family Trust, of which Mr and Mrs Gale and their three children are the beneficiaries.
6. The tax return of the trust for 2007/2008 shows taxable income of $6,930. This is the same amount shown as profit in Com-Lan’s profit and loss statement for 2007/2008. The balance sheet of the company at 30 June 2008 shows, as a liability, shareholders’ loans totalling $27,774, represented (apparently) by $13,887 lent to the company by each of Mr and Mrs Gale.

CONSIDERATION OF THE ISSUE

7. Section 1207 of the Social Security Act 1991 (the Act) explains, inter alia, that the question of whether the income of the trust is attributed to Mr and Mrs Gale depends on the following factors:

(a) whether the trust is a designated private trust under s 1207P of the Act;
(b) whether the trust is a controlled private trust in relation to each of Mr and Mrs Gale under s 1207V of the Act; and
(c) whether Mr and Mrs Gale, as individuals, are attributable stakeholders of the trust under section 1207X of the Act.

(a) Designated private trust

8. Section 1207P of the Act provides that:

1207P Designated private trusts

(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)); or

(d) the trust is an FHSA trust (within the meaning of the First Home Saver Accounts Act 2008).

9. The exclusions in paragraph (a), (b) and (d) do not apply in this matter That leaves for consideration only the question of whether the trust is an excluded trust under paragraph (c), which depends (subsection (4)) on whether the Secretary, by legislative instrument, has declared that a trust of this kind is an excluded trust.
10. In response to questions raised at the hearing, the Secretary’s representative provided to the Tribunal a written paper explaining that the only relevant instrument made by the Secretary is the Social Security (Means Test Treatment of Private Trusts – Excluded Trusts) (DEEWR) Declaration 2008, which declares as “excluded trusts” only:

• fixed trusts created before the reference time (7:30 p.m. on 9 May 2000); and
• community trusts.

11. The Gale Family Trust is not such a trust, and it follows that it is a “designated private trust”.

(b) Controlled private trust

12. Section 1207V of the Act provides that:

(1) For the purposes of this Part, a trust is a controlled private trust in relation to an individual if the trust is a designated private trust and:
(a) the individual passes the control test set out in subsection (2); or
(b) ... .

(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
...

13. Section 1207C(1) of the Act, referred to in s 1207V(2)(a), is in the following terms:

(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
(d) whether a trust is a concessional primary production trust in relation to an individual;
the following are associates of an individual:
(e) a relative of the individual;
(f) an entity who, in matters relating to the trust or company:
(i) acts, or is accustomed to act; or
(ii) under a contract or an arrangement or understanding (whether formal or informal), is intended or expected to act;
in accordance with the directions, instructions or wishes of:
(iii) the individual; or
(iv) the individual and another entity who is an associate of the individual because of another paragraph of this subsection;
(g) an entity that is a declared associate of the individual (see subsection (2));
(h) a business partner of the individual or a business partnership in which the individual is a business partner;
(i) if a business partner of the individual is an individual—the spouse or a child of that business partner;
(j) a trustee of a trust, where:
(i) the individual; or
(ii) another entity that is an associate of the individual because of another paragraph of this subsection;
benefits or is capable (whether by the exercise of a power of appointment or otherwise) of benefiting under the trust, either directly or through any interposed companies, business partnerships or trusts;
(k) a company, where the company is sufficiently influenced by:
(i) the individual; or
(ii) another entity that is an associate of the individual because of another paragraph of this subsection; or
(iii) another company that is an associate of the individual because of another application of this paragraph; or
(iv) 2 or more entities covered by the preceding subparagraphs;
(l) a company, where a majority voting interest in the company is held by:
(i) the individual; or
(ii) the entities that are associates of the individual because of any of the preceding paragraphs of this subsection; or

(iii) the individual and the entities that are associates of the individual because of any of the preceding paragraphs of this subsection.

14. From this it is clear that:
    • (a) Mr and Mrs Gale are associates of each other (s 1207C(1)(e)); and
    • (b) Com-Lan is an associate of each of them (s 1207C(1)(f)).
15. It follows that each of Mr and Mrs Gale passes the control test in relation to the Gale Family Trust because Com-Lan, the trustee of the trust, is an associate of each of them under a provision other than s 1207C(1)(j): s 1207V(2)(a).

(c) Attributable stakeholder

16. Section 1207X(2) of the Act provides:

(2) For the purposes of this Part, if:
(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);
then:
(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:
(i) 100%; or
(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:
(i) 100%; or
(ii) if the Secretary determines a lower percentage in relation to the individual and the trust—that lower percentage.

17. Both Mr and Mrs Gale are attributable stakeholders of the family trust (paragraph (c)).
18. The Secretary appears to have determined, in accordance with subparagraph (e)(ii), that an income attribution percentage lower than 100% (namely 50%) should apply to each of Mr and Mrs Gale. It is for this reason that the trust’s taxable income of $6,930 for the 2007/2008 income year has been attributed to them equally, as to one-half each, or $133.26 each per fortnight.
19. This amount of income is properly attributable to Mr and Mrs Gale in accordance with s 1207Y of the Act. It is “ordinary income” within the meaning of that expression in s 8 of the Act, and it follows that under s 1207Y(1)(e) it is to be attributed to Mr and Mrs Gale at the rate specified.
20. Mr Gale considers this outcome unreasonable because, on this approach, no allowance is made for the fact that the trustee of the trust had tax losses in the years prior to 2007/2008. Mr Gale says that these losses should be available for offset against the trustee’s 2007/2008 income, with the result that there would be no income from the trust to attribute to Mr and Mrs Gale in respect of that year.
21. This point is dealt with in s 1208B of the Act. Reductions to ordinary income of the trustee are restricted to:

• losses and outgoings that are allowable deductions under s 8-1 of the Income Tax Assessment Act 1997;
• deductions in respect of plant under Division 40 of that Act; and
• amounts that are allowable deductions under any other provision of that Act or the Income Tax Assessment Act 1936.

22. Prior year tax losses are not within any of those categories.
23. For completeness, I note that Centrelink’s treatment of the loans to the trust has also been correct. The amount that remains owing to the Gales from the trust is a “financial investment” as per s 9(1)(e) of the Act and is, therefore, a “financial asset”, also defined in s 9(1). The position in relation to financial assets is well explained in the Secretary’s Statement of Facts and Contentions, as follows (some references omitted):

53 Division 1B of Part 3.10 of the Act sets out how income from financial assets is calculated. Financial assets, is defined in s 9 of the Act, include financial investments, which are defined as including “a loan that has not been repaid in full”.
54 Actual return on financial assets is not taken as ordinary income for the purposes of the Act: s 1082. Instead, deeming rates are applied to the financial investments to arrive at an annual rate of ordinary income from a person’s financial assets: s 1078. A lower deeming rate is applied to investments below the deeming threshold, a higher deeming rate is applied to above threshold investments. Deeming rates are determined by the Minister: s 1082. The value of Mr and Mrs Gale’s investments never exceeded the relevant threshold and thus the deemed income on the Gales’ total financial assets was assessed at the rate of 3% from November 2008 and 2% from 20 March 2009.
55 In respect of the deemed income referable to the loans made by the Gales to the trust, it is contended that the value [of] the financial assets for the purposes of deeming is the outstanding amount of the loan: s 1122. As at the 2007/08 financial year each partner had an outstanding loan of $13,887 to the trust.

24. Mr and Mrs Gale did not dispute this part of Centrelink’s calculation. Instead their complaint is directed towards what they perceive as an illogical policy underpinning the law, particularly in relation to the interaction between the financial assets provision and s 1208B referred to above. Their point is simply this - the loans are repaid from profits earned by the trust, but there is no reduction from the trust’s ordinary income allowed under s 1208B for those repayments. In other words, if the trust’s taxable income in a year is $20,000, but out of that amount $8,000 is paid to the Gales as a reduction in the trust’s borrowings from them, the reduced amount of $12,000 (rather than the total amount of $20,000) is the amount that should be attributed to them as income.
25. It seems to me that the Gales’ complaint is misguided. It is the taxable income of the trust that is attributed to them. The repayments of the loan are not deductible under s 8-1 of the Income Tax Assessment Act 1997 because, as repayments of the principal amount borrowed (the loans are interest-free), they are outgoings of capital or of a capital nature. Just as the trust’s income was not increased by the amount of the borrowings when the loans were made, nor should the trust’s income be reduced when repayments of the borrowings are made.
26. Therefore, the decision under review must be affirmed.
    

I certify that the 26 preceding paragraphs are a true copy of the reasons for the decision herein of Mr S E Frost, Senior Member

Signed: .......................[sgd].........................................................

M. Corcoran, Associate

Date of Hearing 17 November 2009

Date of Decision 13 January 2010

Solicitor for the Applicants Appeared in Person

Solicitor for the Respondent Ms R Prasad, Centrelink Legal Services