House of Representatives

Revised Explanatory Memorandum

(Circulated by the authority of the Minister for Social Services, the Hon Kevin Andrews MP)

Schedule 11 - Extending the deeming rules to account-based income streams

Summary

This Schedule will align the income test treatment of account-based superannuation income streams, for products assessed from 1 January 2015, with the deemed income rules applying to other financial assets. Account-based income streams held by income support recipients immediately before 1 January 2015 will continue to be assessed under the previous rules unless recipients choose to change to a product that is assessed under the new rules.

Background

Generally, to calculate the income assessed in relation to an income support recipient's financial investments, deeming rates are applied to the total market value of their financial investments. That is, financial investments are assumed to be earning a certain rate of income, regardless of what they actually earn. The policy rationale is that, by treating all financial investments in the same way, the deeming rules encourage people to choose investments on their merit rather than on the effect the investment income may have on the person's income support entitlement.

However, under the current legislation, Division 1C of part 3.10 of the Social Security Act and Division 4 of Part IIIB of the Veterans' Entitlements Act set out different rules for assessing income in relation to certain income streams. Those income streams provided for in Division 1C and Division 4 are not subject to income deeming.

This measure extends the income deeming provisions to any asset-tested income stream (long term) that is an account-based pension, or an equivalent annuity product. The extension of the deeming rules that currently apply to financial assets, such as bank accounts, shares and managed funds, will ensure that people with similar financial assets are treated consistently under the income support system.

The amendments made by this Schedule commence on 1 January 2015.

Explanation of the changes

Part 1 - Amendments

Amendments to the Social Security Act

Items 3 and 4 broaden the definition of financial investment by inserting new paragraphs 9(1)(i) and (j) to include an asset-tested income stream (long term) that is an account-based pension, and an asset-tested income stream (long term) that is an annuity provided under a contract that meets the requirements determined in an instrument under new subsection 9(1EA). Account-based pension is defined in Part 1.03 of the Superannuation Industry (Supervision) Regulations 1994. Annuity is defined in section 10 of the Superannuation Industry (Supervision) Act 1993.

Item 5 repeals notes 4 and 5 to subsection 9(1C). Subsection 9(1C) defines what are not managed investments for the purposes of the Social Security Act.

The repealed notes referred to the treatment of income streams under Subdivision B of Division 1C of Part 3.10 prior to the amendments made by this Schedule.

Item 6 inserts new subsection 9(1EA), which empowers the Minister to determine the requirements to be met for an annuity to be considered a financial investment under new paragraph 9(1)(j), inserted by item 4 above, for the purposes of the social security law. This power may only be exercised by the making of a legislative instrument in accordance with the Legislative Instruments Act 2003. It is intended to apply only to annuities equivalent to account-based pensions, such as products covered by Regulation 1.05(11A) of the Superannuation Industry (Supervision) Regulations 1994.

Items 24 and 25 substitute new headings to Division 1B and 1C of Part 3.10, to indicate clearly the application of each Division to the determination of income from financial assets and income streams.

Items 26 and 27 limit the scope of Subdivision B of Division 1C of Part 3.10, which sets out the rules for assessing income from income streams that are not family law affected income streams, by inserting new subsection 1097A(2). The new subsection states that Subdivision B of Division 1C does not apply to an asset-tested income stream (long term) that is an account-based pension, and an asset-tested income stream (long term) that is an annuity provided under a contract that meets the requirements determined in an instrument under new subsection 9(1EA).

Note 1 to new subsection 1097A(2) provides that an income stream of the type referred to in the subsection will be subject to treatment under Division 1B.

Note 2 to new subsection 1097A(2) provides a signpost to the application provisions in item 48 of Part 2 of this Schedule, which preserve the rule in Subdivision B in certain situations.

Item 28 substitutes new paragraph 1099DAA(1)(b) , which removed the reference to income streams that are a pension or an annuity that meets the requirements determined by the Minister. This is because these products are now subject to the general rules for assessing income that apply to financial investments.

Items 29 and 30 limit the scope of Subdivision C of Division 1C of Part 3.10, which sets out the rules for assessing income from family law affected income streams, by inserting new subsection 1099DA(2). The new subsection states that Subdivision C of Division 1C does not apply to an asset-tested income stream (long term) that is an account-based pension, and an asset-tested income stream (long term) that is an annuity provided under a contract that meets the requirements determined in an instrument under new subsection 9(1EA).

Note 1 to new subsection 1099DA(2) provides that an income stream of the type referred to in the subsection will be subject to treatment under Division 1B.

Note 2 to new subsection 1099DA(2) provides a signpost to the application provisions in item 48 of Part 2 of this Schedule, which preserve the rule in Subdivision B in certain situations.

The combined effect of items 3 to 6 and 24 to 30 is that an asset-tested income stream (long term) that is an account-based pension or annuity will no longer be subject to the rules for assessing income that apply to most income streams. Instead, by including these asset-tested income streams (long term) in the definition of financial investment, they will be subject to the general rules for assessing income that apply to financial investments.

Items 1, 2, 7 to 23, and 31 make consequential amendments to parts of the Social Security Act that refer to provisions amended by this Part.

Amendments to the Veterans' Entitlements Act

Items 32 and 33 amend notes 1 and 3 respectively to the definitions of income and ordinary income in subsection 5H(1).

The consequential amendments revise the references to the provisions of Part IIIB which may impact on the determination of the income and the ordinary income of a person.

Items 34 and 35 broaden the definition of financial investment by inserting new paragraphs 5J(1)(i) and (j) to include an asset-tested income stream (long term) that is an account-based pension, and an asset-tested income stream (long term) that is an annuity provided under a contract that meets the requirements determined in an instrument made under new subsection 5J(1G).

The definition of account-based pension is located in Part 1.03 of the Superannuation Industry (Supervision) Regulations 1994, and the definition of annuity is in section 10 of the Superannuation Industry (Supervision) Act 1993.

Item 36 repeals notes 4 and 5 to subsection 5J(1C). Subsection 5J(1C) defines what are not managed investments for the purposes of the Veterans' Entitlements Act.

The repealed notes referred to the treatment of income streams under Subdivision B of Division 4 prior to the amendments made by this Schedule.

Item 37 inserts new subsection 5J(1G), which empowers the Minister to determine the requirements to be met for an annuity to be considered a financial investment under new paragraph 5J(1)(j), inserted by item 35 above, for the purposes of the Veterans' Entitlements Act. This power may only be exercised by the making of a legislative instrument in accordance with the Legislative Instruments Act 2003. It is intended to apply only to annuities equivalent to account-based pensions - for example, products covered by Regulation 1.05(11A) of the Superannuation Industry (Supervision) Regulations 1994.

Item 38 amends note 2 to section 46, revising the references to the provisions of Part IIIB which may impact on the determination of the ordinary income of a person.

Items 39 and 40 substitute new headings to Divisions 3 and 4 of Part IIIB, to indicate clearly the application of each Division to the determination of income from financial assets and income streams.

Items 41 and 42 limit the scope of Subdivision B of Division 4 of Part IIIB, which sets out the rules for assessing income from income streams that are not family law affected income streams, by inserting new subsection 46SA(2). The new subsection states that Subdivision B of Division 4 does not apply to an asset-tested income stream (long term) that is an account-based pension, and an asset-tested income stream (long term) that is an annuity provided under a contract that meets the requirements determined in an instrument made under new subsection 5J(1G).

Note 1 to new subsection 46SA(2) provides that an income stream of the type referred to in the subsection will be subject to treatment under Division 3.

Note 2 to new subsection 46SA(2) provides a signpost to the application provisions in item 48 of Part 2 of this Schedule, which preserve the rule in Subdivision B of Division 4 in certain situations.

Item 43 substitutes new paragraph 46YA(1)(b), removing the reference to an income stream that is a pension or an annuity that meets the requirements determined by the Minister. This is because these products are now subject to the general rules for assessing income applying to financial investments.

Items 44 and 45 limit the scope of Subdivision C of Division 4 of Part IIIB, which sets out the rules for assessing income from family law affected income streams, by inserting new subsection 46Z(2). The new subsection states that Subdivision C of Division 4 does not apply to an asset-tested income stream (long term) that is an account-based pension, and an asset-tested income stream (long term) that is an annuity provided under a contract that meets the requirements determined in an instrument made under new subsection 5J(1G).

Note 1 to new subsection 46Z(2) provides that an income stream of the type referred to in the subsection will be subject to treatment under Division 3.

Note 2 to new subsection 46Z(2) provides a signpost to the application provisions in item 48 of Part 2 of this Schedule, which preserve the rule in Subdivision C of Division 4 in certain situations

The combined effect of items 34 to 37 and 41 to 45 is that an asset-tested income stream (long term) that is an account-based pension or annuity will no longer be subject to the rules for assessing income that apply to most income streams. Instead, by including these asset-tested income streams (long term) in the definition of financial investment, they will be subject to the general rules for assessing income that apply to financial investments.

Items 46 and 47 amend paragraphs (c) and (d) of note 2 to point SCH6-E2 of the Rate Calculator in Schedule 6 to the Veterans' Entitlements Act.

The consequential amendments revise the references to the provisions of Part IIIB which may impact on the determination of the ordinary income of a person.

Part 2 - Application provisions

Item 48 contains four subitems. Subitem 48(1) provides that the amendments made by Part 1 apply in relation to working out the ordinary income of a person in relation to days occurring on or after 1 January 2015.

Subitems 48(2) and (3) preserve the existing rules for assessing income from certain income streams in existence immediately before 1 January 2015.

Subitem 48(2) provides that the amendments made by Part 1 do not apply to a person and an income stream if the following criteria are met:

(a)

the person was receiving an income support payment immediately before 1 January 2015;

(b)

either of the following was being provided to the person immediately before 1 January 2015:

(i)

an asset-tested income stream (long term) that is an account-based pension; or

(ii)

an asset-tested income stream (long term), that is an annuity provided under a contract that meets the standards determined in an instrument under subparagraph 1099DAA(1)(b)(ii) of the Social Security Act;

(c)

the person has been continuously receiving an income support payment since 1 January 2015; and

(d)

that income stream has continued to be provided to the person since 1 January 2015.

The person in subitem (2) is referred to as the primary beneficiary for the purposes of subitem (3).

It is intended that, if a person's income support payment ceases to be payable and, on a later date, the same or another income support payment becomes payable to the person, that person would be subject to the amendments made by Part 1 from the day that the income support payment ceases to be payable to that person.

Subitem 48(3) provides that the amendments made by Part 1 do not apply in relation to a reversionary beneficiary and an income stream if the following criteria are met:

(a)

the primary beneficiary dies during a time while the amendments made by Part 1 do not apply because of subitem (2);

(b)

the income stream referred to in subitem (2) reverts to the reversionary beneficiary on the primary beneficiary's death;

(c)

at the time of that reversion, the reversionary beneficiary is receiving an income support payment;

(d)

the reversionary beneficiary has been continuously receiving an income support payment since the time of that reversion; and

(e)

that income stream has been provided to the reversionary beneficiary since the time of that reversion.

Subitem 48(4) defines the term income support payment for the purposes of this application provision.