House of Representatives

Explanatory Memorandum

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

Schedule 4 - Amendments relating to exempt funeral investments

Summary

From 1 January 2008, the threshold for funeral investments that are exempt from the income and assets test will be raised from $5,000 to $10,000. The new threshold will also be subject to indexation in line with the Consumer Price Index. To allow people with existing investments to take advantage of the new threshold, a person or couple will be able to have up to two exempt investments under the changes.

Background

Funeral investments allow an individual or a couple to set aside money for the payment of their funeral expenses. Moneys invested in certain funeral investments are currently exempt from the income and assets tests, provided that contributions to the investment do not exceed $5,000 per person or couple. Funeral investments are only redeemable on the death of the investment holder or their partner. The income and asset test exemption of funeral investments has been in place since 1991.

Explanation of the changes

Amendments to the Social Security Act

Subsection 8(8) of the Social Security Act lists a number of classes of income that are exempt from the income test for social security payments. One of these is income from an exempt funeral investment. Item 1 replaces a reference in a note under paragraph 8(8)(ma) to the old definition of 'exempt funeral investment' in subsection 23(1) with a reference to the new definition provided by new section 19E.

Item 2 inserts a new section into the Social Security Act, section 19E, which provides a new definition of, and new rules for, exempt funeral investments.

New subsection 19E(1) provides that, to work out whether a funeral investment is an exempt funeral investment, the rules set out in the subsection should be applied. Paragraph 19(1)(a) provides that the expenses for the funeral must not be prepaid. This ensures that a person claiming an exemption under the income and assets tests for a funeral bond will not be able also to claim an exemption for pre-paid funeral expenses related to the same funeral.

Paragraph (1)(b) contains the rule for how to determine whether an investment is an exempt funeral investment in two scenarios. The first scenario covers investors with a single investment: it will be exempt if below the new threshold. The second scenario covers investors with two or more investments: up to two will be exempt if, when aggregated, they are less than the new threshold. Investors can nominate which of their funeral investments will be exempt, subject to those investments meeting the definition of an exempt funeral investment.

New subsection 19E(2) provides that any return on an investment is disregarded in determining the amount of an investment for the purposes of section 19E. This ensures that only the purchase price is taken into account.

Subsection (3) combines the old definitions of type A and type B funeral investments into one. It provides that, for the above rule to apply, a funeral investment must be an investment that cannot be realised before maturity and the return on which is not payable before maturity. In addition, the investment must mature on the death of whichever member of a couple dies first or last and is to be applied on maturity to the expenses of the funeral of a member of the couple. Alternatively, the investment must mature on the death of the investor or, if the investor is a member of a couple at the time the investment is made, the investor's partner at that time, and is to be applied on maturity to the expenses of the funeral of the person on whose death it matures.

Item 3 repeals the old definition in subsection 23(1) of 'exempt funeral investment' and substitutes the new definition in section 19E.

Items 4 and 5 repeal the old definitions of type A and type B funeral investments, because of the insertion of new section 19E.

Subsection 1118(1) of the Social Security Act lists a number of asset types that are exempt from the asset test for social security payments. One of these is an exempt funeral investment. Item 6 replaces a reference in a note in that subsection to the old definition of 'exempt funeral investment' in subsection 23(1) with a reference to the new definition provided by new section 19E.

Item 7 inserts in the indexed and adjusted amounts table the exempt funeral investment threshold as an amount to be indexed.

Item 8 inserts into the Consumer Price Index (CPI) Indexation Table the method for indexing the exempt funeral investment threshold. The indexation day is 1 July. The reference quarter is December. The base quarter is the most recent December quarter before the reference quarter. The rounding base is $250.

The combined effect of items 7 and 8 is that the exempt funeral investment threshold is indexed in line with inflation, and rounded to the nearest $250 on the indexation day.

Amendments to the Veterans' Entitlements Act

Although the amendments to the Veterans' Entitlements Act made by this legislation will mirror the amendments to the Social Security Act made by the preceding Items in Schedule 4, there are a number of minor variations within the legislation necessary to reflect differences in legislative formats.

Set out below is a comparative table of the items, referring to the amendments made under Schedule 4. The explanation provided for an item in the amendments to the Social Security Act made in Schedule 4 is to be read as the explanation for the equivalent amendment to the Veterans' Entitlements Act in a later item of Schedule 4.