Ministry of Social Development v Broadbent  NZCA 201
The residential care subsidy is a means-tested financial assistance offered to persons in long-term hospital or rest home care receiving contracted care services. Assets and income of both the person and their partner or spouse can be assessed to determine eligibility. Following changes to the residential care subsidy provisions in 2005, gifts and transfers of property into family trusts can be considered when determining a person’s eligibility for a residential care subsidy.
The powers permitting the Ministry of Social Development (“MSD”) to include assets and income that are no longer the legal property of the applicant are broad. The interplay between the exemptions, allowances and MSD’s powers has recently been considered by the Court of Appeal, which clarified when MSD can determine that income or assets should be included. That decision will be of interest to anyone undertaking asset planning.
Residential care subsidies are primarily dealt with by the Residential Care and Disability Support Services Act 2018 (“the Act”). The Act specifies who must pay for their own long-term care, how to apply for means testing, and the maximum contribution rate any person must make to long-term care. The Act was drafted with the purpose of ensuring that persons use their own resources before seeking financial support under the Act.
Qualifying persons must be 65 years or older. If a person is also eligible for funding and receiving needed contracted care services, they may be entitled to apply to MSD for a means assessment. A means assessment is conducted in two parts – the first is an assets assessment. If a person is below the asset threshold, then an income assessment is conducted. The income assessment determines the level of additional subsidy available to a qualifying person. At the time of writing, the maximum contribution was $1217.28 per fortnight, any shortfall to be covered by the relevant District Health Board, this figure is reduced relative to the applicant’s income assessment.
In brief, the asset threshold is $230,495 for a person who is single or who opts to have their assets calculated in conjunction with those belonging to their spouse. That number is reduced to $126,224 if a person’s spouse is not a qualifying person, the effect of which is that their assets are assessed independently. With some allowances, gifts, including forgiveness of debt, are included in an asset assessments. For the five years prior to the assessment (“the gifting period”), any gifts by the applicant and/or their spouse/partner in excess of $6,500/year will be included as an asset of the applicant. For example, from a gift the previous year of $10,000, $3,500 will be included in an applicant’s asset assessment.
Further, s 39 of the Act grants MSD discretion to include any income or property if the applicant or their spouse/partner has deprived themselves of that income or property. This can allow MSD to look much further back in time than the 5-year gifting period prescribed by the Act. While the language has been modernised, s 39 replaced s 147A of the Social Security Act 1964 in 2018 without substantive change to the relevant test. Deprived property can include:
As noted above, MSD’s scope for assessing an applicant’s assets is broad, and the strict gifting regulations effectively allow it to ‘look-through’ to trust assets and loans. This must be carefully considered when undertaking asset planning, as the applicant in Ministry of Social Development v Broadbent  NZCA 201 recently discovered when MSD sought to treat property gifted below the allowed thresholds as deprived property.
Mrs Broadbent and her husband sold their assets to two family trusts at market value, and then forgave the debt incrementally. The debt was forgiven below the $27,000 cap prior to the gifting period and had not exceeded the $6,500 cap in the gifting period. In total, some $320,000 of debt was forgiven.
The Chief Executive of MSD sought to exercise the powers under s 147A of the Social Security Act 1964, now s 39 of the Residential Care and Disability Support Services Act 2018, to attribute this income to Mrs Broadbent as ‘deprived income’. That would disqualify Mrs Broadbent for a residential care subsidy.
The Social Security Appeal Authority supported the Chief Executive’s approach; but was overturned on appeal to the High Court. The High Court found that income below the legislated annual threshold could not be treated as deprived income using MSD’s discretionary powers.
The Chief Executive appealed to the Court of Appeal.
The question before the Court was summarised at :
…can an asset that Mrs Broadbent disposed of without deprivation nonetheless generate notional income capable of being treated as deprived income…
The test in s 147A had two parts according to the Court of Appeal. Firstly, MSD must confirm that a deprivation of income had occurred. This acted as a ‘gateway’ to the second step, which allowed MSD to exercise its broad, but not limitless, discretion to ‘look through’ legal ownership/alienation arrangements when conducting a means assessment. The Court observed that the Chief Executive must exercise that discretion only when certain that the applicant would not be put under genuine hardship. This is in keeping with the purposes of the Act: to ensure that persons in need of care would first use their own resources or resources available to them before seeking financial assistance from MSD.
The Court determined that the key ‘driver’ therefore, before MSD can exercise the discretion, is to determine the availability of the resources to the applicant. While this allows MSD to effectively compel an applicant to utilise the income generating potential of assets, it does not permit MSD to make a moral judgment as to the historic treatment or investment of assets.
Notably, the Court of Appeal found that the sale of the assets to the Trusts was not, in fact, the relevant deprivation event. The Authority and the High Court had both focused on the sale of the assets – assuming that the totality of that value was deprived. However, as these were sold at a fair market value to the family Trusts, that sale would not meet the definition of a deprivation event. However, the forgiveness of the principal and interest on the loans could be deprived income. Each forgiveness event could qualify as a deprivation of property.
The Court of Appeal agreed that the annual allowable gifting thresholds must be respected by the Chief Executive. Williams J noted at  that the broad power to determine that property was not deprived did not allow the Chief Executive a ‘second bite’ at validly gifted property. Therefore, as the principal was gifted at levels below the relevant annual thresholds, the deprived property was exempted from asset calculations.
Therefore, no asset had been deprived for the purposes of the asset assessment. Only the potential interest on the loans, which was never demanded, could qualify as deprived income for the purposes of the income assessment and resultant additional subsidy.
The Court put forward three premises, relating to this analysis:
The notionally decreasing income could be calculated by MSD at the Chief Executive’s discretion, pursuant to s 39 (or the now repealed s 147A), and could then be included in Mrs Broadbent’s income assessment. Therefore, the first part of the deprivation test could be satisfied – any interest not demanded could be considered deprived income.
The Court noted that MSD must consider the availability of the income to the applicant prior to exercising its discretion to include the deprived income. However, no final decision was reached as the case was returned to the Authority for further fact-finding following the Court of Appeal’s directions.
This case raises a point of interest from a tax perspective. In simple terms, a loan made between related parties with an ‘interest on demand’ clause, is referred to as a Marshall clause. The Commissioner of Inland Revenue has confirmed that, in light of the relationship between the parties and the reality of the economic arrangement, the parties do not need to treat interest which is not demanded as if it had been demanded. This approach recognises that related parties are very unlikely to ever demand interest on that loan, and thus reduces needless compliance costs. Usually, if a loan has interest on demand, the financial arrangement rules dictate how this is to be allocated as income across the period of the loan, even if some of that interest has yet to be demanded.
For that reason, Marshall clauses are common in financial planning and asset management arrangements, as they allow substantial loans to be made and forgiven without incurring a tax liability or additional compliance costs, while leaving open the possibility that interest might be charged periodically if needed. However, the Chief Executive of MSD has now been instructed by the Court of Appeal to treat interest, which was not demanded, and would never have been demanded, as income for the purposes of a residential care subsidy income assessment. The second part of s 147A, being the availability test identified by the Court, may prevent the Chief Executive from exercising her discretion. However, the inconsistency between the definition of income for tax purposes and for means testing purposes must be at the forefront of any asset planner’s mind.
© G D Clews 2020