Senate

Replacement Explanatory Memorandum

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

Chapter 1 Disability Support Pension, Special Needs Disability Support Pension, Bereavement Payments, and Textile, Clothing and Footwear Special Allowance

This Chapter is divided into three Parts. Each Part explains the amendments proposed in Division 2, 3 and 5 in Part 2 of the Bill.

Part A: Amendments relating to disability support pension and special needs disability support pension (Division 2)

Summary of proposed amendments

This Bill proposes to amend the Income Tax Assessment Act 1936 (Principal Act) to restore the provision whereby disability support pension and special needs disability support pension derived by persons above pension age are taxable. The Bill also proposes to restore provisions to apply to the tax treatment of related bereavement payments.

Background to the legislation

Disability support pension

Generally, when they attain pension age, disability support (formerly invalid) pensioners go on to the age pension and their pension becomes taxable but subject to a pensioner rebate. The rebate is sufficient to free a full-rate pensioner from tax on pension income and a certain amount of non-pension income. However, some recipients of disability support pension (DSP) who are unable to qualify for age pension because, for example, of residential status, remain on the DSP after they have attained pension age. Under the provisions of section 23AD of the Principal Act, DSP paid to a person of pension age was taxable but subject to a tax rebate. In 1991, section 23AD was repealed and replaced by Division 1AA.

When the Social Security Act 1947 was rewritten as the Social Security Act 1991 (SSA91) the new Act inadvertently did not provide for persons to continue to receive invalid pension after attain pension age. This situation was remedied in the Social Security (Disability and Sickness Support) Amendment Act 1991 which repealed the then existing Part 2.3 of SSA91 (invalid pension) and replaced it with a new Part 2.3.

Because the SSA91 did not provide for continued payment of the DSP to persons of pension age, section 23AD of the Principal Act was translated into Division 1AA without provision for taxing the payment. It is therefore necessary to:

(a)

provide that DSP derived by persons of pension age be taxable; and

(b)

restrict existing tax provisions relating to DSP to persons under pension age.

Bereavement payments are derived by the surviving member of a pensioner couple where the other partner dies. Where there is no partner the payment may be made, at the discretion of the Secretary of the Department of Social Security, to another person. Where the surviving member of a couple dies before he or she derives the bereavement payment related to the death of the partner, the payment may be made to a third person. In certain circumstances the payment may be made in a lump sum, and in such an instance, the exemption from tax of a proportion of the lump sum is determined by an Exempt Bereavement Payment Calculator A (Calculator A) in section 24ABZB of the Principal Act. Calculator A takes into account the tax status of payments the couple would have derived if the deceased had not died.

Subsection 24ABC(5) of the Principal Act provides that a taxpayer is excluded from receiving bereavement payment if the amount of the taxpayer's pension following a partner's death is greater than what the bereavement payment would be. For example, the husband is employed and, because of his income, the pension entitlement for he and his partner is $100 each. Suppose that, following the death of the husband, the surviving partner is entitled to a single-rate pension of $300. This sum would normally be assessable. However, a further provision entitles her to an exemption from income tax on the difference between the amount of her pre-death pension ($100) and her post-death pension amount ($300). This exemption applies for 7 pension paydays after the date of death. In addition, supplementary amounts, such as payments for rent assistance, are exempt.

The amendments insert provisions, relating to bereavement payments in regard to persons of pension age who derive DSP, which parallel the provisions for age pensioners.

Special Needs Disability Support Pension

Section 23AD of the Principal Act also provided that payments of Special Needs Disability Support Pension to persons over the pension age were taxable. However, when section 23AD was rewritten as Division 1AA, no provision was made for payments of this pension to persons of pension age to be taxable. It is therefore necessary to:

(a)

provide that special needs DSP derived by persons of pension age is taxable; and

(b)

restrict existing tax provisions relating to special needs DSP to persons under pension age.

The amendments insert provisions, relating to bereavement payments in regard to persons of pension age who derive special needs DSP, which parallel the provisions for special needs age pensioners.

Explanation of the proposed amendments

The Bill will amend Division 1AA to:

(a)

ensure that the existing provisions relating to taxability of disability support pension and related bereavement payments apply only to payments to a person who is under pension age [Clause 6 - new subsection 24ABD(1A)]

Both categories of disability support pension at pension age or over will be entitled to the tax rebate to which other recipients of taxable pensions are entitled under section 160AAA of the Principal Act.

Commencement date

The amendments apply to receipt of pension on or after 1 July 1991 [Clause 10].

Clauses involved in the proposed amendments

Clause 4(a): adds new section 24ABDAA to the index of social security payments covered in Subdivision B of Division 1AA of the Principal Act. This section, which is entered in the index against "disability support pension", is that which relates to pension age recipients.

Clause 4(b): adds new section 24ABRA to the index of social security payments covered in Subdivision B of Division 1AA of the Principal Act. This section, which is entered in the index against "special needs disability support pension", is that which relates to pension age recipients.

Clause 5(a): inserts the term "disability support pension" in the table in subsection 24ABA(1) which sets out the taxable pensions and references to the relevant supplementary amounts. Provisions elsewhere in Division 1AA of the Principal Act make these supplementary amounts exempt.

Clause 5(b): inserts the term "special needs disability support pension" in the table in subsection 24ABA(1) which sets out the taxable pensions and references to relevant supplementary amounts. Provisions elsewhere in Division 1AA of the Principal Act make these supplementary amounts exempt.

Clause 6: inserts new subsection 24ABD(1A) to ensure that section 24ABD applies only to payments of DSP to a person who is under pension age.

Clause 7: inserts a new section 24ABDAA which details the tax treatment of payments of DSP and related bereavement payments to a person who is of pension age.

Clause 8: inserts new subsection 24ABR(1A) to ensure that section 24ABR applies only to payments of special needs DSP to a person who is under pension age.

Clause 9: inserts a new section 24ABRA which details the tax treatment of payments of special needs DSP and related bereavement payments to a person who is of pension age.

Clause 10: provides that amendments made by the above clauses apply to payments derived on or after 1 July 1991.

Part B: Amendments relating to bereavement payments (Division 3)

Summary of proposed amendments

This Bill will make minor technical amendments to sections 24ABZB and 24ACX of the Principal Act.

Background to the legislation

Where, because of illness or infirmity, the members of a married pension couple have to live apart, they derive pension at the single-rate rather than the lower married-rate. Similar provisions apply where a member of the couple has to enter respite care.

Under the SSA91, when a member of a pensioner couple dies the surviving member is entitled to a payment in respect of the deceased. In effect, the surviving partner is entitled to receive an amount for 7 pension paydays equal to the amount that would have been payable to the couple if the partner had not died. However, if immediately before the death, the couple were living apart as a result of illness or infirmity, this entitlement is calculated at the ordinary married rate. In certain circumstances, the bereavement payment is paid to the surviving partner as a lump sum.

The Social Security Act 1947 (which was replaced by the SSA91) provided that, if the couple were receiving the illness-separated level of pension because they were living apart due to illness or infirmity, bereavement payment was to be calculated as if the couple had been living together. This also applied to respite care couples. Initially this provision with regard to both illness-separated and respite care couples was not included in SSA91. The Social Security Legislation Amendment Act (No. 4) 1991 amended SSA91 to reinstate the provision. As a result the bereavement payment derived by the surviving member of such couples is now calculated as if the couple had been living together immediately before the death.

Section 24ABZB of the Principal Act contains Exempt Bereavement Calculator A (Calculator A) which provides the means to calculate the "tax-free amount" relating to a bereavement payment made in a lump sum under SSA91 following the death of a member of a pensioner couple.

Step 2 in Calculator A provides for working out the amount of payments that would have been derived by the taxpayer on each of the relevant pension paydays. The amount is that which would have been exempt if the partner had not died and, in certain circumstances, subject to the partner's age.

Step 4 in the calculator provides for working out the amount that would have been derived by the deceased on each of the 7 pension paydays if the deceased had not died. This amount, "the pension payday notional partner amount" for each payday is summed to arrive at the "notional partner amount". This amount is added to the "exempt notional taxpayer amount" calculated in accordance with Steps 2 and 3 of Calculator A and relating to the surviving partner. The sum of the two amounts is referred to as the "tax free amount". The tax-free amount is exempt from tax under the relevant provisions of Division 1AA of Part III of the Principal Act.

Because SSA91 initially did not provide for the adjustment of the bereavement payment where the couple were living apart because of illness or infirmity, it had not been taken up in the Principal Act when Division 1AA replaced former section 23AD. This applies also to a respite care couple.

A provision, similar to that initially made in the SSA91, for adjusting the bereavement payment was contained in Part III of the Veterans' Entitlements Act 1986 (VEA) which was rewritten in the Veterans' Entitlements Amendment Act 1991. The provision was retained in the rewritten part III. However, when the Principal Act was amended to take account of the rewriting of Part III of the VEA, the provision relating to these couples was not taken up in section 24ACX which contains Exempt Bereavement Calculator B (Calculator B). Calculator B provides the means to calculate the "tax-free amount" relating to a bereavement payment made under the VEA.

Explanation of the proposed amendments

The amendments propose to modify the application of Steps 2 and 4 of the Exempt Bereavement Payment Calculators A and B so that lump sum bereavement payments relating to illness-separated pensioners and respite-separated pensioners are worked out as though the members of the couple has been living together immediately before the death [Clauses 11 and 12] .

The following example illustrates the proposed operation of Calculator A:

A social security pensioner couple were living apart because of illness of the husband. They each received pension of $300 per pension payday (that is, fortnightly). Both pensioners are exempt from tax on their pension. The husband dies. Assume that the first available pension payday is the first pay day after the death of the husband. (The married-rate pension is $250 each per pension payday).

Calculator A will work as follows:

Step 1: The number of pension paydays is 7.

Step 2: As the wife's pension is exempt the pension payday exempt notional taxpayer amount is $250. (Step 2 of the calculator will provide that the partners are to be treated as though they have been living together immediately before the death; the married-rate pension of $250 is therefore relevant).

Step 3: Exempt notional taxpayer amount is $1.750 [$250 x 7]

Step 4: Pension pay day notional partner amount is $250.

If the partner had not died he would have receive a pension of $300 on each of the relevant pension paydays. However, as Step 2 will provide that they are to be treated as though the partners had been living together immediately before the death, the married-rate pension is relevant.

Step 5: Notional partner amount is $1,750. [$250 x 7]

Step 6: Tax-free amount is $3,500. [Step 3 + Step 5]

Commencement date

The amendments to section 24ABZB will apply to payments derived on or after 13 December 1991 [Clause 13(1)].

The amendments to section 24ACX will apply to payments derived on or after 1 July 1991 [Clause 13(2)].

Clauses involved in the proposed amendments

Clause 11(a): will insert new paragraph (c) in Step 2 of Calculator A in section 24ABZB. New paragraph (c) will provide that, where immediately before the partner's death the couple were an illness separated couple or a respite care couple, they are not to be treated as such a couple.

Clause 11(b): will substitute a new Step 4 of Calculator A in section 24ABZB in place of the existing Step 4. The new Step 4 will add a paragraph (b) to provide that, where immediately before the partner's death the couple were an illness separated couple or a respite care couple, they are not to be treated as such a couple.

Clause 12(a): will insert new paragraph (d) in Step 2 of Calculator B in section 24ACX. New paragraph (d) will provide that, where immediately before the partner's death the couple were an illness separated couple or a respite care couple, they are not to be treated as such a couple.

Clause 12(b): will substitute a new Step 4 of Calculator B in section 24ACX in place of the existing Step 4. The new Step 4 will add a paragraph (b) to provide that where immediately before the partner's death the couple were an illness separated couple or a respite care couple they are not to be treated as such a couple.

Clause 13(1): provides that the amendments made by clause 11 will apply to social security bereavement payments derived on or after 13 December 1991.

Clause 13(2): provides that the amendments made by clause 12 will apply to service bereavement payments derived on or after 1 July 1991.

Part C: Amendment relating to rebates in respect of Textile, Clothing and Footwear (TCF) Special Allowance (Division 5).

Summary of proposed amendments

This Bill will amend the Principal Act to extend eligibility for a rebate of income tax to recipients of the TCF Special Allowance.

Background to the legislation

Section 160AAA of the Principal Act provides for rebates in respect of certain pensions, benefits and allowances. Subsection 160AAA(1) contains a definition of the term "rebatable benefit" which lists the benefits and allowances which satisfy the definition. Subsection 160AAA(3) provides that, where the assessable income of a taxpayer of a year of income includes an amount of rebatable benefit, the taxpayer is entitled to a rebate of tax of an amount ascertained in accordance with the regulations.

Retrenchees from the textile clothing and footwear industries may be eligible to participate in one of two training programs: the TCF Special Allowance or the Formal Training Assistance programs. The basic allowance under the former is not a rebatable benefit while under the latter it is. This amendment will ensure the basic allowance under the TCF Special Allowance is rebatable also.

The TCF Special Allowance is provided under the Textile Clothing and Footwear Labour Adjustment Package. The allowance is designed to encourage employees retrenched from the textile, clothing and footwear industries to undertake training to fit them for employment elsewhere. It includes two main components:

(a)

a basic allowance which corresponds in amount to the Job Search Allowance and the New Start Allowance paid under the SSA91 to single persons aged 21 or above without dependants; and

(b)

a training allowance.

Both components are taxable under existing tax law.

Some retrenchees of the textile, clothing and footwear industries are eligible for Formal Training Assistance. This program provides a basic allowance which is, in effect, Job Search Allowance or New Start Allowance payable under Parts 2.11 and 2.12 of SSA91 respectively. These allowances have replaced the Unemployment Benefit. Under Formal Training Assistance, retrenchees aged 21 or above also derive a training allowance payable at the same rate as the training allowance derived under the TCF Special Allowance. The basic allowance under Formal Training Assistance is eligible for a rebate of income tax as a result of the operation of section 160AAA of the Principal Act and Part 8 of the Income Tax Regulations.

Explanation of the proposed amendments

This Bill will amend subsection 160AAA(1) to add to the definition of "rebatable benefit" the term, an amount paid by way of TCF Special Allowance. Thus, by the operation of subsection 160AAA(3) of the Principal Act, entitlement to a tax rebate will be extended to recipients of the TCF Special Allowance [Clause 21] .

Commencement date

These amendments will apply to payments of the TCF Special Allowance on or after 26 September 1991 [Clause 22] .

Clauses involved in the proposed amendment

Clause 21: will amend subsection 160AAA(1) by adding to the definition of "rebatable benefit" the term "paid by way of Textile, Clothing and Footwear Special Allowance". This effectively extends eligibility for the rebate to recipients of Textile, Clothing and Footwear Special Allowance.

Clause 22: will provide that the amendment of subsection 160AAA(1) will apply to payments of Textile, Clothing and Footwear Special Allowance made on or after 26 September 1991.