House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)

Exemptions for pensions and allowances

Overview

7.1 The Bill will amend the Income Tax Assessment Act 1936 (the Act) to:

(a)

exempt from income tax, in certain circumstances, particular bereavement payments paid under the Social Security Act 1991 (SSA91); and

(b)

provide for the same income tax treatment of the Mature Age Allowance and the Mature Age Partner Allowance paid under SSA91as is provided for the Age Pension and Wife Pension, respectively.

Summary of the amendments

Date of effect

7.2 Bereavement Payments: 1 July 1993 [Clause 34] .

7.3 Mature Age Allowance and Mature Age Partner Allowance: 20 March 1994 [Clause 40] .

Part A: Bereavement payments

Background to the legislation - general

7.4 Bereavement payments may be payable following the death of a social security pensioner, allowee or beneficiary or a person associated with such a person, for example, a partner. The purpose of the payments is to provide financial assistance over a period of fourteen weeks following the date of the death, referred to as the "bereavement period" .

7.5 At present, the income tax law provides for tax treatment of only certain bereavement payments relating to pensions. The following diagram shows the bereavement period and points relating to bereavement payments and their tax treatment. The significant points on the diagram are:

•

bereavement notification day - the day on which the Department of Social Security (DSS) becomes aware of the death.

•

first available bereavement adjustment payday (FABAP) - the first payday after the bereavement notification day for which it is practicable to terminate or adjust payments under SSA91.

7.6 The first available bereavement adjustment payday effectively divides the bereavement period into two periods:

•

bereavement rate continuation period (BRCP) in relation to which a bereavement lump sum may be payable; it ends before the FABAP unless the FABAP occurs on or after the last day of the bereavement period; where the latter occurs, BRCP coincides with the bereavement period.

•

bereavement lump sum period in relation to which a bereavement lump sum may be payable; it begins on the first available bereavement adjustment payday and ends on the last day of the bereavement period.

7.7 In broad terms, there are three modes of payment that the existing income tax treatment of bereavement payments comprehends:

•

continued payment , where, following the date of death, the surviving pensioner is entitled to a payment in respect of the partner on each of the paydays in the BRCP at the rate at which the deceased would have received payment if the death had not occurred; this payment is exempt from income tax.

•

bereavement lump sum payment , where a bereavement lump sum is payable to the surviving partner, taking into account the continued payments (if any) to which the surviving partner is entitled before the FABAP. All or proportion of a bereavement lump sum may be exempt from tax. Exempt Bereavement Calculator A (Calculator A) in section 24ABZB of the Act provides the steps to determine the "tax-free amount". Where the tax-free amount exceeds the lump sum payment the excess may be set off against other social security payments received during the bereavement period and which are assessable.

•

application of an "exclusion provision" , where the new single rate of pension received by the surviving partner exceeds or is equal to the combined rate of pension if the person had not died; in these circumstances no bereavement amount is payable. The difference between the post-bereavement payment and the amount that would have been received by the surviving partner if the person had not died is exempt. The rest of the payment is assessable.

7.8 The following notes set out the background to and explanations of the proposed amendments to the income tax law under two headings:

(1)

bereavement lump sum payments to certain carers; and

(2)

bereavement payments to recipients of Job Search Allowance, New Start Allowance, Sickness Allowance and Special Benefit.

(1) Bereavement lump sum payments to certain carers

Background to the legislation

7.9 This Part concerns only bereavement lump sum payments made under section 136A of the Social Security Act 1991 (SSA91). Subsection 24ABF(1) of the Income Tax Assessment Act 1936 already provides for the tax treatment of continued payment to the persons affected by section 136A. Exclusion provisions do not apply to persons eligible for lump sum payments under section 136A of SSA91.

7.10 A carer pension may be payable to a person who cares for a severely handicapped person. Part or whole of the bereavement payment may be payable to the carer as a lump sum. Calculator A determines the proportion of the lump sum to be exempt from income tax.

7.11 An amendment of the Social Security Act 1991 (SSA91) provides that, under section 236A of that Act, a bereavement lump sum is payable to a person where:

•

the person is receiving a carer's pension; and

•

the person is caring for another person who is not the person's partner; and

•

the person being cared for dies; and

•

immediately before the death of the person being cared for either:

(a)

the person being cared for was not a member of a couple; or

(b)

the person being cared for was a member of a couple and the partner of the person being cared for was not receiving a social security pension or benefit or a service pension.

7.12 Under existing income tax legislation, there is no provision for the tax treatment of this bereavement lump sum payment for carers.

Explanation of the amendments

7.13 The amendments will provide for a "tax-free amount" of a bereavement lump sum payment paid to a carer to be exempt from income tax [Clause 28] . This tax-free amount will be calculated by a new Exempt Bereavement Calculator AA (Calculator AA) formula.

7.14 Section 24ABZC will provide for new Calculator AA [Clause 33] . An example will illustrate the application of Calculator AA.

Example: Application of Calculator AA

7.15 Person A cared for person B, who was not a member of a couple. The law precluded B from receipt of a pension on residency grounds. B died and A immediately notified the Department of Social Security(DSS) of the death. There are 7 pensioner pay days in the bereavement lump sum period. Both A and B were below pension age.

7.16 The rate of carer pension paid to A is $280 per pensioner pay day. A receives bereavement lump sum payment of $1,960 ($280 x 7) payable under section 236A of the SSA91.

7.17 Calculate the tax-free amount as follows:

Step 1:

As both carer and caree were under pension age the amount of $1,960 would be exempt had the caree not died. The notional exempt amount for the taxpayer is $1,960.

Step 2:

Residency grounds preclude the caree from receipt of pension. As the caree receives no payments under the SSA91 the notional amount for the caree is nil.

Step 3:

Add the notional exempt amount for the taxpayer and the notional amount for the caree: $1,960 + 0 = $1,960. This is the tax-free amount.

7.18 The whole of the lump sum of $1,960 is exempt from income tax.

(2) Bereavement payments for allowees and beneficiaries

Background to the legislation

7.19 Bereavement payments may be payable in regard to the bereavement period of 14 weeks:

•

where a member of a couple dies; and

•

one or both were recipients of Job Search, New Start and Sickness Allowances or Special Benefit.

7.20 In broad terms, the surviving partner will receive the same amount as the couple would have received by way of allowance or benefit if the death had not occurred.

Qualification for bereavement payment to allowees or beneficiaries

7.21 An allowee or beneficiary must be a long-term social security recipient as defined in the SSA91 and a member of a couple whose partner dies. Additional criteria relate to the partner. Immediately before the death, the partner must have been a social security or service pensioner or a long-term social security recipient. A partner may qualify as a long-term social security recipient, for example, if his or her partner has the allowance or benefit increased because he or she is dependent. Both partners must be 21 years or over or have dependent children.

7.22 At present these bereavement payments are not exempt from income tax.

Explanation of the amendments

7.23 In the Act, separate sections deal with each of Job Search, Newstart and Sickness Allowance and Special Benefit. The sections determine how much of the normal payment of these allowances and benefit received is assessable.

7.24 The Bill proposes to amend these sections of the Act to provide for:

•

exemption from tax of continued payment , in certain circumstances, following the death of a partner;

•

the tax treatment of bereavement lump sum payments ;

•

treatment of payments to a surviving partner that are at a rate greater than or equal to the combined pre-bereavement rate ( exclusion provision ).

7.25 In broad terms, in regard to the bereavement period, it is the intention that the surviving partner should pay no more tax on the allowance or benefit than he or she would have paid if the death had not occurred. There are three sets of circumstances prior to the death that must be dealt with:

(1)

both partners were recipients of allowance or benefit and one dies; or

(2)

there was one recipient whose allowance or benefit was increased because of a "benefit-increase partner" (ie one who was fully dependent on the recipient) and the benefit-increase partner dies; or

(3)

there was one recipient whose allowance or benefit was increased because of a benefit-increase partner and the recipient dies.

Continued payment

(1) Both partners were recipients and one dies

7.26 The surviving partner is entitled, during the BRCP, to continued payment equal to that which the deceased partner would have received on each payday before the next available adjustment payday. Under the amendments such payments will be exempt from income tax.

7.27 At the same time, in addition, the surviving partner would continue to be entitled to the allowance or benefit at his or her pre-bereavement rate. This is not a bereavement payment. It will be assessable but subject to beneficiary rebate under section 160AAA of the Act.

7.28 The provisions relating to these continued payments where both partners had been recipients may be summarised as follows:

Example

7.29 A, a long-term Newstart allowee, receives a fortnightly payment of $260. His wife, B, also a long-term Newstart allowee, receives a fortnightly payment of $260. B dies. A does not notify DSS of the death until after the end of the bereavement period. The seven payments on behalf of B during the bereavement period will be exempt from tax. There will be no lump sum payment.

(2) Recipient's benefit or allowance increased because of benefit-increase partner who dies.

7.30 Where an allowee's payment is increased because of a dependent partner and the partner dies the recipient is entitled to continue to receive the same amount in regard to each payday in the BRCP. Any supplementary amounts, such as rent assistance, to which the recipient is entitled will be exempt from tax. As the full amount of the allowance or benefit was assessable before the death, this will also be so for continued payment. (Under section 160AAA of the Act, the recipient will be entitled to a beneficiary rebate to reduce or extinguish the tax on the payment in the usual way).

7.31 There is no need to make any specific provision in the Act to make the continued payment assessable. The sections in the SSA91 that provide for the continued payment in the BRCP are as follows:

Example

7.32 F, a Newstart allowee has his fortnightly payment of $260 increased to $511 because he supports his wife, G. G dies and F does not notify DSS of the death till after the end of the bereavement period. F receives $511 for 7 paydays in the bereavement period. The payments are assessable. (F would be entitled to a beneficiary rebate to reduce or extinguish the tax on the amount in the usual way).

(3) Recipient 's benefit or allowance increased because of benefit-increase partner and recipient dies.

7.33 Where the recipient dies, the benefit-increase partner will be entitled to continued payments at the pre-bereavement rate until the first available adjustment payday. Before the death the benefit-increase partner received no allowance or benefit and therefore paid no tax on it. Accordingly he or she will pay no tax on continued payment entitlement in regard to the BRCP. Again, any supplementary amounts, such as rent assistance, to which the recipient would have been entitled will be exempt from tax.

7.34 The provisions relating to these continued payments where the benefit-increase partner is the surviving partner are summarised as follows:

7.35 The following table summarises the situation in regard to continued payment for different circumstances:

7.36 When the partner allowance (see Part B of this chapter) comes in to effect on 29 September 1994 there will no longer be benefit-increase partners. The bereavement provisions in SSA91 applicable to these persons will no longer apply. It will not be necessary to amend the Act

Lump sum bereavement payments

7.37 The amendments provide that the part of a bereavement lump sum payment that does not exceed the tax-free amount is to be exempt from income tax [Clauses 29, 30, 31, 32] . The proposed Exempt Bereavement Calculator AB (Calculator AB) formula in proposed section 24ABZD will determine the tax-free amount relevant to:

•

the situation where both partners were recipients and one dies; and

•

the situation where the allowance or benefit was increased because of a benefit-increase partner and the partner dies. Calculator AB contains three steps [Clause 33] .

7.38 In Step 1 the only exempt payments will be supplementary amounts such as rent assistance.

7.39 Where both the partners received the allowance or benefit, in Step 2 the notional amount for the partner will be that which the deceased would have received if the deceased had not died. This will be exempt from income tax. Again, supplementary amounts will also be exempt.

7.40 Where the normal benefit or allowance paid to the recipient is increased because the partner is dependent on the taxpayer the notional amount for the partner determined in Step 2 will be:

•

where the benefit increase partner dies: nil; and

•

where the recipient dies: the amount the deceased would have received if the death had not occurred.

7.41 In Step 3, add the amounts determined by means of Steps 1 and 2 to arrive at the tax-free amount.

7.42 During the bereavement lump sum period, the surviving partner will be entitled to the benefit or allowance at the single rate. This will be assessable. It is not a bereavement payment but a normal payment of allowance or benefit and is subject to beneficiary rebate under section 160AAA of the Act.

7.43 The results of the operation of Exempt Bereavement Calculator AB are summarised in broad terms in the following table:

7.44 Where the allowance or benefit was increased because of a benefit-increase partner and the recipient dies the bereavement lump sum payment to which the surviving partner is entitled will be entirely exempt from income tax.

7.45 The provisions relating to bereavement lump sum payments in various circumstances may be summarised as follows:

7.46 The following examples show the tax treatment of the relevant bereavement payments.

Example (a): Lump sum bereavement amount - benefit increase partner dies - application of Calculator AB

7.47 X is a recipient of a Sickness Allowance and receives a fortnightly payment of $260. Because he supports a partner, Y, the payment increases by $251 to $511. X and Y are both aged over 21 and below pension age. Y dies and X notifies DSS of the death. There are 2 paydays for X in the BRCP. During the BRCP, X is entitled to the allowance at the same rate as if the partner had not died. He would be entitled to a beneficiary rebate under section 160AAA of the Act that would reduce or extinguish the tax on this amount. During the bereavement lump sum period he is entitled to normal Newstart at the single rate of $281 per fortnight. He receives a lump sum of $1,150 [($511 - $281) x 5]. Calculate the tax-free amount as follows:

Step1:

If Y had not died none of the payment that would have been received by X during the bereavement lump sum period would be exempt from income tax. The notional exempt amount for the taxpayer will be nil.

Step 2:

If Y had not died, the amount she derived during the bereavement lump sum period would be nil. This is the notional amount for the partner.

Step 3:

The tax-free amount is nil.

7.48 The taxpayer will be assessable on the bereavement payment of $1,150 but probably would be eligible for beneficiary rebate at the married rate. It would reduce or extinguish any tax on the lump sum and continued payment. (The payment of Newstart Allowance at the single rate during the bereavement lump sum period would be subject to the beneficiary rebate under section 160AAA of the Act).

Example (b): Lump sum bereavement amount - partner not a benefit-increase partner - application of Calculator AB

7.49 Mr Dash receives Newstart Allowance of $260 per fortnight. Mrs Dash, his partner, also receives Newstart Allowance of $260 per fortnight. Their ages are 40 and 38 respectively. Mr Dash dies and Mrs Dash immediately notifies DSS of the death. During the BRCP, Mrs Dash will be entitled to continued payment at the rate of $260 per fortnight in addition to her own payment of $260 per fortnight. The continued payment will be exempt and her own payment will be subject to beneficiary rebate under section 160AAA of the Act. During the bereavement lump sum period the allowance is payable at the single rate of $281 per fortnight. This amount will be assessable but subject to beneficiary rebate under section 160AAA of the Act. Mrs Dash receives a bereavement lump sum payment of $1,673[($520 - $281)x 7].

7.50 Calculator AB applies as follows.

Step 1:

The amount that would have been derived by Mrs Dash during the bereavement lump sum period was not exempt. The notional exempt amount for the taxpayer is nil.

Step 2:

If he had not died Mr Dash would have derived $1,820 ($260 x 7) during the bereavement lump sum period. This is the notional amount for the partner.

Step 3:

The tax-free amount is $1,820.

7.51 The lump sum payment of $1,673 is exempt and there is a further tax-free amount of $147 ($1820 - $1673) to set off against Mrs Dash's single rate allowance received during the bereavement period.

Example (c): Bereavement lump sum payment - including exempt supplementary amount - application of Calculator AB.

7.52 M is a recipient of a Sickness Allowance and receives a fortnightly payment of $260. Because he supports a partner, N, the payment increases to $511. M also receives rent assistance of $100 per fortnight. They are both aged over 21 and below pension age. N dies and M immediately notifies DSS of the death. Following the death, M will be entitled to the allowance at the single rate of $281 per fortnight increased by rent assistance, which is now $60 per fortnight. M receives a lump sum of $1,890 [$611 - $341) x 7].

7.53 Calculate the tax-free amount as follows:

Step 1:

During the bereavement lump sum period the taxpayer would have derived rent assistance of $700 ($100 x 7) which is exempt. This is the notional exempt amount for the taxpayer.

Step2:

If N had not died, the amount derived by N during the bereavement lump sum period would be nil. This is the notional amount for the partner.

Step 3:

The tax-free amount is $700.

7.54 The tax-free amount of $700 is exempt from income tax. The balance of the lump sum bereavement payment ($1,190) is assessable. The payments of $60 per week for rent assistance are exempt and the fortnightly payment of $281 is assessable. Again, however, M probably would be entitled to a beneficiary rebate that would reduce or extinguish the tax otherwise payable.

Example (d): Lump sum bereavement amount - recipient dies leaving a surviving benefit-increase partner

7.55 Mr Blank received Newstart Allowance which is increased to $511 per fortnight because he supports a partner. They are both aged over 21 and under pension age. The recipient dies. There are two paydays in the BRCP. During the BRCP, the surviving partner is entitled to two continued payments of $511 which are exempt from tax. During the bereavement lump sum period the surviving partner is entitled to normal Newstart Allowance at the single rate of $281 per fortnight. (This will be subject to beneficiary rebate under section 160AAA of the Act). She receives a lump sum of $1,150 [($511 -$281) x 5]. The lump sum will be exempt from tax.

Exclusion provision

7.56 The exclusion provisions apply where the new single rate of allowance or benefit equals or exceeds the married rate of allowance or benefit received if the person had not died. In these circumstances the survivor is entitled to the single rate of benefit or allowance and is not entitled to receive bereavement payments. The Act refers to this as an "exclusion provision".

7.57 The otherwise assessable amount that exceeds that which would have been assessable to the surviving pensioner if the person had not died, is exempt from tax for each of the 7 payments after the death. Section 24A of the Act contains references to the paragraphs of SSA91 relevant in relation to exclusion provision dealt with in this Part [Subclause 27] and which are summarised in the following table:

7.58 The amendments will treat as assessable that amount of the allowance or benefit that would have been assessable if the partner had not died [Clauses 29, 30, 31, 32].

7.59 The exclusion provisions in the Act relation to allowances and benefit dealt with in this Part will be as tabulated below.

Example (a): Application of exclusion provision - no supplementary amounts

7.60 A couple each received $120 Newstart Allowance per payment, all of which was assessable. Following the death of one member of the couple, the surviving member is entitled, as an unmarried person to a single adult allowance of $281. However, $161 is exempt ($281 - $120). This exemption applies only for seven allowance payments following the death so that $1,127($161x7) is exempt from tax. The surviving partner probably would also be eligible for beneficiary rebate.

Example (b): Application of exclusion provision - with supplementary payments

7.61 The members of a couple each receive, per fortnight, $120 assessable Newstart Allowance plus $30 rent assistance. Their combined fortnightly income is therefore $300. Following the death of one of the couple the surviving partner is entitled, as an unmarried person, to an assessable Newstart payment of $280 plus $33 rent assistance per fortnight. The total fortnightly payment to the survivor is $313. As this exceeds the pre-bereavement income level of the couple, the surviving partner would not be eligible for bereavement payments.

7.62 Of the basic fortnightly allowance payable in the bereavement period, $160 is exempt ($280 - $120). The $33 per week in rent assistance is also exempt. For each of the 7 payments after the death, the surviving partner receives $313, of which $193 is exempt and $120 is not exempt. Over the bereavement period, payments of $1,351 ($193 x 7) are exempt and $840 ($120 x 7) not exempt. The surviving partner would also be eligible for beneficiary rebate at the single rate.

Non-bereavement payments in bereavement lump sum period

7.63 Reference has been made to non-bereavement payments during the bereavement period. Some of these payments can affect the level of bereavement lump sum payments when applicable to the bereavement lump sum period. For the sake of clarity, features of the non-bereavement payments for surviving partners are set out in Table 9.

Part B: Mature Age Allowance and Mature Age Partner Allowance

Background to the legislation

7.64 In the 1993-94 Budget the Government announced the introduction of the Mature Age Allowance (MAA) to allow persons aged 60 to age pension age who have been unemployed, and in receipt of income support, for 12 months or more to transfer to a more generous allowance where there are no job-seeking activity requirements.

7.65 The Government decided to also provide a measure similar to the Wife Pension - the Mature Age Partner Allowance (MAPA) - which would be payable to the partner of a recipient of the MAA.

7.66 Amendments to the SSA91 will provide for the MAA and the MAPA.

Explanation of the amendments

7.67 The Bill proposes income tax treatment of the MAA and MAPA, similar to the tax treatment of the age pension and the wife pension respectively.

Mature Age Allowance (MAA)

7.68 The basic MAA payment will be taxable [Clause 39] . However, a proposed amendment of the Income Tax Regulations will extend the pensioner rebate to recipients of the MAA.

7.69 Supplementary amounts such as rent assistance paid to recipients of MAA will be exempt from tax [Clause 39] .

7.70 The Bill proposes to extend the tax treatment of pensioner bereavement payments to recipients of MAA. The continued payments relating to the BRCP will be exempt from income tax in the same way as for the age pension [Clause 39] .

7.71 The use of the Exempt Bereavement Payment Calculator A formula in section 24ABZB of the Principal Act will determine the tax-free amount relating to any bereavement lump sum payment [Clause 39] .

7.72 In the bereavement period, the survivor's income from social security pension, allowance or benefit may be greater than or equal to the combined income of the couple from such sources immediately before the death. In such circumstances SSA91 provides that there will be no bereavement payment (Operation of exclusion provision). The relevant reference in the SSA91 is subparagraph 660XKA(1)(e) [Subclause 36(b)] .

7.73 However, any excess of such income received during the bereavement period over the amount that would have been received if the death had not occurred will be exempt from income tax [Clause 39] .

Example

7.74 A is a recipient of the Mature Age Allowance and his spouse, B, a recipient of the Mature Age Partner Allowance. They each receive allowance payments of $260 per fortnight. A dies and the first available bereavement payday is the second payday after the death. In regard to the bereavement rate continuation period B is entitled to a bereavement payment of $260 that is exempt from income tax and a payment at a single rate of, say, $285 that is taxable. However, this amount is subject to the pensioner rebate, which would extinguish the tax on it.

7.75 B receives a Bereavement lump sum of $1,410 and continues to receive $285 each following payday. The tax-free amount is determined using Exempt Bereavement Payment Calculator A:

Step 1.

The relevant pension paydays are 6.

Step 2.

The pension payday exempt notional taxpayer amount is $260.

Step 3.

The exempt notional taxpayer amount is $1,560.

Step 4.

The pension payday notional partner amount is $260.

Step 5.

The notional partner amount is $1,560.

Step 6.

The tax-free amount is $3,120.

7.76 As the lump sum payment is only $1,410 the excess of the tax-free amount ($1,710) will be set off against other social security payments received by B in the bereavement period, which as a single pensioner during the bereavement period amount to $1,995. The taxpayer will be taxable therefore on the remainder of $285 but will be eligible for the pensioner rebate that will offset the tax on this amount.

Mature Age Partner Allowance (MAPA)

7.77 MAPA will be payable to the partner of a mature age allowee. Where the recipient is above pension age, supplementary amounts, such as rent assistance, will be exempt and the balance will be assessable for income tax. If the recipient is below pension age the entire payment is exempt [Clause 39] . The age of the recipient's partner does not affect the taxability of the payment.

7.78 The use of the Exempt Bereavement Payment Calculator A in section 24ABZB of the Principal Act will determine the tax-free amount of any bereavement lump sum payment that will be exempt from tax. The balance of the lump sum payment will not be exempt [Clause 39] .

7.79 As with the wife pension, exclusion provisions do not apply to the MAPA.

7.80 The following table summarises the tax treatment of MAA and MAPA: