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Residential care subsidy, trust, Trusts

Notional income knocked back

The High Court decision in Broadbent v Ministry of Social Development, which is essentially a test case, considers whether income derived from gifted assets (sometimes referred to as notional income) can be taken into consideration for income assessment purposes.

The general purpose of the Social Security Act 1964, which includes provisions relating to a wide range of social security benefits, is to provide financial support to people, taking into account that where appropriate they should use the resources available to them first.  See s 1A(c)(i).

When a person requires long-term residential care an application can be made for a subsidy to help meet the cost.  The application is a two-step process.  Step one is a means assessment.  If the applicant is below the relevant threshold the next step is an income assessment.  Income is defined very widely for income assessment purposes.

In Broadbent v Ministry of Social Development:

[19] The Ministry concluded that Mrs Broadbent had deprived herself of income to the value of $45,395.89 a year by transferring assets into trust. On the Ministry’s analysis, the actual income derived from the assets held by the trusts, as well as the notional income that could have been earned had the trusts not held non-income-earning assets, should be treated as Mrs Broadbent’s income for the purposes of the income assessment process.

[20] The consequence of taking this “deprived” income into account was that Mrs Broadbent’s income was assessed as being above the income threshold necessary to qualify for a residential care subsidy. She was therefore required to contribute the maximum contribution of $1,217.28 a fortnight towards the cost of her care.

This finding was challenged by Mrs Broadbent (through her litigation guardian) on the basis that once a gift is made, “that is the end of the matter. The income associated with that asset cannot be factored back in when calculating an applicant’s income.”

Policy background

Relevantly Katz J noted that:

[49] There are obvious downsides to the present statutory scheme. It is possible for people to gift significant sums (whether to trusts or not) over the course of their lives that are not then available to them to meet the costs of their rest home care. It is perhaps not surprising that this is a matter of particular concern to the Ministry. Indeed I note that the increasing prevalence of applicants for residential care subsidies having trusts prompted a change in the Ministry’s operational policy in November 2007 (following the introduction of s 147A of the Act), to look at gifting prior to the five-year gifting period as a matter of course.

[50] On the other hand, the current regime, with its permissible gifting thresholds (regardless of the identity of the donee) promotes certainty, consistency, and the efficient use of the Ministry’s resources (because the Ministry only has to focus on gifting in excess of the permitted thresholds when undertaking the means assessment process).

[51] Whether the current regime is unduly generous or not is ultimately a matter for Parliament. I have found that the interpretation advanced by the Ministry, while it may meet the Ministry’s policy objectives, does not accord with the statutory scheme, properly construed.

Outcome

The High Court found that the relevant statutory scheme must be interpreted consistently with longstanding principles of the common law, which includes “the absolute or unconditional gift of an asset to another person necessarily includes all the rights, benefits and entitlements associated with that asset, including any right or entitlement to future income”.

As stated by Katz J at [44] “There is nothing to suggest that Parliament envisaged that either allowable gifting (in the sum of $6,000 per annum) or permissible gifting (in the sum of $27,000 per annum) were intended to be conditional in nature. In the absence of some clear indication to the contrary, such gifting must be considered to be unconditional. As I have outlined, the unconditional gift of an asset necessarily involves the relinquishment of all future income streams from that asset. Included within the gift of an asset is a gift of all the rights, benefits and entitlements associated with that asset.”

The result was a finding that MSD has been wrong to assess notional income on deprived assets.

The consequences of this decision will be relevant to many residents in long-term residential care who are being required to contribute notional or imputed income to the cost of their care.

The obvious question is whether the decision will be appealed or whether legislative amendment will follow.

 

References:

 

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