Editors --- "Disability support pension: attribution of trust assets; whether trust is a 'controlled private trust'; whether discretionary objects of a nonexhaustive trust have alone or together measurable interests in the corpus or income of the trust" [2009] SocSecRpr 22; (2009) 11(2) Social Security Reporter, Article 11

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Disability support pension: attribution of trust assets; whether trust is a ‘controlled private trust’; whether discretionary objects of a nonexhaustive trust have alone or together measurable interests in the corpus or income of the trust

SECRETARY TO THE DFHCSIA v ELLIOT and ELLIOT

Federal Court of Australia

Decided: 24th March 2009 by Black CJ, Stone and Edmonds JJ

Background

Mr and Mrs Elliott were beneficiaries, along with their daughter and future children and their issue, of a life discretionary trust (the Trust) created by clause 5(b) of Mr Elliott’s father’s will dated 17 July 2000.

Centrelink had determined that the Trust was a ‘controlled private trust’ and that the assets of the Trust were to be attributed to the Elliotts. The attribution of the Trust’s assets resulted in the cancellation of the Elliotts’ pensions. The Elliotts appealed this decision to the SSAT, who found in their favour.

The Secretary to the DFHCSIA appealed the decision to the AAT. The AAT, which had evidence before it about the way in which the Trust had been administered, accepted that the trustees were administering the Trust at arm’s length and that the trustees had applied their independent judgment in considering whether or not to exercise their discretion. However, the AAT was satisfied that the Trust was a ‘controlled private trust’, the assets of which were to be attributed to the Elliotts.

The Elliotts appealed the decision to the Federal Court of Australia. The primary judge ordered that the decision of the AAT be set aside and that the SSAT’s decision be affirmed. The primary judge concluded that neither of the Elliotts, acting alone or together, had any legal or practical capacity to take control of the Trust. In the circumstances, they did not pass the ‘control test’ in relation to the Trust. The primary judge observed that it was open to doubt whether Part 3.18 was intended to extend to persons such as the Elliotts who ‘have minimal, if any, control over the corpus or income of a trust’ because ‘neither singly nor together are the Elliotts (or the Elliots and their daughter) able to control the disposition of the income or capital of the trust’.

The Secretary appealed the Court’s decision to the Full Federal Court.

The issues

The appeal turned on the proper construction of one aspect of the ‘control test’ in s.1207V(2)(d) of the Social Security Act 1991 (the Act).

Discussion

The Full Court noted that, pursuant to s.1207V(1), for the purposes of Part 3.18 of the Act, a trust is a ‘controlled private trust’ in relation to an individual if the trust is a ‘designated private trust’ (as defined in s.1207P(1)) and the individual passes the ‘control test’ in s.1207V(2) or the ‘source test’ in s.1207V(3).

In this matter, the Full Court was concerned with the proper construction of one aspect of the control test, namely s.1207V(2)(d). The Full Court’s decision turned on whether the Elliotts had an ‘interest’ in the corpus or income of the Trust and, if so, whether that interest could be measured.

The Full Court noted that the issue of whether a person who is a ‘beneficiary’ or ‘object’ of a trust has an ‘interest’ in the trust or the income thereof, has been addressed in a number of cases over the last 120 years in different statutory contexts, and that, in every case, the answer or conclusion arrived at has depended on two matters:

1. The nature of the discretionary trust in relation to the beneficiary or object; whether the trust is exhaustive with respect to the class of which the beneficiary or object is a member in the sense that the trustee is bound to distribute to one or more of the class or whether the trust is non-exhaustive by reason that the trustee has, in the case of income, a power to accumulate, or, in the case of corpus, there is a gift over in default of exercise of the discretion; and whether the relevant class is, at the relevant time, still open or closed; and

2. the statutory context in which the issue arises; in particular whether the mechanism of the statue cannot operate unless the precise extent of the interests can be identified.

In respect of the first matter, the Court noted that there are at least four kinds of discretionary trusts which have been identified:

1. Exhaustive trust with a closed class of beneficiaries;

2. Exhaustive trust with an open class of beneficiaries;

3. Non-exhaustive trust with closed class of beneficiaries;

4. Non-exhaustive trust with open class of beneficiaries.

The Full Court noted that, provided there is, at or during the relevant point or period of measurement, more than one member of the class in a discretionary trust, it is impossible to measure the extent of an individual beneficiary’s interest in the trust. However, it was also noted that in the case of an exhaustive trust, in relation to the trust’s income, it will be possible to measure the collective interests of all existing members of the class. That is, it an be said with absolute certainty that the individual rights of the beneficiaries when added up or taken together will extend to the whole income. There can be an equation x + y + z = 100, although the value of x, y or z is not yet known.

In the case of a non-exhaustive trust, the Full Court concluded that it will not be possible to measure the collective interests of all existing members of the class for the reason that the Trustee’s power to accumulate might be exercised. The Full Court concluded that, in the present case, the Trust as to both income and capital in clause 5(b) of the will (having regard to the Trustee’s power to accumulate the income of the trust in clause 7(b)(i) of the will) was a non-exhaustive discretionary trust with an open class of beneficiaries. The Full Court concluded, therefore, that the beneficial interests of the beneficiaries, both individually and collectively, were incapable of measurement.

The Full Court found that s.1207V(2) (d) mandates that the beneficial interests in the trust must be measured before the ‘control test’ requirement is satisfied. The Full Court therefore found that s.1207V(2)(d) could not apply to the Trust as the Elliotts’ interests in the Trust were incapable of being measured.

Formal decision

The Full Court dismissed the appeal

with costs.

[S.O.]

Court:

Federal Court of Australia