Explanatory Memorandum
(Circulated by the authority of the Minister for Families, Housing, Community Services and Indigenous Affairs, the Hon Jenny Macklin MP)Schedule 4 - Thalidomide payments
Summary
This Schedule ensures that payments made from the Thalidomide Australia Fixed Trust to beneficiaries of the Trust, or in respect of a beneficiary of the Trust, are exempt from income tax and from social security and veterans' affairs income tests. This Schedule also ensures that Commonwealth ex gratia payments, made to beneficiaries of the Trust in respect of social security and veterans' affairs payments, forgone due to the income test exemption currently not being in effect, are also exempt from income tax.
Background
The morning sickness drug, thalidomide, which has been associated with a range of birth defects, was distributed by the Distillers Company (Bio-chemicals) Australia Pty Ltd to Australians from 1958 to 1962.
The majority of thalidomide survivors received common law settlements around 1974. However, as a result of negotiations initiated in September 2008 with Diageo plc (the British company which acquired the companies that initially distributed the drug), Diageo plc has agreed to make payments of varying amounts to the 36 Australian thalidomide survivors by way of an annuity.
Under the social security law and the Veterans' Entitlements Act, a person's rate of income support payment is subject to an income and assets test. Currently, payments such as these annuity payments are assessable as income for social security and veterans' affairs purposes, which has resulted in any thalidomide survivors who receive income support payments either having their rate reduced or their payment suspended or cancelled. Payments such as the annuity payments are also assessable for income tax purposes.
Subsection 8(8) of the Social Security Act and subsection 5H(8) of the Veterans' Entitlements Act specify certain amounts that are not income for the purposes of the social security law and the Veterans' Entitlements Act.
This Schedule amends both subsection 8(8) and subsection 5H(8) and provides for these annuity payments to be excluded from the income test under the social security law and the Veterans' Entitlements Act. The Schedule also amends section 51-30 of the Income Tax Assessment Act 1997 (the Income Tax Assessment Act) to ensure the annuity payments are included in a list of income that is exempt from income tax.
As a result of being paid these thalidomide payments, survivors who were in receipt of a social security payment or income support under the Veterans' Entitlements Act may have had their social security or veterans' affairs payment suspended due to the effect of the social security or veterans' affairs income test.
Because legislative amendments to exempt the payments from the income tests could not be enacted immediately, Commonwealth ex gratia payments were made to survivors whose income support had been affected. These payments are assessable income in the hands of survivors due to the operation of the income tax law. This Schedule amends section 51-30 of the Income Tax Assessment Act to include the ex gratia payments made to survivors in the list of exempt income.
Under the pension reform measures that occurred in 2009, a person who was receiving certain social security or veterans' affairs payments on 19 September 2009 can continue to have their payment calculated under transitional rules if those rules provide a higher payment rate than new rules introduced under the pension reforms, provided the person remains continuously on the payment. As a result, a number of social security and veterans' affairs recipients continue to have their payment calculated under the transitional rules as this gives them a higher rate of payment than under the new rules.
However, where the person's social security or veterans' affairs payment is no longer payable ? for example, when their assessable income exceeds the disqualifying limit ? access to the transitional rules is lost and cannot be regained. As a consequence, if the person's social security or veterans' affairs payment subsequently becomes payable again, the person's rate would be calculated according to the new rules which could be at a lower rate. Most of the thalidomide survivors who were receiving a social security or veterans' affairs payment are no longer receiving their payment. As a result, those who were paid under the transitional rules have lost access to those rules.
This Schedule provides for thalidomide survivors to regain access to the transitional rules as soon as their social security or veterans' affairs payment becomes payable on commencement of the amendments to subsection 8(8) of the Social Security Act or subsection 5H(8) of the Veterans' Entitlements Act.
The amendments made by this Schedule commence the day this Act receives Royal Assent.
Explanation of the changes
Part 1 - Main amendments
Amendments to the Income Tax Assessment Act
Item 1 includes payments from the Thalidomide Australia Fixed Trust and the Commonwealth ex gratia thalidomide payments in the list of exempt income in section 11-15.
Item 2 amends section 51-30, which lists tax-exempt 'Welfare' payments, to include payments from the Thalidomide Australia Fixed Trust and the Commonwealth ex gratia thalidomide payments.
The exemption will apply provided the payments are made to a beneficiary of the Trust or to another individual in respect of a beneficiary of the Trust. Payments applied for the benefit of a beneficiary of the Trust to cover specific expenses will also be tax exempt to the beneficiary of the Trust. However, the amendment does not exempt these payments in the hands of any third party recipient.
Item 3 is an application provision and provides that the amendments made to exempt the Commonwealth ex gratia thalidomide payments will apply for the 2010-11 and 2011-12 income years only. As the payments will only be made until such time as payments from the Thalidomide Australia Fixed Trust are made exempt from social security income tests, it is not necessary for this exemption to be ongoing.
Item 3 also provides that the amendments made to exempt payments from the Thalidomide Australia Fixed Trust from income tax commence in the 2010-11 income year and apply thereafter.
Amendments to the Social Security Act
Item 4 inserts new paragraph 8(8)(vc) into subsection 8(8). New paragraph 8(8)(vc) provides that a payment by the Thalidomide Australia Fixed Trust that is made to, or applied for the benefit of, a beneficiary of the Trust or is made to a person in respect of a beneficiary of the Trust is not income for the purposes of the Social Security Act.
Item 5 repeals paragraph 146(1)(b) of Schedule 1A to the Social Security Act and substitutes a new paragraph 146(1)(b). New paragraph 146(1)(b) provides that the transitional rules under clause 146 continue to apply to a person as long as they continuously receive one of the pensions listed in paragraph 146(1)(a) (even if the person transfers between a number of those pensions or otherwise stops receiving one and starts receiving another without a gap of a day or more between the receipt of either pension) or subclause 146(1A) applies.
Item 6 inserts new subclause 146(1A) into clause 146 of Schedule 1A of the Social Security Act. New subclause 146(1A) applies to a person if:
- (a)
- a payment by the Thalidomide Australia Fixed Trust:
- •
- is made to, or applied for the benefit of, the person or the person's partner as a beneficiary of the Trust; or
- •
- is made to the person or the person's partner in respect of a beneficiary of the Trust; and
- (b)
- subparagraph 146(1)(b)(i) applies to the person immediately before the payment is made; and
- (c)
- at the commencement of item 4 of Schedule 4 to this Act, the person receives a social security payment mentioned in paragraph 146(1)(a); and
- (d)
- after the commencement of item 4 , the person continues, without a break, to receive that social security payment or any of the other payments listed in paragraph 146(1)(a).
The purpose of this subclause is to ensure that any thalidomide survivors, who have received an annuity payment which has resulted in their social security payment being cancelled or suspended, will regain access to the transitional rules, provided they receive one of the listed payments and the other requirements of clause 146 apply.
Amendments to the Veterans' Entitlements Act
Item 7 inserts new paragraph 5H(8)(xb) into subsection 5H(8). New paragraph 5H(8)(xb) provides that a payment by the Thalidomide Australia Fixed Trust that is made to, or applied for the benefit of, a beneficiary of the Trust or is made to a person in respect of a beneficiary of the Trust is not income for the purposes of the Veterans' Entitlements Act.
Item 8 repeals paragraph 30(1)(b) of Schedule 5 to the Veterans' Entitlements Act and substitutes a new paragraph 30(1)(b). New paragraph 30(1)(b) provides that the transitional rules under clause 30 continue to apply to a person as long as they continuously receive one of the pensions listed in paragraph 30(1)(a) (even if the person transfers between a number of those pensions or otherwise stops receiving one and starts receiving another without a gap of a day or more between the receipt of either pension) or subclause 30(1A) applies.
Item 9 inserts new subclause 30(1A) into clause 30 of Schedule 5 to the Veterans' Entitlements Act. New subclause 30(1A) applies to a person if:
- (a)
- a payment by the Thalidomide Australia Fixed Trust:
- •
- is made to, or applied for the benefit of, the person or the person's partner as a beneficiary of the Trust; or
- •
- is made to the person or the person's partner in respect of a beneficiary of the Trust; and
- (b)
- subparagraph 30(1)(b)(i) applies to the person immediately before the payment is made; and
- (c)
- at the commencement of item 7 of Schedule 4 to this Act, the person receives a payment mentioned in paragraph 30(1)(a); and
- (d)
- after the commencement of item 7 , the person continues, without a break, to receive that payment or any of the other payments listed in paragraph 30(1)(a).
The purpose of this subclause is to ensure that any thalidomide survivors, who have received an annuity payment which has resulted in their social security or Veterans' Entitlements Act payment being cancelled or suspended, will regain access to the transitional rules, provided they receive one of the listed payments and the other requirements of clause 30 apply.
Part 2 - Amendments commencing on 1 July 2014
Amendments to the Income Tax Assessment Act
Item 10 repeals, with effect from 1 July 2014, the Commonwealth ex gratia thalidomide payment from the list of exempt income in section 11-15. It is not anticipated that ex gratia payments will be made from 1 July 2014, as they will only be made while the payments from the Trust are assessed as income for social security means test purposes.
Item 11 repeals, with effect from 1 July 2014, the exemption for the Commonwealth ex gratia thalidomide payments in section 51-30. The ex gratia payments are not anticipated to be made from 1 July 2014.