Validly forgiven trust debt: does it generate notional income?

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In the recent case of Chief Executive of the Ministry of Social Development v Broadbent [2019] NZCA 201, (2019) 5 NZTR 29-002, the Court of Appeal considered the following question:

When making an assessment of whether or not a person should qualify for a Residential Care Subsidy, can the Chief Executive include any income capable of being derived from validly gifted assets – that is, gifted assets valued below the excessive gifting threshold contained in regulation 9B(a) of the Social Security (Long-term Residential Care) Regulations 2005 (i.e. $27,000.00 per annum total)?

In other words, can an asset of which a person disposes without deprivation – that is, within the allowed limits – still be held to generate notional income capable of being treated as deprived income under section 147A of the Social Security Act 1964?

The Court decided in the negative:

  1. Where property is sold for fair value, there cannot have been a deprivation of its potential income because the income stream has also been sold for fair value as part of the price of the property.
  2.  Annual gifting of portions of the value of the resulting debt (where the purchase price is satisfied by a loan back) at a rate below the excessive gifting threshold would logically also transfer, without deprivation, the income stream associated with that portion of the debt.
  3. However, income deprivation will occur in relation to the steadily decreasing loan principal if the lender has not claimed interest on that figure.

What is particularly interesting about this case, is that the Social Security Appeal Authority (along with the High Court and everyone else – except the Court of Appeal) all proceeded on the basis that the gifting programme related to the Broadbents’ assets. That is, that the Broadbents had gifted their assets to their trusts.

The Broadbents did not gift assets to their trusts – they sold them for fair value. The gifting related to the reduction to zero of the resulting debt back. Assets exchanged or sold for good value are not deprivations, and so section 147A does not apply to them.

Furthermore, the Court held that:

  1. The Chief Executive is not entitled to gross up the value of the assets of the Family Trust, calculate a notional income from that value, and then treat that as if it were Mrs Broadbent’s income for the purposes of section 147.
  2.  Nor can the Chief Executive ignore debts that have been validly forgiven in order to adopt a notional and constant interest rate that is/was supposedly available to the lender on that debt.

Instead, what is required is a calculation methodology that:

  • Recognises that any notional income from the debt would have steadily reduced over time – as a direct corollary of the debt itself being steadily forgiven over time…

…and then in light of such:

  • Determines what a reasonable current income figure should be, taking into consideration the terms and purposes of the current means testing regime.

The Court acknowledged that a) there is no single way of making these calculations, and b) it would not be appropriate or helpful for the Court (at least at this stage) to set the parameters concerning such. This is the responsibility of the Chief Executive.

The Ministry of Social Development is currently in the process of reviewing its procedures in light of Broadbent.