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Instrument 2019 No. R31 Determinations/Veterans' Entitlements as made
This instrument sets out alternative methods to calculate the value of an asset-tested income stream (lifetime) for persons to whom section 52BAB of the Veterans’ Entitlements Act 1986 applies. Section 52BAB provides for the value of asset-tested income streams (lifetime) that are not managed investments and does not apply to family law affected income streams.
Administered by: Veterans' Affairs
Registered 20 Jun 2019
Tabling HistoryDate
Tabled HR02-Jul-2019
Tabled Senate02-Jul-2019

EXPLANATORY STATEMENT

 

Veterans’ Entitlements (Value of Asset-tested Income Streams (Lifetime)) Determination 2019

(Instrument 2019 No. R31)

 

PURPOSE

The Veterans’ Entitlements (Value of Asset-tested Income Streams (Lifetime)) Determination 2019 (the Instrument) is made under subsection 52BAB(4) of the Veterans’ Entitlements Act 1986 (the Act).

The Instrument sets out alternative methods to calculate the value of an asset-tested income stream (lifetime) for persons to whom section 52BAB of the Act applies. Section 52BAB provides for the value of asset-tested income streams (lifetime) that are not managed investments and does not apply to family law affected income streams.

DVA and the Department of Social Services (DSS) will be implementing similar legislative instruments in relation to lifetime income streams to align the asset tests applicable to these products. This is to ensure that the asset test for all Commonwealth pension recipients who hold a lifetime income stream is applied equally from 1 July 2019. These instruments do not apply to account-based income streams, the most common retirement income product and will only apply to products purchased or acquired on or after 1 July 2019.

BACKGROUND

Schedule 1 of the Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Act 2019 (the Supporting Retirement Incomes Act) will, from 1 July 2019, amend the rules for lifetime income streams, to create fairer, more equitable means test outcomes under the VEA. This was part of the 2018-19 Budget measure ‘More Choices for a Longer Life – Finances for a Longer Life’.

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

·         encouraging the development of lifetime income stream products, and

·         ensuring that the assessment of lifetime income streams is fair and reflects the value of the products.

Under the assets test, the new means test rules provided for in section 52BAB of the Act will generally assess a proportion of the total purchase amount for the lifetime income stream. Sixty percent of the purchase amount will be assessed starting on a person’s assessment day, as determined under subsection 52BAB(6) or (7) of the Act. This will continue until the person reaches their threshold day, as determined under subsection 52BAB(10) of the Act. After this point, 30 per cent of the purchase amount will be assessed.

This treatment reflects the restricted access to capital placed on holders of innovative income stream products under recent changes to the Superannuation Industry (Supervision) Regulations 1994 (the SIS Regulations). One of the requirements in the new regulations is that, to qualify for earnings tax concessions, innovative lifetime income streams have to meet a Capital Access Schedule (the 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 limits imposed by the CAS are outlined in the diagram below.

However, products purchased under different superannuation regulations, or outside of the superannuation regulations, are not bound by the CAS. This can make the product more valuable to the person and more available for self-support. As the new means test rules in Schedule 1 of the Supporting Retirement Incomes Act apply to all lifetime income stream products, regardless of what regulations they fall under, the new means test rules include additional integrity rules to make the rules fair across all types of products. Products with high surrender values or high death benefits are subject to additional rules so that they are appropriately assessed under the means test, reflecting their greater value and potential to be used for self-support.

The additional integrity rules were included in the announcement of the new means test rules in the 2018-19 Budget. In the Supporting Retirement Incomes Act, an instrument making power was provided to establish such integrity rules. Subsection 52BAB(5) of the Act provides that if an amount or amounts worked out using the method in an instrument made under subsection 52BAB(4) are greater than the amount resulting from the method set out in subsection 52BAB(3), then the value of the person’s income stream is the highest of those amounts.

This Instrument establishes these integrity rules and provides the methods for calculating the current or future surrender value and death benefit values.

With this Instrument in place, under the assets test, the value of an asset-tested income stream (lifetime) is the higher of:

·         60 per cent of a product’s purchase amount 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; and

·         Any current or future death benefit above the limits in the CAS.

COMMENCEMENT

This instrument commences on 1 July 2019 immediately after the commencement of Schedule 1 of the Supporting Retirement Incomes Act.

ACTS INTERPRETATION ACT PROVISION

Commencement: for clarity, section 4 of the Acts Interpretation Act 1901 applies to this Instrument. This is because the Instrument is made after the Supporting Retirement Incomes Act received Royal Assent and before the commencement of that Act. 

CONSULTATION

The policy enacted by this Instrument has been widely consulted on. This included a preliminary discussion paper released publicly for comment in early 2017, a position paper released publicly for comment in early 2018, and a private consultation on Schedule 1 of the Supporting Retirement Incomes Act. Stakeholders from the financial product and seniors advocacy sectors engaged in these consultations. Additionally, government bodies including the Australian Government Actuary, the Treasury, the Department of Social Services and Services Australia were consulted on this policy.

Consultation on the text of the Instrument was undertaken with the Department of Social Services and Services Australia. Consultation was also undertaken with key stakeholders in the financial product sector. This included the Australian Institute of Actuaries and members of the Australian Tax Office Superannuation Industry Stewardship Group.

REGULATORY IMPACT STATEMENT

The Office of Best Practice Regulation has advised that the new means test rules for lifetime income streams are non-regulatory/machinery in nature and have a zero regulatory cost (OBPR reference 23186). The Instrument is a part of the implementation of the new means test rules for lifetime income streams.


 

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Human rights implications

The Instrument engages the right to social security under Article 9 of the International Covenant on Economic, Social and Cultural Rights. The right to social security requires that a system be established under domestic law, and that public authorities must take responsibility for the effective administration of the system. The social security scheme must provide a minimum essential level of benefits to all individuals and families that will enable them to acquire at least essential health care, basic shelter and housing, water and sanitation, foodstuffs, and the most basic forms of education.

The Instrument is compatible with Australia’s obligations not to take any backward steps in relation to the right to social security. The Instrument does not unreasonably restrict a person’s eligibility to receive a means test benefit under the Act or reduce the benefits to which a person may be entitled.

The Instrument has been created to ensure fair and equitable means test outcomes for lifetime income stream products assessed as asset-tested income streams (lifetime).

If the Instrument were not in place, products with high surrender values or high death benefits would not have these characteristics assessed in the assets test under the Act. Those who have access to greater capital for self-support through high surrender values or high death benefits would not have this recognised in the assets test under the Act. This would be unfair and inequitable when compared to the treatment of other lifetime income streams with restrictions on access to capital, and with the treatment of other assets held by eligible recipients.

By making sure surrender values and death benefit values of asset-tested income stream products (lifetime) are fairly assessed in the assets test under the Act, DVA’s benefit system appropriately recognises individuals’ capacity for self-support when determining their rate of income support, and remains sustainable for future generations.

Conclusion

The Instrument is compatible with the right to social security.

 

 

Repatriation Commission

Rule-Maker

FURTHER EXPLANATION OF PROVISIONS

See Attachment A.


 

Attachment A

EXPLANATION OF THE PROVISIONS

Section 1

This section provides that the title of the Instrument is the Veterans’ Entitlements (Value of Asset-tested Income Streams (Lifetime)) Determination 2019.

Section 2

This instrument commences on 1 July 2019 immediately after the commencement of Schedule 1 of the Supporting Retirement Incomes Act.

Subsection 4(3) of the Acts Interpretation Act 1901 provides that anything may be done before the start time (of the Act) for the purpose of enabling the exercise of the power, or of bringing the appointment or instrument into effect, as if the commencement had occurred. This provision enables the instrument to be lawfully made after the Act has received Royal Assent and prior to the commencement of the Act.

Section 3

This section provides that the Instrument is made under subsection 52BAB(4) of the Veterans’ Entitlements Act 1986.

Section 4

This section provides definitions for key terms in the Instrument and a note providing that three definitions are defined in the Act.

The definition of ‘Life Tables’ is defined by reference to the Australian Life Tables 2010-12. These Life Tables are published by the Australian Government Actuary and are available free of charge in the publications section of the Australian Government Actuary website, at the following website: http://www.aga.gov.au/publications/life_table_2010-12/.

Paragraph 14(1)(b) of the Legislation Act 2003 supports the incorporation by reference of instruments and writing not in the form of an Act or legislative instrument as in force or existing at the time the legislative instrument commences. The Australian Life Tables 2010-12 are incorporated as in force on the day this Instrument commences.

Section 5

Section 5 specifies the method of working the value of an asset-tested income stream (lifetime) product.

Subsection 5(1) provides that section 5 sets out a method for working out the value of an asset-tested income stream (lifetime) by reference to the surrender value of the income stream.

Subsection 5(2) provides that the value of a person’s asset-tested income stream (lifetime) on a particular day is the highest value for that day or any later day worked out using the method statement in this subsection. The method statement in this subsection outlines the following steps to be taken to establish the relevant amounts to be used in the calculation:

 

·         Step 1. Determine the surrender value of the asset-tested income stream (lifetime) for the day.

 

·         Step 2. Compare the surrender value with the surrender comparison value of the income stream for the day (see subsection 5(3)).

 

·         Step 3. The value of the income stream for the day is:

 

(a)    if the surrender value is more than the surrender comparison value and the income stream is not a joint income stream—the surrender value; or

 

(b)   if the surrender value is more than the surrender comparison value and the income stream is a joint income stream—the surrender value multiplied by the proportion of the income stream attributable to the person on that day; or

 

(c)    if the surrender value is less than or equal to the surrender comparison value—nil.

Subsection 5(3) provides that the access amount is the surrender comparison value for a day during the 14 day period that begins on the assessment day of an asset-tested income stream (lifetime). Access amount is defined in section 4 of the Instrument, and mirrors the definition of ‘access amount’ used in the SIS Regulations, adapted for an asset-tested income stream (lifetime). For any other day, the surrender comparison value is the amount worked out for the day under subsection 5(4) unless subparagraph 5(3)(b)(ii) applies. Subparagraph 5(3)(b)(ii) provides that if the amount worked out for the day under subsection 5(4) is less than or equal to zero, the surrender comparison value is nil.

Subsection 5(4) provides the formula for the calculation of the amount for a day (the access day) where paragraph 5(3)(b) applies. This formula provides that the access amount for the income stream at the time of the commutation, is divided by the life expectancy period for the income stream, then multiplied by the remaining life expectancy. This figure is reduced by the previously commuted amount to give the surrender comparison value. This formula is the same as the formula in regulation 1.06B of the SIS Regulations, which establishes the CAS.

For the purposes of subsection 5(4), previously commuted amount means the sum of any amounts commuted from the income stream before the access day and remaining life expectancy means the number of days remaining in the life expectancy period for the income stream after subtracting the number of days in the period:

(a)    starting on the assessment day for the income stream; and

 

(b)   ending on the access day.

Section 6

Subsection 6(1) provides that section 6 sets out a method for working out the value of an asset-tested income stream (lifetime) by reference to the death benefit of the income stream.

Subsection 6(2) provides that the value of a person’s asset-tested income stream (lifetime) on a particular day is the highest value for that day or any later day worked out using the method statement in this subsection. The method statement in this subsection outlines the following steps to be taken to establish the relevant amounts to be used in the calculation:

 

·         Step 1. Determine the death benefit of the asset-tested income stream (lifetime) for the day.

 

·         Step 2. Compare the death benefit with the death benefit comparison value of

the income stream for the day (see subsection 6(3)).

 

·         Step 3. The value of the income stream for the day is:

 

(a)    if the death benefit is more than the death benefit comparison value and the income stream is not a joint income stream—the death benefit; or

 

(b)   if the death benefit is more than the death benefit comparison value and the income stream is a joint income stream—the death benefit multiplied by the proportion of the income stream attributable to the person on that day; or

 

(c)    if the death benefit is less than or equal to the death benefit comparison value—nil.

Subsection 6(3) provides that the access amount is the death benefit comparison value for a day during the first half of the life expectancy period of the asset-tested income stream (lifetime). Access amount and first half of the life expectancy period are defined in section 4 of the instrument, and mirror the definitions of ‘access amount’ and ‘first half of the life expectancy period’ used in the SIS Regulations, adapted for an asset tested income stream lifetime. For any other day, the death benefit comparison value is the amount worked out for the day under subsection 6(4) unless subparagraph 6(3)(b)(ii) applies. Subparagraph 6(3)(b)(ii) provides that if the amount worked out for the day under subsection 6(4) is less than or equal to zero, the death benefit comparison value is nil.

Subsection 6(4) provides the formula for the calculation of the amount for a day (the access day) where paragraph 6(3)(b) applies. This formula provides that the access amount for the income stream at the time of the commutation, is divided by the life expectancy period for the income stream and multiplied by the remaining life expectancy. This figure is reduced by the previously commuted amount to give the death benefit comparison value.

This formula is the same as the formula in regulation 1.06B of the SIS Regulations, which establishes the CAS.

For the purposes of subsection 6(4), previously commuted amount means the sum of any amounts commuted from the income stream before the access day and remaining life expectancy means the number of days remaining in the life expectancy period for the income stream after subtracting the number of days in the period:

(a)    starting on the assessment day for the income stream; and

 

(b)   ending on the access day.

Example

Tamotsu purchases an asset-tested income stream (lifetime) at age 70 (birthday 20 September 1949) on 1 January 2020.

·         The assessment day for the income stream is 1 January 2020.

·         Tamotsu’s life expectancy period is 15 years (5,475 days).

·         The purchase amount for the income stream is $200,000.

·         The access amount for the income stream is $200,000.

·         The income stream has no surrender value until Tamotsu turns 80. While Tamotsu is 80, the income stream has a surrender value of $200,000. From when Tamotsu turns 81, the income stream has no surrender value again.

·         The income stream has a death benefit of $40,000 for the duration of the income stream. 

·         Tamotsu makes no commutations from the income stream.

 

Surrender Value Method

The surrender value method works out the surrender comparison value of the asset‑tested income stream (lifetime) for the current day, and every later day, and then compares it to the actual surrender value on that day.

The highest value on that day or any later day is the value of the income stream under the method.

From 1 January 2020 to 14 January 2020, the income stream’s surrender comparison value is $200,000.

On 15 January 2020, the surrender comparison value begins to reduce. On 15 January 2020, the surrender comparison value is:

because there are 15 days between 1 January 2020 and 15 January 2020 (inclusive).This value continues to reduce, on a straight-line basis.

Notably, when Tamotsu turns 80 on 20 September 2029, the income stream’s surrender comparison value is:

because there are 3,551 days between 1 January 2020 and 20 September 2029 (inclusive).

When Tamotsu turns 81 on 20 September 2030, the income stream’s surrender comparison value is:

because there are 3,916 days between 1 January 2020 and 20 September 2030 (inclusive).

Tamotsu’s income stream only has a surrender value when Tamotsu is 80 years of age. In this period, Tamotsu’s surrender value is $200,000. Outside of this period, the income stream has no surrender value.

The surrender comparison values for Tamotsu are therefore only below the surrender value of Tamotsu’s asset-tested income stream lifetime for the period 20 September 2029 to 19 September 2030.

The result of comparing the surrender comparison value with the surrender value on each day are outlined in the table below:

Date

1 Jan 2020

19 Sept 2029

20 Sept 2029

19 Sept 2030

20 Sept 2030

Value

$0

$0

$200,000

$200,000

$0

Importantly, the surrender value method takes into account the current day, and all future days, when determining the value of the asset-tested income stream (lifetime). The highest value across these days is the value of the income stream on the current day. Therefore, even though the result of the comparison on the days between 1 January 2020 and 19 September 2029 is $0, the value of the income stream on those days under the surrender value method will be $200,000, given the future daily value between 20 September 2029 and 19 September 2030.

The value of Tamotsu’s asset-tested income stream (lifetime) under the surrender value method is:

·         from 1 January 2020 to 19 September 2030 - $200,000

·         from 20 September 2030 onwards – nil.

 

Death Benefit Method

The death benefit method works in a similar way to the surrender value comparison method. It works out the death benefit comparison value of the asset‑tested income stream (lifetime) for the current day, and every later day, and then compares it to the actual death benefit on that day.

The highest value on that day or any later day is the value of the income stream under the method.

Note that Tamotsu’s first half of the life expectancy period is 2,737 days. There are 2,737 days from 1 January 2020 is 29 June 2027 (inclusive).

Therefore, from 1 January 2020 to 29 June 2027, the income stream’s death benefit comparison value is $200,000.

At 30 June 2027, the income stream’s death benefit comparison value is:

 

Notably, on 28 December 2031 (4,380 days into Tamotsu’s life expectancy period), the income stream’s death benefit comparison value is:

The income stream’s death benefit comparison value continues to reduce after 28 December 2031.

Tamotsu’s income stream has a consistent death benefit amount of $40,000. Therefore, the death benefit will be less than or equal to the death benefit comparison amount from 1 January 2020 to 28 December 2031. The death benefit will be more than the death benefit comparison amount from 29 December 2031 onwards.

The result of comparing the death benefit comparison value with the death benefit on each day are outlined in the table below:

Date

1 Jan 2020

28 Dec 2031

29 Dec 2031

Value

$0

$0

$40,000

Importantly, the death benefit method takes into account the current day, and all future days, when determining the value of the asset-tested income stream (lifetime). The highest value across these days is the value of the income stream on the current day. Therefore, even though the result of the comparison on the days between 1 January 2020 and 28 December 2031 is $0, the value of the income stream on those days under the death benefit method will be $40,000, given the future daily value from 29 December 2031.

Therefore, the value of Tamotsu’s asset-tested income stream (lifetime) under the death benefit method is:

·         from 1 January 2020 onwards - $40,000.