Federal Register of Legislation - Australian Government

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A Bill for an Act to amend the law relating to social security and veterans’ entitlements, and for related purposes
Administered by: Social Services
For authoritative information on the progress of bills and on amendments proposed to them, please see the House of Representatives Votes and Proceedings, and the Journals of the Senate as available on the Parliament House website.
Registered 29 Nov 2018
Introduced HR 29 Nov 2018
Table of contents.

2016-2017-2018

 

 

 

 

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

 

 

 

 

 

SOCIAL SERVICES AND OTHER LEGISLATION AMENDMENT

(SUPPORTING RETIREMENT INCOMES) BILL 2018

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Circulated by the authority of the

Minister for Families and Social Services, the Hon Paul Fletcher MP)


Contents

 

OUTLINE- 1

FINANCIAL IMPACT STATEMENT- 2

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS- 2

NOTES ON CLAUSES- 1

Schedule 1 – Lifetime Income Streams- 2

Schedule 2 – Work Bonus- 33

Schedule 3 – Pension Loans Scheme- 39

Schedule 4 – Other Amendments- 55

 



SOCIAL SERVICES AND OTHER LEGISLATION AMENDMENT

(SUPPORTING RETIREMENT INCOMES) BILL 2018

 

 

OUTLINE

 

The Bill introduces the following measures:

 

1.    Lifetime income streams

2.    Work Bonus

3.    Pension Loans Scheme

4.    Other amendments

 

 

Schedule 1 – Lifetime income streams

 

This Schedule establishes new means test rules to accommodate the development of new innovative income streams. The Schedule also amends the current rules for lifetime income streams to create fairer, more equitable means test outcomes.

 

Schedule 2 – Work Bonus

 

This Schedule increases the Work Bonus to $300 per fortnight and extends the application of the Work Bonus to income earned from remunerative work that involves personal exertion, including self-employment and work undertaken by contractors or consultants.

 

Schedule 3 – Pension Loans Scheme

 

This Schedule expands the Pension Loans Scheme (PLS) to provide more Australians of Age Pension age (for social security recipients), income support supplement qualifying age or service pension age (for Veterans’ Affairs recipients), with access to the Scheme.

 

Schedule 4 – Other amendments

 

This Schedule makes technical amendments to simplify the Social Security Act 1991 and confirms that income support recipients over Age Pension age qualify for the employment nil rate period.

 

 


 

FINANCIAL IMPACT STATEMENT

 

The measures in this Bill have an estimated impact on the fiscal balance over the forward estimates of $258.6 million in cost (whole of government). The impact on the fiscal balance for each schedule is as follows:

 

MEASURE

FINANCIAL IMPACT OVER THE FORWARD ESTIMATES  

Schedule 1 – Lifetime income streams 

Cost of $20.2 million

Schedule 2 – Work Bonus

Cost of $227.4 million

Schedule 3 – Pension Loans Scheme

Cost  of $11.0 million

Schedule 4 – Other amendments

No impact 

 

 

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

 

The Statement of Compatibility with Human Rights appears at the end of this explanatory memorandum.

 

 

 


SOCIAL SERVICES AND OTHER LEGISLATION AMENDMENT

(SUPPORTING RETIREMENT INCOMES) BILL 2018

 

 

NOTES ON CLAUSES

 

Abbreviations used in this explanatory memorandum

 

  • Social Security Act means the Social Security Act 1991; and

 

  • Veterans’ Entitlements Act means the Veterans’ Entitlements Act 1986.

 

 

Clause 1 sets out how the new Act is to be cited – that is, as the Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Act 2018.

 

Clause 2 provides a table setting out the commencement dates of the various sections in, and Schedules to, the new Act.

 

Clause 3 provides that each Act that is specified in a Schedule is amended or repealed as set out in that Schedule.

 

 

 


Schedule 1 – Lifetime Income Streams

 

Summary

 

This Schedule establishes new means test rules to accommodate the development of new innovative income streams, resulting from recent changes to the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations). The Schedule also amends the current rules for lifetime income streams, to create fairer, more equitable means test outcomes.

 

The amendments contained in this Schedule implement part of the 2018-19 Budget measure ‘More Choices for a Longer Life – Finances for a Longer Life’.

 

Background

 

Most social security payments are means tested. The policy objective of means testing is to equitably and fairly target income support to those people who are most in need and ensure that the social security system remains sustainable, both fiscally and in terms of community support. Those with the means to support themselves are expected to draw upon their own resources for self-support.

 

In most cases, the social security means test includes an income test and an assets test. This process involves an assessment of the personal resources available to an individual and is used to calculate how much assistance is payable. The method of calculating the tests, as well as what income and assets are to be included, is provided in the Social Security Act and Veterans’ Entitlements Act.

 

The Government’s 2016-17 Budget included a commitment to review the social security means test rules for retirement income products in the context of announced changes to the SIS Regulations. The changes to the SIS Regulations enable innovative pooled lifetime income stream products to qualify for earnings tax concessions, provided that they comply with requirements contained in the SIS Regulations. These changes were implemented through the Treasury Laws Amendment (2017 Measures No.1) Regulations 2017, by inserting new regulations 1.06A and 1.06B in the SIS Regulations.

 

Pooled lifetime income streams are products that pool the funds of multiple people to provide consistent income to surviving members for life. These products are intended to help people use their retirement savings in a way that supports their specific needs and help manage the risk of running out of retirement savings. They also include products that defer making payments for a period of time (for example, until age 85). The changes to the SIS Regulations are designed to allow product providers to innovate and create new pooled lifetime income products that benefit Australians in and approaching retirement.

 

The existing means test rules for lifetime income streams were made for simple income stream products, such as lifetime annuities. Continuing to use them for the wide possible range of complex products that are expected to emerge under the changes to the SIS Regulations in the near future would leave the income support system open to exploitation, and could distort people’s financial decisions in retirement.

 

The new means test rules in this Schedule strike a balance between:

  • encouraging the development of pooled lifetime income stream products, and
  • ensuring that the assessment of pooled lifetime income streams is fair and reflects the value of the products.

 

The new means test rules will apply to all pooled lifetime income products held by social security or Department of Veterans’ Affairs income support recipients that are acquired or purchased on or after commencement.  Products purchased before commencement will not be affected by these new rules.

 

Under the income test, the new means test rules will assess 60 per cent of payments from a pooled lifetime income stream as income. This reflects that part of the payments made by the income stream are a return of a person’s initial investment amount, and therefore not income.

 

Under the assets test, the new means test rules will generally assess a proportion of the total purchase amount for the pooled lifetime income stream. 60 per cent of the purchase amount will be assessed at the point of purchase.  This will continue until the person reaches their threshold day, as outlined in this Schedule. After this point, 30 per cent of the purchase amount will be assessed.

 

This treatment takes into account the restrictions placed on these products by the changes to the SIS Regulations. One of the requirements in the new regulations is that, to qualify for earnings tax concessions, innovative pooled lifetime income streams have to meet a Capital Access Schedule (CAS). The CAS refers to the limits placed on the amount that a person can recover from their pooled lifetime income stream should they withdraw from the product (the surrender value), or should they die (the death benefit). The diagram below illustrates.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Life Expectancy at purchase
½ Life Expectancy at purchase
 

 

 

 


As such, when someone invests in a pooled lifetime income stream, they have limited access to their initial capital investment.  By assessing only 60 per cent of the purchase price as an asset, the new rules recognise the limited ability for these income streams to be ‘cashed in’ for self‑support.  By assessing 30 per cent of the purchase price as an asset in later life, the rules also recognise that the pooled lifetime income stream continues to have some value to the person, but avoids unfair outcomes when there is no ability to ‘cash in’ the income stream.

 

However, the CAS only applies to income streams offered under arrangements in the SIS Regulations. Income stream products can be purchased outside of the superannuation system (i.e. purchased with non-superannuation monies under arrangements regulated by the Life Insurance Act 1995).

 

This can make the product more valuable to the product holder, and more available to be used for self-support. Accordingly, the means test rules have some additional provisions for products with high surrender values or death benefits.

 

In such situations, the product will be compared to the CAS that would apply to that product were it under the SIS Regulations. If any current or future surrender value is above the limits allowed in the CAS, they will be compared to the 60 per cent / 30 per cent treatment outlined above. The highest value will then be assessed as the asset value of the product. This approach will be provided for in a legislative instrument.

 

Therefore, under the assets test, the means test rules will assess the higher of:

  • 60 per cent of a product’s purchase amount as an asset up until the threshold day, or 30 per cent from that point onwards
  • Any current or future surrender value above the limits in the CAS
  • Any current or future death benefit above the limits in the CAS

 

Explanation of the changes

 

Schedule 1 – Lifetime income streams

 

Social Security Act 1991

 

Income streams are defined for means test purposes in section 9. This definition includes:

  • an income stream arising under arrangements that are regulated by the Superannuation Industry (Supervision) Act 1993 (SIS Act); or
  • an income stream arising under a public sector superannuation scheme (within the meaning of that Act); or
  • an income stream arising under a retirement savings account; or
  • an income stream provided as life insurance business by a life company registered under section 21 of the Life Insurance Act 1995; or
  • an income stream designated in writing by the Secretary for the purposes of this definition, having regard to the guidelines determined under subsection 9(1E); or
  • a family law affected income stream;

 

but does not include any of the following:

  • available money;
  • deposit money;
  • a managed investment;
  • a listed security;
  • a loan that has not been repaid in full;
  • an unlisted public security;
  • gold, silver or platinum bullion.

 

Income streams covered by this definition are divided into three main categories, each with their own treatment under the means test:

  • asset-test exempt income streams
  • asset-tested income streams (short term), and
  • asset-tested income streams (long term).

 

The amendments contained in this Schedule create a new category of income stream, asset-tested income streams (lifetime). The new rules in this Schedule apply to this new category of income stream.

 

Items 1, 8, 10, 12, 14, 16, 18, 19, 23, 24, 30, 31 and 32 amend the Social Security Act to remove references to ‘deferred annuities’ to avoid confusion with the new means test rules for deferred lifetime income streams going forward.

 

The deferred annuities these provisions relate to ceased to be offered in 1994, when the superannuation system was introduced.  There are no existing pension recipients with deferred annuity assets. 

 

Item 2 inserts a definition of ‘asset-tested income stream (lifetime)’ in subsection 9(1) as provided in the new section 9E.

 

Item 3 amends the definition of ‘asset-tested income stream (long term)’ in subsection 9(1) to provide that the income stream must be for a specified term and therefore operates consistently with the new definition of an ‘asset-tested income stream (lifetime)’ as provided for in item 2.

 

Item 4 inserts a new note explaining that since asset-tested income stream (long term) must be for a specified term it cannot be an asset-tested income stream (lifetime).

 

Items 5, 6 and 7 amend the definition of ‘asset-tested income stream (short term)’ in subsection 9(1) to provide that it is not an asset-test exempt income stream, an asset-tested income stream (long term) or an ‘asset-tested income stream (lifetime)’. These related amendments are included for clarity; the term-limited nature of asset-tested income streams (short term) would prevent them from meeting the definition of asset-tested income stream (lifetime) under new section 9E.

 

Item 9 inserts a new paragraph (n) into the definition of ‘income stream’ in subsection 9(1). This new paragraph provides that amounts paid to a person as compensation, or under an insurance scheme, in relation to an inability to work or incapacity are excluded from the meaning of ‘income stream’. This is to remove ambiguity present in the existing legislation.

 

Item 11 inserts a new definition into subsection 9(1) to provide for the meaning of ‘preservation age’, which has the same meaning as in the Income Tax Assessment Act 1997. Preservation age is not currently defined in the Social Security Act. It is used in the new subsection 1120AB(6) at item 37 related to the meaning of a person’s assessment day as provided for under new section 1120AB.

 

Item 13 inserts a new paragraph (h) into subsection 9(1B). This item amends the list of items that are ‘managed investments’ for the purposes of the Social Security Act, to include an asset-tested income stream (lifetime) that does not arise under arrangements that are regulated by the SIS Act.  This should be read in conjunction with items 15 and 17, which clarify that asset-tested income streams (lifetime) not arising under arrangements regulated by the SIS Act should only be assessed as managed investments if the person’s assessment day has not yet occurred.

 

Item 15 inserts a new note (note 5) at the end of the notes to subsection 9(1B) that refers the reader to new paragraph 9(1B)(h) (see item 13).  

 

Item 17 adds new paragraphs (i) and (j) into subsection 9(1C). This item amends the list of items that are not ‘managed investments’ for the purposes of the Social Security Act, to include:  

·         an asset-tested income stream (lifetime) that is regulated by the SIS Act; and

·         an asset-tested income stream (lifetime) that is not regulated by the SIS Act where the person’s assessment day (within the meaning of section 1120AB) for the income stream has occurred.

 

Example:  James purchases a lifetime income stream with a five year deferral period outside of the superannuation system at age 40. At purchase, it is assessed as a managed investment under section 1120AA.

 

At age 45, the annuity starts making payments. James’ assessment day is reached when the lifetime income stream starts making payments, so from this day the income stream is assessed as an asset-tested income stream (lifetime), under section 1120AB.

 

Item 20 inserts a new paragraph (c) after paragraph 9D(1)(b). Where a secondary income stream is created by a family law decision, subsection 9D(1) operates to apply the same means test treatment to the secondary income stream (secondary FLA income stream) as was applied to the primary income stream (primary FLA income stream). The new paragraph 9D(1)(c) allows subsection 9D(1) to operate for asset-tested income streams (lifetime) that are affected by family law decisions, in the same way it operates for asset-tested income streams (long term) and asset-tested income streams (short term). FLA stands for family law affected.

 

Item 21 amends paragraph 9D(2)(b) to replace ‘either an asset-tested income stream (long term) or an asset tested income stream (short term)’ with ‘an asset-tested income stream (long term), an asset-tested income stream (short term) or an asset-tested income stream (lifetime)’. Subsection 9D(2) provides for the treatment of a secondary FLA income stream where there is no primary FLA income stream related to that secondary FLA income stream. The amendment to paragraph 9D(2)(b) will operate so that the secondary FLA income stream should be assessed as an ‘an asset-tested income stream (long term), an asset-tested income stream (short term) or an asset-tested income stream (lifetime)’ as would have been applicable if a primary FLA income stream had existed.

 

Item 22 inserts a new section 9E that sets out the meaning of an asset-tested income stream (lifetime).

 

Subsection 9E(1) and 9E(2) provide conditions that if present will mean that an income stream is an ‘asset-tested income stream (lifetime)’. The conditions under subsection 9E(1) are that the contract or governing rule for the provisions of the income stream ensure that:

·         The income stream is to continue for the remainder of the life of one or more individuals and the amount of payments are determined having regard to:

o   The age, life expectancy or other mortality related factors of the relevant individual; and

o   The pool of assets supporting the income stream are held for the collective benefit of the relevant individual/s; and

·         The income stream is not an asset-test exempt income stream (as defined in subsection 9(1)); and

·         The income stream is not a defined benefit income stream (as defined in subsection 9(1)).

 

This definition of an ‘asset-tested income stream (lifetime)’ has been adapted from the existing definition of a pooled investment pension found in regulation 307‑205.02D of the Income Tax Assessment Regulations 1997. It has been slightly altered to account for products both inside and outside the superannuation system. The new means test rules apply to products that meet this definition.

 

In short, a product is an asset-tested income stream (lifetime) if:

  • once income stream payments start, the product offers income stream payments for the remainder of the life of the product owner or reversionary beneficiary
  • the product has regard to the mortality of the product owner, and
  • the product is supported by a pool of assets held for the collective benefit of many individuals, including the product owner.

 

The conditions under subsection 9E(2) are:

·         That the income stream satisfies the conditions determined in a legislative instrument made for the purposes of subsection 9(3); and

·         The income stream is not an asset-test exempt income stream (as defined in subsection 9(1)); and

·         The income stream is not a defined benefit income stream (as defined in subsection 9(1)).

 

Subsection 9E(3) provides a power for the Secretary to determine (by legislative instrument) other conditions that if present will mean that an income stream is an ‘asset-tested income stream (lifetime)’.  This ensures that the definition of ‘asset-tested income stream (lifetime)’ has sufficient flexibility and can be broadened to capture innovative lifetime income stream product/s that may emerge in the future, to which these rules are intended to apply, but where the application of the criteria outlined at subsection 9E(1) to the product is unclear. This is intended to be used flexibly, including at the level of individual products.

 

Items 25 and 26 replace the headings at sections 1099C and 1099D to also refer to asset-tested income stream (long term). This is for clarity.

 

Item 27 inserts a new section 1099DAB: Income – asset tested income stream (lifetime). This new section sets out a formula for the calculation of the amount of income that the person is taken to receive from an asset-tested income stream (lifetime) each year.

 

The method involves multiplying the annual payment by 0.6, where ‘annual payment’ is the amount payable to the person for the year under the asset-tested income stream (lifetime). The definition of ‘annual payment’ is the same definition used in the existing rules for other classes of income streams.

 

Example: Alice receives an annual payment of $5,000 from a lifetime income stream. 60 per cent ($3,000) is assessed as income under the income test. As their payments increase due to indexation, 60 per cent of the payments will continue to be assessed under the income test for the duration of the income stream.

 

Item 28 inserts a new section 1099DCA: Income from asset-tested income stream (lifetime). Subsection 1099DCA(1) provides a power for the Secretary to determine the amount that a person is taken to receive each year from family law affected asset-tested income streams (lifetime).

 

When making a determination under this section, the Secretary must comply with any decision-making principles in force under new section 1099DD.

 

Item 29 inserts a new subsection 1099DD(e) to provide the Secretary with the power to formulate, via legislative instrument, decision-making principles for decisions made under subsection 1099DCA(1).

 

Item 33 replaces the heading at section 1119 to clarify that the section does not apply to asset-tested income streams (lifetime).

 

Item 34 amends subsection 1119(1) to provide that section 1119 does not apply to an asset-tested income stream (lifetime).

 

Item 35 replaces the note at the end of subsection 1119(1) to direct readers to section 1120 for defined benefit income streams, to sections 1120AA and 1120AB for the treatment of asset-tested income streams (lifetime) and section 1120A for the treatment of family law affected income streams.

 

Item 36 inserts a note similar to that under item 35 to direct readers to section 1120A for the treatment of family law affected income streams at the end of subsection 1120(1).

 

Item 37 inserts two new sections, 1120AA and 1120AB which apply to determining the value of asset-tested income streams (lifetime) where they are or are not managed investments.

 

Asset-tested income streams that are managed investments

New section 1120AA provides for the value of asset-tested income streams (lifetime) that are managed investments. As outlined in items 13 and 17, this new section applies to asset-tested income streams (lifetime) that are not regulated by the SIS Act, that have not reached their assessment day (within the meaning of section 1120AB).

 

Subsection 1120AA(2) clarifies that section 1120AA does not apply to family law affected income streams.

 

Item 37 also inserts a note similar to that under item 35 and 36 to direct readers to section 1120A for the treatment of family law affected income streams at the end of subsection 1120AA(2).

 

New subsection 1120AA(3) provides that the value of an income stream, for the purposes of the assets test, is the purchase amount for that income stream.

 

‘Purchase amount’ is defined in new subsection 1120AA(4) as being the:

  • sum of each compounded amount(s) (worked out under subsection 1120AA(5)) paid for the income stream less any commuted amounts; or
  • should the circumstances determined under an instrument made under new subsection 1120AA(7) apply – an amount worked out according to that instrument.

 

New subsection 1120AA(5) sets out how to calculate the ‘compounded amount’ in relation to the purchase amount for the income stream. This requires that the formula below be applied for each relevant adjustment day:

 

 

This formula has been adapted from regulation 307.205.02C in the Income Tax Assessment Regulations 1997, which is used to determine the value of deferred income streams for tax purposes. It has the effect of compounding the amounts paid for the income stream annually by the above threshold rate (as determined in subsection 1082(2) of the Social Security Act).

 

New subsection 1120AA(5) also sets the meaning of the following terms: ‘compounded amount for the relevant adjustment day’, the ‘relevant above threshold rate for the relevant adjustment day’, the ‘relevant adjustment day’ and the ‘relevant payment day’ for the purposes of the formula above.

 

Each instalment paid to purchase the income stream is increased over time to account for investment returns. The increased instalments are then added together at the point of assessment to determine the purchase amount.

 

Example: James purchases an annuity with a five year deferral period outside of the superannuation system on 1 July 2020 for $100,000. At purchase, it is assessed as a managed investment under section 1120AA.

 

1 July 2020 is the relevant payment day for the income stream. The relevant adjustment days on which the purchase amount should be recalculated are therefore 1 July 2020, and each 12 month anniversary of 1 July 2020.

 

On 1 July 2020:

  • the relevant above threshold rate for the relevant adjustment day is zero, as the relevant adjustment day is the relevant payment day
  • the compounded amount for the relevant adjustment day is the amount that was paid for the income stream, as 1 July 2020 is the earliest relevant adjustment day.

 

 

Therefore, on 1 July 2020, the compounded amount is calculated as:

 

 

$100,000 is then the purchase amount until the next adjustment day on 1 July 2021.

 

For the purposes of this example, assume that the above threshold rate set by the Minister under subsection 1082(2) of the Social Security Act is 3.5 per cent on 1 July 2021.

 

Then, on 1 July 2021:

  • the relevant above threshold rate for the relevant adjustment day is 3.5 per cent
  • the compounded amount for the relevant adjustment day is $100,000, the amount calculated at the previous adjustment day.

 

Therefore, on 1 July 2021, the compounded amount is calculated as:

 

 

$103,500 is then the purchase amount until the next adjustment day on 1 July 2022.

 

For the following adjustment days, this process is repeated. For the purposes of this example, assume that the above threshold rates for 1 July 2022, 1 July 2023 and 1 July 2024 are 3.5 per cent, 3.75 per cent and 4 per cent respectively.

 

On 1 July 2022, the compound amount is:

 

 

 

On 1 July 2023, the compounded amount is:

 

 

On 1 July 2024, the compounded amount is:

 

 

On 1 July 2025, the annuity starts making payments. James’ assessment day is reached when the annuity starts making payments, so from this day the annuity is assessed under section 1120AB, not as a managed investment under section 1120AA. His purchase amount will be calculated in a similar manner under section 1120AB.

 

New subsection 1120AA(6) provides for the treatment of joint income streams. For the purposes of new subsections 1120AA(4) and (5) an amount paid for a joint income stream is taken to be that amount multiplied by the proportion of the income stream attributable to a person on the relevant day. Among any other relevant factors, the contract or governing rules for the provision of the income stream may be used to determine the proportion of the income stream attributable to a person.

 

Example: Chloe and Jennifer both contribute monies to the purchase of a $100,000 income stream outside of superannuation in a single payment. 75 per cent of the income stream is attributable to Chloe, and 25 per cent is attributable to Jennifer.

 

The amount paid for Chloe’s proportion of the income stream is:

 

 

The amount paid for Jennifer’s proportion of the income stream is:

 

 

New subsection 1120AA(7) provides a power for the Secretary to make a legislative instrument that determines the purchase amount for an asset-tested income stream (lifetime) (under paragraph 1120AA(4)(b)) that is a managed investment in certain circumstances. This instrument making power is intended to be used if products fail, and the purchase amount needs to be adjusted to reflect the value of the product. It is also intended to be used for products such as collective defined contribution schemes, where there is no obvious purchase price i.e. there is not a direct relationship between amounts paid and the value of the income stream.

 

Asset-tested income streams (lifetime) that are not managed investments

New section 1120AB provides for the value of asset-tested income streams (lifetime) that are not managed investments. New subsection 1120AB(1) provides that section 1120AB applies to a person’s asset‑tested income stream (lifetime) where the person’s ‘assessment day’ (within the definition of subsection 1120AB(6)) has occurred.

 

After subsection 1120AB(1), item 37 also inserts:

·         note 1 to direct readers to subsection 9(1) for the meaning of asset-tested income stream (lifetime) and subsection 1120AB(6) for the meaning of persons’ assessment day for the purposes of section 1120AB.

·         Note 2 indicates that section 1120AB applies separately in relation to each of the person’s asset-tested income streams (lifetime).

 

New subsection 1120AB(2) clarifies that section 1120AB does not apply to family law affected income streams.

 

Item 37 also inserts a note similar to that under item 35 and 36 to direct readers to section 1120A for the treatment of family law affected income streams at the end of subsection 1120AB(2).

 

New subsection 1120AB(3) sets out the steps for working out the value of a person’s income stream for the purposes of the assets test. Where the test occurs on a day beginning on a person’s assessment day (within the definition of subsection 1120AB(6)) for the income stream and ending on the person’s threshold day, the value is the purchase amount multiplied by 0.6. Where the test occurs after the person’s threshold day, the value is the purchase amount multiplied by 0.3.

 

Example:

Nina purchases a lifetime income stream with a purchase amount of $200,000. Initially, 60 per cent of the purchase amount ($120,000) is assessed as an asset under the assets test. 60 per cent continues to be assessed until the threshold day for the income stream, after which point 30 per cent ($60,000) of the purchase amount is assessed as an asset under the assets test. 30 per cent is then assessed for the rest of the duration of the lifetime income stream.

 

New subsection 1120AB(4) provides a power for the Secretary to determine, by legislative instrument, one or more methods for working out the value of an asset-tested income stream (lifetime) for persons to whom section 1120AB applies.

Additional rules that apply to products that do not meet the limits for death benefits and surrender values outlined in the capital access schedule (see background above), are intended to be implemented through this legislative instrument making power.

 

New subsection 1120AB(5) provides that if an amount or amounts worked out using the method in an instrument made under 1120AB(4) are greater than the amount resulting from the method set out in new subsection 1120AB(3), then the value of the person’s income stream is the highest of those amounts.

 

Assessment Day

The meaning of ‘assessment day’ is set out in new subsection 1120AB(6). Where an income stream is regulated by the SIS Act (i.e. purchased with superannuation monies), the ‘assessment day’ will be the later of:

·         the day that the person first satisfies a condition of release mentioned in the SIS Regulations that is of a kind determined in a notifiable instrument under new subsection 1120AB(7);

·         the day the first amount was paid for the income stream;

·         the day the person acquired the income stream (if no amount is identifiable as having been paid for the income stream).

 

It is intended that the conditions of release that will be determined in a notifiable instrument under new subsection 1120AB(7) should mirror the specific conditions of release outlined in sub-regulation 1.06A(3)(a) of the SIS Regulations. These are the conditions of release that determine when payments from an innovative superannuation income stream can commence.

 

Example: Ben purchases a lifetime annuity on 1 July 2020 with superannuation monies. He does not meet a relevant condition of release for his superannuation until 20 September 2024.

 

Ben’s lifetime annuity has an assessment day of 20 September 2024, as this is the latter of the date of purchase and the date he meets a relevant condition of release. His lifetime annuity is not assessed under the means test before 20 September 2024.

 

Where an income stream is not regulated by the SIS Act (i.e. purchased with non‑superannuation monies), the ‘assessment day’ will be the earlier of:

  • the commencement day in relation to the income stream, if this is before the day the person reaches preservation age; or
  • the latest of the day the first amount was paid for the income stream, the day the person reaches preservation age and the day the person acquired the income stream (if no amount is identifiable as having been paid for the income stream).

 

The note under subsection 1120AB indicates that ‘commencement day’ and ‘preservation age’ have the same meaning as provided in subsection 9(1). Commencement day is the first day of the period to which the first payment of the income stream relates and item 11 inserts a new definition of preservation age.

 

As products purchased outside of superannuation are not bound by the rules relating to conditions of release, preservation age has been used as a proxy to deliver similar results to similar products purchased with superannuation monies.

 

Example: Tegan purchases a lifetime annuity on 1 July 2020 with non-superannuation monies. The income stream does not commence payments until 1 July 2030. Tegan reaches preservation age on 1 July 2025.

 

As Tegan’s income stream does not commence until after she reaches preservation age, the assessment day for the income stream is the later of the date of purchase and the date Tegan reaches her preservation age. Therefore, Tegan’s assessment day is 1 July 2025. Her income stream is assessed as a managed investment under section 1120AA from 1 July 2020 to 30 June 2025, and as an asset-tested income stream (lifetime) under section 1120AB from 1 July 2025.

 

Threshold Day

A method statement for determining the ‘threshold day’ is set out in new subsection 1120AB(8).  The ‘threshold day’ is the date at which an asset-tested income stream (lifetime)’s assessable value steps down from 60 per cent of the purchase amount to 30 per cent of the purchase amount under the calculation in new subsection 1120AB(3).

 

The threshold day is calculated with reference to the life expectancy of a 65‑year‑old male on the assessment day. The life expectancy of a 65‑year‑old male will be specified in a notifiable instrument made by the Secretary, with reference to the most recent Australian Government Actuary Life Tables. The current table is accessible here: http://www.aga.gov.au/publications/life_table_2010-12/04-ALT-Males.asp. The threshold day is no less than five years after the assessment day.

 

Example: Ian purchases a lifetime annuity on 1 July 2020 at age 70. The income stream’s assessment day is 1 July 2020. On 1 July 2020, the life expectancy of a 65‑year‑old male is 19.5 years.

 

The threshold day for Ian’s lifetime annuity is calculated as follows:

 

Step 1: Life expectancy of a 65‑year‑old male at the assessment day (rounded):
           

 

Step 2: Add 65 to the result at step 1:

           

 

Step 3: Decrease the number at step 2 by Ian’s age on the assessment day:

             

 

Step 4: If the number at step 3 is greater than five, the assessment day for Ian’s income stream is the last day of that number of years beginning on the assessment day:

           

 

Step 5: Not applicable.

 

Therefore, Ian’s lifetime annuity has a threshold day of 30 June 2035.

 

Example: Barbara and Karen jointly hold a lifetime annuity, purchased on 1 July 2020. The income stream’s assessment day is 1 July 2020. On 1 July 2020, Barbara is 65, Karen is 85, and the life expectancy of a 65‑year‑old male is 19.5 years.

 

The threshold day for Barbara and Karen’s lifetime annuity is calculated as follows:

 

Step 1: Life expectancy of a 65‑year‑old male at the assessment day (rounded):
           

 

Step 2: Add 65 to the result at step 1:

           

 

Step 3: Decrease the number at step 2 by the greater of Barbara and Karen’s ages on the assessment day:

             

 

Step 4: Not applicable.

 

Step 5: If the number at step 3 is less than five, the threshold day for Barbara and Karen’s income stream is the last day of the five day period beginning on the assessment day:

           

 

Therefore, Barbara and Karen’s lifetime annuity has a threshold day of 30 June 2025.

 

New subsection 1120AB(9) provides a power for the Secretary to make a notifiable instrument detailing the life expectancy of a 65‑year‑old male for step 1 of the method statement under subsection 1120AB(8). In making such an instrument, the Secretary must be satisfied that the instrument is consistent with the most recent Life Tables published from time to time by the Australian Government Actuary. The current table is accessible here: http://www.aga.gov.au/publications/life_table_2010-12/04-ALT-Males.asp.

 

Purchase amount

The purchase amount is used in subsection 1120AB(3) to determine the value of an asset-tested income stream (lifetime).

 

New subsection 1120AB(10) sets out how to calculate the purchase amount for asset‑tested income streams (lifetime) that are not managed investments. The purchase amount is either:

  • the sum of:
    • amounts paid for the income stream before the ‘person’s assessment day’ for the income stream (defined in subsection 1120AB(6)), compounded up to the assessment day (as calculated under new subsection 1120AB(11)), and
    • amounts paid for the income stream on or after the person’s assessment day;

     less any commuted amounts, or

  • if the circumstances determined in an instrument under new subsection 1120AB(13) apply – the amount worked out in accordance with that instrument.

 

The method for working out the compounded amount, in new subsection 1120AB(11) is similar to subsection 1120AA(5), which calculates the compounded amounts for asset-tested income streams (lifetime) that are managed investments. Like that earlier method, this formula has been adapted from regulation 307.205.02C of the Income Tax Assessment Regulations 1997.

 

The key differences from the calculation in 1120AA(5) are in the meanings of ‘relevant above threshold rate of the relevant adjustment day’ and ‘relevant adjustment day’.  These differences allow for the calculation of the compounded amount on the assessment day, which may be less than 12 months after the previous relevant adjustment day.

 

Each instalment made before the assessment day is increased over time to account for investment returns. The increased instalments are then added together at the point of assessment to determine the purchase amount.

 

After a person reaches their assessment day, the instalments are no longer increased. When instalments are made after a person’s assessment day, they are added on to the total amount at the assessment day. They are not increased over time. This ensures a similar treatment to products purchased in one payment after the assessment day.

 

Example: Amy purchases a deferred income stream within superannuation with four instalments of $50,000. Each instalment is made one year apart; the first instalment is made on 1 July 2020, the second instalment is made on 1 July 2021, the third instalment is made on 1 July 2022 and the fourth instalment is made on 1 July 2023.

 

Amy’s assessment day is 1 November 2022.

 

Each instalment made by Amy is compounded by the formula in subsection 1120AB(11). Each year, the instalment increases in value depending on the above threshold rate at each 12 month anniversary of the instalment being made, or at the assessment day.

 

For this example, assume the above threshold rate is 3.25 per cent on 1 July 2021, 3.25 per cent on 1 July 2022, and 3.5 per cent on 1 November 2022.

 

When an instalment is increased across a full year, the full deeming rate applies. For the final part year before the adjustment day (e.g. in this example, between 1 July 2022 and 1 November 2022), the rate is a pro-rata rate, meaning it only accounts for the number of days in the year for which the instalment is being increased.

 

The compounded amount is therefore the following amounts on the following days:

 

1 July 2020:

 

1 July 2021: $50,000, increased by deeming rate at 1 July 2021

                       

                       

 

1 July 2022: $51,625, increased by deeming rate at 1 July 2022

                       

                       

 

1 November 2022: $53,303, increased by a pro-rata deeming rate at 1 November 2022

Note that there are 123 days between 1 July 2022 and 1 November 2022.

                       

                       

 

This process is done for the three instalments made before the assessment day for the income stream on 1 November 2022:

 

 

Instalment 1

Instalment 2

Instalment 3

Total purchase amount

1 July 2020

$50,000.00

-

-

$  50,000.00

1 July 2021

$51,625.00

$50,000.00

-

$101,625.00

1 July 2022

$53,302.81

$51,625.00

$50,000.00

$154,927.81

1 November 2022

$53,931.49

$52,233.89

$50,589.73

$156,755.11

 

On the assessment day, the purchase amount for Amy’s income stream is $156,755.11.

 

Amy makes one more instalment after her assessment day, of $50,000 on 1 July 2023. This is added to her total purchase amount at the assessment day, $156,755.11, for a total of $206,755.11.

 

As Amy makes no more instalments to the products after 1 July 2023, her purchase amount does not change after 1 July 2023 and remains at $206,755.11.

 

The full process for calculating Amy’s purchase amount is stepped out in the table below.

 

 

Instalment 1

Instalment 2

Instalment 3

Instalment 4

Total purchase amount

1 July 2020

$50,000.00

-

-

-

$  50,000.00

1 July 2021

$51,625.00

$50,000.00

-

-

$101,625.00

1 July 2022

$53,302.81

$51,625.00

$50,000.00

-

$154,927.81

1 November 2022

$53,931.49

$52,233.89

$50,589.73

-

$156,755.11

1 July 2023

$53,931.49

$52,233.89

$50,589.73

$50,000.00

$206,755.11

 

New subsection 1120AB(12) provides for the treatment of joint income streams. For the purposes of new subsections 1120AB(10) and (11) an amount paid for the income stream is taken to be that amount multiplied by the proportion of the income stream attributable to the person on the relevant day. This operates in the same way to the provision in subsection 1120AA(6) for asset-tested income streams (lifetime) that are managed investments.

 

New subsection 1120AB(13) provides a power for the Secretary to make a legislative instrument that determines the purchase amount for an asset-tested income stream (lifetime) for the purposes of paragraph 1120AB(10)(b). If the circumstances determined in an instrument under new subsection 1120AB(13) apply – the purchase amount under paragraph 1120AB(10)(b) is worked out in accordance with that instrument. It is intended to be used if products fail, and the purchase amount needs to be adjusted to reflect the value of the product. It is also intended to be used for products such as collective defined contribution schemes, where there is no obvious purchase price, i.e. there is not a direct relationship between amounts paid and the value of the income stream.

 

Item 38 inserts a new subsection 1121(3C) and provides that the value of an asset‑tested income stream (lifetime) is not reduced by the amount of any charge or encumbrance over that asset, for the purposes of calculating the value of the person’s assets for the purposes of section 1121(1). This aligns the treatment of asset-tested income streams (lifetime) with the treatment of asset-tested income streams (long term).

 

Item 39 inserts a new section 1121B: Value of life policy.

 

Subsection 1121B(1) provides that section 1121B applies, in relation to a person, on a day (which is defined as the ‘assessment day’) and if the person:

·         has reached pension age; and

·         is the owner of a life policy covered by paragraphs 9(1)(a) or 9(1)(b) of the Life Insurance Act 1995; and

·         became the owner of the policy after they reached pension age; and

·         whose life is insured on the assessment day has paid for the policy (regardless of who paid the amount) a sum total of each amount paid in any period of 12 months that exceeds 15% of the maximum death benefit that would be payable in the event of the death of the person.

 

Subsection 1121B(2) provides that the asset value of the life policy on the assessment day is the greater of the value if the policy were surrendered on that day, and the purchase price of the product less any commuted amounts.

 

This is to align the treatment of life policy with the additional rules for products that do not meet the limits for death benefits outlined in the CAS (see background above) that are set to be implemented through a legislative instrument under new subsection 1120AB(4) (see item 37).

 

Item 40 provides for the application of the amendments contained in Schedule 1.

 

The new rules for asset-tested income streams (lifetime) apply to those income streams purchased (i.e. a payment has been made towards the income stream) or acquired on or after commencement of item 40.

 

Income streams purchased or acquired prior to commencement of item 40 will not be subject to the new rules for asset-tested income streams (lifetime) outlined in this Schedule.

 

The new rules for life insurance policies provided for in new section 1121B apply in relation to all persons who reach pension age on or after commencement of item 40.

 

 

Veterans’ Entitlements Act 1986

 

Items 41, 42, 49, 51, 53, 55, 57, 59, 60, 64, 65, 71, 72, 73 and 74 amend the Veterans’ Entitlements Act to remove references to ‘deferred annuities’ to avoid confusion with the new means test rules for deferred lifetime income streams going forward.

 

The deferred annuities those provisions relate to ceased to be offered in 1994, when the superannuation system was introduced.  There are no existing pension recipients with deferred annuity assets. 

 

Item 43 inserts a definition of ‘asset-tested income stream (lifetime)’ in subsection 5J(1) as provided in the new section 5JE.

 

Item 44 amends the definition of ‘asset-tested income stream (long term)’ in subsection 5J(1) to provide that the income stream must be for a specified term and therefore operates consistently with the new definition of an ‘asset-tested income stream (lifetime)’ as provided for in item 43.

 

Item 45 inserts a new note explaining that since asset-tested income stream (long term) must be for a specified term it cannot be an asset-tested income stream (lifetime).

 

Items 46, 47 and 48 amend the definition of ‘asset-tested income stream (short term)’ in subsection 5J(1) to provide that it is not an asset-test exempt income stream, an asset-tested income stream (long term) or an ‘asset-tested income stream (lifetime)’. These related amendments are included for clarity; the term-limited nature of asset-tested income streams (short term) would prevent them from meeting the definition of asset-tested income stream (lifetime).

 

Item 50 inserts a new paragraph (n) into the definition of ‘income stream’ in subsection 5J(1). This new paragraph provides that amounts paid to a person as compensation, or under an insurance scheme, in relation to an inability to work or incapacity are excluded from the meaning of ‘income stream’. This is to remove ambiguity present in the existing legislation.

 

Item 52 inserts a new definition into subsection 5J(1) to provide for the meaning of ‘preservation age’, which has the same meaning as in the Income Tax Assessment Act 1997. Preservation age is not currently defined in the Veterans’ Entitlements Act. It is used in the new subsection 52BAB at item 79 related to the meaning of a person’s assessment day.

 

Item 54 inserts a new paragraph (h) into subsection 5J(1B). This item amends the list of items that are ‘managed investments’ for the purposes of the Veterans’ Entitlements Act, to include an asset tested income stream (lifetime) that does not arise under arrangements that are regulated by the SIS Act.  This should be read in conjunction with items 56 and 58, which clarify that asset-tested income streams (lifetime) not arising under arrangements regulated by the SIS Act should only be assessed as managed investments if the person’s assessment day has not yet occurred.

 

Item 56 inserts a note at the end of the notes to subsection 5J(1B).  The new note states for the purposes of new paragraph 5J(1B)(h), i.e. where an asset-tested income stream (lifetime) is not regulated by the SIS Act, new paragraph 5J(1C)(j) provides for circumstances where the person’s assessment day has occurred. In these circumstances, the asset-tested income stream (lifetime) should not be assessed as a managed investment. The meaning of ‘assessment day’ is provided in new section 52BAB (item 79).  

 

Item 58 adds new subparagraphs (i) and (j) into subsection 5J(1C). This item amends the list of items that are not ‘managed investments’ for the purposes of the Veterans’ Entitlements Act, to include:

·         an asset-tested income stream (lifetime) that is regulated by the SIS Act; and

·         an asset-tested income stream (lifetime) that is not regulated by the SIS Act where the person’s assessment day for the income stream has occurred.

 

Example:  James purchases a lifetime income stream with a five year deferral period outside of the superannuation system at age 40. At purchase, it is assessed as a managed investment under section 52BAA.

 

At age 45, the annuity starts making payments. James’ assessment day is reached when the lifetime income stream starts making payments, so from this day the income stream is assessed as an asset-tested income stream (lifetime), under section 52BAB.

 

Item 61 inserts a new paragraph (c) after paragraph 5JD(1)(b). Where a secondary income stream is created by a family law decision, subsection 5JD(1) operates to apply the same means test treatment to the secondary income stream (secondary FLA income stream) as was applied to the primary income stream (primary FLA income stream). The new paragraph 5JD(1)(c) allows subsection 5JD(1) to operate for asset-tested income streams (lifetime) that are affected by family law decisions, in the same way it operates for asset-tested income streams (long term) and asset-tested income streams (short term). FLA stands for family law affected.

 

Item 62 amends paragraph 5JD(2)(b) to replace ‘either an asset-tested income stream (long term) or an asset tested income stream (short term)’ with ‘an asset-tested income stream (long term), an asset-tested income stream (short term) or an asset-tested income stream (lifetime)’. Subsection 5JD(2) provides for the treatment of a secondary FLA income stream where there is no primary FLA income stream related to that secondary FLA income stream. The amendment to paragraph 5JD(2)(b) will operate so that the secondary FLA income stream should be assessed as ‘an asset-tested income stream (long term), an asset-tested income stream (short term) or an asset-tested income stream (lifetime)’ as would have been applicable if a primary FLA income stream had existed.

 

Item 63 inserts a new section 5JE that sets out the meaning of an asset-tested income stream (lifetime).

 

Subsection 5JE(1) and 5JE(2) provide conditions that if present will mean that an income stream is an ‘asset-tested income stream (lifetime)’. The conditions under subsection 5JE(1) are that the contract or governing rule for the provisions of the income stream ensure that:

·         the income stream is to continue for the remainder of the life of one or more individuals and the amount of payments are determined having regard to:

o   the age, life expectancy or other mortality related factors of the relevant individual; and

o   the pool of assets supporting the income stream are held for the collective benefit of the relevant individual/s; and

·         the income stream is not an asset-test exempt income stream; and

·         the income stream is not a defined benefit income stream.

 

This definition of an asset-tested income stream (lifetime) has been adapted from the existing definition of a pooled investment pension found in regulation 307‑205.02D of the Income Tax Assessment Regulations 1997. It has been slightly altered to account for products both inside and outside the superannuation system. The new means test rules apply to products that meet this definition.

 

In short, a product is an asset-tested income stream (lifetime) if:

  • once income stream payments start, the product offers income stream payments for the remainder of the life of the product owner or reversionary beneficiary;
  • the product has regard to the mortality of the product owner, and
  • the product is supported by a pool of assets held for the collective benefit of many individuals, including the product owner.

 

The conditions under subsection 5JE(2) are:

·         that the income stream satisfies the conditions determined in a legislative instrument made for the purposes of subsection 5JE(3); and

·         the income stream is not an asset-test exempt income stream; and

·         the income stream is not a defined benefit income stream.

 

Subsection 5JE(3) provides a power for the Commission to determine (by legislative instrument) other conditions that if present will mean that an income stream is an ‘asset-tested income stream (lifetime)’.  This ensures that the definition of ‘asset-tested income stream (lifetime)’ has sufficient flexibility and can be broadened to capture innovative lifetime income stream product/s that may emerge in the future, to which these rules are intended to apply, but where the application of the criteria outlined at subsection 5JE(1) to the product is unclear. This is intended to be used flexibly, including at the level of individual products.

 

Items 66 and 67 replace the headings at sections 46X and 46Y to also refer to asset-tested income stream (long term). This is for clarity.

 

Item 68 inserts a new section 46YB: Income—asset-tested income stream (lifetime). This new section sets out a formula for the calculation of the amount of income that the person is taken to receive from an asset-tested income stream (lifetime) each year.

 

The method involves multiplying the annual payment by 0.6, where ‘annual payment’ is the amount payable to the person for the year under the asset-tested income stream (lifetime). The definition of ‘annual payment’ is the same definition used in the existing rules for other classes of income streams.

 

Example: Alice receives an annual payment of $5,000 from a lifetime income stream. 60 per cent ($3,000) is assessed as income under the income test. As their payments increase due to indexation, 60 per cent of the payments will continue to be assessed under the income test for the duration of the income stream.

 

Item 69 inserts a new section 46ZBA: Income from asset-tested income stream (lifetime). Subsection 46ZBA(1) provides a power for the Commission to determine the amount that a person is taken to receive each year from family law affected asset-tested income streams (lifetime).

 

When making a determination under this section, the Commission must comply with any decision-making principles in force under new section 46ZC.

 

Item 70 inserts a new subsection 46ZC(e) to provide the Commission with the power to formulate, via legislative instrument, decision-making principles for decisions made under subsection 46ZBA(1).

 

Item 75 replaces the heading at section 52A to clarify that the section does not apply to asset-tested income streams (lifetime).

 

Item 76 amends subsection 52A(1) to provide that section 52A does not apply to an asset-tested income stream (lifetime).

 

Item 77 replaces the note at the end of subsection 52A(1) to direct readers to section 52B for defined benefit income streams, to sections 52BAA and 52BAB for the treatment of asset-tested income streams (lifetime) and section 52BA for the treatment of family law affected income streams.

 

Item 78 inserts a note similar to that under item 77 to direct readers to section 52BA at the end of subsection 52B(1) for family law affected income streams.

 

Item 79 inserts two new sections, 52BAA and 52BAB which apply to determining the value of asset-tested income streams (lifetime) where they are or are not managed investments.

 

Asset-tested income streams that are managed investments

New section 52BAA provides for the value of asset-tested income streams (lifetime) that are managed investments. As outlined in items 54 and 58, this new section applies to asset-tested income streams (lifetime) that are not regulated by the SIS Act and that have not reached their assessment day (within the meaning of section 52BAB).

 

Subsection 52BAA(2) clarifies that section 52BAA does not apply to family law affected income streams.

 

Item 79 also inserts a note similar to that under item 77 and 78 to direct readers to section 52BA for the treatment of family law affected income streams at the end of subsection 52AA(2).

 

 

New subsection 52BAA(3) provides that the value of an income stream, for the purposes of the assets test, is the purchase amount for that income stream.

 

‘Purchase amount’ is defined in new subsection 52BAA(4) as being the:

  • sum of each compounded amount(s) (worked out under subsection 52BAA(5)) paid for the income stream less any commuted amounts; or
  • should the circumstances determined under an instrument made under new subsection 52BAA(7) apply – an amount worked out according to that instrument.

 

New subsection 52BAA(5) sets out how to calculate the ‘compounded amount’ in relation to the purchase amount for the income stream. This requires that the formula below be applied for each relevant adjustment day:

 

 

This formula has been adapted from regulation 307.205.02C in the Income Tax Assessment Regulations 1997, which is used to determine the value of deferred income streams for tax purposes. It has the effect of compounding the amounts paid for the income stream annually by the above threshold rate (as determined in subsection 46J(2) of the Veterans’ Entitlements Act).

 

New subsection 52BAA(5) also sets the meaning of the following terms: ‘compounded amount for the relevant adjustment day’, the ‘relevant above threshold rate for the relevant adjustment day’, the ‘relevant adjustment day’ and the ‘relevant payment day’ for the purposes of the formula above.

 

Each instalment paid to purchase the income stream is increased over time to account for investment returns. The increased instalments are then added together at the point of assessment to determine the purchase amount.

 

Example: James purchases an annuity with a five year deferral period outside of the superannuation system on 1 July 2020 for $100,000. At purchase, it is assessed as a managed investment under section 52BAA.

 

1 July 2020 is the relevant payment day for the income stream. The relevant adjustment days on which the purchase amount should be recalculated are therefore 1 July 2020, and each 12 month anniversary of 1 July 2020.

 

On 1 July 2020:

  • the relevant above threshold rate for the relevant adjustment day is zero, as the relevant adjustment day is the relevant payment day
  • the compounded amount for the relevant adjustment day is the amount that was paid for the income stream, as 1 July 2020 is the earliest relevant adjustment day.

 

Therefore, on 1 July 2020, the compounded amount is calculated as:

 

 

$100,000 is then the purchase amount until the next adjustment day on 1 July 2021.

 

For the purposes of this example, assume that the above threshold rate set by the Minister under subsection 1082(2) of the Social Security Act, noting this is relevant as per subsection 46J(2) of the Veterans’ Entitlements Act, is 3.5 per cent on 1 July 2021.

 

Then, on 1 July 2021:

  • the relevant above threshold rate for the relevant adjustment day is 3.5 per cent
  • the compounded amount for the relevant adjustment day is $100,000, the amount calculated at the previous adjustment day.

 

Therefore, on 1 July 2021, the compounded amount is calculated as:

 

 

$103,500 is then the purchase amount until the next adjustment day on 1 July 2022.

 

For the following adjustment days, this process is repeated. For the purposes of this example, assume that the above threshold rates for 1 July 2022, 1 July 2023 and 1 July 2024 are 3.5 per cent, 3.75 per cent and 4 per cent respectively.

 

 

On 1 July 2022, the compound amount is:

 

 

On 1 July 2023, the compounded amount is:

 

 

On 1 July 2024, the compounded amount is:

 

 

On 1 July 2025, the annuity starts making payments. James’ assessment day is reached when the annuity starts making payments, so from this day the annuity is assessed under section 52BAB, not as a managed investment under section 52BAA. His purchase amount will be calculated in a similar manner under section 52BAB.

 

New subsection 52BAA(6) provides for the treatment of joint income streams. For the purposes of new subsections 52BAA(4) and (5) an amount paid for a joint income stream is taken to be that amount multiplied by the proportion of the income stream attributable to a person on the relevant day. Among other relevant factors, the contract or governing rules for the provision of the income stream may be used to determine the proportion of the income stream attributable to a person.

 

Example: Chloe and Jennifer both contribute monies to the purchase of a $100,000 income stream outside of superannuation in a single payment. 75 per cent of the income stream is attributable to Chloe, and 25 per cent is attributable to Jennifer.

 

The amount paid for Chloe’s proportion of the income stream is:

 

 

The amount paid for Jennifer’s proportion of the income stream is:

 

 

New subsection 52BAA(7) provides a power for the Commission to make a legislative instrument that determines the purchase amount for an asset-tested income stream (lifetime) that is a managed investment in certain circumstances. The instrument making power is intended to be used if products fail, and the purchase amount needs to be adjusted to reflect the value of the product. It is also intended to be used for products such as collective defined contribution schemes, where there is no obvious purchase price i.e. there is not a direct relationship between amounts paid and the value of the income stream.

 

Asset-tested income streams (lifetime) that are not managed investments

New section 52BAB provides for the value of asset-tested income streams (lifetime) that are not managed investments. New subsection 52BAB(1) provides that section 52BAB applies to a person’s asset‑tested income stream (lifetime) where the person’s ‘assessment day’ (within the definition of subsection 52BAB(6)) has occurred.

 

After subsection 52BAB(1), item 79 also inserts:

·         note 1 to direct readers to subsection 5J(1) for the meaning of asset-tested income stream (lifetime) and subsection 52BAB(6) for the meaning of persons’ assessment day for the purposes of section 52BAB.

·         Note 2 indicates that section 52BAB applies separately in relation to each of the person’s asset-tested income streams (lifetime).

 

New subsection 52BAB(2) clarifies that section 52BAB does not apply to family law affected income streams.

 

Item 79 also inserts a note similar to that under item 77 and 78 to direct readers to section 52BA for the treatment of family law affected income streams at the end of subsection 52BAB(2).

 

New subsection 52BAB(3) sets out the steps for working out the value of a person’s income stream for the purposes of the assets test. Where the test occurs on a day beginning on a person’s assessment day (within the definition of subsection 52BAB(6)) for the income stream and ending on the person’s threshold day, the value is the purchase amount multiplied by 0.6. Where the test occurs after the person’s threshold day, the value is the purchase amount multiplied by 0.3.

 

Example:

Nina purchases a lifetime income stream with a purchase amount of $200,000. Initially, 60 per cent of the purchase amount ($120,000) is assessed as an asset under the assets test. 60 per cent continues to be assessed until the threshold day for the income stream, after which point 30 per cent ($60,000) of the purchase amount is assessed as an asset under the assets test. 30 per cent is then assessed for the rest of the duration of the lifetime income stream.

 

New subsection 52BAB(4) provides a power for the Commission to determine, by legislative instrument, one or more methods for working out the value of an asset-tested income stream (lifetime) for person to whom section 52BAB applies.

 

Additional rules that apply to products that do not meet the limits for death benefits and surrender values outlined in the capital access schedule (see background above), are intended to be implemented through this legislative instrument making power.

New subsection 52BAB(5) provides that if an amount or amounts worked out using the method in an instrument made under 52BAB(4) are greater than the amount resulting from the method set out in new subsection 52BAB(3), then the value of the person’s income stream is the highest of those amounts.

 

Assessment Day

The meaning of ‘assessment day’ is set out in new subsection 52BAB(6). Where an income stream is regulated by the SIS Act (i.e. purchased with superannuation monies), the ‘assessment day’ will be the later of:

·         the day that the person first satisfies a condition of release mentioned in the SIS Regulations that is of a kind determined in a notifiable instrument under new subsection 52BAB(7);

·         the day the first amount was paid for the income stream;

·         the day the person acquired the income stream (if no amount is identifiable as having been paid for the income stream).

 

It is intended that the conditions of release that will be determined in a notifiable instrument under new subsection 52BAB(7) should mirror the specific conditions of release outlined in sub-regulation 1.06A(3)(a) of the SIS Regulations. These are the conditions of release that determine when payments from an innovative superannuation income stream can commence.

 

Example: Ben purchases a lifetime annuity on 1 July 2020 with superannuation monies. He does not meet a relevant condition of release for his superannuation until 20 September 2024.

 

Ben’s lifetime annuity has an assessment day of 20 September 2024, as this is the latter of the date of purchase and the date he meets a relevant condition of release. His lifetime annuity is not assessed under the means test before 20 September 2024.

 

Where an income stream is not regulated by the SIS Act (i.e. purchased with non‑superannuation monies), the ‘assessment day’ will be the earlier of:

  • the commencement day in relation to the income stream, if this is before the day the person reaches preservation age; or
  • the latest of the day the first amount was paid for the income stream, the day the person reaches preservation age and the day the person acquired the income stream (if no amount is identifiable as having been paid for the income stream).

 

The note under subsection 52BAB indicates that ‘commencement day’ and ‘preservation age’ have the same meaning as provided in subsection 5J(1). Commencement day is the first day of the period to which the first payment of the income stream relates and item 52 inserts a new definition of preservation age.

 

As products purchased outside of superannuation are not bound by the rules relating to conditions of release, preservation age has been used as a proxy to deliver similar results to similar products purchased with superannuation monies.

 

Example: Tegan purchases a lifetime annuity on 1 July 2020 with non-superannuation monies. The income stream does not commence payments until 1 July 2030. Tegan reaches preservation age on 1 July 2025.

 

As Tegan’s income stream does not commence until after she reaches preservation age, the assessment day for the income stream is the later of the date of purchase and the date Tegan reaches her preservation age. Therefore, Tegan’s assessment day is 1 July 2025. Her income stream is assessed as a managed investment under section 52BAA from 1 July 2020 to 30 June 2025, and as an asset-tested income stream (lifetime) under section 52BAB from 1 July 2025.

 

Threshold Day

A method statement for determining the ‘threshold day’ is set out in new subsection 52BAB(8).  The ‘threshold day’ is the date at which an asset-tested income stream (lifetime)’s assessable value steps down from 60 per cent of the purchase amount to 30 per cent of the purchase amount under the calculation in new subsection 52BAB(3).

 

The threshold day is calculated with reference to the life expectancy of a 65‑year‑old male on the assessment day. The life expectancy of a 65‑year‑old male will be specified in a notifiable instrument made by the Commission, with reference to the most recent Australian Government Actuary Life Tables. The current table is accessible here: http://www.aga.gov.au/publications/life_table_2010-12/04-ALT-Males.asp. The threshold day is no less than five years after the assessment day.

 

Example: Ian purchases a lifetime annuity on 1 July 2020 at age 70. The income stream’s assessment day is 1 July 2020. On 1 July 2020, the life expectancy of a 65‑year‑old male is 19.5 years.

 

The threshold day for Ian’s lifetime annuity is calculated as follows:

 

Step 1: Life expectancy of a 65‑year‑old male at the assessment day (rounded):
           

 

Step 2: Add 65 to the result at step 1:

           

 

Step 3: Decrease the number at step 2 by Ian’s age on the assessment day:

             

 

Step 4: If the number at step 3 is greater than five, the assessment day for Ian’s income stream is the last day of that number of years beginning on the assessment day:

           

 

Step 5: Not applicable.

 

Therefore, Ian’s lifetime annuity has a threshold day of 30 June 2035.

 

 

Example: Barbara and Karen jointly hold a lifetime annuity, purchased on 1 July 2020. The income stream’s assessment day is 1 July 2020. On 1 July 2020, Barbara is 65, Karen is 85, and the life expectancy of a 65‑year‑old male is 19.5 years.

 

The threshold day for Barbara and Karen’s lifetime annuity is calculated as follows:

 

Step 1: Life expectancy of a 65‑year‑old male at the assessment day (rounded):
           

 

Step 2: Add 65 to the result at step 1:

           

 

Step 3: Decrease the number at step 2 by the greater of Barbara and Karen’s ages on the assessment day:

             

 

Step 4: Not applicable.

 

Step 5: If the number at step 3 is less than five, the threshold day for Barbara and Karen’s income stream is the last day of the five day period beginning on the assessment day:

           

 

Therefore, Barbara and Karen’s lifetime annuity has a threshold day of 30 June 2025.

 

New subsection 52BAB(9) provides a power for the Commission to make a notifiable instrument detailing the life expectancy of a 65‑year‑old male for step 1 of the method statement under subsection 52BAB(8). In making such an instrument, the Commission must be satisfied that the instrument is consistent with the most recent Life Tables published from time to time by the Australian Government Actuary. The current table is accessible here: http://www.aga.gov.au/publications/life_table_2010-12/04-ALT-Males.asp.

 

Purchase amount

The purchase amount is used in subsection 52BAB(3) to determine the value of an asset-tested income stream (lifetime).

 

New subsection 52BAB(10) sets out how to calculate the purchase amount for asset‑tested income streams (lifetime) that are not managed investments. The purchase amount is either:

  • the sum of:
    • amounts paid for the income stream before the person’s ‘assessment day’ for the income stream (defined in subsection 52BAB(6)), compounded up to the assessment day (as calculated under new subsection 52BAB(11)), and
    • amounts paid for the income stream on or after the person’s assessment day;

less any commuted amounts, or

  • if the circumstances determined in an instrument under new subsection 52BAB(13) apply – the amount worked out in accordance with that instrument.

 

The method for working out the compounded amount, in new subsection 52BAB(11) is similar to subsection 52BAA(5), which calculates the compounded amounts for asset-tested income streams (lifetime) that are managed investments. Like that earlier method, this formula has been adapted from regulation 307.205.02C of the Income Tax Assessment Regulations 1997.

 

The key differences from the calculation in 52BAA(5) are in the meanings of ‘relevant above threshold rate of the relevant adjustment day’ and ‘relevant adjustment day’.  These differences allow for the calculation of the compounded amount on the assessment day, which may be less than 12 months after the previous relevant adjustment day.

 

Each instalment made before the assessment day is increased over time to account for investment returns. The increased instalments are then added together at the point of assessment to determine the purchase amount.

 

After a person reaches their assessment day, the instalments are no longer increased. When instalments are made after a person’s assessment day, they are added on to the total amount at the assessment day. They are not increased over time. This ensures a similar treatment to products purchased in one payment after the assessment day.

 

Example: Amy purchases a deferred income stream within superannuation with four instalments of $50,000. Each instalment is made one year apart; the first instalment is made on 1 July 2020, the second instalment is made on 1 July 2021, the third instalment is made on 1 July 2022 and the fourth instalment is made on 1 July 2023.

 

Amy’s assessment day is 1 November 2022.

 

Each instalment made by Amy is compounded by the formula in subsection 52BAB(11). Each year, the instalment increases in value depending on the above threshold rate at each 12 month anniversary of the instalment being made, or at the assessment day.

 

For this example, assume the above threshold rate is 3.25 per cent on 1 July 2021, 3.25 per cent on 1 July 2022, and 3.5 per cent on 1 November 2022.

 

When an instalment is increased across a full year, the full deeming rate applies. For the final part year before the adjustment day (e.g. in this example, between 1 July 2022 and 1 November 2022), the rate is a pro-rata rate, meaning it only accounts for the number of days in the year for which the instalment is being increased.

 

The compounded amount is therefore the following amounts on the following days:

 

1 July 2020:

 

1 July 2021: $50,000, increased by deeming rate at 1 July 2021

                       

                       

 

1 July 2022: $51,625, increased by deeming rate at 1 July 2022

                       

                       

 

 

1 November 2022: $53,303, increased by a pro-rata deeming rate at 1 November 2022

Note that there are 123 days between 1 July 2022 and 1 November 2022.

                       

                       

 

This process is done for the three instalments made before the assessment day for the income stream on 1 November 2022:

 

 

Instalment 1

Instalment 2

Instalment 3

Total purchase amount

1 July 2020

$50,000.00

-

-

$  50,000.00

1 July 2021

$51,625.00

$50,000.00

-

$101,625.00

1 July 2022

$53,302.81

$51,625.00

$50,000.00

$154,927.81

1 November 2022

$53,931.49

$52,233.89

$50,589.73

$156,755.11

 

On the assessment day, the purchase amount for Amy’s income stream is $156,755.11.

 

Amy makes one more instalment after her assessment day, of $50,000 on 1 July 2023. This is added to her total purchase amount at the assessment day, $156,755.11, for a total of $206,755.11.

 

As Amy makes no more instalments to the products after 1 July 2023, her purchase amount does not change after 1 July 2023 and remains at $206,755.11.

 

The full process for calculating Amy’s purchase amount is stepped out in the table below.

 

 

Instalment 1

Instalment 2

Instalment 3

Instalment 4

Total purchase amount

1 July 2020

$50,000.00

-

-

-

$  50,000.00

1 July 2021

$51,625.00

$50,000.00

-

-

$101,625.00

1 July 2022

$53,302.81

$51,625.00

$50,000.00

-

$154,927.81

1 November 2022

$53,931.49

$52,233.89

$50,589.73

-

$156,755.11

1 July 2023

$53,931.49

$52,233.89

$50,589.73

$50,000.00

$206,755.11

 

New subsection 52BAB(12) provides for the treatment of joint income streams. For the purposes of new subsections 52BAB(10) and (11) an amount paid for the income stream is taken to be that amount multiplied by the proportion of the income stream attributable to the person on the relevant day. This operates in the same way to the provision in subsection 52BAA(6) for asset-tested income streams (lifetime) that are managed investments.

 

New subsection 52BAB(13) provides a power for the Commission to make a legislative instrument that determines the purchase amount for an asset-tested income stream (lifetime) for the purposes of paragraph 52BAB(10(b). If the circumstances determined in an instrument under the new subsection 52BAB(13) apply – the purchase amount under paragraph 52BAB(10)(b) is worked out in accordance with that instrument. It is intended to be used if products fail, and the purchase amount needs to be adjusted to reflect the value of the product. It is also intended to be used for products such as collective defined contribution schemes, where there is no obvious purchase price, i.e. there is not a direct relationship between amounts paid and the value of the income stream.

 

Item 80 inserts a new subsection 52(3C) and provides that the value of an asset‑tested income stream (lifetime) is not reduced by the amount of any charge or encumbrance over that asset, for the purposes of calculating the value of the person’s assets for the purposes of the Veterans’ Entitlements Act. This aligns the treatment of asset-tested income streams (lifetime) with the treatment of asset-tested income streams (long term).

 

Item 81 inserts a new section 52CB: Value of life insurance policies.

 

Subsection 52CB(1) provides that section 52CB applies, in relation to a person, on a day (which is defined as the ‘assessment day’) and if the person:

 

·         has reached pension age; and

·         is the owner of a life policy covered by paragraphs 9(1)(a) or 9(1)(b) of the Life Insurance Act 1995; and

·         became the owner of the policy after they reached pension age; and

·         whose life is insured on the assessment day has paid for the policy (regardless of who paid the amount) a sum total of each amount paid in any period of 12 months that exceeds 15% of the maximum death benefit that would be payable in the event of the death of the person.

 

Subsection 52CB(2) provides that the asset value of the life policy on the assessment day is the greater of the value if the policy were surrendered on that day, and the purchase price of the product less any commuted amounts.

 

This is to align the treatment of life policies with the additional rules for products that do not meet the limits for death benefits outlined in the CAS (see background above) that are set to be implemented through a legislative instrument under new subsection 52BAB(4) (see item 79).

 

Item 82 provides for the application of the amendments contained in Schedule 1.

 

The new rules for asset-tested income streams (lifetime) apply to those income streams purchased (i.e. a payment has been made towards the income stream) or acquired on or after commencement of item 82.

 

Income streams purchased or acquired prior to commencement of item 82 will not be subject to the new rules for asset-tested income streams (lifetime) outlined in this Schedule. The new rules for life insurance policies provided for in new section 52CB apply in relation to all persons who reach pension age on or after commencement of item 82.


Schedule 2 – Work Bonus

 

Summary

 

This Schedule increases the Work Bonus from $250 to $300 per fortnight and extends the application of the Work Bonus to all income from gainful work that involves personal exertion. This includes earnings from self-employment and work undertaken as an independent contractor or consultant. This Schedule will also increase the maximum unused concession balance from $6,500 to $7,800 in line with the increase of the Work Bonus amount.

 

The amendments contained in this Schedule implement part of the 2018-19 Budget measure ‘More Choices for a Longer Life – Finances for a Longer Life’.

 

Background

 

The Work Bonus is an income test concession, and is currently $250 per fortnight. This means that the first $250 of fortnightly employment income is not counted under the pension income test. Any unused part of the Work Bonus currently accrues to a maximum balance of $6,500, and is used to exempt future earnings.

 

Social security pensioners of age pension age and Department of Veterans’ Affairs pension recipients of qualifying age are able to access the Work Bonus.

 

The Work Bonus was set at $250 in 2011 and has not been increased since. This Schedule will increase the Work Bonus to $300 per fortnight, meaning that eligible pensioners will get more benefit from working. In line with current arrangements, the new Work Bonus amount of $300 per fortnight will not be subject to automatic indexation.

 

Currently, the Work Bonus only applies to employment income, which is defined in the Social Security Act as income earned from remunerative work undertaken by a person in an employer / employee relationship. Accordingly, the Work Bonus is not currently applied to earnings from work performed outside an employer / employee relationship, such as self-employment and work undertaken as an independent contractor or consultant.

 

This Schedule extends the application of the Work Bonus to all earnings from gainful work that involves personal exertion. The intention is that pensioners who are not in an employer / employee relationship, who work for financial gain or reward, and whose work involves personal exertion, are able to benefit from the Work Bonus in the same manner as pensioners who have earnings as an employee. This will improve the consistency and equity of the Work Bonus arrangements.

 

It is not intended that managing personal or family financial or real estate investments, or undertaking domestic duties in relation a person’s own residence would meet this requirement for personal exertion.

 

The intention is that only gainful work that involves personal exertion will qualify for the Work Bonus and that work undertaken by a person will not be considered to be gainful work to the extent it consists of management or administration of a person’s financial investments or real property, such as managing an investment portfolio or renting or leasing out real estate.

 

It is also intended that the Work Bonus would only apply to income that is commensurate to the work performed. For example, if a person received a $10,000 distribution from a trust, the Work Bonus would only apply to that amount to the extent that the person could show that they had performed work commensurate to the amount paid.

 

The amendments made by this Schedule commence on 1 July 2019.

 

 

Explanation of the changes

 

Schedule 2 – Work Bonus

 

Social Security Act 1991

 

Items 1, 2, 5, 7, 9, 10, 13, 14 and 21 amend various provisions of the Social Security Act by omitting 'employment income’ and substituting ‘work bonus income’. This ensures that in addition to employment income, the Work Bonus applies to income from remunerative work that involves personal exertion, including self-employment income.

 

Items 3, 11 and 15 insert a note in various provisions of the Social Security Act that refer to work bonus income to indicate that work bonus income is defined at
subsection 1073AA(4BA).

 

Items 4, 6, 8 and 12 repeal existing examples in various provisions of the Social Security Act that refer to employment income, and substitute new examples that refer to work bonus income. The new examples reflect the increase in the Work Bonus amount to $300.

 

Item 16 repeals the heading ‘Definition’ from subsection 1073AA(4C) and substitutes ‘Definitions’ to take into account the added definition of ‘work bonus income’ and formula for ‘gainful work income’.

 

Item 17 inserts the definition of ‘work bonus income’ and the formula for calculating ‘gainful work income’ for the purposes of section 1073AA of the Social Security Act. New subsection 1073AA(4BA) provides the work bonus income for an instalment period is the sum of the person’s employment income for that period and the sum of the person’s gainful work income for each day in that period. This gives effect to the intention to extend the application of the Work Bonus to income from remunerative work that involves personal exertion, in addition to employment income. This also ensures that the Work Bonus is only applied once, that is, to the sum of the employment income and gainful work income for an instalment period.

 

The note at the end of subsection 1073AA(4BA) signposts that the definition of ‘employment income’ is at section 8 of the Social Security Act.

 

New subsection 1073AA(4BB) provides that for the purposes of section 1073AA, a person’s ‘gainful work income’ for a day in an instalment period is the amount worked out using the following formula:

 

Annual amount is defined in subsection 1073AA(4BB), and means the annual amount of ordinary income of the person that is earned, derived or received by the person from gainful work (within the meaning of section 1073AAA) undertaken by the person, being the annual amount as last determined by the Secretary.

 

This formula takes into consideration that a person who is not in an employer / employee relationship, and is earning, deriving or receiving income from gainful work, may earn an ordinary income that varies throughout an instalment period.

 

New subsection 1073AA(4BC) clarifies that the amount worked out at
paragraph 1073AA(4BA)(b), that is, the sum of the person’s gainful work income for each day in an instalment period, is to be rounded to the nearest cent (rounding 0.5 cents downwards).

 

Items 18 and 19 increase the Work Bonus amount for an instalment period of 14 days to $300.

 

Item 20 inserts new subsections 1073AA(5A) and 1073AA(5B). New
subsection 1073AA(5A) provides that if a person has gainful work income for an instalment period, the rate of the person’s gainful work income on a yearly basis for each day in that period may be worked out using the following formula:

 

 

As provided for in the note following new subsection 1073AA(5A), this subsection and the formula will be relevant to working out the person’s rate of social security pension in accordance with Pension Rate Calculator A at the end of section 1064 or Pension Rate Calculator C at the end of section 1066.  

 

New subsection 1073AA(5B) clarifies that the amount worked out at subsection 1073AA(5A), that is, the sum of the person’s gainful work income on a yearly basis for each day in that period, is to be rounded to the nearest cent (rounding 0.5 cents downwards).

 

Item 22 inserts new section 1073AAA. New section 1073AAA sets out the meaning of gainful work, which is work for financial gain or reward (other than as an employee) where the work involves personal exertion on the part of the person and is carried on within or outside Australia. It is intended that the Work Bonus applies to gainful work income that is commensurate to the work performed. For example, if a person received a $10,000 distribution from a trust, the Work Bonus would only apply to that amount to the extent that the person could show that they had performed work commensurate to the amount paid.

 

The Work Bonus will not apply to any income associated with a return on financial investments or real estate investments, or for work of a domestic nature in the person’s own home. This is reflected in new subsections 1073AAA(2) and (3) respectively. It is however, intended that the Work Bonus would be available to a person who is a farmer, as this work is considered management or administration of a business, that is, the farm, rather than management of real property.

 

The note at the end of subsection 1073AAA(2) directs the reader to section 9 of the Social Security Act for the definition of ‘financial investment’.

 

New subsections 1073AAA(4) and (5) provide definitions for the purposes of section 1073AAA, including ‘place of residence’, ‘family company’, ‘family group’ and ‘family trust’. The note after the definition of ‘family group’ directs the reader to
subsection 23(1) of the Social Security Act for the definition of ‘family member’.

 

Item 23 increases the unused concession balance to $7,800.

 

Item 24 repeals the example at subsection 1073AB(2) and substitutes a new example to reflect the new unused concession balance of $7,800.

 

Item 25 is an application provision, providing that the amendments of the Social Security Act made by this Schedule apply in relation to the instalment period that includes 1 July 2019 and later instalment periods.

 

Veterans’ Entitlements Act 1986

 

Items 26, 27, 30, 32, 34, 35, 38, 39, 44, 49 and 50 amend various provisions of the Veterans’ Entitlements Act by omitting “employment income” and substituting “work bonus income”. This ensures that in addition to employment income, the Work Bonus applies to income from remunerative work that involves personal exertion, including self-employment income.

 

Items 28, 36 and 40 repeal notes in various provisions of the Veterans’ Entitlements Act that refer to employment income, and substitute notes that indicate work bonus income is defined at subsection 46AA(4BA).

 

Items 29, 31, 33, 37 and 51 repeal existing examples in various provisions of the Veterans’ Entitlements Act that refer to employment income, and substitute new examples that refer to work bonus income. The new examples also reflect the increase in the Work Bonus amount to $300.

 

Item 41 repeals the heading ‘Definition’ from subsection 46AA(4C) and substitutes ‘Definitions’ to take into account the added definition of ‘work bonus income’ and formula for ‘gainful work income’.

 

Item 42 inserts the definition of ‘work bonus income’ and the formula for calculating ‘gainful work income’ for the purposes of section 46AA of the Veterans’ Entitlements Act. New subsection 46AA(4BA) provides the work bonus income for a pension period is the sum of the person’s employment income for that period and the person’s gainful work income for that period. This gives effect to the intention to extend the application of the Work Bonus to income from remunerative work that involves personal exertion, in addition to employment income. This also ensures that the Work Bonus is only applied once, that is, to the sum of the employment income and gainful work income for a pension period.

 

The note at the end of subsection 46AA(4BA) signposts that the definition of ‘employment income’ is at section 46AB of the Veterans’ Entitlements Act.

 

New subsection 46AA(4BB) provides that for the purposes of section 46AA, a person’s ‘gainful work income’ for a pension period is the amount worked out using the following formula:

 

Annual amount is defined in subsection 46AA(4BB) and means the annual amount of ordinary income of the person that is earned, derived or received by the person from gainful work (within the meaning of section 46ABA) undertaken by the person, being the annual amount as last determined by the Commission.

 

This formula takes into consideration that a person who is not in an employer / employee relationship, and is earning, deriving or receiving income from gainful work, may earn an ordinary income that varies throughout the pension period.

 

Item 43 increases the Work Bonus amount for the pension period to $300.

 

Item 45 makes clear that section 1073AA of the Social Security Act is relevant in determining a person’s partner’s employment income.

 

Item 46 inserts new section 46ABA. New section 46ABA sets out the meaning of gainful work, which is work for financial gain or reward (other than as an employee) where the work involves personal exertion on the part of the person and is carried on within or outside Australia. It is intended that the Work Bonus applies to gainful work income that is commensurate to the work performed. For example, if a person received a $10,000 distribution from a trust, the Work Bonus would only apply to the extent that the person could show that they had performed work commensurate to the amount received.

 

The Work Bonus will not apply to any income associated with a return on financial investments or real estate investments, or for work of a domestic nature in the person’s own home. This is reflected in new subsections 46ABA(2) and (3) respectively. It is however, intended that the Work Bonus would be available to a person who is a farmer, as this work is considered management or administration of a business, that is, the farm, rather than management of real property.

 

The note at the end of subsection 46ABA(2) directs the reader to subsection 5J(1) of the Veterans’ Entitlements Act for the definition of ‘financial investment’.

 

New subsections 46ABA(4) and (5) provide definitions for the purposes of section 46ABA, including ‘place of residence’, ‘family company’, ‘family group’ and ‘family trust’. The note after the definition of ‘family group’ directs the reader to subsection 5L(1) of the Veterans’ Entitlements Act for the definition of ‘family member’.

 

Item 47 increases the unused concession balance to $7,800.

 

Item 48 repeals the example at subsection 46AC(2) and substitutes a new example to reflect the new unused concession balance of $7,800.

 

Item 52 is an application provision, providing that the amendments of the Veterans’ Entitlements Act made by this Schedule apply in relation to the pension period that includes 1 July 2019 and later pension periods.

 

 

 

 

 

 


Schedule 3 – Pension Loans Scheme

 

 

Summary

 

This Schedule expands the Pension Loans Scheme (PLS) to provide more Australians of Age Pension age, income support supplement qualifying age or service pension age, with access to the Scheme.

 

The amendments contained in this Schedule implement part of the 2018-19 Budget measure ‘More Choices for a Longer Life – Finances for a Longer Life’.

 

Background

 

Under the current PLS, Australians of Age Pension age, income support supplement qualifying age or service pension age, who cannot receive one of these payments because of their income or assets (but not both), can receive a payment under the PLS.

 

Additionally, people who receive only a part-rate of payment can increase the rate of their payment to the maximum rate of the payment by borrowing the difference between their fortnightly part-rate and the maximum rate.

 

Amounts borrowed under the PLS become a debt due and payable to the Commonwealth and this debt is secured by a charge against the person’s real property in Australia.

 

The debt (which is subject to interest compounding fortnightly) is usually recovered from the person once the relevant real property is sold or from the person's estate once the person dies.

 

This Schedule will amend the Social Security Act and the Veterans’ Entitlements Act to allow people who have reached Age Pension age, income support supplement qualifying age or service pension age to participate in the PLS even if they are assessed as having a nil rate of payment under both the income and assets tests for the relevant payment. Under current rules, a person must have a rate greater than nil under at least one of these tests in order to participate in the PLS.

 

This Schedule will also expand the PLS to allow people to participate in the PLS even if they are already receiving the maximum rate of the payment.

 

This is because the fortnightly amount that can be borrowed under the PLS will be increased so that both new and existing participants in the PLS can borrow up to 150 per cent of the maximum fortnightly rate of the payment, including supplements (Pension Supplement, Energy Supplement, and Rent Assistance, where applicable), as payment plus loan.

 

Existing age-based loan-to-value ratio limits will continue to apply when determining a person’s maximum loan amount under the PLS. This will link the amount that PLS participants can borrow to the value of the property or properties they have given as security for their loan.

 

The measure will better target the PLS to those who would benefit the most and give older Australians more choice to draw on the equity in their real assets to support their standard of living in retirement, and allow many older Australians to do so while remaining in their home.

 

The amendments made by Part 1 of this Schedule will commence on 1 July 2019. The contingent amendments made by Part 2 of this Schedule will commence on 20 March 2020.

 

Explanation of the changes

 

Schedule 3 – Pension loans scheme

 

Part 1 – Main amendments

 

Social Security Act 1991

 

Items 1 and 2 contain consequential amendments to subsection 23(11).
Subsection 23(11) sets out when a person is ‘participating in the pension loans scheme’.

 

Items 3 to 7 make consequential amendments to notes in the Pension Rate Calculators in sections 1064, 1066 and 1066A.

 

Items 8 and 9 insert new subsections (1A) and (5) into section 1121. Section 1121 applies when assessing the value of a person’s assets for means testing purposes where the assets are subject to charges or encumbrances. Generally speaking, the value of a charge or encumbrance is disregarded when assessing the value of an asset for means testing purposes. The amendments made by these items clarify that where an asset is the subject of a charge given to the Commonwealth to secure repayment of a loan under the PLS (i.e. a charge under section 1138), the value of the person’s debt under the PLS (i.e. the debt under section 1135) reduces the value of the asset when assessing the asset for means testing purposes. This section will apply to a person who is or was participating in the PLS.

 

A note to new subsection 1121(5) states that if there are other charges or encumbrances over any of those real assets, there may be a further reduction under subsection 1121(1) in the value of those assets.

 

Items 10 and 11 make amendments to section 1133AA(1), the section which sets out specific definitions for the PLS.

 

Item 10 repeals the definitions of assets reduced rate and income reduced rate from section 1133AA(1), as they are no longer required as the result of amendments in this Schedule.

 

Item 10 also repeals the definition of guaranteed amount.

 

Item 11 inserts a definition of nominated amount. ‘Nominated amount’ is defined as the amount (if any) specified to be the nominated amount under paragraph 1136(1A)(b) or subsection 1137(1) (as the case may be). The nominated amount replaces the guaranteed amount currently used in the PLS.

 

Currently, a PLS recipient may choose to nominate a guaranteed amount that they are entitled to retain out of the proceeds of the enforcement of a charge under
section 1138. This prevents recovery by the Commonwealth of a set amount of an asset’s sale proceeds.

 

Because the guaranteed amount is irrecoverable and able to be altered at any time, it could be used by a person participating in the PLS to render some, or all, of their PLS debt unrecoverable. This is not a fair or sustainable outcome. 

 

The new nominated amount (like the guaranteed amount) will allow a person participating in the PLS to specify an amount of their real assets not to be factored into the determination of a person’s maximum loan amount, limiting the growth of their PLS debt, but does not prevent the recovery of this amount by the Commonwealth.

 

The nominated amount will also be taken into account by the Secretary in determining whether the value of a person’s real assets are sufficient to secure the payment of any debt that may become payable to the Commonwealth under the PLS. This is one of the qualification requirements for participation in the PLS (see section 1133).

 

Item 12 repeals paragraph 1133(1)(b). This item amends the qualification requirements for people who are not a member of a couple and wish to participate in the PLS. The item removes the requirement that a person must have a rate greater than nil under one or both of the income and assets tests worked out under a Pension Rate Calculator. This ensures that a person may qualify to participate in the PLS despite having a nil rate under both the income and assets tests for the Age Pension.

 

Item 13 inserts new paragraphs (ca), (cb) and (cc) into subsection 1133(1). Subsection 1133(1) sets out the qualification requirements for people participating in the PLS who are not a member of a couple. New paragraphs 1133(1)(ca) and (cb) set out that a person is qualified to participate in the PLS if, in addition to satisfying other qualification requirements, the person is not bankrupt and the person is not subject to a personal insolvency agreement under Part X of the Bankruptcy Act 1966. In addition to this, new paragraph 1133(1)(cc) further provides that, to qualify to participate in the PLS, a person must also satisfy the Secretary that there is adequate and appropriate insurance in relation to the real assets the person has given as security for their loan under the PLS.

 

Item 14 amends subparagraph 1133(1)(d)(i) to clarify that in determining whether a person qualifies to participate in the PLS, the Secretary must be satisfied that a person’s assets are sufficient to secure the payment of any debt that may become payable to the Commonwealth under the PLS. This amendment applies to a person who is not a member of couple.

 

Item 15 amends subparagraph 1133(1)(d)(i) to omit the words ‘guaranteed amount’ and substitute the words ‘nominated amount’. This is a consequential amendment.

 

Item 16 repeals note 1 from subsection 1133(1). This is a consequential amendment.

 

Item 17 repeals and substitutes a new note 3 in subsection 1133(1). This is a consequential amendment.

 

Item 18 repeals paragraph 1133(2)(b). This item amends the qualification requirements for people who are a member of a couple and wish to participate in the PLS. This item removes the requirement that a person must have a rate greater than nil under one or both of the income and assets tests worked out under a Pension Rate Calculator. This ensures that a person may qualify to participate in the PLS despite having a nil rate under both the income and assets tests for the Age Pension.

 

Item 19 inserts new paragraphs (ca), (cb) and (cc) into subsection 1133(2). Subsection 1133(2) sets out the qualification requirements for a person participating in the PLS as a member of a couple. New paragraphs 1133(2)(ca) and (cb) set out that a person is qualified to participate in the PLS if, in addition to satisfying other qualification requirements, the person is not bankrupt and the person is not subject to a personal insolvency agreement under Part X of the Bankruptcy Act 1966. In addition to this, new paragraph 1133(2)(cc) further provides that, to qualify to participate in the PLS, a person must also satisfy the Secretary that there is adequate and appropriate insurance in relation to the real assets the person has given as security for their loan under the PLS.

 

Item 20 amends subparagraph 1133(2)(d)(i) to clarify that in determining whether a person qualifies to participate in the PLS, the Secretary must be satisfied that a person’s assets are sufficient to secure the payment of any debt that may become payable to the Commonwealth under the PLS. This amendment applies to a person who is a member of couple.

 

Item 21 amends subparagraph 1133(2)(d)(i) to omit the words ‘guaranteed amount’ and substitute the words ‘nominated amount’. This is a consequential amendment.

 

Item 22 repeals note 1 from subsection 1133(2). This is a consequential amendment.

 

Item 23 repeals and substitutes a new note 3 in subsection 1133(2). This is a consequential amendment.

 

Item 24 adds new subsection (4) at the end of section 1133. This new subsection provides that in working out the value of real property for the purposes of subparagraphs 1133(1)(d)(i) or (2)(d)(i) or paragraph 1133(3)(d) the Secretary may take into account any charge or encumbrance over the property. The new subsection also provides that section 1121 is to be disregarded in working out the value of the real property for the purposes of these subparagraphs. The effect of this item is to ensure that when assessing the value of a person’s real property to determine whether it is sufficient to secure the payment of any debt that may become payable under PLS, consideration can be given to charges or encumbrances over the property. If the real property is subject to charges or encumbrances when the person requests participation in the PLS, the value of these charges or encumbrances may result in the person being refused participation in the PLS. Alternatively, if the person is an existing participant in the PLS, charges or encumbrances that are brought into existence after the person’s participation in the PLS may result in the person ceasing to participate in the PLS (see new section 1141 discussed below).

 

Item 25 amends subparagraphs 1134(1)(e)(i) and (ia). This amendment ensures that, in working out the fortnightly rate of the pension or allowance payable to the person by operation of the PLS, the person can be paid 1.5 times the maximum fortnightly rate of the pension or allowance and supplements (including Pension Supplement, Energy Supplement, and Rent Assistance, where applicable) for which the person qualifies under subsection 1133(1) or (2). Paragraph 1134(1)(e) will continue to allow a person to nominate a lower fortnightly rate of payment.

 

Item 26 amends the definition of age component amount in subsection 1135A(1) so that a person’s age component amount is the amount that is specified in a determination under new subsection 1135A(3)(see below). The age component amount is one of the factors used to determine a person’s maximum loan available under the PLS.

 

Item 27 amends paragraph (a) of the definition of value of real assets in
subsection 1135A(1) to omit the words ‘guaranteed amount’ and substitute the words ‘nominated amount’. This is a consequential amendment.

 

Item 28 amends note 2 to the definition of value of real assets in subsection 1135A(1) to omit the words ‘guaranteed amount’ and substitute the words ‘nominated amount’. This is a consequential amendment.

 

Item 29 repeals subsection 1135A(3) and substitutes a new subsection that provides that the Minister may, by legislative instrument, make a determination for the purposes of the following:

 

            (a)       the definition of age component amount in subsection 1135A(1);

            (b)       the definition of age component amount in subsection 52ZCA(1) of the                 Veterans’ Entitlements Act.

 

The age component amount is used to determine the maximum amount of loan a PLS recipient is able to accumulate before they are unable to receive additional pension through the Scheme. The age component amounts help prevent the PLS loan from growing beyond the value of the securing real assets.

 

The age component amounts are sensitive to the PLS interest rate and assumptions around growth in property values. When these change, the age component amounts also need to change. Providing the age component amounts as a legislative instrument allows the Minister to respond effectively to such policy and economic changes.

 

The legislative instrument under new subsection 1135A(3) would apply to recipients of the PLS under the Social Security Act and the PLS under the Veterans’ Entitlements Act. This is consistent with the Minister’s power to determine interest rates for PLS loans under both Acts by legislative instrument.

 

Item 30 repeals paragraph 1136(1A)(b) and substitutes a new paragraph. This is a consequential amendment.

 

Item 31 amends the heading of section 1137 to omit the words ‘guaranteed amount’ and substitute the words ‘nominated amount’. This is a consequential amendment.

 

Item 32 repeals paragraph 1137(1)(a) and substitutes a new paragraph. This is a consequential amendment.

 

Item 33 repeals paragraph 1137(1)(c) and substitutes a new paragraph. This is a consequential amendment.

 

Item 34 inserts new section 1137A. This new section clarifies that a person’s participation in the PLS does not, of itself, entitle the person to additional benefits that would ordinarily be available to people who receive a social security pension or social security payment. The new section likewise clarifies that a person’s participation in the PLS does not, of itself, entitle the person to additional benefits that would ordinarily be available to people to whom a social security pension or social security payment is payable. This applies regardless of whether the additional benefit is a pension, benefit, payment, supplement, subsidy, pensioner concession card, seniors health card or any other sort of benefit. New subsection 1137A(3) makes clear that such additional benefits are available to PLS recipients who would, but for their participation in the PLS, be entitled to a social security pension.

 

Items 35 and 36 repeal notes from subsections 1138(1) and (2). These are consequential amendments.

 

Item 37 amends paragraph 1138(3)(a) to insert a reference to new section 1141A (see below).

 

Item 38 inserts a new note 1A after note 1 to subsection 1138(3) which describes the effect of new section 1141A (see below).

 

Items 39 and 40 repeal notes from subsections 1138(3) and 1139(2A). These are consequential amendments.

 

Item 41 amends subsection 1140(1) to omit the words ‘but after deduction of any guaranteed amount’. Subsection 1140(1) applies where the assets cease to be assets of a person and the person receives proceeds from the sale or other disposal of the assets. The effect of this amendment is to ensure that where real assets of a person are subject to a charge under section 1138 (as a result of the person having a debt under the PLS) and the assets cease to be assets of the person the Commonwealth may recover from the person, out of those proceeds the whole or part of the debt secured by the charge.

 

This amendment reflects the changes made to replace the guaranteed amount with the nominated amount (see discussion in item 11 above).

 

Item 42 inserts new subsection (2A) into section 1140. This new subsection clarifies the effect of subsection 1140(2). New subsection 1140(2A) clarifies that for the purposes of paragraph 1140(2)(b), a charge under section 1138 in relation to assets offered as security under the PLS remains enforceable against subsequent owners of those real assets regardless of whether the assets have been disposed of by way of sale, transfer, gift, will or otherwise.

 

Item 43 inserts new section 1141A. New subsection 1141A(1) clarifies that the Secretary may determine that the PLS ceases to operate in relation to a person if:

 

(a)       a person is participating in the PLS; and

(b)       the Secretary is satisfied that the person ceases to be qualified to participate in    the PLS.

 

The new subsection further provides that the PLS ceases to operate in relation to the person at the beginning of the first instalment period for the social security pension being paid to the person that begins after the determination is made.

 

A note to new subsection 1141A(1) refers the reader to sections 1139 and 1142A which deal with the repayment or recovery of a debt owed by a person under the PLS.

 

New subsection 1141A(2) provides that the Secretary must give the person notice of the determination under new subsection 1141A(1).

 

New subsection 1141A(3) provides that the determination under new
subsection 1141A(1) is not a legislative instrument. This subsection is inserted to assist readers of the Bill. A determination under new subsection 1141A(1) is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003. Subsection 1141A(3) is merely declaratory of the law and is not an exemption from the Legislation Act 2003.

 

Item 44 adds a new note at the end of subsection 1142(1) which refers the reader to sections 1139 and 1142A. These sections deal with the repayment or recovery of a debt owed by a person under the PLS.

 

Item 45 amends the heading to section 1142A. This amendment is a consequential amendment.

 

Item 46 amends subsection 1142A(1) to insert a reference to new -section 1141A after the reference to section 1141. New subsection 1141A  is inserted by this Schedule.

 

Item 47 inserts new note 1A after note 1 to subsection 1142(1). This note describes the effect of new section 1141A, which is inserted by this Schedule.

 

Items 48, 49 and 50 make amendments to section 1144. This section relates to the manner of the enforcement of a charge under the PLS. Item 50 repeals
subsection 1144(2) to ensure that where a person has real assets subject to a charge under the PLS to secure repayment of a debt under the Scheme, the charge can be enforced to recover the full amount of the PLS debt. Items 48 and 49 are consequential amendments.

 

Item 51 is an application and transitional provision for the amendments made by this Schedule.

 

Subitem 51(1) provides that the amendments of section 1121 made by this Schedule apply in relation to working out the value of a person’s assets for days occurring in an instalment period that begins on or after the commencement of this item (whether the person became a participant in the PLS before, on or after that commencement).

 

Subitem 51(2) provides that the amendments of section 1133 made by this Schedule apply in relation to working out whether a person is qualified to participate in the PLS in relation to days occurring on or after the commencement of this item.

 

Subitem 51(3) provides that the amendments of section 1134 made by this Schedule apply in relation to an instalment period that begins on or after the commencement of this item.

 

Subitem 51(4) provides that subsection 1135A(1), as affected by subsection 1135A(3) (as substituted by this Schedule), applies in relation to the following:

 

(a)       a person who becomes a participant in the PLS on or after the commencement    of this item;

(b)       a person who was a participant in the PLS immediately before that commencement.

 

Subitem 51(5) provides that for the purposes of Division 4 of Part 3.12, an amount that is a guaranteed amount immediately before the commencement of this item is taken on and after that commencement to be a nominated amount.

 

Subitem 51(6) provides that subitem 51(5) does not affect the operation of subsection 1137(1) in relation to the nominated amount. A note to subitem 51(6) notes that subsection 1137(1) allows a person to change the nominated amount.

 

Subitem 51(7) provides that section 1137A, as inserted by this Schedule, applies in relation to working out whether a benefit is to be provided to a person in relation to days occurring on or after the commencement of this item.

 

Subitem 51(8) provides that the amendment of subsection 1140(1) made by this Schedule applies in relation to real assets that cease to be real assets on or after the commencement of this item (whether the charge arose under section 1138 before, on or after that commencement).

 

Subitem 51(9) provides that subsection 1140(2A), as inserted by this Schedule, applies in relation to the disposal of real assets on or after the commencement of this item (whether the charge arose under section 1138 of that Act before, on or after that commencement).

 

Subitem 51(10) provides that section 1141A, as inserted by this Schedule, applies in relation to a person’s participation in the PLS that began before, on or after the commencement of this item.

 

Subitem 51(11) provides that the amendments of section 1144 made by this Schedule apply in relation to the enforcement of a charge on or after the commencement of this item (whether the charge arose under section 1138 before, on or after that commencement).

 

Veterans’ Entitlements Act 1986

 

Items 52 and 53 insert new subsections (1A) and (5) into section 52C. Section 52C applies when assessing the value of a person’s assets for means testing purposes where the assets are subject to charges or encumbrances. Generally speaking, the value of a charge or encumbrance is disregarded when assessing the value of an asset for means testing purposes. The amendments made by these items clarify that where an asset is the subject of a charge given to the Commonwealth to secure repayment of a loan under the PLS (i.e. a charge under section 52ZF), the value of the person’s debt under the PLS (i.e. the debt under section 52ZC) reduces the value of the asset when assessing the asset for means testing purposes. This section will apply to a person who is or was participating in the PLS.

 

A note to new subsection 52C(5) states that if there are other charges or encumbrances over any of those real assets, there may be a further reduction under subsection 52C(1) in the value of those assets.

 

Items 54 and 55 make amendments to subsection 52ZAAA(1), the section which sets out specific definitions for the PLS.

 

Item 54 repeals the definitions of assets reduced rate, adjusted income reduced rate and income reduced rate from subsection 52ZAAA(1), as they are no longer required as the result of amendments in this Schedule.

 

Item 54 also repeals the definition of guaranteed amount.

 

Item 55 inserts a definition of nominated amount. ‘Nominated amount’ is defined as the amount (if any) specified to be the nominated amount under paragraph 52ZD(1A)(b) or subsection 52ZE(1) (as the case may be). The nominated amount replaces the guaranteed amount currently used in the PLS.

 

Currently, a PLS recipient may choose to nominate a guaranteed amount that they are entitled to retain out of the proceeds of the enforcement of a charge under
section 52ZF. This prevents recovery by the Commonwealth of a set amount of an asset’s sale proceeds.

 

Because the guaranteed amount is irrecoverable and able to be altered at any time, it could be used by a person participating in the PLS to render some, or all, of their PLS debt unrecoverable. This is not a fair or sustainable outcome. 

 

The new nominated amount (like the guaranteed amount) will allow a person participating in the PLS to specify an amount of their real assets not to be factored into the determination of a person’s maximum loan amount, limiting the growth of their PLS debt, but does not prevent the recovery of this amount by the Commonwealth.

 

The nominated amount will also be taken into account by the Commission in determining whether the value of a person’s real assets are sufficient to secure the payment of any debt that may become payable to the Commonwealth under the PLS. This is one of the eligibility requirements for participation in the PLS (see
section 52ZA).

 

Item 56 contains a consequential amendment to paragraph 52ZAAA(3)(b).
Subsection 52ZAAA(3) sets out when a person is ‘participating in the pension loans scheme’.

 

Item 57 repeals paragraph 52ZA(1)(c). This item amends the eligibility requirements for people who are not a member of a couple and wish to participate in the PLS. The item removes the requirement that a person must have a rate greater than nil under one or both of the income and assets tests worked out under Module A of the Rate Calculator. This ensures that a person may be eligible to participate in the PLS despite having a nil rate under both the income and assets tests.

 

Item 58 inserts new paragraphs (da), (db) and (dc) into subsection 52ZA(1). Subsection 52ZA(1) sets out the eligibility requirements for people participating in the PLS who are not a member of a couple. New paragraphs 52ZA(1)(da) and (db) set out that a person is eligible to participate in the PLS if, in addition to satisfying other eligibility requirements, the person is not bankrupt and the person is not subject to a personal insolvency agreement under Part X of the Bankruptcy Act 1966. In addition to this, new paragraph 52ZA(1)(dc) further provides that, to be eligible to participate in the PLS, a person must also satisfy the Commission that there is adequate and appropriate insurance in relation to the real assets the person has given as security for their loan under the PLS.

 

Item 59 amends subparagraph 52ZA(1)(e)(i) to clarify that in determining whether a person is eligible to participate in the PLS the Commission must be satisfied that a person’s assets are sufficient to secure the payment of any debt that may become payable to the Commonwealth under the PLS. This amendment applies to a person who is not a member of couple.

 

Item 60 amends subparagraph 52ZA(1)(e)(i) to omit the words ‘guaranteed amount’ and substitute the words ‘nominated amount’. This is a consequential amendment.

 

Item 61 repeals note 1 from subsection 52ZA(1). This is a consequential amendment.

 

Item 62 repeals and substitutes a new note 3 in subsection 52ZA(1). This is a consequential amendment.

 

Item 63 repeals paragraph 52ZA(2)(c). This item amends the eligibility requirements for people who are a member of a couple and wish to participate in the PLS. This item removes the requirement that a person must have a rate greater than nil under one or both of the income and assets tests worked out under Module A of the Rate Calculator. This ensures that a person may be eligible to participate in the PLS despite having a nil rate under both the income and assets tests.

 

Item 64 inserts new paragraphs (da), (db) and (dc) into subsection 52ZA(2). Subsection 52ZA(2) sets out the eligibility requirements for a person participating in the PLS as a member of a couple. New paragraphs 52ZA(2)(da) and (db) set out that a person is eligible to participate in the PLS if, in addition to satisfying other eligibility requirements, the person is not bankrupt and the person is not subject to a personal insolvency agreement under Part X of the Bankruptcy Act 1966. In addition to this, new paragraph 52ZA(2)(dc) further provides that, to be eligible to participate in the PLS, a person must also satisfy the Commission that there is adequate and appropriate insurance in relation to the real assets the person has given as security for their loan under the PLS.

 

Item 65 amends subparagraph 52ZA(2)(e)(i) to clarify that in determining whether a person is eligible to participate in the PLS the Commission must be satisfied that a person’s assets are sufficient to secure the payment of any debt that may become payable to the Commonwealth under the PLS. This amendment applies to a person who is a member of couple.

 

Item 66 amends subparagraph 52ZA(2)(e)(i) to omit the words ‘guaranteed amount’ and substitute the words ‘nominated amount’. This is a consequential amendment.

 

Item 67 repeals note 1 from subsection 52ZA(2). This is a consequential amendment.

 

Item 68 repeals and substitutes a new note 3 in subsection 52ZA(2). This is a consequential amendment.

 

Item 69 adds new subsection (4) at the end of section 52ZA. This new subsection provides that in working out the value of real property for the purposes of subparagraphs 52ZA(1)(e)(i) or (2)(e)(i) or paragraph 52ZA(3)(d) the Commission may take into account any charge or encumbrance over the property. The new subsection also provides that section 52C is to be disregarded in working out the value of the real property for the purposes of these subparagraphs. The effect of this item is to ensure that when assessing the value of a person’s real property to determine whether it is sufficient to secure the payment of any debt that may become payable under PLS, consideration can be given to charges or encumbrances over the property. If the real property is subject to charges or encumbrances when the person requests participation in the PLS, the value of these charges or encumbrances may result in the person being refused participation in the PLS. Alternatively, if the person is an existing participant in the PLS, charges or encumbrances that are brought into existence after the person’s participation in the PLS may result in the person ceasing to participate in the PLS (see new section 52ZJA discussed below).

 

Item 70 amends subparagraph 52ZB(1)(e)(i). This amendment ensures that, in working out the fortnightly rate of the pension or allowance payable to the person by operation of the PLS, the person can be paid 1.5 times the maximum fortnightly rate of the pension or allowance (and applicable supplements) for which the person is eligible under subsection 52ZA(1) or (2). Paragraph 52ZB(1)(e) will continue to allow a person to nominate a lower fortnightly rate of payment.

 

Item 71 amends step 3 of the method statement in subsection 52ZC(3) to provide that interest payable on a PLS debt is compound interest at the rate fixed by a legislative instrument made under subsection 1135(4) of the Social Security Act (by the Minister administering that Act).

 

Item 72 repeals subsection 52ZC(4) and is a consequential amendment resulting from the amendment in item 71.

 

Item 73 amends the definition of age component amount in subsection 52ZCA(1) to provide that a person’s age component amount is the amount that is specified in a determination made under new subsection 1135A(3) of the Social Security Act (by the Minister administering that Act).

 

Item 74 amends paragraph (a) of the definition of value of real assets in
subsection 52ZCA(1) to omit the words ‘guaranteed amount’ and substitute the words ‘nominated amount’. This is a consequential amendment.

 

Item 75 amends note 2 to the definition of value of real assets in subsection 52ZCA(1) to omit the words ‘guaranteed amount’ and substitute the words ‘nominated amount’. This is a consequential amendment.

 

Item 76 repeals subsection 52ZCA(3) and is a consequential amendment resulting from the amendment in item 73.

 

Item 77 repeals paragraph 52ZD(1A)(b) and substitutes a new paragraph. This is a consequential amendment.

 

Item 78 amends the heading of section 52ZE to omit the words ‘guaranteed amount’ and substitute the words ‘nominated amount’. This is a consequential amendment.

 

Item 79 repeals paragraph 52ZE(1)(a) and substitutes a new paragraph. This is a consequential amendment.

 

Item 80 repeals paragraph 52ZE(1)(c) and substitutes a new paragraph. This is a consequential amendment.

 

Item 81 inserts new section 52ZEA. This new section clarifies that a person’s participation in the PLS does not, of itself, entitle the person to additional benefits that would ordinarily be available to people who receive a service pension or income support supplement. The new section likewise clarifies that a person’s participation in the PLS does not, of itself, entitle the person to additional benefits that would ordinarily be available to people to whom a service pension or income support supplement is payable. This applies regardless of whether the additional benefit is a pension, benefit, payment, supplement, subsidy, pensioner concession card, seniors health card or any other sort of benefit. New subsection 52ZEA(3) makes clear that such additional benefits are available to PLS recipients who would, but for their participation in the PLS, have received a service pension or income support supplement at a rate greater than nil.

 

Items 82 and 83 repeal notes from subsections 52ZF(1) and (2). These are consequential amendments.

 

Item 84 amends paragraph 52ZF(3)(a) to insert a reference to new section 52ZJA (see below).

 

Item 85 inserts a new note 1A after note 1 to subsection 52ZF(3) which describes the effect of new section 52ZJA (see below).

 

Items 86 and 87 repeal notes from subsections 52ZF(3) and 52ZG(2A). These are consequential amendments.

 

Item 88 amends subsection 52ZH(1) to omit the words ‘but after deduction of any guaranteed amount’. Subsection 52ZH(1) applies where the assets cease to be assets of a person and the person receives proceeds from the sale or other disposal of the assets. The effect of this amendment is to ensure that where real assets of a person are subject to a charge under section 52ZF (as a result of the person having a debt under the PLS) and the assets cease to be assets of the person the Commonwealth may recover from the person, out of those proceeds the whole or part of the debt secured by the charge.

 

This amendment reflects the changes made to replace the guaranteed amount with the nominated amount (see discussion in item 55 above).

 

Item 89 inserts new subsection (2A) into section 52ZH. This new subsection clarifies the effect of subsection 52ZH(2). New subsection 52ZH(2A) clarifies that for the purposes of paragraph 52ZH(2)(b), a charge under section 52ZF in relation to assets offered as security under the PLS remains enforceable against subsequent owners of those real assets regardless of whether the assets have been disposed of by way of sale, transfer, gift, will or otherwise.

 

Item 90 inserts new section 52ZJA. New subsection 52ZJA(1) clarifies that the Commission may in writing determine that the PLS ceases to operate in relation to a person if:

 

(a)       a person is participating in the PLS; and

(b)       the Commission is satisfied that the person ceases to be eligible to participate      in the PLS.

 

The new subsection further provides that the PLS ceases to operate in relation to the person at the beginning of the first pension period for the service pension or income support supplement being paid to the person that begins after the determination is made.

 

A note to new subsection 52ZJA(1) refers the reader to sections 52ZG and 52ZKA which deal with the repayment or recovery of a debt owed by a person under the PLS.

 

New subsection 52ZJA(2) provides that the Commission must give the person notice of the determination under new subsection 52ZKA(1).

 

New subsection 52ZJA(3) provides that the determination under new
subsection 52ZJA(1) is not a legislative instrument. This subsection is inserted to assist readers of the Bill. A determination under new subsection 52ZJA(1) is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003. Subsection 52ZJA(3) is merely declaratory of the law and is not an exemption from the Legislation Act 2003.

 

Item 91 adds a new note at the end of subsection 52ZK(1) which refers the reader to sections 52ZG and 52ZKA. These sections deal with the repayment or recovery of a debt owed by a person under the PLS.

 

Item 92 amends the heading to section 52ZKA. This amendment is a consequential amendment.

 

Item 93 amends subsection 52ZKA(1) to insert a reference to new section 52ZJA after the reference to section 52ZJ. New subsection 52ZJA  is inserted by this Schedule.

 

Item 94 inserts new note 1A after note 1 to subsection 52ZKA(1). This note describes the effect of new section 52ZJA, which is inserted by this Schedule.

 

Items 95, 96 and 97 make amendments to section 52ZM. This section relates to the manner of the enforcement of a charge under the PLS. Item 97 repeals
subsection 52ZM(2) to ensure that where a person has real assets subject to a charge under the PLS to secure repayment of a debt under the Scheme, the charge can be enforced to recover the full amount of the PLS debt. Items 95 and 96 are consequential amendments.

 

Items 98 and 99 repeal notes in subpoints SCH6-A1(2) and SCH6-A1(6) of
Schedule 6. These provisions contain the Rate Calculators for the service pension and income support supplement. These are consequential amendments.

 

Item 100 is an application and transitional provision for the amendments made by this Schedule.

 

Subitem 100(1) provides that the amendments of section 52C made by this Schedule apply in relation to working out the value of a person’s assets for days occurring in a pension period that begins on or after the commencement of this item (whether the person became a participant in the PLS before, on or after that commencement).

 

Subitem 100(2) provides that the amendments of section 52ZA made by this Schedule apply in relation to working out whether a person is eligible to participate in the PLS in relation to days occurring on or after the commencement of this item.

 

Subitem 100(3) provides that the amendments of section 52ZB made by this Schedule apply in relation to a pension period that begins on or after the commencement of this item.

 

Subitem 100(4) provides that subsection 52ZCA(1), as affected by
subsection 1135A(3) of the Social Security Act (as substituted by this Schedule) applies in relation to the following:

 

(a)       a person who becomes a participant in the PLS on or after the commencement    of this item;

(b)       a person who was a participant in the PLS immediately before that commencement.

 

Subitem 100(5) provides that for the purposes of Subdivision E of Division 1 of
Part IIIB, an amount that is a guaranteed amount immediately before the commencement of this item is taken on and after that commencement to be a nominated amount.

 

Subitem 100(6) provides that subitem 100(5) does not affect the operation of subsection 52ZE(1) in relation to the nominated amount. A note to subitem 100(6) notes that subsection 52ZE(1) allows a person to change the nominated amount.

 

Subitem 100(7) provides that section 52ZEA, as inserted by this Schedule, applies in relation to working out whether a benefit is to be provided to a person in relation to days occurring on or after the commencement of this item.

 

Subitem 100(8) provides that the amendment of subsection 52ZH(1) made by this Schedule applies in relation to real assets that cease to be real assets on or after the commencement of this item (whether the charge arose under section 52ZF before, on or after that commencement).

 

Subitem 100(9) provides that subsection 52ZH(2A), as inserted by this Schedule, applies in relation to the disposal of real assets on or after the commencement of this item (whether the charge arose under section 52ZF before, on or after that commencement).

 

Subitem 100(10) provides that section 52ZJA, as inserted by this Schedule, applies in relation to a person’s participation in the PLS that began before, on or after the commencement of this item.

 

Subitem 100(11) provides that the amendments of section 52ZM made by this Schedule apply in relation to the enforcement of a charge on or after the commencement of this item (whether the charge arose under section 52ZF before, on or after that commencement).

 

Part 2 – Contingent amendments

 

Social Security Act 1991

 

Items 101 and 102 are contingent amendments that will commence immediately after the commencement of Schedule 4 to the Social Services Legislation Amendment (Welfare Reform) Act 2018 (the Welfare Reform Act). Schedule 4 to the Welfare Reform Act commences on 20 March 2020 and provides for the cessation of bereavement allowance from that date.

 

Item 101 is a technical amendment to paragraph 23(11)(b). Subsection 23(11)) sets out when a person is ‘participating in the pension loans scheme’.

 

Item 102 is a technical amendment to the heading for section 1137.


Schedule 4 – Other Amendments

 

Summary

 

This Schedule makes technical amendments to simplify the Social Security Act and confirm that income support recipients over Age Pension age qualify for the employment nil rate period.

 

Background

 

A recipient whose social security pension or benefit is not payable because of employment income may qualify for an employment income nil rate period. During this period, the recipient is considered to be receiving a social security pension or benefit for certain purposes, including retaining their Health Care Card or Pensioner Concession Card.  

 

Income support recipients over Age Pension age were given access to the employment nil rate period provisions as part of Pension Reform changes in September 2009. However, this was not reflected at subsection 23(4A) of the Social Security Act.

 

This Schedule therefore makes clear that income support recipients over Age Pension age may qualify for the employment income nil rate period. Changes made by this Schedule are beneficial in nature, and will not adversely impact any individual.

 

 

Explanation of the changes

 

Schedule 4 – Other amendments

 

Social Security Act 1991

 

Items 1, 4, 5, 8, 9 and 12 repeal references to the pension age in various provisions in the Social Security Act. This removes the requirement that a person has not reached pension age in order to qualify for the employment nil rate period, and makes clear that income support recipients over Age Pension age may qualify for the employment nil rate period.

 

Items 2, 3, 6, 7, 10 and 11 remove phrases in various provisions in the Social Security Act that are unnecessary. This has the effect of simplifying the relevant provisions in the Social Security Act.


STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

 

Prepared in accordance with Part 3 of the

Human Rights (Parliamentary Scrutiny) Act 2011

 

SOCIAL SERVICES AND OTHER LEGISLATION AMENDMENT

(SUPPORTING RETIREMENT INCOMES) BILL 2018

 

 

This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview of the Bill

This Bill provides for three changes to support Australians in retirement: new means test rules to encourage the development and take-up of lifetime retirement income products, an expansion of the Pension Loans Scheme, and an increase and extension of the Pension Work Bonus.

 

Human rights implications

The amendments are consistent with supporting the right to social security. They are beneficial and improve a person’s right to social security.

 

The new means test rules for pooled lifetime income streams amend the income and assets test rules to encourage the development and take-up of lifetime retirement income products that can help retirees manage the risk of outliving their savings. They ensure the fair and sustainable assessment of this particular type of financial product.

 

The increase in the Work Bonus to $300 a fortnight and extension of the Work Bonus to include income from gainful work that involves personal exertion will mean that less income from work will be assessed for income support income testing purposes. Eligible pensioners and veterans will get higher income support payments and therefore benefit more from working.

 

The expansion of the Pension Loans Scheme will increase the fortnightly amount of pension plus loan from 100 to 150 per cent of the maximum rate of fortnightly pension and allow all people of Age Pension age with securable real estate owned in Australia to obtain a fortnightly loan. For the first time, maximum rate pensioners with securable real estate will be able to improve their standard of living in retirement by accessing the equity in their home as a loan while still living there.

 

The Bill also includes technical amendments to confirm current arrangements under which income support recipients over Age Pension age qualify for the employment nil rate period.

 

In total, this Bill will give retirees greater choice and flexibility when it comes to managing their finances in retirement. It will enable home-owning retirees to receive more income, and it will allow older Australians to keep more of their pension when they work.

 

Conclusion

The amendments in the Schedule are compatible with human rights because they improve a person’s access to social security.

 

 

 

 

[Circulated by the authority of the Minister for Families and Social Services, the Hon Paul Fletcher MP]