Senate

Explanatory Memorandum

Circulated By the Authority of the Minister for Families, Housing, Community Services and Indigenous Affairs, the Hon Jenny Macklin MP

Schedule 6 - Pension reform measures

Summary

This Schedule makes amendments to address two minor anomalies arising from the pension reform legislation enacted in 2009.

The amendments ensure that leave payments taken as part of an ongoing employment relationship will be treated in the same way as the income that would have been earned if the employee had not taken leave.

The amendments also ensure that members of a couple who receive separate income support payments from Centrelink and the Department of Veterans' Affairs will be able to benefit from the work bonus rules in the same way as a couple benefits from the work bonus rules where they receive their income support payment from the same agency.

Background

These amendments are to clarify, and provide certainty around the application of, certain provisions inserted by the Social Security and Other Legislation Amendment (Pension Reform and Other 2009 Budget Measures) Act 2009 (the Pension Reform Act) and the Veterans' Affairs and Other Legislation Amendment (Pension Reform) Act 2009 .

The current definitions of employment income in subsection 8(1C) of the Social Security Act and subsection 46AB(1) of the Veterans' Entitlements Act specifically exclude leave payments received by an individual. Employment income and leave payments are treated differently under the various rate calculators in the Social Security Act and the Veterans' Entitlements Act.

Since the commencement of clause 146 in Schedule 1A to the Social Security Act (inserted by the Pension Reform Act), there has been uncertainty in the treatment of leave payments. This has resulted in possible unintended consequences for people whose rates of pension are calculated in accordance with clause 146.

A similar problem does not arise under the Veterans' Entitlements Act as that Act does not include the same daily employment income attribution rules as those located in Division 1AA of Part 3.10 of Chapter 3 of the Social Security Act.

Under the social security law, it is possible that a person, during a period of leave such as annual leave, will, because of the different income attribution rules applying to employment income as opposed to leave payments, no longer satisfy the requirements of the transitional arrangements. This may happen, for example, where leave income is attributed to a single day in an instalment period and not spread out over the entire instalment period under section 1073B.

Because the beneficial transitional arrangements operate such that, once a person loses access to them, they cannot ever have access to them again, it is possible for the person, once they return from leave, to receive a lower rate of payment than they were receiving before they went on leave. This may be the case even if, during their leave period, the amount that was paid to them as leave payments was equivalent to the amount that they would otherwise have received as employment income.

It is also not clear that leave payments can be counted towards the income concession amount calculated under section 1073AA of the Social Security Act or section 46AA of the Veterans' Entitlements Act. The income concession amount under section 1073AA or section 46AA is only worked out with respect to employment income. Because the current definition specifically excludes leave payments (as defined), a person can have their payment rate reduced during a period of leave even if their leave payments are equivalent to the employment income they would have otherwise received because the income concession provisions in section 1073AA or section 46AA do not apply to leave payments.

Currently, section 1073AA of the Social Security Act provides for people over age pension age to benefit from an income concession amount, which is an amount of employment income that is disregarded for the purposes of the ordinary income test used in determining their rate of pension. There is an equivalent provision (section 46AA) in the Veterans' Entitlements Act to provide that recipients of payments under that Act also benefit from an income concession amount if they have employment income.

The amendments in this Schedule correct these anomalies in relation to leave payments so that people get the beneficial effect of the provisions that they were intended to have.

Similarly, the work bonus amendments will clarify that an eligible couple, where one member is in receipt of a social security pension or veterans' entitlements income support pension and the other is in receipt of a payment under the Veterans' Entitlements Act or a social security pension, will be treated the same as a couple where both members receive a social security pension or a veterans' entitlements income support pension.

Currently, a member of a couple receiving a relevant social security payment whose partner is receiving a veterans' payment will not receive the full benefit of the social security pension reform work bonus amendments.

The amendments made by this Schedule commence on the day of Royal Assent.

Explanation of the changes

Amendments to the Social Security Act

Item 1 repeals paragraph 8(1A)(b) and substitutes a new paragraph 8(1A)(b) that will ensure leave payments made to employees who have an ongoing employment arrangement with their employer are included in the definition of employment income.

Item 2 repeals paragraph 8(1A)(e) and substitutes a new paragraph 8(1A)(e) that confirms leave payments made to a person when their employment ends are not included in the definition of employment income.

Item 3 omits the reference to paragraph (1A)(e) in subsection 8(1C) and inserts a reference to subsection (1A) to reflect the changes to the definition of employment income made by items 1 and 2 .

Item 4 omits the words 'sick leave' and substitutes the words 'personal/carer's leave' into the definition of leave payment in subsection 8(1C). This item is intended to reflect current terminology and does not mean that a payment of sick leave is not to be counted as a leave payment for the purposes of the social security law. Sick leave would fall within the definition of personal/carer's leave for the purposes of this provision.

Item 5 repeals subsection 1073AA(6) and substitutes a new subsection 1073AA(6) to clarify that the income concession amount is to be applied to the employment income earned, derived or received by each member of the couple before the ordinary income test in the rate calculators is applied.

Item 6 amends the first example at the end of subsection 1073AA(6) by adding the words 'and subsection (1) applies to David and Amy' after the word 'couple'. This amendment confirms that, for the work bonus to apply to both members of a couple, they both need to have reached age pension age and be in receipt of either age pension, wife pension, disability support pension, carer payment, disability wage supplement, bereavement allowance or widow B pension.

Item 7 amends the second example at the end of subsection 1073AA(6) by adding the words 'and subsection (1) applies to Ian and Simone' after the word 'couple'. This amendment confirms that, for the work bonus to apply to both members of a couple, they both need to have reached age pension age and be in receipt of either age pension, wife pension, disability support pension, carer payment, disability wage supplement, bereavement allowance or widow B pension.

Item 8 inserts two new subsections at the end of section 1073AA.

New subsection 1073AA(7) is inserted to avoid confusion about how section 1073AA interacts with the rate calculators and, in particular, the modules relating to a couples' ordinary income, for example, Module E of Rate Calculator A.

New subsection 1073AA(8) is inserted to clarify that, where one member of a couple has the benefit of an income concession amount under the Veterans' Entitlements Act, then that income concession amount is to be taken into consideration when determining that couple's ordinary income under point 1064-E2 or 1066-E2.

Amendments to the Veterans' Entitlements Act

Item 9 repeals subsection 46AA(5) and substitutes a new subsection 46AA(5) to clarify that the income concession amount is to be applied to the employment income earned, derived or received by each member of the couple before the ordinary/adjusted income test in point SCH6-E3 of the rate calculator is applied.

Item 10 amends the first example at the end of subsection 46AA(5) by adding the words 'and subsection (1) applies to David and Amy' after the word 'couple'. This amendment confirms that, for the work bonus to apply to both members of a couple, they both need to have reached qualifying age and be in receipt of either a service pension or an income support supplement.

Item 11 amends the second example at the end of subsection 46AA(5) by adding the words 'and subsection (1) applies to Ian and Simone' after the word 'couple'. This amendment confirms that, for the work bonus to apply to both members of a couple, they both need to have reached qualifying age and be in receipt of either a service pension or an income support supplement.

Item 12 inserts a new subsection at the end of section 46AA. New subsection 46AA(5A) is inserted to avoid confusion about how section 46AA interacts with the rate calculator and. in particular, the module relating to a couples' ordinary/adjusted income, Module E of the Rate Calculator.

New subsection 46AA(5A) provides that, where one member of a couple has the benefit of an income concession amount under the Social Security Act, then that income concession amount is to be taken into consideration when determining that couple's ordinary income under point SCH6-E3.

Items 13 to 16 amend section 46AB. Section 46AB provides for a definition of the term 'employment income' for the purposes of the work bonus income concession applied under section 46AA.

Item 13 repeals and substitutes paragraph 46AB(1)(b) to provide that the 'ordinary income' of a person will include 'employment income' that is earned, derived or received, or that is taken to have been earned, derived or received, by the person for work undertaken as an employee in an employer/employee relationship, and that income is to include but is not to be limited to:

•

salary, wages, commissions and employment-related fringe benefits that have been earned, derived or received or have been taken to have been earned, derived or received; and

•

leave payments to the person that have been received in relation to a continuing employer/employee relationship.

Item 14 repeals and substitutes paragraph 46AB(1)(e), which provides that employment income will not include a leave payment made to a person who was not employed on a continuing basis.

Item 15 is a consequential amendment to subsection 46AB(2) to replace a reference to the repealed paragraph 46AB(1)(e) with a reference to subsection (1), reflecting the changes to the definition of employment income made by items 13 and 14 .

Item 16 is a technical amendment to paragraph 46AB(2)(a) to replace a reference to 'sick leave' with the more contemporary term 'personal/carer's leave'.

This item does not mean that a payment of sick leave is not to be counted as a leave payment for the purposes of the Veterans' Entitlements Act. Payments in respect of sick leave would fall within the definition of personal/carer's leave for the purposes of this provision.