Greg Neil: Trusts remain safe haven

The High Court has ruled on means testing for residential care subsidies

The High Court has delivered a judgment that will be of significant interest for those potentially requiring long-term residential care in the future.

The relevant case involved asset and income means testing for the purposes of assessing whether an additional government subsidy is available to a person for the costs of that care. Contrary to the approach adopted in practice by Work and Income in recent times, the Court held that income streams associated with assets that a person has unconditionally gifted cannot be taken into account as income of that person for means testing purposes.

The case of Broadbent v Ministry of Social Development concerned a relatively common ownership structure. Between 1990 and 2014 Mrs Broadbent and her late husband sold certain assets, including the family home and a holiday home, to two family trusts for fair value. The trusts owed a debt back for the assets which was then periodically gifted to the trusts to the extent of $27,000 or less annually.

In 2014 Mrs Broadbent applied for a residential care subsidy in relation to her rest home costs. Under the Social Security Act, if a person has "deprived" themselves of property or income, a means assessment can be conducted on the basis that the deprivation had not occurred. The key issue in the case, therefore, was how the transfer of assets and gifting should be treated for the purposes of assessing Mrs Broadbent's eligibility for a subsidy.

The Ministry accepted that the gifts made to the trusts were under the $27,000 threshold specified in the legislation for permissible gifts and, therefore, Mrs Broadbent qualified for a subsidy on the basis of the assets test. However, the Ministry argued that Mrs Broadbent failed to qualify on the basis of the income means assessment as she had deprived herself of income by transferring the assets to the trusts.

Ultimately the court held in favour of Mrs Broadbent on the basis that an unconditional gift of an asset necessarily involves the relinquishment of all future income streams from that asset. The Ministry was therefore not entitled to conduct the income assessment as if a permissible gift had not been made at all. Justice Katz concluded by noting that whether the current regime is unduly generous or not is ultimately a matter for Parliament.

It will be interesting to see if there is a legislative response to this case following the general election. It seems only a matter of time before the means assessment framework becomes more rigorous along the lines of that which now applies for Working for Families tax credits.

Greg Neill is a tax partner at Crowe Horwath - Hawke's Bay and can be contacted at greg.neill@crowehorwath.co.nz. This information is general in nature and readers should seek specialist advice before making financial decisions.