Editors --- "Age pension: controller of family trust; attributable stakeholder; whether asset attribution less than 100%" [2006] SocSecRpr 14; (2006) 8(2) Social Security Reporter, Article 3

• SECRETARY TO THE DFaCS and LINTON
• Background
• The law
• The issues
• Formal decision

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Age pension: controller of family trust; attributable stakeholder; whether asset attribution less than 100%

SECRETARY TO THE DFaCS and LINTON

Decided: 7th February 2006 by R. Hunt

Background

Linton established the Linton Family Trust (‘the trust’) in 1975 along with a family company, Tonlin Enterprises Pty Ltd (‘Tonlin’), to act as its trustee. Linton and his wife were among the beneficiaries of the trust and were directors of the family company. In 1993 the trust deed was amended so that Linton and his wife were no longer named as beneficiaries. Their four adult children became the only named beneficiaries.

In 1991 the trust purchased a property which was sold 12 years later. The capital gains tax generated by the sale was paid for by the beneficiaries of the trust, Linton’s four children.

In 2001 Linton and his wife resigned as directors of the family company, but Linton stayed on as company secretary. His children, especially his son Bruce, began to assume formal control of the trust.

Centrelink found Linton was the controller of the trust and attributed 100% of the assets of the trust to him. On 20 October 2004 Centrelink cancelled his pension as the assets of the trust attributed to him exceeded the cut-off limit for age pension in accordance with the assets test.

The SSAT held that by 2004Linton was not a controller of the family trust and therefore entitled to the age pension. The DFaCS appealed the decision.

The law

Since 1 January 2002, the Social Security Act 1991 (‘the Act’) has provided that the assets and income of a private trust or company can be attributed to an individual.

Section 1207V(1) of the Act states that a trust is a controlled private trust in relation to an individual if the individual passes the ‘control test’ or the ‘source test’ .

1207V.(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

(d) the aggregate of:

(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);

is 50% or more; or

(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.

The assets of the trust can be attributed to an individual stakeholder, if either the control or source tests are satisfied.

1207X.(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.

Section 1209E requires the Secretary to comply with the Attribution Principles when making a determination under s.1207X. These principles are set out in the Social Security (Attributable Stakeholders and Attribution Percentages) Principles2000.

The issues

The AAT was required to decide if Linton was an ‘attributable stakeholder’ because he passed the control or source test and if so, whether 100% of the assets of the trust should be attributed to him.

The control test

A person can be considered controller of a trust in two ways, either via the ‘control’ test or via the ‘source’ test. The AAT was satisfied that the relevant test in this case was the control test.

The AAT described the control test as capturing a person if they retain core management abilities or functions, such as controlling a trustee, wielding veto power, having the ability to change trustees or the terms of the trust or influence distributions from the trust. The AAT held that Linton controlled the trust in this manner, although the situation altered over the years. Even though the trustee was Tonlin, the family company, Linton was able to vary the trust deed, and remove or appoint the trustee, and thus Linton was caught by the control test by virtue of s.1207V(2)(b) of the Act. The AAT also noted that there were further reasons why Linton was within the control test, citing s.1209V(2)(h).

Notwithstanding this finding the AAT accepted that over time, Linton’s son Bruce began to assume formal control of the trust because his father was no longer capable. Due to his age, Linton became vague and forgetful.

The SSAT decided that as Linton had lost the ability to control the trust and was unable to exercise any discretion about trust distributions or to initiate modifications of the trustor its beneficiaries he was not captured by the control test under s.1207V(2)of the Act.

The AAT accepted the SSAT’s fact findings, but felt that Linton still met the control test under subsections (2)(b) and possibly (2)(h).

However, the AAT felt that on the evidence of two of Linton’s children, all the directors of the trustee company Tonlin exercised control of the trust in the way contemplated bys.1207V(2)(h). The evidence was that the family had meetings and discussions before they took any action as trustee. Decisions were reached by consensus. The directors of Tonlin were accustomed or ‘might reasonably be expected to act in accordance with the directions, instructions or wishes of a group in relation to the individual’(as per s.1207V(2)(h)).

The AAT found each of the directors of Tonlin (Linton and his four children) and possibly Linton’s wife were captured by the control test for the purposes of the Act and the attribution of assets for calculation of Linton’s pension.

Attribution of trust assets

In considering whether Linton should be attributed less than 100% of the trust’s assets the AAT considered the principles in the Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2000.

Whilst Linton was the secretary of Tonlin which was trustee of the trust, and theoretically controlled the trust by virtue of the power to appoint, dismiss or remunerate trustees, the AAT said the evidence was such that the day to day running of the trust was beyond him. The AAT referred to Giedans and Secretary, Department of Family & Community Services (2003)75 ALD 768 as authority for holding that it was not appropriate to attribute100% of the assets to Linton.

Formal decision

The AAT set aside the decision under review and found that Linton was only one of several controllers of the trust. The matter was remitted to the Secretary to make a determination in accordance with the principles set out in the Social Security (Attributable Stakeholders and Attribution Percentages) Principles 2000.

[J.F.]