Editors --- "Income test: lottery win paid by instalment" [2005] SocSecRpr 5; (2005) 7 Social Security Reporter, Article 5

• DUGGAN and SECRETARY TO THE DFaCS
• The law
• Submissions
• Formal decision

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Income test: lottery win paid by instalment

DUGGAN and SECRETARY TO THE DFaCS

(2005/863)

Decided: 5th September 2005 by R. Hunt

Duggan was receiving age pension (AP) at the maximum rate when she won $300,000 in a lottery. The terms of the lottery win were that it would be paid to her in instalments rather than as a lump sum. She advised Centrelink of the lottery win in March 2005. Centrelink decided to treat the lottery winnings as assessable income and reduced her rate of pension unders.1064 of the Social Security Act 1991 (the Act).

Duggan sought a review of this decision, as she had been advised by officials from the Taxation Office and from the lottery office, that Centrelink would not assess the winnings as income.

The law

Section 8(1) of the Social Security Act 1991 (the Act) provides the definition of “income” for social security income test purposes:

“Income”, in relation to a person, means:

(a) an income amount, earned, derived or received by the person for the person’s own use or benefit; or

(b) a periodical payment by way of gift or allowance; or

(c) a periodical benefit by way of gift or allowance;

but does not include an amount that is excluded under subsection (4), (5) or (8).

“Income amount” means:

(a) valuable consideration; or

(b) personal earnings; or

(c) moneys; or

(d) profits;

(whether of a capital nature or not).

Section 8(11) of the Act provides for amounts received that are exempt for the purposes of determining a person’s rate of AP (or exempt lump sum):

An amount received by a person is an exempt lump sum if:

(a) the amount is not a periodic amount (within the meaning of subsection 10(1A); and

(b) the amount is not a leave payment within the meaning of points 1067G-H20, 1067L-D16 and 1068-G7AR; and

(c) the amount is not income from remunerative work undertaken by the person; and

(d) the amount is an amount, or class of amounts, determined by the Secretary to be an exempt lump sum.

Note: Some examples of the kinds of lump sums that the Secretary may determine to be exempt lump sums include a lottery win or other windfall, a legacy or bequest, or a gift-if it is a one-off gift.

Submissions

Duggan argued that the Centrelink decision was unfair because if she had received her winnings in a lump sum, it would not have been assessed as income, but as she has received periodic payments, she was unable to spend her winnings in the same way as a lump sum.

Are lottery winnings paid in instalments ‘income’?

The AAT considered that while s.8(11) of the Act contains a “note” about lottery wins, the note does not carry the force of law, but is simply an observation about the possible interpretation and application of the section. In addition, the note is expressed as examples of what the Secretary “may” determine to be an exempt sum. Generally, social security law did not treat a windfall gain, such as a lottery win, as income. This is because a windfall gain usually lacks regularity or periodicity, which is a feature of income. However, in Duggan’s case, the winnings were not paid as a lump sum but periodically at the rate of$5,000 every two months or $30,000 per annum.

The AAT considered a number of relevant cases and concluded:

In the past, lottery wins were usually not assessable income for income tax purposes according to general principles. See, for example, Graham v Green (1925) 2 KB 37, Babka v Federal Commissioner of Taxation [1989] FCA 383; (1989) 89 ALR 373. Other gifts and windfall gains may not amount to income as well but there are incursions into this general principle depending on matters such as the contribution of the recipient to the arrangement and whether the receipt of the moneys involved is periodic. There are numerous examples of moneys which might otherwise have been treated as exempt from income tax that have been converted to income by the manner in which the moneys are received in the hands of the recipient. It is the character of the receipt in the hands of the recipient which determines whether it is income or capital. A lump sum received as such is generally capital, whereas periodic instalments are received in the manner of income and are treated as income for this reason. (Reasons, para.12)

The AAT also considered Centrelink’s policy guidelines which state that “periodical lottery winnings that are a series of payments under one contract are not exempt - each instalment is assessed as income over the period it represents”.

The AAT held that the general principle is that periodic payments are income.

As Duggan’s lottery winnings were paid to her in the form of instalments, they were clearly “periodical payments” and fell within the definition of “income” set out in s.8(1) of the Act.

Formal decision

The AAT affirmed the decision under review.

[S.P.]