House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Families, Community Services and Indigenous Affairs, the Hon Mal Brough MP)

Schedule 11 - Amendments relating to income streams

Summary

This Schedule amends the Social Security Act and the Veterans' Entitlements Act to make a number of non-Budget amendments aimed at enhancing and improving the efficiency and effectiveness of various income streams rules.

Background

Definition of 'income stream'

The definition of an 'income stream' in paragraph (d) of subsection 9(1) of the Social Security Act and in subsection 5J(1) of the Veterans' Entitlements Act states that an income stream means 'an income stream provided by a life insurance business (within the meaning of the Life Insurance Act 1995 )'.

The definition describes an income stream in terms of 'life insurance business', as defined in the Life Insurance Act 1995 (Life Insurance Act), not 'a life insurance business' as currently defined in the Social Security Act.

Definition of 'defined benefit income stream'

The current definition of a defined benefit income stream in both the Social Security Act and the Veterans' Entitlements Act inadvertently excludes certain defined benefit income streams acquired from 3 May 2006 and sourced from public sector and other corporate defined benefit superannuation funds established before 20 September 1998. These amendments ensure that these income streams are included in the definition so that they also qualify for the 100 per cent exemption from the assets test.

Reversion of life expectancy income streams

This amendment provides that a life expectancy income stream purchased before 20 September 2004, which reverts to a reversionary beneficiary, will only retain asset test exempt status if the remaining term of the income stream matches the reversionary beneficiary's life expectancy at the point of reversion. This requirement was inadvertently removed from both Acts in legislation that took effect from 20 September 2004.

Income from certain low-payment assets-tested income streams

This amendment is consequential to the recent superannuation amendments in the Tax Laws Amendment (Simplified Superannuation) Act 2007 (the Simplified Superannuation Act) and proposed changes to the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).

Currently, sections 1099DAA of the Social Security Act and 46YA of the Veterans' Entitlements Act stipulate that a specified minimum amount of income must be assessed for the purposes of the social security and Veterans' Entitlements Act means tests in relation to allocated (that is, account based) income streams, even if the actual amount of income withdrawn is lower than amount to be assessed specified for social security and Veterans' Entitlements Act purposes. Without amendments to sections 1099DAA and 46YA, as a result of the proposed changes to the SIS Regulations, section 1099DAA or section 46YA may no longer apply to all forms of account based products, as is the case currently. In addition, the stipulated minimum amount of income currently assessed under section 1099DAA for social security means test purposes or under section 46YA for the purposes of the Veterans' Entitlements Act would exceed the minimum amount of income that could actually be withdrawn under the new limits specified in proposed amendments to the SIS Regulations, which is contrary to the intent of the new arrangements arising from the Government's Super Plan.

Allocation of unallocated reserves

Currently, due to the operation of paragraph 1118(1)(h) of the Social Security Act or paragraph 52(1)(g) of the Veterans' Entitlements Act, unallocated reserves, within a superannuation fund's trust account, are not assessable in relation to a social security customer under the social security means test or a service pensioner or income support supplement recipient under the Veterans' Entitlements Act . One of the reasons for the enactment of the 'trusts and companies' measures in 2001 (in Part 3.18 of the Social Security Act and Division 11A of Part IIIB of the Veterans' Entitlements Act), was that certain interests in trusts were not able to be assessed against social security customers or service pensioners and income support supplement recipients, which resulted in a substantial loophole for customers who took advantage of these structures. Part 3.18 of the Social Security Act and Division 11A of Part IIIB of the Veterans' Entitlements Act specifically exclude superannuation funds from the scope of their operation. This policy needs to be extended to small superannuation funds and requires legislative backing.

Definition of 'deductible amount'

The definition of 'deductible amount' in section 9 of the Social Security Act and section 5J of the Veterans' Entitlements Act was recently amended by Part 2 of Schedule 8 to the Simplified Superannuation Act, due to the Government's Super Plan. The definition is now subject to further amendment, as it may lead to the deductible amount for some social security customers and service pensioners or income support supplement recipients being lower under the new definition in Part 2 of Schedule 8 to the Simplified Superannuation Act than it was under the old definition. This is contrary to the intention of the Government's Super Plan so an amendment is required.

Explanation of the changes

Social Security Act amendments

Item 1 repeals paragraph (d) of the definition of income stream under subsection 9(1) of the Social Security Act and substitutes a new definition. Paragraph (d) provides that an income stream issued as 'life insurance business' under the Life Insurance Act by a life company regulated under that same act will be an 'income stream' for social security purposes.

Item 2 repeals paragraph (e) of the definition of income stream under subsection 9(1) of the Social Security Act.

Item 3 amends paragraph 9(1F)(b) to provide that, where a superannuation fund established before 20 September 1998 provides a defined benefit income stream to a person, then that income stream does not need to meet the requirements of paragraph 9(1F)(b) of the Social Security Act (that is, the income stream does not need to be provided under rules that meet the standards of subregulation 1.06(2) of the SIS Regulations) to be a defined benefit income stream. However, such an income stream must still meet the requirements of paragraphs (a) and (c) of that definition.

Item 4 inserts a new paragraph (ba) in subsection 9(1F) of the Social Security Act. This new paragraph provides that, where a superannuation fund established before 20 September 1998 provides an income stream to a person, the income stream is a defined benefit income stream if it is provided under rules that meet the standards determined by the Minister in a legislative instrument. To be a defined benefit income stream, the income stream must also meet the requirements of paragraphs 9(1F)(a) and (c).

The amendment made by Item 5 means that regardless of whether an income stream meets the requirements of paragraphs 9(1F)(b) or (ba), to be a defined benefit income stream it must also satisfy paragraph 9(1F)(c).

Item 6 inserts a new paragraph (d) in subsection 9B(1A) of the Social Security Act. Where a life-expectancy income stream, purchased prior to 20 September 2004, is paid to the reversionary beneficiary of the income stream and that beneficiary's remaining life expectancy at the point of reversion is equal to the remaining term of the income stream, the income stream will retain its asset test exempt status on reversion. Both the beneficiary's remaining life expectancy period and the remaining term of the income stream need to be calculated on the basis of whole years.

Item 7 inserts into subparagraph 1099DAA(1)(b)(i) a power for the Minister to apply, by legislative instrument, the minimum withdrawal limits that will apply to all account based pensions from 1 July 2007. This will allow the Minister to accommodate the proposed changes to the SIS Regulations that will apply from that date.

Item 8 replaces the reference to the SIS Regulations in subparagraph 1099DAA(1)(b)(ii) with a power for the Minister to apply, by legislative instrument, the minimum withdrawal limits that will apply to account based income stream products from 1 July 2007. Again this will allow the Minister to accommodate the proposed changes to the SIS Regulations.

Item 9 changes the words 'minimum limit' to 'minimum amount' in the formula contained subsection 1099DAA(3) of the Social Security Act. This will align the wording in the Act with the wording in the proposed changes to the SIS Regulations.

Items 10 and 11 repeals and replaces the current definition of 'minimum limit' with 'minimum amount' in subsection 1099DAA(3) of the Social Security Act to align the wording in the Act with the wording in the proposed changes to the SIS Regulations. The definition provides for the minimum amount to be calculated in accordance with the method determined, by legislative instrument, by the Minister.

Item 12 inserts new section 1120C in the Social Security Act. Section 1120C provides for the unallocated reserves in a superannuation trust fund to be assessed against the beneficiaries of that fund in the same proportions as the allocated reserves of the fund are held by those beneficiaries.

Subsection 1120C(1) states that section 1120C applies in calculating the value of a person's investment in a superannuation fund if the fund has four or fewer members and the fund has reserves (within the meaning of section 115 of the Superannuation (Industry) Supervision Act 1993 ).

Subsection 1120(2) provides a formula to assess the unallocated reserves that are included in the value of the person's investment in the superannuation fund, for social security means test purposes. This section applied regardless of whether these reserves would have otherwise been an exempt asset in relation to the person, due to the operation of paragraph 1118(1)(h) of the Social Security Act.

Subsection 1120(3) provides a formula if it is not possible to determine the proportion of the allocated reserves of the fund allocated to each beneficiary. If it is not possible to calculate this, the unallocated reserve should be split equally between all beneficiaries of the fund for social security purposes.

Item 13 inserts a transitional provision into Part 3 of Schedule 1A to the Social Security Act. New section 136 amends the definition of 'deductible amount' so that, where the deductible amount calculated for social security customers is lower, under the definition in Part 2 of Schedule 8 to the Simplified Superannuation Act, than it would have been under the old definition in the Social Security Act, then the calculations under the old definition should prevail. The intention is to ensure that social security customers who are receiving an income support payment before the trigger day continue to have their deductible amount assessed under the old definition.

Subsection 136(1) provides the following rules to determine whether the calculation of the deductible amount under the old definition, for the purposes of the social security law, should continue in relation to a person's income stream rather than using the 'new' deductible amount. This subsection applies if:

a)

a person has received at least one payment from a defined benefit income stream before 1 July 2007, and is still receiving payments from the income stream; and

b)

the person receives an income support payment in respect of a continuous period starting before, and ending on or after, the trigger day; and

c)

the amount of the income support payment received before the trigger day was affected by the deduction of a deductible amount (within the meaning of the Social Security Act) from the amount of the payments payable to the person for a year under the income stream; and

d)

if the person's trigger day is after 1 July 2007 and the income stream has not been partially commuted on or after 1 July 2007 and before the trigger day.

Paragraph (d) only applies if the person's trigger day is after 1 July 2007. In effect, this means that, if a person is 60 years or over before 1 July 2007, they only need to satisfy paragraphs (a), (b) and (c) to continue to have their 'old' deductible amount applied in respect of their income stream payments.

Subsection 136(2) provides that, despite the amendment of the Social Security Act by Part 2 of Schedule 8 to the Simplified Superannuation Act, for the purposes of working out the amount of the income support payment received by the person on or after the trigger day in respect of the remaining part of the period mentioned in paragraph 1(b), the deductible amount is the greater of:

a)

the deductible amount mentioned in paragraph 1(d); or

b)

the sum of the amounts that are tax free components of the payments received from the income stream during the year (worked out under Subdivision 307-C of the Income Tax Assessment Act 1997 ).

In effect, this provision now displaces the amendments made under Part 2 of Schedule 8 to the Simplified Superannuation Act. If a person makes a claim for an income support payment after 1 July 2007, the amended definition of 'deductible amount' in Part 2 of Schedule 8 to the Simplified Superannuation Act applies.

If a person is receiving an income support payment and at any time after 1 July 2007 ceases to receive that payment, then if the person later starts to receive an income support payment again, the person's deductible amount is to be calculated according to the definition of 'deductible amount' in Part 2 of Schedule 8 to the Simplified Superannuation Act (that is, the new deductible amount). Any provisions that preserve the period in which a person is taken to receive a payment (for example, section 38B of the Social Security Act) may also operate in these types of cases and may allow a person to keep their 'old deductible amount', even where that person ceased to receive an income support payment for a certain period

Subsection 136(3) provides that the trigger day for a person is either:

a)

the day the person turns 60, if the person is under 60 years at the end of 30 June 2007; or

b)

1 July 2007, if the person is 60 years or over at the end of 30 June 2007.

Veterans' Entitlements Act amendments

Item 1 repeals paragraph (d) of the definition of income stream under subsection 5J(1) of the Veterans' Entitlements Act and substitutes a new definition. Paragraph (d) provides that an income stream issued as 'life insurance business' under the Life Insurance Act by a life company regulated under that same act will be an 'income stream' for the purposes of the Veterans' Entitlements Act.

Item 2 repeals paragraph (e) of the definition of income stream under subsection 5J(1) of the Veterans' Entitlements Act.

Item 3 amends paragraph 5J(1E)(b) to provide that, where a superannuation fund established before 20 September 1998 provides a defined benefit income stream to a person, then that income stream does not need to meet the requirements of paragraph 5J(1E)(b) of the Veterans' Entitlements Act (that is, the income stream does not need to be provided under rules that meet the standards of subregulation 1.06(2) of the SIS Regulations) to be a defined benefit income stream. However, such an income stream must still meet the requirements of paragraphs (a) and (c) of that definition.

Item 4 inserts a new paragraph (ba) in subsection 5J(1E) of the Veterans' Entitlements Act. This new paragraph provides that, where a superannuation fund established before 20 September 1998 provides an income stream to a person, the income stream is a defined benefit income stream if it is provided under rules that meet the standards determined by the Minister in a legislative instrument. To be a defined benefit income stream, the income stream must also meet the requirements of paragraphs 5J(1E)(a) and (c).

The amendment made by Item 5 means that regardless of whether an income stream meets the requirements of paragraphs 5J(1)(b) or (ba), to be a defined benefit income stream it must also satisfy paragraph 5J(1E)(c).

Item 6 inserts a new paragraph (d) in subsection 5JB(1A) of the Veterans' Entitlements Act. Where a life-expectancy income stream, purchased prior 20 September 2004, is paid to the reversionary beneficiary of the income stream and that beneficiary's remaining life expectancy at the point of reversion is equal to the remaining term of the income stream, the income stream will retain its asset test exempt status on reversion. Both the beneficiary's remaining life expectancy period and the remaining term of the income stream need to be calculated on the basis of whole years.

Item 7 inserts into subparagraph 46YA(b)(i) a power for the Minister to apply, by legislative instrument, the minimum withdrawal limits that will apply to all account based pensions from 1 July 2007. This will allow the Minister to accommodate the proposed changes to the SIS Regulations that will apply from that date.

Item 8 replaces the reference to the SIS Regulations in subparagraph 46YA(b)(ii) with a power for the Minister to apply, by legislative instrument, the minimum withdrawal limits that will apply to account based income stream products from 1 July 2007. Again this will allow the Minister to accommodate the proposed changes to the SIS Regulations.

Item 9 changes the words 'minimum limit' to 'minimum amount' in the formula contained subsection 46YA(3) of the Veterans' Entitlements Act. This will align the wording in the Act with the wording in the proposed changes to the SIS Regulations.

Items 10 and 11 repeal and replace the current definition of 'minimum limit' with 'minimum amount' in subsection 46YA(3) of the Veterans' Entitlements Act to align the wording in the Act with the wording in the proposed changes to the SIS Regulations. The definition provides for the minimum amount to be calculated in accordance with the method determined, by legislative instrument, by the Minister.

Item 12 inserts new section 52BC in the Veterans' Entitlements Act. Section 52BC provides for the unallocated reserves in a superannuation trust fund to be assessed against the beneficiaries of that fund in the same proportions as the allocated reserves of the fund are held by those beneficiaries.

New subsection 52BC(1) states that section 52BC applies in calculating the value of a person's investment in a superannuation fund if the fund has 4 or fewer members and the fund has reserves (within the meaning of section 115 of the Superannuation (Industry) Supervision Act 1993 ).

New subsection 52BC(2) provides a formula to assess the unallocated reserves which are included in the value of the person's investment in the superannuation fund, for the purposes of the Veterans' Entitlements Act means test. This section applied regardless of whether these reserves would have otherwise been an exempt asset in relation to the person, due to the operation of paragraph 52(1)(g) of the Veterans' Entitlements Act.

New subsection 52BC(3) provides a formula if it is not possible to determine the proportion of the allocated reserves of the fund allocated to each beneficiary. If it is not possible to calculate this, the unallocated reserve should be split equally between all beneficiaries of the fund for the purposes of the Veterans' Entitlements Act.

Item 13 inserts a transitional provision in Schedule 5 to the Veterans' Entitlements Act. New clause 11B amends the definition of 'deductible amount' so that, where the deductible amount calculated for a service pensioner or income support supplement was calculated under section 27H of the Income Tax Assessment Act 1936 , and after a trigger day the deductible amount is calculated under subsections 307-125(4) to (7) of the Income Tax (Transitional Provisions) Act 1997 , and the new deductible amount results in the person receiving a lower rate of income support pension, then the calculations under the old definition should prevail. The intention is to ensure that service pensioners and income support supplement recipients who are receiving an income support payment before the trigger day do not receive less pension as a result of the new definition being applied.

New subclause 11B(1) provides the following rules to determine whether the calculation of the deductible amount under the old definition, for the purposes of the Veterans' Entitlements Act, should continue in relation to a person's income stream rather than using the 'new' deductible amount. This subsection applies if:

a)

a person has received at least one payment from a defined benefit income stream before 1 July 2007, and is still receiving payments from the income stream; and

b)

the person receives an income support payment in respect of a continuous period starting before, and ending on or after, the trigger day; and

c)

the amount of the income support payment received before the trigger day was affected by the deduction of a deductible amount (within the meaning of the Veterans' Entitlements Act) from the amount of the payments payable to the person for a year under the income stream; and

d)

if the person's trigger day is after 1 July 2007 and the income stream has not been partially commuted on or after 1 July 2007 and before the trigger day.

Paragraph (d) only applies if the person's trigger day is after 1 July 2007. In effect, this means that if a person is 60 years or over before 1 July 2007, they only need to satisfy paragraphs (a), (b) and (c) to continue to have their 'old' deductible amount applied in respect of their income stream payments.

New subclause 11B(2) provides that, despite the amendment of the Veterans' Entitlements Act by Part 2 of Schedule 8 to the Simplified Superannuation Act, for the purposes of working out the amount of the income support payment received by the person on or after the trigger day in respect of the remaining part of the period mentioned in paragraph 1(b), the deductible amount is the greater of:

a)

the deductible amount mentioned in paragraph 1(d); or

b)

the sum of the amounts that are tax free components of the payments received from the income stream during the year (worked out under subsections 307-125(4) to (7) of the Income Tax (Transitional Provisions) Act 1997 ).

In effect, this provision now displaces the amendments made under Part 2 of Schedule 8 to the Simplified Superannuation Act. If a person makes a claim for an income support payment after 1 July 2007, the amended definition of 'deductible amount' in Part 2 of Schedule 8 to the Simplified Superannuation Act applies.

If a person is receiving an income support payment and at any time after 1 July 2007 ceases to receive that payment, then if the person later starts to receive an income support payment again, the person's deductible amount is to be calculated according to the definition of 'deductible amount' in Part 2 of Schedule 8 to the Simplified Superannuation Act (that is, the new deductible amount). Any provisions that preserve the period in which a person is taken to receive a payment may also operate in these types of cases and may allow a person to keep their 'old deductible amount', even where that person ceased to receive an income support payment for a certain period.

New subclause 11B(3) provides that the trigger day for a person is either:

a)

the day the person turns 60, if the person is under 60 years at the end of 30 June 2007; or

b)

1 July 2007, if the person is 60 years or over at the end of 30 June 2007.