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Social Security Reporter |
Age pension: assets test; whether transfer of funds to daughter was a gift or a loan
(2012/562)
Decided: 28th August 2012 by J. Toohey
Mr and Mrs Darcy owned their home. When their daughter and son could not afford to buy their own homes, the Darcys decided to assist each of them by giving them an advance on their inheritances. Their home was unencumbered and they used an existing overdraft facility to draw down funds totalling $430,000. They took out an interest only loan, and gave the bank a mortgage over their home as security. Their daughter and son agreed to pay the interest owing from time to time but the principal would not be repaid.
In October 2005, Mr and Mrs Darcy gave their daughter $169,000 towards the purchase of a property. She was in a de facto relationship and they wanted to ensure the value of their contribution would be solely hers if the relationship ended. On the advice of their solicitor they entered into a loan agreement with their daughter which provided that the money would be repayable on 30 days’ notice if the relationship ended. The intention was to isolate it from any property settlement, after which they could return it to her for her own use. In 2009 or 2010 the Darcys gave a further $260,000 to their daughter to buy a unit in Melbourne for their son who was an undischarged bankrupt. The unit was bought in the daughter’s name and their son occupied it. As he was single, they saw no need for the kind of formal agreement they had with their daughter.
The Darcys intended to retire in 2011 and asked their solicitor and financial adviser whether the transactions would have any effect on their future entitlement to a pension. They were advised that their pensions would not be affected.
In September 2011, Mr and Mrs Darcy applied for age pensions. Centrelink treated the funds transferred to their children as loans, meaning they were assets for the purposes of the Pension Assets Test, and reduced the rate of their pensions accordingly. This decision was affirmed by the Social Security Appeals Tribunal (SSAT) and the Darcys sought a review of this decision.
The issue for the Tribunal to determine was whether the transfer of funds to the Darcys’ daughter in 2005 was properly characterised as a loan or a gift. The funds transferred later to their son were not in issue.
Mr and Mrs Darcy met the requirements in s.43 of the Social Security Act 1991 (the Act) and qualified for the age pension. Their pensions were payable at rates calculated according to a calculator in s.1064 of the Act, based on their combined assets.
Pursuant to s.9(1) of the Act a loan that has not been repaid in full is a financial investment and so a financial asset. Section 1077 provides that age pensioners and members of a couple are deemed to receive income from a financial asset.
Section 1118 exempts certain assets when calculating the value of a person’s assets. Section 1121 provides that if an asset (other than an exempt asset) is subject to a charge or encumbrance then, for the purposes of the assets test, its value is reduced by the value of the charge or encumbrance.
Pursuant to s.1122 a loan made after 27 October 1986 is considered an asset, and the value of a person’s assets includes so much of the loan as remains unpaid.
The Act contains provisions aimed at preventing a person who is claiming a social security payment from diminishing the value, or disposing of, assets in order to qualify for the payment. Assets disposed of in this way are included in the calculation of a person’s assets.
Section 1123 provides that a person disposes of assets if they directly or indirectly dispose of, or diminish the value of, some or all of, their assets; and, either, they receive no, or no adequate, consideration in money or money’s worth for the disposal or diminution, or the Secretary is satisfied that their purpose, or dominant purpose in doing so was to obtain a social security advantage.
Section 1127 provides that the disposition of an asset more than five years before the person became eligible for a social security payment is disregarded for the purposes of provisions in the Act concerning disposal of assets.
The Tribunal noted that the effect of these provisions was that a gift made within five years before qualifying for the age pension is treated as an asset. As the transfer of funds to the Darcys’ daughter occurred more than five years before either of them qualified for age pensions, if properly characterised as a gift, it would not affect their pensions.
If the transfer was properly characterised as a loan, then it would affect their pensions. The term loan is not defined in the Act. It is referred to in the Guide to Social Security Law (the Guide) which contains Centrelink policy about the interpretation and application of social security law. The Tribunal noted that it should apply the policy unless there are cogent reasons not to do so: Drake v The Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60.
According to the Guide:
To be a loan there MUST be:
o an actual lending of money or an asset of a particular value, AND
o a clear intention to repay.
A loan is:
o an advance of money, or
o the payment of an amount for, on account of, on behalf or poor at the request of the person where there is an obligation, whether express or implied, to repay the amount.
The Darcys and their daughter gave evidence before the Tribunal which was accepted. The facts as outlined above were not in dispute.
The Darcys intended that their daughter’s equity in the property by reason of the funds given to her would be isolated from any property settlement if her relationship ended. This had not happened. Their daughter had paid the interest on the overdraft but the principal was an advance on her inheritance.
The Darcys assisted their son to purchase his property in 2009 or 2010. In April 2012 he decided to move from Melbourne to Sydney and so the property was sold for slightly less than the purchase price. The proceeds were returned to his parents who applied it to reduce their overdraft until he found a suitable property in Sydney.
The Darcys conceded that because the money was given to their son within five years of them qualifying for the pension if it was a gift it would affect their pension; if it was found to be a loan, then as it had been repaid, it affected their pension for a few months only. They did not seek review of that aspect of Centrelink’s determination.
In support of the contention that the money advanced by the Darcys to their daughter was a loan the Secretary relied on the loan agreement drawn up in 2005 and the information provided in their application for age pensions.
The Tribunal accepted that on its face, the contract signed by the Darcys and their daughter and her partner was clearly a loan agreement but this left open the question whether it was merely a device to protect their daughter’s equity in her home in the event of a property dispute.
The Tribunal considered that based on the definition of a loan in the Guide, a defining characteristic of a loan was an intention that it be repaid.
The Secretary argued that the agreement evinced a clear intention that the Darcys could demand the whole of their money back on 30 days’ notice which was said to be sufficient to characterise it as a loan rather than a gift.
The Tribunal accepted that it is in the nature of a gift that there is no expectation of its return. The Tribunal was satisfied that at no time was there any intention by the Darcys or their daughter that she repay the money. Even if it had been ‘called in’ this was intended to be only temporary and there was never any intention that it be returned to the Darcys for their own use.
The Tribunal noted that in the arrangement the Darcys had with their son there was no written agreement with him and the arrangement was the same. The only difference was that he was not in a relationship and the Tribunal was satisfied that if the daughter had not been in a relationship, there would have been no written agreement with her.
The Secretary relied on the Tribunal’s decision in Lyons and Secretary, Department of Family and Community Services and Anor (2007) AATA 1095 and argued that the Darcys could not take advantage of the loan agreement to protect the advanced money in the event of a separation and then re-characterise it as a gift to take advantage of the provisions of the social security legislation in order to obtain a higher rate of age pension.
The Tribunal distinguished Lyons (above) as in that case there was clear evidence in the form of financial statements and directors’ reports supporting the view that the transactions in question were loans which the applicant then sought to characterise differently. The issue in this case was whether the original transaction was a loan at all.
The Secretary also relied on the Tribunal's decision in Hanrick and Secretary, Department of Family and Community Services (2003) AATA 549 which also involved a commercial arrangement.
The Tribunal did not accept that the Darcys had attempted retrospectively to re-characterise the arrangement with their daughter. Having sought legal advice about how best to protect their daughter’s equity in her property they acted on advice that the loan agreement was the best means of doing so.
The Tribunal noted that a similar situation arose in Tsourounakis and Repatriation Commission [2004] AATA 332, in which the Tribunal considered whether Mr and Mrs Tsourounakis’ assets included the value of a house they said they had given to their son. Their claim was made under the Veterans Entitlements Act 1986, which contained provisions virtually identical to those affecting the Darcys.
In Tsourounakis it was concluded that a property which had been their family home did not constitute part of their assets as although it remained in their name they had given it to their son when he lost his own home due to a failed business. At the time they said they always intended it would be his eventually but did not transfer the property to him because they feared his creditors could take it. From 1992, he lived in it with his family, paid all the outgoings and maintained the property.
The Tribunal noted the very strong policy reasons why a person should not be able to divest themselves of assets in order to obtain a social security payment. Any transaction which had the appearance of a loan, but which was claimed to be a gift, should be examined closely to determine its true nature. The Tribunal concluded that there was compelling evidence in this case to treat the transaction as a gift.
The decision was set aside and in substitution the Tribunal decided that the transaction by which the Darcys gave $169,000 to their daughter in 2005 was a disposition of an asset within the meaning of the Act which, because it occurred more than five years before either of them qualified for the age pension, was to be disregarded in calculating the value of their assets.
The matter was remitted to the Secretary to determine the correct rate of payment of the Darcys’ age pensions since 2 September 2011. [C.E.]
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URL: http://www.austlii.edu.au/au/journals/SocSecRpr/2012/24.html