Craig Meldrum examines how Centrelink treats family trusts and private companies for age pension eligibility and highlights the importance of seeking high-quality technical advice.
It is surprising how often I receive calls from advisers asking me to explain how Centrelink will treat their client’s family trust or private company, predominantly for age pension eligibility.
In many instances, “Mum and Dad” had a family business for many years that has long since ceased to be a going concern and, but for the large loan account inside the company, they would have wound it down a long time ago. In other cases, it is a family investment trust – testament to a wealth creation and/or asset protection strategy set up years ago with their accountant and financial adviser, which may have provided some tax benefits and built scale in pooling family investment reserves. Sometimes, however, it is not necessarily Mum and Dad’s family trust or private company but their high-income-earning son or daughter who has set up the structure and asked Mum and Dad to be beneficiaries to help manage tax.
Nevertheless, in all the cases I have looked at, no-one has ever had the forethought, a decade out from retirement, to ask, “Will this impact on our ability to qualify for the age pension?”
What are the attribution rules?
The attribution rules were introduced from January 1, 2002 and became effective from April 30, 2002. Their purpose was to assess interests in family trusts, testamentary trusts and private companies under both the income and assets tests. This would effectively remove a “Centrelink shelter” that had allowed many people to qualify for Government assistance who otherwise would have been caught if assets held in these structures had been invested in their own names.
Trusts and private companies
Without going into “what is a company?” and ‘“what is a trust?”, details of which I am sure we are all cognisant, consider what Centrelink and the Department of Veterans’ Affairs (DVA) defines as a private company or private trust. According to the Centrelink Financial Information Services (FIS) Fact Sheet FIS022.0905, a private company “is a separate legal entity, set up to run a business or to hold investments, registered under Corporations Law, owned by shareholders and managed by its directors who are elected by the shareholders”. (See Note 1.)
Centrelink will deem the entity to be a private company if, at the end of the last financial year, it met any two of the following three criteria:
1. the consolidated gross operating revenue of the company and any subsidiaries was less than $25 million;
2. the consolidated gross assets of the company and any subsidiaries were less than $12.5 million; and
3. the company and any subsidiaries had less than 50 employees.
Most of the Mum and Dad enterprises I have encountered are certainly within that range; and if private companies hold many millions in net tangible assets (NTA) it generally means the directors hold significant wealth in their own names and in family trusts and self-managed superannuation funds (SMSFs), so they will not be looking to qualify for Centrelink anyway.
In terms of private trusts, again referring to the aforementioned FIS Fact Sheet, Centrelink includes family discretionary trusts and testamentary trusts with fewer than 50 “members”. Now, trusts generally don’t have “members”, they have beneficiaries, or objects (in the case of a discretionary trust). But for the purposes of the attribution rules, a trust with more than 50 members is deemed to be a widely-held trust in the same form as listed (or unlisted) property trusts, managed share trusts and other public trading trusts. In these cases the member’s holding is treated as a financial asset and deemed for income using the normal deeming rates.
The assessment tests
One of the difficulties faced by many people seeking to apply to Centrelink or to the DVA for financial support, particularly when they become eligible for the age pension, is determining how they will be assessed when there are often some seemingly minute and innocuous associations to a private company or trust. For instance, in the examples mentioned above, where Mum and Dad are directors of a defunct company that ceased trading many years earlier, or where they are objects of a family trust and have never received a distribution, are they still caught by Centrelink/DVA?
There are two distinct tests that apply jointly to determine the inclusion of assets and income from a private company or trust. These are:
1. a source test; and
2. a control test.
Simply speaking, the source test relates to the source of funds introduced to a trust or private company, and the control test relates to who is in control of the trust or private company – for instance, directors of the company or corporate trustee, individual trustees, appointors and beneficiaries/shareholders.
By applying the attribution rules, a person applying for Centrelink/DVA support is attributed with the assets or income of the private trust or company and those assets and income are treated no differently from how the person’s own assets and income are treated.
1. The control test
You might think, “Well, the trustee has control of the assets of the trust so it is likely they will be ‘pinged’ by Centrelink/DVA”. And it is true that the director of the private company or the trustee of the trust does have control of the assets. But consider also, apart from the day-to-day management of the trust, who else can exercise effective control of the trust. Centrelink considers that anyone who can dismiss and appoint a trustee, veto a trustee’s decision or change the trust deed is also included; that is, an appointor, principal or guardian. Centrelink will also look beyond the normal trust law auspices where it deems a person might have influence over the trustee, or where the trustee might be expected to act for the benefit of that person.
