Editors --- "Assets and income tests: whether assets and income of testamentary trust wholly attributable; whether Special Disability Trust" [2008] SocSecRpr 9; (2008) 10(1) Social Security Reporter, Article 9

• SECRETARY TO THE DFHCSIA and EGBERTS
• Background
• The issues
• Whether Egberts held a life interest in the Trust?
• Whether the assets and income of the Trust were wholly attributable to Egberts?
• Whether there was a Special Disability Trust?
• Formal decision

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Assets and income tests: whether assets and income of testamentary trust wholly attributable; whether Special Disability Trust

SECRETARY TO THE DFHCSIA and EGBERTS

(2007/2102)

Decided: 21st December 2007 by D.P. Block

Background

Egberts had a severe intellectual disability and received disability support pension (DSP). Prior to her mother’s death in 2001Egberts was cared for by her mother in her mother’s home at St Clair. Egberts’ mother made a will in which she settled a testamentary trust (the Trust) for the benefit of Egberts. Egberts’ sisters were appointed executors and trustees (the Trustees) of the will. The will provided for the estate to be held by the Trustees on trust for the benefit of Egbert with absolute discretion to use the assets of the estate (capital and income)for the benefit of Egberts. The assets of the Trust were the St Clair house and term deposits of $80,000.

After her mother’s death, Egberts lived in the St Clair house until October 2004 before moving into a group home. The St Clair house was rented out to one of Egberts’ brothers for $250 per week. As well as the rental income the Trust derived a small amount of interest income.

The Trustees were concerned that Egberts did not have security of tenure in the group home and could be asked to leave or need to leave at any time. They accumulated the income of the Trust for the possibility that they would need to undertake renovations to the St Clair home and pay for support services so that Egbert could return to live there, and to meet any increased costs for Egberts’ medical treatment or other therapies. The Trust had only paid out $9000 in the years 2002 and 2003.

Centrelink reduced Egberts’ rate of DSP on the basis that the assets and income of the Trust should be wholly attributed to Egberts pursuant to Part 3.18 of the Social Security Act 1991 (the Act). A debt of $1850.98 was raised for the period14 October 2004 to 28 June 2008.

The SSAT set aside the decision. The Secretary to the DFHCSIA appealed to the AAT.

The issues

The relevant issues were:

· whether Egberts held a life interest in the Trust;

· whether the assets and income of the Trust where wholly attributable to Egberts; and

· whether the Trust was a Special Disability Trust.

Whether Egberts held a life interest in the Trust?

Section 1118 of the Act provides that the value of certain assets of an individual are to be disregarded for the purpose of calculating the value of a person’s assets. These include the value of a person’s life interest.

The SSAT set aside Centrelink’s decision, determining that Egbert sonly had a life interest under the Trust and therefore the value of her life interest should not be used to calculate her DSP entitlement.

The Tribunal found that the SSAT erred in determining that Egberts held a life interest under the Trust. A life interest is one in which the beneficiary or life tenant is entitled, during his or her lifetime, to the income derived. By contrast the Trust was held to be a discretionary trust in which Egberts was the only possible discretionary object.

Whether the assets and income of the Trust were wholly attributable to Egberts?

Part 3.18 of the Act operates to attribute to individuals, in certain circumstances, assets owned by companies and trusts. Section 1118 of the Act operates so as to restrict the operation of the attribution provisions, but only to the extent that the asset to be attributed would be disregarded in accordance with s.1118 of the Act. .

The SSAT considered whether the assets of the trust should be attributed to Egberts. The SSAT considered that because Egberts’ interest in the Trust was to be disregarded (as it was a life interest), then the assets of the Trust were also exempt. Having determined that Egbert held a life interest, the SSAT concluded that the value of her life interest in the Trust should not be used to calculate her DSP entitlement.

The SSAT then considered whether the income of the trust should be attributed to Egberts. After setting out the relevant criteria from the Social Security (Attributable Stakeholders and Attribution Percentages)Principles 2000 the SSAT concluded that the appropriate attribution percentage was 0. A significant reason for reaching this conclusion was that Egberts did not have any ‘control’ over the Trust and the prospect of future benefit was ‘unknown’. The SSAT therefore determined that the assets of the trust should be disregarded pursuant to s.1118 of the Act and that the income of the Trust be attributed at the rate of 0%.

The AAT found the SSAT erred in that s.1118 did not prevent the assets of the Trust from being attributed to Ebgerts in accordance with Part 3.18 of the Act. The Tribunal found that the Trust was a designated private trust under s.1207P of the Act and a controlled private trust under s.1207V of the Act. Further, that Egberts and the Trustees were attributable stakeholders as referred to in s.1207X of the Act.

The Tribunal held that Part3.18 applied, subject to two issues, to attribute the assets of the Trust to Egberts. The two issues were:

(a) the effect of s.1208E(1)(c); and

(b) the extent to which, on discretionary basis, the income and assets of the Trust should be attributed.

Section 1208E(1) of the Act provides:

(a) an individualist an attributable stakeholder of a company or trust at a particular time on or after 1 January 2002; and

(b) at that time, the company or trust owns a particular asset (whether alone or jointly or in common with another entity or entities); and

(c) if, at that time, that asset had been owned by the individual instead of by the company or trust, the value of the asset would not be required to be disregarded by an express provision of this Act; and

(d) at that time, the asset is not an excluded asset;

there is to be included in the value of the individual’s assets an amount equal to the individual’s asset attribution percentage of the value of the asset referred to in paragraph (b).

In determining the percentage of attribution, s.1207X(5) of the Act requires consideration of the Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2000 (the Principles).

The Tribunal said thats.1208E(1)(c) posed a hypothetical question - whether the value of an asset which is owned, in this case by the Trust, would be exempt if the same asset were owned by the relevant individual, that is, Egberts. In this case the relevant assets were the bank deposits and the St Clair property. The Tribunal found that if those assets were owned by Egberts they would not be exempt. The St Clair property would not be exempt unless it had been her principal home, which it no longer was.

The Tribunal then turned to consider the application of the Principles in Egberts’ case. Egberts’ counsel argued that she should not be considered an attributable stakeholder. The reasons were that she did not make any contribution to the Trust; she had no capacity to exercise any control over the Trust; that since March 2003 she had not derived any benefit from the Trust; and that it was unlikely she would do so in the foreseeable future.

The Tribunal noted that it is necessary to have regard to the degree of control exercised by Egberts. But this was only one element and that all other elements pointed towards a 100 percent attribution. The Tribunal noted that whilst the Trustees were accumulating rather than distributing income, there was no reason to suppose that the Trustees would not, if the need arose, utilise income or assets for Egberts’ benefit. On the evidence, the current policy of accumulation was designed to benefit Egberts. Under the terms of the Trust only Egberts could benefit.

The Tribunal discussed that the prima facie position of the legislation is that the attribution percentage is 100 percent. Only where the attributable stakeholder will not, as a matter of substance, benefit from the Trust should the attribution percentage be reduced. This was not the case in this matter. Egberts was to be attributed 100 percent.

Whether there was a Special Disability Trust?

A third issue arose at the Tribunal, that is, whether the Trust was a Special Disability Trust (SDT).

The Act was amended with effect from 20 September 2006, by the inclusion of a new Part 3.18A ‘Private financial provision for certain people with disabilities’. The effect of Part 3.18A is to modify the rules in respect of individuals with disabilities who have the benefit of a SDT.

For a trust to fall within Part 3.18A, it must satisfy all the requirements of s.1209L-T, although the Secretary has the power to waive any one or more of them.

The DFHCSIA contended that the Trust did not meet the requirements of s.1209N of the Act - that is, the sole purpose of the trust must be to ‘meet the reasonable care and accommodation needs of the beneficiary’. The DFHCSIA contended that the Trust was for Egberts’ benefit generally and the trust deed was not limited in the way expressly required bys.1209N(1) in that the Trustees were entitled to distribute income to Egberts for purposes unconnected with her care and accommodation needs.

The Tribunal agreed the Trust was not in strict compliance with the provisions of s.1209N of the Act. However the Tribunal accepted that it was an SDT, and waived the requirement to satisfy section 1209N.

Formal decision

The Tribunal set aside the decision under review and determined that:

(a) the decision of the DFHCSIA is affirmed; and

(b) the Trust was to be categorised as a Special Disability Trust within Part 3.18A of the Act with effect from 20 September 2006.

[J.F.]