Jonathan Scragg and Polly Higbee discuss a recent High Court case concerning historic gifting that may affect eligibility for the residential care subsidy.
The High Court recently confirmed that for the purposes of means testing for the Ministry of Social Development’s residential care subsidy, the relevant threshold for gifts made before the five-year gifting period applies to the combined gifting of the applicant and his/her spouse or partner (B v Chief Executive of the Ministry of Social Development  NZHC 3165 (B v MSD)).
The decision will be of interest to lawyers, particularly those who advise clients on trust gifting programmes and eligibility for the residential care subsidy.
Residential care subsidy
Eligibility for the residential care subsidy is determined on the basis of a means assessment which considers both an applicant’s assets and income. An application will be declined if the applicant’s assets exceed certain prescribed thresholds.
The assessment of assets includes consideration of whether gifts have been made to a trust in excess of prescribed thresholds. For the five-year period up to the date of the assessment, the annual threshold for gifting is $6,000. For the period before the five-year gifting period (historic gifting), the annual threshold is $27,000. Gifting in excess of $27,000 per year may be considered “deprivation”, in which case the ministry may conduct the means assessment as if the deprivation has not occurred (s147A of the Social Security Act 1964 (Act)).
B v MSD
The issue for the High Court in B v MSD was whether the $27,000 annual threshold for historic gifting applied to gifting only by the applicant, Mrs B, or whether the $27,000 threshold applied to the total combined gifting of Mrs B and her husband, Mr B.
In 1987 Mr and Mrs B established a family trust. The trust purchased various assets which resulted in debts to Mr and Mrs B. From 1987 to 2004 Mr and Mrs B each made annual gifts to the trust of $27,000 in forgiveness of the debts. In 2009 Mrs B applied for the residential care subsidy. The ministry undertook a means assessment and concluded there had been deprivation because of the historic annual combined $54,000 gifting of Mr and Mrs B.
Mrs B appealed the decision (which had been upheld by the Benefits Review Committee) to the Social Security Appeal Authority. The authority dismissed the appeal. The case proceeded to the High Court as a “case stated” appeal.
Justice Collins found that the $27,000 threshold for historic gifting applied to the combined annual gifting of Mr and Mrs B. In particular, Justice Collins determined that regulation 9B(a) of the Social Security (Long-Term Residential Care) Regulations 2005 (regulations) was to be interpreted consistently with s147A of the Act. As s147A refers to deprivation by an applicant or his or her spouse or partner, the court found the figure of $27,000 in regulation 9B(a) must refer to the “aggregated values of gifts made by the applicant and his or her spouse or partner”.
Justice Collins rejected an argument that the $27,000 threshold in regulation 9B(a) was intended to mirror the threshold that had applied under the former gift duty regime, and therefore should be applied as “per person” and not “per couple”. The argument was rejected notwithstanding reference to various Cabinet documents, accepted by the court as extrinsic aids to the interpretation of the regulations, which indicated the $27,000 threshold in regulation 9B(a) was a guideline based on the gifting provisions previously used in respect of the imposition of gift duty. The court also rejected an argument based on preference being given to an interpretation of regulation 9B(a) that was consistent with the rights contained in the New Zealand Bill of Rights Act 1990.
The practice of gifting $27,000 per person (and accordingly $54,000 per couple) per year to family trusts has been widespread and has continued despite the abolition of gift duty. No doubt this has, at least in part, been on the basis of the profession’s understanding of the ministry’s approach to the treatment of the gifting thresholds within the means assessment process.
The result of the High Court’s decision is that many people who have undertaken a gifting programme to a family trust may now unexpectedly find themselves ineligible for the residential care subsidy. This will come as an unwelcome shock to many. It will also likely cause many members of the profession concern at the prospect of claims from disgruntled clients for previous advice on gifting programmes.
B v MSD is under appeal to the Court of Appeal. A hearing is scheduled for August 2013. Until the outcome of the appeal is known the legal position remains uncertain.
Lawyers may wish to consider whether there is a need to notify professional indemnity insurers in respect of the risk of potential claims for previous gifting advice. Some brokers are encouraging practitioners to notify insurers of the risk of potential claims. Practitioners are encouraged to check their particular circumstances with their broker/insurer.
Lawyers advising clients on current gifting programmes will want to consider what level of gifting is appropriate in the light of the High Court’s decision. Every client’s circumstances will be different and will require individual consideration.
Jonathan Scragg and Polly Higbee of Duncan Cotterill appeared as counsel for Mrs B in the High Court, together with Ilsaad Razak of Smith & Partners, Auckland. Practitioners with questions or comments about the case and its implications can email firstname.lastname@example.org or email@example.com.