Revised Explanatory Memorandum
(Circulated by the authority of the Minister for Social Services, the Hon Kevin Andrews MP)
Schedule 4 - Period of Australian working life residence
Summary
From 1 January 2014, age pensioners and certain other pensioners with unlimited portability, will be required to have been Australian residents for 35 years during their working life (from age 16 to age pension age) to receive their full means-tested pension after 26 weeks' absence from Australia. The current requirement is 25 years. The change will also apply to all pensioners paid under social security agreements outside Australia, except those with Greece and New Zealand due to the specific terms of those agreements.
Pensioners who are living overseas immediately before 1 January 2014 will continue to be paid under the current 25-year rule, unless they return to Australia for longer than 26 weeks and leave again, when the new rules will start to apply to their pension calculation.
In an associated change, members of a couple paid outside Australia under a social security agreement will now have their pensions calculated on the basis of their own Australian working life residence, rather than their partners' Australian working life residence, as already applies to pensioners paid outside Australia under domestic portability rules in non-agreement countries. Existing pensioners outside Australia immediately before 1 January 2014 are exempt from this change unless they would be eligible for a higher rate of pension under the new rules.
Background
Strengthening Australian working life residence requirements
Domestically-qualified pensioners
Currently, some Australian pensions may continue to be paid to a pensioner who is overseas for an unlimited period. However, after 26 weeks, such pensions are paid at a rate which is a proportion of the domestic rate of pension where the pensioner has less than 25 years of Australian working life residence.
A person's working life is the period beginning when the person turns 16 and ending when the person reaches age pension age (as defined in the Social Security Act). A pensioner's period of Australian working life residence is the aggregate of periods during the person's working life during which the person has been an Australian resident.
Where the person has an Australian working life residence of 25 years or more, their pension is not reduced. However, if they have an Australian working life residence of less than 25 years, their pension is reduced to the percentage of the full means-tested rate of pension represented by dividing the number of years of their Australian working life residence by 25 years. For example, a person with 15 years of Australian working life residence will have their maximum payment rate reduced to 60 per cent - a percentage calculated on the basis of 15 years divided by 25 years.
This has been significantly more generous than the pension rules of other OECD countries, which generally require 35 to 45 years of pension contributions to receive a full pension. For example, France, Denmark, Japan and Canada require 40 years of pension contributions, and New Zealand has a 45-year working age residence requirement for payment overseas.
These amendments increase the required working life residence to receive a full means-tested rate of pension overseas from 25 to 35 years.
Pensions affected are age pension and, in some circumstances, disability support pension, wife pension and widow B pension.
The change will apply from 1 January 2014 to absences from Australia commencing on or after that day. In general, the change will not apply to pensioners who are already overseas on 1 January 2014, unless they subsequently return to Australia for a period of more than 26 weeks. Special arrangements will also be made for pensioners who reside overseas, but are temporarily in Australia on 1 January 2014. Provided such pensioners again leave Australia to return overseas before the expiry of 26 weeks from 1 January 2014, their pension rate will continue to be calculated by reference to a period of 25 years' working life residence.
Pensioners paid under international agreements
In some circumstances, an Australian pension is paid to a pensioner as a result of the operation of one of Australia's various social security agreements with other countries. In this case, a scheduled international social security agreement under the Social Security (International Agreements) Act 1999 (the Social Security International Agreements Act) may override the ordinary provisions of the social security law. For pensioners who are outside Australia, and receive an Australian social security payment solely because of the operation of a scheduled international agreement, where the rate of payment is to be determined under the agreement according to the law of Australia, Australian working life residence is also relevant. For a small number of Australia's international agreements, calculation of pension rate for a pensioner who is in Australia may also be subject to Australian working life residence. To align with the change from 25 to 35 years for domestically-qualified pensioners, the Social Security International Agreements Act is also amended to increase the base Australian working life residence from 25 to 35 years.
The change will similarly apply to absences or to the rate of pensions granted under an international agreement from 1 January 2014. However, if a pensioner is outside Australia at this date and is receiving a social security payment under a scheduled international agreement at a rate worked out taking into account the person's period of Australian working life residence, the amendments will not apply unless the person subsequently returns to Australia for a period of at least 26 weeks. Similarly, where such a pensioner resides overseas, but is temporarily in Australia on 1 January 2014, their pension rate will continue to be calculated by reference to a period of 25 years' working life residence, provided they again leave Australia to return overseas before the expiry of 26 weeks from 1 January 2014.
Paying pensioners qualified under international agreements based upon their own working life residence
In a related change, members of a couple paid outside Australia under a social security agreement will have their pensions calculated on the basis of their own Australian working life residence, rather than their partner's or former partner's Australian working life residence.
Currently, partnered age and disability support pensioners, or former members of age or disability support pension couples, paid under the Social Security International Agreements Act, are able to be paid according to the higher Australian working life residence duration of either partner. A person receiving, under the Social Security International Agreements Act, either carer payment in respect of their care for their partner or wife pension, is deemed to have a period of Australian working life residence that is equal to the Australian working life residence of their partner (even if that is less than their own). Basing these people's pensions upon their own Australian working life residence will mean that these pensioners are treated the same as pensioners paid outside Australia under domestic portability rules.
This change will also apply to periods of absence commencing on or after 1 January 2014, such that pensioners already overseas at that date will not be affected unless they return to Australia for at least 26 weeks. However, for some wife pensioners or carer payment recipients already overseas, the change may result in a higher rate of payment. If so, despite the fact they are already overseas, the amendments will apply to the calculation of their pensions from 1 January 2014.
Explanation of the changes
Amendments to the Social Security Act
Module C of the Pension Portability Rate Calculator at section 1221 provides for the calculation of the residence factor, as part of the process of generating a rate of pension for portable pensions. Point 1221-C1 provides that, if a person's period of Australian working life residence is 300 months (25 years) or more, the person's residence factor is 1. Item 2 omits the reference in this point to 300 months (25 years) and substitutes 420 months (35 years). Item 1 updates the heading to the point, to refer to 35 years, rather than 25 years.
Point 1221-C2 provides the formula for calculating the residence factor. The formula divides the person's period of Australian working life residence by 300 months (25 years) if the person's period of Australian working life residence is less than 25 years. Items 4 and 5 omit the references to 300 months (25 years) in this point and the related formula, and substitute references to 420 months (35 years). Item 3 updates the heading to the point, to refer to 35 years, rather than 25 years.
Item 6 provides for the application of these changes. Subitem 6(1) provides that the change from 25 to 35 years' Australian working life residence applies to periods of absence from Australia starting on or after 1 January 2014. However, the other subitems qualify this general case.
Subitem 6(2) deals with a situation where a person receiving a portable pension which may be subject to a proportional calculation based upon Australian working life residence, is in Australia immediately before 1 January 2014, although is not at that date residing in Australia. Provided such a person departs Australia before the end of the period of 26 weeks beginning on 1 January 2014, and remains in receipt of that pension at the point of departure, then the amendments do not apply (subject to subitem (5)).
Subitem 6(3) deals with a person who came within the situation covered by subitem (2), who again returns to Australia on or after 1 January 2014. Where such a person again leaves Australia within the period of 26 weeks of returning, and remains in receipt of that pension, then the amendments do not apply. However, this is subject to subitem (5).
Subitem 6(4) deals with the situation where a person receiving a portable pension which is subject to a proportional calculation based upon Australian working life residence, was outside Australia immediately before 1 January 2014. The amendments do not apply to such a person by virtue of subitem (1). If such a person later returns to Australia, but again leaves Australia within 26 weeks of returning having remained in receipt of their pension, then subitem (4) provides that the amendments will not apply to the later absence, subject to subitem (5).
The above items may prevent application of the amendments for successive returns to and departures from Australia. Subitem 6(5) then provides a general rule which will end this saving if the person at any time returns to Australia and their subsequent departure is not covered by any of subitems (1) to (4). In this case, the particular departure will be subject to the new rules applying a 35-year Australian working life residence. This subitem continues to apply the new 35-year rule to any subsequent departures from Australia despite the fact they may otherwise have been covered by one of the earlier subitems.
Amendments to the Social Security International Agreements Act
Strengthening Australian working life residence
Division 3 of Part 3 of the Social Security International Agreements Act (calculation of international agreement portability rates) provides for the calculation of the residence factor, as part of the process of generating a rate of pension for portable pensions paid because of the operation of scheduled international social security agreements. Section 23 provides that, if a person's period of Australian working life residence is 300 months (25 years) or more, the person's residence factor is 1. Item 10 omits the reference in this section to 300 months (25 years), and substitutes a reference to 420 months (35 years). Item 9 updates the heading to the section, to refer to 35 years, rather than 25 years.
Section 24 provides the formula for calculating the residence factor. The formula divides the person's period of Australian working life residence by 300 months (25 years) if the person's period of Australian working life residence is less than 25 years. Items 12 and 13 update the references to 300 months (25 years) in the section and the related formula, substituting references to 420 months (35 years). Item 11 updates the heading to the section, to refer to 35 years, rather than 25 years.
Item 14 provides for the application of these amendments for periods of absence from Australia. Subitem 14(1) provides that the change from 25 to 35 years' Australian working life residence applies to periods of absence from Australia starting on or after 1 January 2014. However, the other subitems qualify this general case.
Subitem 14(2) deals with a situation where a person receiving a social security payment under a scheduled international social security agreement is in Australia immediately before 1 January 2014, although is not at that time residing in Australia. Provided such a person departs Australia before the end of the period of 26 weeks beginning on 1 January 2014, and remains in receipt of that payment at the point of departure, then the increase in working life residence to 35 years does not apply. This is subject to exceptions dealt with in subitems (5) and (6).
Subitem 14(3) deals with a person who came within the situation covered by subitem (2), who again returns to Australia having previously departed on or after 1 January 2014. Where such a person again leaves Australia within the period of 26 weeks of returning, and remains in receipt of that pension, then the amendments do not apply. However, this is subject to subitem (5), and subitem (6) (dealt with under paying agreement pensioners based upon their own working life residence below).
Subitem 14(4) deals with the situation where a person receiving a portable pension which is subject to a proportional calculation based upon Australian working life residence at a rate worked out under Part 3 of the Social Security International Agreements Act was outside Australia immediately before 1 January 2014. The amendments do not apply to such a person by virtue of subitem (1). If such a person later returns to Australia, but again leaves Australia within 26 weeks of returning, having remained in receipt of their pension, then the amendments will not apply to the later absence, subject to subitems (5) and (6).
The above items may prevent application of the amendments for successive returns to and departures from Australia. Subitem 14(5) then provides a general rule which will end this saving if the person at any time returns to Australia and their subsequent departure is not covered by any of subitems (1) to (4). In this case, the particular departure will be subject to the new rules applying a 35-year Australian working life residence. This subitem continues to apply the new 35-year rule to any subsequent departures from Australia despite the fact they may have otherwise been covered by one of the earlier subitems on a previous occasion.
Subitem 14(7) provides an additional overarching case for people who claim a pension, generally from outside Australia, under a social security agreement and whose start date for payment is on or after 1 January 2014. Regardless of when such a person's absence from Australia began, the new rules applying a 35-year Australian working life residence apply.
Paying internationally qualified pensioners based upon their own working life residence
Division 2 of Part 3 of the Social Security International Agreements Act (Australian working life residence) establishes the rules for determining a person's period of Australian working life residence. Sections 18 to 20 and section 22 provide for the calculation of a person's Australian working life residence by reference to another person's Australian working life residence (generally the person's partner) for age pension, disability support pension, wife pension and carer payment. Item 8 repeals these sections. As a result, a person's Australian working life residence for the purposes of calculating the rate of these payments is calculated on an individual basis.
Item 7 makes a consequential change to section 16.
In alignment with the change to increase Australian working life residence requirements from 25 to 35 years, this change applies to periods of absence from Australia starting on or after 1 January 2014 (subitem 14(1)) and to persons whose start day for their social security payment under a scheduled international agreement is on or after 1 January 2014 (subitem 14(7)). However, subitem 14(6) provides an additional application for wife pension or carer payment recipients who are overseas immediately before 1 January 2014 where the amendments made by items 7 and 8 would result in a higher rate of pension. For these pensioners, the amendments will apply from 1 January 2014. Similarly, where the temporary return of a person provided for in subitem 14(2), 14(3) or 14(4) would otherwise apply the old rules, subitem (6) ensures that the amendments made by items 7 and 8 apply despite the return.