Bills Digest No. 161 2000-01
Family and Community Services Legislation (Simplification and Other Measures)
Bill 2001
WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments. This Digest does not have
any official legal status. Other sources should be consulted to determine
the subsequent official status of the Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer & Copyright Details
Family and Community Services Legislation (Simplification
and Other Measures) Bill 2001
Date Introduced: 24 May
2001
House: House of Representatives
Portfolio: Family and
Community Services
Commencement: Generally,
Royal Assent. The key provisions in Schedules 1 and 2 commence on 20 September
2001. However, item 15 of Schedule 1 is taken to have commenced on 1 July
2000 and items 1 and 24 of Schedule 2 have contingent commencement dates.
Primarily to amend the Social Security Act 1991 (SSA)
to:
- update the rules regarding recovery of certain social security payments
where recipients receive or are entitled to lump sum or periodic compensation
payments;
- strengthen the rules regarding income and assets tests treatment of
income streams;
- set out in the social security law the legislative basis for the current
treatment of allowable deductions from of gross rental income;
- streamline the deeming exemptions for assets that have been determined
as unrealisable under the assets test hardship provisions;
- allow compensation arrears debts that are treated as income to be
recovered directly from compensation payers or insurers; and
- change the taper rate for the income cut-out formula used to set the
compensation preclusion period for recipients of lump sum compensation
payments.
As there is no central theme to the amendments proposed
by this Bill, a background to each major amendment is contained in the
Main Provisions section of this Digest
Schedule 1 - Compensation Recovery
The SSA contains special rules for the treatment of compensation
provided as replacement earnings. These special provisions are to ensure
that persons, who are able to access income support from compensation,
cannot at the same time access assistance from government-provided income
support. It has been a long-standing view of successive governments that
the compensation system has the first responsibility for the provision
of income support to those with a compensable illness or injury, not the
taxpayer by way of government support. The foremost concern of governments
has been that there should not be any 'double dipping', that is receiving
compensation for lost earnings from a wrongdoer or insurer while at the
same time receiving government income support.
The special rules are contained in Part 3.14.
Enforcement of Compensation Rights
The Secretary may require claimants or recipients of
'compensation affected payments' to take reasonable action to claim or
obtain compensation (section 1164).(1) (The list of 'compensation
affected payments' features all of the income support payments provided
under the SSA.(2)) Until the action is taken, the 'compensation
affected payment' is not payable to the person.
Proposed section 1166 empowers the Secretary to
require persons to take actions that s/he considers reasonable. The Secretary
will also have the power to disregard any other agreement the person has
entered into waiving the right to or withdrawing a claim for compensation.
Receipt of Compensation
Where a person or their partner receives a lump sum compensation
payment, subsequently becomes entitled to and claims or receives a compensation
affected payment, they or their partner are subject to a preclusion period.
During this period, compensation affected payments are not payable to
the person or their partner (section 1165). Moreover, any payments received
during this period are liable to be recovered (section 1166). However,
the lump sum compensation payment is not treated as ordinary income (section
1167).
Proposed sections 1169 and 1170 correspond
to section 1165 but they operate on the basis of a single preclusion period,
to which items 5 and 15 relate (see below).
Similarly, where a person or their partner receives periodic
compensation payments, the rate of compensation affected payment (or other
benefit or parenting payment) payable to them or their partner is reduced
on a fortnightly dollar-for-dollar basis (section 1168). (Unreduced) payments
received during this period are liable to be recovered (section 1170).
However, the periodic payments are not treated as ordinary income (section
1171).
Proposed sections 1173 and 1174 correspond
to section 1168 but the rate is reduced on a daily dollar-for-dollar
basis to allow more flexibility in matching social security payments to
periodic compensation payments where payments periods may differ.
A Person Already Receiving Compensation Affected
Payments
In effect, where a person becomes entitled to a compensation
affected payment following a compensation award, etc. rather than treating
compensation entitlements as receipts for ordinary income purposes, they
are treated as a substitute for the affected payment.
Proposed subsection 1173(4) clarifies the
operation of the reduction rules where a person is already receiving an
affected payment when a compensation award, etc. is made. In effect, the
rule is reversed: rather than treating compensation entitlements as substitutes,
they are treated as receipts for the purposes of ordinary income under
the income test.
It is significant to note that the substitution only
occurs during the preclusion period.
Dollar-for-Dollar Reductions and Partners
If a person and their partner both receive or claim a
compensation affected payment, the reduction is split equally between
them (subsection 1168(3B)). If the partner receives or claims another
social security benefit or parenting payment, the reduction is made initially
against the person and subsequently against their partner (subsection
1168(5)).
In effect, any excess of periodic compensation payment
will also reduce a partner's income support payment on a dollar-for-dollar
basis. This treatment has been in place for a considerable period, and
has been criticized as being too harsh. It would be common for a person's
periodic compensation payments, which are based on their normal weekly
earnings, to exceed the partnered rate of most social security payments
and to result in a significant reduction in income support made to the
person's partner.
For example, as at May 2001 the partnered rate of newstart
allowance was $322.80 per fortnight. A periodic compensation paid at a
rate of $450 per fortnight would reduce the partner's income support payment
by the excess of $127.20 per fortnight. The net rate than paid to the
partner would be $322.80 minus $127.20 leaving $195.60 per fortnight.
Proposed section 1174 splits this rule,
applying a dollar-for-dollar reduction to the person entitled to the compensation
payments and the ordinary income test for the partner.
The effect of the proposed legislative change is to treat
any excess payment as ordinary income and the appropriate income test
free areas and tapers are then applied. The results achieved will vary,
depending on what sort of income support payment the partner is receiving.
Most will be allowee partners, receiving one of the allowance payments,
the main ones being newstart allowance, partner allowance, parenting payment
(partnered).
Where the partner is on an allowance payment, any excess
partner income reduces the payment rate by 70 cents in the dollar. A different
result applies to pension recipients.(3)
In the example set out above, the excess of $127.20 would
be reduced to $89.04. The net rate then payable is $322.80 minus $89.04
leaving $233.76 per fortnight. This is substantially more than the current
rate result of $195.60 per fortnight.
Preclusion Periods
The SSA currently prescribes two 'preclusion periods'.
The 'old preclusion period' - for payments made before 20 March 1997 -
is determined by the 'compensation part' of the lump sum payment (the
part attributable to lost earnings or lost capacity to earn) divided by
average weekly earnings. In effect the period was the number of weeks
which the compensation part of the lump sum payment could have been distributed
as average weekly earnings. The 'new preclusion period' - for payments
made after 20 March 1997 - is determined by the compensation part divided
by an 'income cut-out amount'. This amount is based on the maximum basic
(single) rate and the pharmaceutical allowance, plus the income free area
for a single person. Given the disparity between average weekly earnings
and pension rates, this will always be less than average weekly earnings.
Thus, a 'new preclusion period' would always be longer than an 'old preclusion
period'.
Items 5 and 15 seek to replace these periods
with a single preclusion period, based on the 'new preclusion period'
but with a more generous 'income cut-out amount'. As the Explanatory Memorandum
indicates, the new 'income cut-out amount' formula is now consistent with
the 40% pension income taper introduced as part of the GST changes.(4)
This has the effect of shortening preclusion periods for new lump sum
payments.
The new 'income cut-out amount' in item 15 will
be deemed to have commenced on 1 July 2000, before the other relevant
amendments commence on 20 September 2001. The retrospective commencement
relates to the new 'income cut-out amount' formula. As indicated this
is beneficial and is thus unobjectionable from the standpoint of welfare
recipients. However, it might be expected to have some financial impact,
which does not appear to have been separately quantified in the Explanatory
Memorandum.
Recovery from Partners
As indicated above, where a person receives a lump sum
compensation payment, the lump sum or the compensation affected payments
are liable to be recovered, whichever is the smaller (section 1166). Similarly,
where a person receives periodic compensation payments, compensation affected
payments are also liable to be recovered (section 1170).
Significantly, where a person receives these compensation
payments, compensation affected payments are also liable to be recovered
from partners.
Proposed sections 1178-1181 correspond to sections
1166 and 1170 but they do not expressly permit recovery from partners.
Recovery from Compensation Payers and Insurers
Alternative to recovery from persons and partners, the
SSA permits recovery from potential compensation payers or insurers (but
not both). The rules for compensation payers are contained in Division
4 and substantially duplicated for insurers in Division 5.
Proposed Subdivision C replaces Divisions 4 and
5 with a single set of rules applicable separately to compensation payers
and insurers.
Schedule 2 - Simplification Package
Income Streams
The proposed changes to the SSA presented in Schedule
2 refer to income stream products and were a part of the Simplification
Package announced in the 2000-2001 Budget.(5)
Background - Income Stream Products
There are two main types of lifetime income stream products:
lifetime pensions and lifetime annuities. A lifetime pension is
provided by a superannuation fund and can only be purchased with superannuation
monies.(6) A lifetime annuity can be purchased with
any monies. Lifetime income streams are payable for the person's lifetime,
paying income payments at least annually. Purchase involves exchanging
a lump sum superannuation amount in return for a guaranteed series of
future periodic payments.
Separate to lifetime products, which are paid during
the purchaser's life, there are also life expectancy products, in which
the full dollar amount is paid to the purchaser over the term of the product.
The term of the product is usually set to the estimated life expectancy
of the purchaser, at the time of purchase. Life expectancies are taken
from the latest Australian Life Tables published by the Australian Government
Actuary.
Popularity of lifetime pensions and annuities
Since the early 1990s allocated pensions and annuities
(income stream products) have become the most popular structured private
retirement income stream plans in the financial market. Literally billions
of superannuation funds (and other funds) have been rolled into (or used
to purchase) income stream funds. Also, there are rapidly increasing numbers
of self-managed superannuation funds that are being designed to switch
from accumulating benefits to income streams. The advantage of income
streams is that:
- they can be designed to meet individual needs
- moneys can be pooled into a diverse range of managed investments,
responsive to market fluctuations and trends
- savings can be made to last longer
- account balances can rise and fall with fluctuations in pooled fund
earnings and market value of investments
- money is not necessarily locked away and there is scope to make capital
withdrawals and taxed under lump sum tax rules
- there is capacity to vary income received
- there are tax advantages for income withdrawals if taken at a steady
pace, and
- investment income earned is not taxable.
The income stream fund balance mainly reduces by the
regular income payments, any capital withdrawals and ordinary fees and
charges.
Income and Assets Testing
In the 1997-98 Budget, the Government announced changes
to the pensions and benefits income and assets tests treatment of income
stream products.(7) The reforms were mainly in response to
the burgeoning use of income stream products by persons of retired age
and the increased diversity, design and complexity of these products.
The main concern was that some people were able to organise substantial
assets into mechanisms that circumvented the income and assets testing
arrangements. The other issue was to provide some favourable treatment
of income and assets testing towards those investments that were long-term
and genuinely providing an income stream in retirement.
The changes were introduced with the passage of the Social
Security and Veterans' Affairs Legislation Amendment (Budget and Other
Measures) Act 1997.(8)
Currently, most investments are subject to the income
and assets tests. Under the current rules, income stream products are
generally caught by both income and assets tests, with some exceptions.
For the income test, special rules apply as the income stream payments
generally include a return of a part of the capital used to purchase the
product. Mostly, it is only the income part, which is counted under the
income test. In brief the features of the current treatment arrangements
are:
|
Income stream type
|
Income test
|
Assets test
|
|
Long-term
|
|
|
|
Complying life time/life expectancy with no residual capital*
|
Gross annual payment less a deduction based on purchase price
|
Exempt**
|
|
Medium-term
|
|
|
|
Terms >5yrs
Some residual capital value
|
Gross annual payment less a deduction based on purchase price
|
Subject to assets test
|
|
Short-term
|
|
|
|
Terms of <5yrs
|
Subject to income test under extended Deeming
|
Subject to assets test
|
* The prohibition on residual capital value was
based on the view that it would be unreasonable to expect taxpayers
to support the use of the product for purposes other than a retirement
income stream, eg to intentionally leave a lump sum to the purchaser's
estate.
** The asset test exemption for long-term products
was aimed at providing an incentive for people to use lump sums to purchase
an income stream that could be expected to last for the duration of
their retirement, rather than relying on the age pension.
Reliability and Dependability of Income Stream
Products
In January 1999, the Australian Prudential Regulation
Authority (APRA) issued a modification to the Superannuation Industry
(Supervision) (SIS) Regulations. The modification introduced tighter prudential
requirements for superannuation funds paying pensions. All superannuation
funds paying pensions (other than allocated pensions or those backed wholly
by life company annuities) are now generally required to produce an annual
actuarial certificate. This certificate must state that there is a 'reasonable
degree of probability' that the fund will be able to pay those pensions
for the specified term of the product (or as required under the fund's
governing rules).
The modification was largely in response to the burgeoning
use of superannuation funds into income stream products. The modification
had a direct impact on how products are assessed under the income and
asset testing rules. Under the SSA, to be defined as an income stream
under the means testing rules, products must be provided under one of
a number of prudential arrangements (subsection 9(1)). The Superannuation
Industry (Supervision) (SIS) Act 1993 is one of these arrangements.
Products provided under the SIS legislation must meet the requirements
of that legislation, including the new prudential requirements. If the
new prudential requirements are met, this will also go some way to ensuring
that the product is regarded as an income stream under the SSA.
The APRA modification pertains to the reliability and
dependability of income stream products. Effectively, the Government in
recognising certain classes of investments and providing concessional
or favourable income and assets test treatment is also concerned with
the amount or level of payments. Arguably, it is in the best interests
of both government and individuals to encourage people to use their savings
to obtain the best possible retirement income, subject to the level of
risk involved being acceptable.
However, where people wish to transfer some of their
savings, including their retirement savings, to others (for example, members
of their family), the policy is that this should not be at the expense
of the taxpayer.
Continued and Increasing Diversity of Income
Stream Products
Income stream products continue to be a very popular
form of investment for the retired aged. One of the features of this popularity
has been the increased incidence of self-managed income streams. This
feature poses new problems for decisions about product classification
and, flowing from this, the appropriate income and assets test treatment
under the SSA. Where an income stream is purchased commercially, the APRA
rules need to be complied with and as a result it is far more likely that
the product will run for its intended duration, ie. for the remainder
of the investor's life or life expectancy at the time of purchase.
This security and surety about the product not changing
may not apply in relation to self-managed products. These are products
where the purchaser of the income stream is also the trustee of the product.
With these products, there is far more scope and freedom for the purchaser/trustee
to dissolve and re-organise the product at any time. In such cases, the
purchaser/trustee may have already received the benefits of assets test
exemption for some period, but, the product or products have not run for
their originally intended duration, and arguably, did not properly warrant
such an asset concession at all. The amendments proposed in items 2-15
will apply some increased rigour about products that meet, and continue
to meet, requirements to gain access to concessional asset test treatment.
Commuted or Dissolved Products: Debts and Hardship
Currently, in order to be an 'assets-test exempt income
stream', the contract or the governing rules for the product must contain
a number of features. These features include a prohibition on residual
capital value (as indicated), upper and lower limits on indexation of
payment amounts and limits on transfer, commutation and dissolution. The
key features for present purposes are that the income stream may only
be transferred on the death of the person to a reversionary beneficiary
(ie, a person entitled under the contract or governing rules to the remainder
of the income stream on the death of the purchaser, etc.).(9)
Also the income stream may only be commuted within 6 months of its commencement,
or to the person's estate or a reversionary beneficiary (within 10 years
of the person's death), or to the extent necessary to cover superannuation
contributions surcharge liabilities.(10)
Item 22 provides for the creation of a debt, where
an income stream product, which has had concessional asset test treatment,
is commuted or dissolved contrary to the contract or governing rules applying
to the product. In effect, this will ensure that the taxpayer's interest
in any asset test concessions is protected.
Hardship
Items 5 and 8 seek to add an exception
to the general prohibition on commutation to allow a person to commute
an income stream to the extent necessary to pay a 'hardship amount'. This
exception will only operate in very limited cases:
- A person must apply in writing to the Secretary because of 'extreme
financial hardship'
- The Secretary must be satisfied that
- the circumstances are 'exceptional' and 'could not be reasonably foreseen'
- the person has insufficient 'liquid assets' that could be realised,
and
- the amount to be commuted is required to meet 'unavoidable expenditure'.
'Unavoidable expenditure' includes 'essential medical
expenses', 'essential repairs to the person's principal home' and 'essential
household goods'.
'Liquid assets' include shares, managed investments and
insurance policies. They also include financial deposits 'whether or not
the amount can be withdrawn or repaid immediately' and amounts due 'and
able to be paid' by a person's former employer.
To some extent, the latter forms of 'liquid assets' are
subject to time and resource obstacles, which are or may be beyond the
person's control. These obstacles are significant in the context of the
time limits implicit in the definition of 'unavoidable expenditure'.
The approach to hardship in items 5 and 8
may be contrasted with the approach to hardship elsewhere in the SSA.
For example, a person applying for newstart allowance may be able to claim
exemption from a waiting period if they are in 'severe financial hardship'.
Their circumstances need not be exceptional and there is no concern over
the nature of the proposed expenditure. Hardship can be shown to exist
if their liquid assets are 'less than the fortnightly amount at the maximum
payment rate of the payment or allowance that would be payable to the
person if the person's claim was granted'.(11)
While the two approaches to hardship are distinguishable,
because one deals with availability of money for major lump sum payments
and the other deals with availability of money for minor living expenses
etc., it is still significant that a far higher threshold has been set
for social security recipients accessing income stream assets than for
would be social security recipients accessing social security payments.
The gap would seem to be the measure of the disincentive to 'hide' assets
in the form of income stream products. However, it may operate too harshly
in relation to some bona fide welfare recipients.
Rental Income
Item 17 proposes to insert into the SSA a description
of how rental income deductions are to be assessed for the purposes of
the income test.(12) It is proposed to directly link legislative
definition of allowable rental income deductions in the SSA to the general
definitions of allowable income deductions provided in sections 51(13)
of the Income Tax Assessment Act 1936 and 8-1(14) of
the Income Tax Assessment Act 1997. In both of these provisions,
the general definitions of allowable income deductions target those directly
incurred in earning or producing the income. Being general, there is some
scope to interpret what the expenses have been. They include:
- all losses and outgoings to the extent to which they are
- incurred in gaining or producing the assessable income
- expenses necessarily incurred in carrying on a business for the purpose
of gaining or producing assessable income.
For rental properties some examples are rates, property
maintenance, agents fees.
Some rental income deductions allowed under the Income
Tax Assessment Acts (ITAA) may not be allowed under the SSA. An example
is capital depreciation. The main reason for differences in allowable
deductions between the SSA and ITAA, largely stems from the different
treatment and measurement of income between the two Acts. The ITAA assesses
income in order to determine a level of tax liability to provide revenue,
regardless of a person's need. The SSA assesses income as one means of
measuring need for welfare assistance.
- Compensation includes common law damages or statutory insurance or
compensation, for lost earnings or lost capacity to earn: subsection
17(2).
- Subsection 17(1).
- Where the partner is on a pension payment, eg. age pension, disability
support pension, carer payment, the result is different because pension
payments have a different income test. For pension, the income test
free area is $94 per fortnight and income above this limit reduces the
maximum pension rate by 40 cents in the dollar (May 2001). Therefore,
excess compensation of $127.20 would be reduced by the free area of
$94 to $33.20. Affecting income is 40 cents in the dollar of $33.20,
ie. $13.28. The maximum partnered pension rate of $335.50 per fortnight
(May 2001), would be reduced by $13.28 to arrive a net pension rate
payable of $322.22. This is substantially more than the rate currently
payable of $208.30 ($335.20 minus $127.20 = $208.30).
- Explanatory Memorandum, p 1.
- Family and Community Services - Portfolio Budget Statements, Budget
Related Paper No 1.8, page 168.
- Superannuation money commonly means within a superannuation fund and
can also refer to lump sums paid as 'eligible work termination payments',
for example long-service leave.
- Department of Social Security - Portfolio Budget Statements, Budget
Related Paper No 1.14, pages 59 and 60.
- For background on this Bill see Susan Downing, Social Security and
Veterans' Affairs Legislation Amendment (Budget and Other Measures)
Bill 1997, Bills Digest No. 136
1997-98 at http://www.aph.gov.au/library/pubs/bd/1997-98/98bd138.htm
[14/06/01].
- Paragraph 9A(2)(i).
- Paragraph 9A(2)(h).
- Sub-section 19C(2).
Meaning of 'in severe financial hardship': person who is not
a member of a couple
19C.(2) A person who is not a member
of a couple and who makes a claim for parenting payment, austudy
payment or one of the following allowances:
(a) newstart allowance
(b) widow allowance
(c) mature age allowance
(d) sickness allowance
(e) youth allowance
is in severe financial hardship if the value
of the person's liquid
assets (within the meaning of subsection
14A(1)) is less than the fortnightly amount at the maximum payment
rate of the payment or allowance that would be payable to the person:
(f) if the person's claim were granted.
- This proposal was announced in the 2000-2001 Budget as a part of the
Simplification Package: Family and Community Services, op. cit., p.
168.
- Section 51 of the Income Tax Assessment Act 1936 relevantly
provides:
(1AA) Subsection (1) does not apply to the 1997-98
year of income or a later year of income.
All losses and outgoings to the extent to which they
are incurred in gaining or producing the assessable income, or are necessarily
incurred in carrying on a business for the purpose of gaining or producing
such income, shall be allowable deductions except to the extent to which
they are losses or outgoings of capital, or of a capital, private or
domestic nature, or are incurred in relation to the gaining or production
of exempt income.
- Section 8-1 of the Income Tax Assessment Act 1997 provides:
(1) [Deductible losses and outgoings]
You can deduct from your assessable income any
loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a *business for the purpose
of gaining or producing your assessable income.
Note: Division 35 prevents losses from non-commercial
business activities that may contribute to a tax loss being offset against
other assessable income.
(2) [Exclusions]
However, you cannot deduct a loss or outgoing under
this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c) it is incurred in relation to gaining or producing your *exempt
income; or
(d) a provision of this Act prevents you from deducting it.
For a summary list of provisions about deductions,
see section 12-5.
Nathan Hancock and Peter Yeend
15 June 2001
Bills Digest Service and Social Policy Group
Information and Research Services
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ISSN 1328-8091
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