[2014] AATA 964  

Division	GENERAL ADMINISTRATIVE DIVISION	
File Number	2014/3251	
Re	Leonard Bayliss	
	APPLICANT	
And	Secretary, Department of Social Services	
	RESPONDENT	
Decision

Tribunal	Dr P McDermott RFD, Senior Member
Senior Member A C Cotter
	
Date	24 December 2014	
Place	Brisbane	
The Tribunal varies the decision of the Social Security Appeals Tribunal and remits to the respondent for reconsideration the valuation of the applicant’s asset, being his right in equity to demand payment of the Unpaid Present Entitlements standing to his credit in the Kaell Trust and consider the claim of the applicant having regard to these reasons. 

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Dr P McDermott RFD, Senior Member

CATCHWORDS
SOCIAL SECURITY – Newstart Allowance – Unpaid Present Entitlements – UPE – Value of assets exceed limit – Balance held in trust – UPE held to be loan for purposes of attribution – Whether UPE loan, debt or otherwise – Method for valuing assets – Decision varied and remitted.

LEGISLATION
Social Security Act 1991 (Cth), ss 11, 611, 1122, 1208E, 1209E, 1207P, 1207V
Social Security (Attribution of Assets) Principles 2001 (Cth)

CASES
Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1990) 3 ACSR 649
Cayeux and Department of Family and Community Services [2000] AATA 434
Commissioner of Taxation (Cth) v Radilo Enterprises Pty Ltd (1997) 72 FCR 300
Re Eimberts and Repatriation Commission (1988) 16 ALD 19
Gordon and Department of Social Security [1992] AATA 174
Prime Wheat Association Ltd v Chief Commissioner of Stamp Duties (1997) 37 ATR 479 
Turner and Secretary, Department of Family and Community Services [2003] AATA 680

REASONS FOR DECISION

Dr P McDermott RFD, Senior Member
Senior Member A C Cotter

24 December 2014
Introduction
1.	On 14 March 2014, Mr Leonard Bayliss applied to Centrelink for a Newstart allowance. He subsequently completed the necessary forms and attended a work assessment interview. Being assessed as in need of the top level of support to find employment, an appointment was made for him with Sarina Russo at Logan for 9 April 2014. That appointment did not proceed, because when Mr Bayliss arrived, he was advised that he was no longer eligible for support and that he would need to contact Centrelink. The decision to reject the claim was affirmed by both an 
Authorised Review Officer (“ARO”) of the Department of Human Services and the Social Security Appeals Tribunal (“SSAT”).  
2.	At the heart of the matter is how a particular asset of Mr Bayliss, shown in the financial statements of a trust as an “unpaid present entitlement” in his favour as a beneficiary, is characterised for the purpose of the asset test. The Respondent, the Secretary, Department of Social Services (“Secretary”), considers it is a loan; Mr Bayliss disagrees. The relevance of the dispute is that if the amount is classed as a loan, it is to be valued in a particular way under the legislation, which Mr Bayliss believes operates to his disadvantage. If it is not a loan, then an alternative valuation approach may need to be considered.
Background
3.	The facts are not controversial. They can be conveniently summarised as follows.
4.	In March 1986, Mr Bayliss won a share in a first division lottery, the value of which share was a little over two million dollars. After paying off his home mortgage, purchasing a new car and taking a holiday, he placed the balance of his winnings in a term deposit, maturing in July 1986, pending receipt of investment advice. Shortly afterwards, Mr Bayliss gave notice to his then employer and retired, in the expectation that he would never have to work again. 
5.	After interviewing several prospective candidates, Mr Bayliss selected an accountant and financial planner. Acting on their advice, the Kaell Trust (“the Trust”) was formed on 
3 July 1996 with Kaell Investment Holdings Enterprise Pty Ltd (“Company”), incorporated the same day, as trustee. Mr Bayliss was, and is, the sole director, secretary and shareholder of the Company.
6.	Mr Bayliss was, and is, the appointer of the Trust. He and his daughter are the sole beneficiaries.
7.	Relevantly, cl 6(o) of the Deed of Trust provides that the trustee has the power: 
To appropriate without obtaining any of the consents otherwise required by law any part of the Trust Fund either in its actual condition or state of investment or by setting apart or crediting in the books or accounts of the trust any sum in or towards the satisfaction of any share whether vested or contingent to which any person may be entitled in the Trust Fund.
8.	Most of the winnings were deposited into the Trust’s bank account with Macquarie Bank Limited. Income came into the Trust from investments and Mr Bayliss had the freedom to draw any amount of money he wanted which usually was about $50,000.00 per year, but was sometimes more and sometimes less. That continued for about seven years when Mr Bayliss separated from his wife. He was given primary care of his daughter. A property settlement was effected in December 2004, with Mr Bayliss’ share being just over one million dollars. He subsequently cut back on his living expenses and reduced his annual drawings. He built a new house in 2006, selling many of his assets to fund it. 
9.	From late 2007, his investments, like those of many, were affected by the 
Global Financial Crisis. He and the Trust also suffered considerable financial losses from investments in Great Southern Plantations, the wash up of which was, at the time of the hearing, still before the courts, with that investment frozen pending further orders. As a consequence, he could no longer cover his living expenses from his drawings. Assets were sold at a loss to fund living expenses.
10.	The financial statements for the Trust for the 2012-2013 financial year confirm that it suffered losses on its disposal of investments in both 2012 and 2013. The balance sheet confirmed an excess of liabilities over assets of $239,904.00. Included in those liabilities were Unpaid Present Entitlements (“UPE”) totalling $383,268.00, comprised of an amount of $347,793.00 in respect of Mr Bayliss (“Mr Bayliss’ UPE”) and the balance for his daughter, the other beneficiary of the Trust. Total assets were put at $143,364.00.
11.	In support of his claim for Newstart allowance, Mr Bayliss completed a number of forms, including the modPT for private trusts. In response to Question 51, as to whether the Trust owes money to anyone, including associates (“distributions allocated to a beneficiary that have not yet been paid to the beneficiary”), he answered “Yes”, and identified the amounts referred to in the preceding paragraph which related to him and his daughter. In response to the next question, he confirmed that there was no written loan agreement. He reiterated that answer in response to Question 97.
12.	Mr Bayliss’ claim was rejected by the Secretary on the basis that he failed to meet the assets test prescribed by s 611 of the Social Security Act 1991 (Cth) (“Act”). As at 
14 March 2014, the limit was $196,750.00 for a single person who owns his or her own home. 
The Review Process
13.	Mr Bayliss requested that the Secretary’s original decision be reviewed by an ARO. In deciding to affirm the decision, the ARO concluded that Mr Bayliss had a loan to the Trust of $347,793.00, which constituted an asset and which exceeded the allowable limit.
14.	In affirming that decision, the SSAT applied the attribution provisions under Part 3.18 of the Act and the Social Security (Attribution of Assets) Principles 2001 (“Principles”) made under s 1209E of the Act to deduct from the value of the Trust’s assets Mr Bayliss’ UPE; that reduced the value of the attributed assets to nil. However, the SSAT went on to conclude that the $347,793.00 was in fact a loan by Mr Bayliss to the Trust and therefore should be included in his assets. Relying on s 1122 of the Act, the SSAT observed that that section had long been regarded as a deeming provision which allows the value of the asset to be determined at its book value, regardless of recoverability.
The Issue for the Tribunal 
15.	While Mr Bayliss has sought a review of the SSAT’s decision, it emerged from his Statement of Facts, Issues and Contentions and from his evidence and submissions at the hearing, that there was only one “live” issue for the Tribunal’s determination. It is of a particularly narrow compass and can neatly be summarised as follows.
16.	Mr Bayliss contends, for the reasons discussed below, that the amount designated as his UPE in the Trust’s financial statements is not a “loan”, but rather a debt in his favour.  On questioning from the Tribunal, he did not dispute that should that argument be accepted, the “debt” would still be an asset that would need to be taken into account for the purposes of the asset test. However, if Mr Bayliss’ argument was to succeed and the UPE was not characterised as a “loan”, s 1122 of the Act would not apply and could not afford its “deeming” assistance to the Secretary in valuing that asset. If the Tribunal were to conclude that the amount is properly characterised as a loan, Mr Bayliss readily concedes that the result using s 1122 of the Act is correct, that the value of the loan is taken as its book value (regardless of the prospects of recoverability), and the decision would be affirmed.
17.	The Advocate for the Secretary likewise acknowledged that if Mr Bayliss’ UPE were found to be a debt rather than a loan, it would still be considered to be an asset of 
Mr Bayliss for the purpose of the asset test. She had no instructions as to how that 
re-characterised asset might be valued, but quite properly acknowledged that 
s 1122 of the Act may well not be applicable in those circumstances. 
18.	In light of these developments, the central issue for determination is whether the amount shown in the Trust’s financial statements as Mr Bayliss’ UPE is a loan.
The Parties’ Contentions
19.	The Secretary asserted that Mr Bayliss’ UPE constituted a loan by him to the trustee. As such, the Secretary contended that it was an asset whose value should be determined by reference to s 1122 of the Act. That provides that if a person lends an amount after 
27 October 1986, the value of that person’s assets for the purposes of the Act includes “so much of that amount as remains unpaid but does not include any amount payable by way of interest under the loan”. On that basis, the Secretary included the amount of $347,793.00 in the value of Mr Bayliss’ assets.
20.	Mr Bayliss denied that his UPE was a loan at all. He did so on two bases. First, he relied on the reasoning of the Tribunal in Cayeux and Department of Family and Community Services [2000] AATA 434 as authority for the proposition that one cannot “lend” to oneself. Second, relying on passages from Chitty on Contracts, and the decision of the Supreme Court of Victoria in Brick and Pipe Industries Ltd. v Occidental Life Nominees Pty Ltd (1990) 3 ACSR 649, he contended that, in order to be a loan, there had to be, not simply a payment of monies, but rather, an obligation, express or implied, to repay monies. He asserted that the amount designated as his UPE was the sum of distributions from the Trust to be made to him, but not yet paid; no money has been advanced by him and therefore could not be repaid. The UPE, he said, represented a debt, but not a loan. As mentioned earlier, during the hearing, Mr Bayliss conceded that if his argument were correct, the “debt” would still be considered an asset, but would not be valued in accordance with the deeming provision in s 1122 of the Act. 
21.	Therefore, the central issue to be determined is whether Mr Bayliss’ UPE is a loan.
Consideration
Ineffectual loan – a ‘loan’ to oneself?
22.	Mr Bayliss’ first point can be readily dealt with. Putting to one side the reservations (which this Tribunal shares) expressed in Turner and Secretary, Department of Family and  Community Services [2003] AATA 680 that the reasoning in Cayeux was “misconceived”, the Tribunal considers this matter is also clearly distinguishable on its facts. In Cayeux, Mr Bayliss was the sole trustee, sole beneficiary and the appointer of the trust. In the present case, Mr Bayliss is one of two named beneficiaries of a trust with a corporate trustee having its own separate and distinct legal personality. There is therefore no suggestion that Mr Bayliss lent monies to himself.
The nature of a loan
23.	The second argument posed by Mr Bayliss focuses on the very nature of what constitutes a “loan”. For such an important concept, it is surprising that the term is not specifically defined in the Act. It is therefore necessary to have recourse to its plain, everyday meaning. According to the Oxford English Dictionary, “loan” means, amongst other things:
A thing lent; something the use of which is allowed for a time, on the understanding that it shall be returned or an equivalent given; esp. a sum of money lent on these conditions, and usually at interest.  
The Macquarie Dictionary provides the following definition: “something lent or provided on condition of being returned, especially a sum of money lent at interest.” Significantly, both meanings focus on the concept of something being given on the understanding that it will, in time, be returned.
24.	That concept, based on return or repayment, resonates in a number of authorities that were referred to by the parties, as well as some additional authorities identified by the Tribunal.
25.	Mr Bayliss referred us to the following passage from the decision of Ormiston J in Brick and Pipe Industries:
Strangely the word ‘loan’ has not been frequently defined and in the many authorities cited, although the concept of lending was assumed to be understood, only one definition appears, namely in the judgement of Richardson J. in Re Securitibank Ltd. (No. 2) [1978] 2 NZLR 136, at p.167: “…the essence of a loan of money is the payment of a sum of money on condition that at some future time an equivalent amount will be repaid.
26.	Mr Bayliss went on to contend that it is not sufficient to characterise a debt as a loan due to the mere existence of the debt itself. He referred us to the following comments of Gleeson CJ in Prime Wheat Association Ltd v Chief Commissioner of Stamp Duties (1997) 37 ATR 479:
Here there was no advance of money. There was, as required by the language of the definition of advance, financial accommodation, but that is not sufficient.  An agreement for sale which allows credit to a purchaser does not, on that account alone, involve an advance of money... Ultimately, there was a debt, but not a loan.
The essence of a loan is an obligation of repayment.  Here what was involved on the part of the purchasers was payment, not repayment [emphasis added].
27.	In Gordon and Department of Social Security [1992] AATA 174, Deputy President Forgie relevantly relied upon the following passages from Chitty on Contracts (26th edition, paragraphs 3574 and 3576):
Definition of loan. A contract of loan of money is a contract whereby one person lends or agrees to lend a sum of money to another, in consideration of a promise express or implied to repay that sum on demand, or at a fixed or determinable future time, or conditionally upon an event which is bound to happen, with or without interest…
Loans distinguished from other forms of debt…at common law not every form of indebtedness amounts to a loan [emphasis added].
28.	The Tribunal also notes the following observations of Sackville and Lehane JJ in the 
Full Federal Court decision of Commissioner of Taxation (Cth) v Radilo Enterprises Pty Ltd (1997) 72  FCR 300:
A loan involves an obligation on the borrower to repay the sum borrowed. The matter is put this way by Dr Pannam:
A loan of money may be defined, in general terms, as a simple contract whereby one person (‘the lender’) pays or agrees to pay a sum of money in consideration of a promise by another person (‘the borrower’) to repay the money upon demand or at a fixed date.  The promise of repayment may or may not be coupled with a promise to pay interest on the money so paid.  The essence of the transaction is the promise of repayment.  As Lowe J put it in a judgment delivered on behalf of himself and Gavan Duffy and Martin JJ: “‘Lend’ in its ordinary meaning in our view imports an obligation on the borrower to repay.”… Repayment is the ingredient which links together the definitions of ‘loan’ to be found in the Oxford English Dictionary, the various legal dictionaries and the text books. In essence then a loan is a payment of money to or for someone on the condition that it will be repaid [emphasis added].
The character of the UPE
29.	Having regard to the dictionary meanings and this judicial commentary, the question must be asked: what is the nature of Mr Bayliss’ UPE?  
30.	Apart from Mr Bayliss’ evidence and the Trust’s financial statements and taxation return for the 2013 financial year, the Tribunal has before it no evidence as to the circumstances surrounding or leading to the creation and treatment of Mr Bayliss’ UPE or that in respect of his daughter. However, some observations can be made from the material to hand.
31.	First, it appears from the Trust Distribution Statement that, over time, the trustee has made appropriation under cl 6(o) of the Deed of Trust to each of the beneficiaries. It is also equally clear from that statement that a distinction is made between an appropriation and actual payment, with unpaid distributions or entitlements apparently accruing to the benefit of the respective beneficiaries, being carried over from one year to the next, and with the balance being reduced from time to time by the amount of the payments actually made. Those balances are in turn shown as UPEs in the Trust’s balance sheet and treated as a liability. From that analysis, it is clear that the UPE represents, as its name suggests, entitlements which have been earmarked for the respective beneficiaries but which have not been actually paid to them. Rather, those entitlements, although appropriated to the respective beneficiaries, continue to be held on trust for them by the trustee until the beneficiary calls for payment. The relationship being that of trustee and beneficiary, the latter has a right in equity to call for the payment. Because the appropriation by the trustee has already been made, the beneficiary has a present entitlement and can call for payment at any time. Once that call for payment has been made, the trustee will be obligated to pay to the beneficiary the amount demanded. 
Is it a loan?
32.	Where does that analysis leave the categorisation of the arrangement as a loan?
33.	As mentioned above, an analysis of the financial statements underscores the “unpaid” nature of the UPE. Although an allocation has been made by the trustee to the respective beneficiaries, the financial statements confirm that the UPEs assigned to each of them remain undistributed. 
34.	After review of the evidence, we do not consider that a loan was made. There are several reasons for our conclusion. First, there is no evidence, or suggestion, of any such agreement or arrangement having been entered into. There is neither loan documentation, nor any written evidence of such an understanding between the beneficiaries (or either of them) and the trustee. Nor is there evidence of any verbal arrangement or understanding in that regard; indeed, the Trust’s financial statements do not reflect such an arrangement.  On the contrary, Mr Bayliss, who is both a major beneficiary and sole director of the trustee Company, disavows any such loan arrangement. We also note that there was no challenge to the contention of Mr Bayliss that the entry of the UPE of the beneficiaries was an account entry of the trustee. 
35.	Consequently, on the evidence before it, the Tribunal does not consider Mr Bayliss’ UPE to constitute a loan for the purpose of the asset test.
What does this mean for Mr Bayliss’ asset test?
36.	It follows from what has been said above that Mr Bayliss’ UPE should not have been considered a loan for the purpose of the asset test under s 611 of the Act. In particular, 
s 1122 of the Act, with its “deeming” effect, should not have been applied in the circumstances. 
37.	That said, there is no doubt that the equitable right which Mr Bayliss enjoys, of being able to call on the trustee for payment of his UPE (or part of it) is an “asset” for the purpose of the Act. Section 11(1) of the Act defines “asset” as “property”, which in turn has been given a broad meaning to include legal and beneficial rights (see, for example, Re Eimberts and Repatriation Commission (1988) 16 ALD 19). That asset needs to be valued for the purpose of the asset test, but without reference to s 1122 of the Act. While Mr Bayliss had some suggestions for the way the valuation process should proceed, the Secretary’s Advocate, quite understandably, had no instructions as to the approach to be adopted. In those circumstances, it seems appropriate to remit this issue to the Secretary to undertake a valuation of Mr Bayliss’ right in respect of the UPE.  
Part 3.18 of the Social Security Act 1991 (Cth)
38.	We have concluded that Part 3.18 of the Act applies to the Kaell Trust. This provision creates a scheme for the attribution to individuals of the assets and income of certain private trusts.
39.	There is no issue that the Kaell Trust is a designated private trust. The Deed of Trust was not in the “T-Documents”. The Tribunal requested that Mr Bayliss provide the Deed of Trust of the Kaell Trust which was admitted into evidence. After examining the deed that creates the Kaell Trust, we consider that the Trust is a designated private trust, as all of the conditions s 1207P(1)(a) are not satisfied. It is sufficient to refer to the first condition in that paragraph which requires that the trust be a fixed trust. The term “fixed trust” is not defined in the Act and should, in our view, be understood having regard to general law concepts. The first condition in s 1207P(1)(a) of the Act cannot be satisfied as the Trust is not a fixed trust. This is because the various beneficiaries do not have any fixed entitlement to either capital or income. This is apparent from cl 15 of the 
Deed of Trust which provides that the trustee has absolute discretion to distribute income to one of more members of the discretionary class. This trust, rather than being a fixed trust, is a discretionary trust. We should also mention that there is no evidence before us that the Kaell Trust has been declared to be an excluded trust under 
s 1207P(4) of the Act. 
40.	Having found that the Kaell Trust is, for the purposes of Part 3.18 of the Act, a designated private trust. We have considered whether the Trust is a 
“controlled private trust” as defined in s 1207V of the Act. Subsection 1207V(1) provides that a trust is a “controlled private trust” in relation to an individual if the trust is a designated private trust and the individual passes the “control test” set out in 
s 1207V(2) or the individual passes the “source test” set out in s 1207V(3). What is material for the purposes of the “control test” in s 1207V(2)(b) of the Act is the fact that Mr Bayliss has the power to appoint or remove the trustee. This power is conferred by 
cl 17 of the Deed of Trust for the Kaell Trust and has not been affected by the deed of variation. We accordingly find that the Kaell Trust is a “controlled private trust” in relation to Mr Bayliss. 
41.	This is therefore a case where there is the attribution of income and assets of the Kaell Trust in accordance with ss 1207V and 1208E of the Act.
Conclusion
42.	For the reasons outlined above, the Tribunal varies the decision of the SSAT and remits to the Secretary for reconsideration the valuation of Mr Bayliss’ asset, being his right in equity to demand payment of the UPEs standing to his credit in the Kaell Trust and consider the claim of the applicant having regard to these reasons.

I certify that the preceding 42 (forty -two) paragraphs are a true copy of the reasons for the decision herein of Dr P McDermott RFD, Senior Member, and Senior Member A C Cotter.	
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Associate
Dated 24 December 2014

Date of hearing	3 November 2014	
Joined Party	In person	
Solicitors for the Third Party	Donna Smith, Department of Social Services