House of Representatives

Revised Explanatory Memorandum

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

Schedule 5 - Interest charge

Summary

This Schedule will allow for an interest charge to be applied to certain debts relating to austudy payment, fares allowance, youth allowance payments to full-time students and apprentices, and ABSTUDY living allowance payments. The interest charge will only be applied where the debtor does not have or is not honouring an acceptable repayment arrangement. Debtors who are already making repayments, or who come to a repayment agreement with the Department of Human Services following the implementation of the measure, will not be charged interest.

The rate of the interest charge will be based upon on the 90-day Bank Accepted Bill rate, plus an additional seven per cent, as is currently applied by the Australian Taxation Office for tax debts under the Taxation Administration Act. Over the last four years, this rate has averaged 11.07 per cent, and currently stands at 9.6 per cent.

Background

The key purpose of the interest charge is to encourage debtors to repay their debt, in a timely fashion, where they have the financial capacity to do so.

Once the interest charge is in place, debtors who have not been making repayments will have an incentive to engage with the Department of Human Services to make a repayment arrangement in order to avoid the interest charge. The design of the repayment arrangement will mean that the interest charge will only be applied to debts of those debtors who have the capacity to repay their debt but are not doing so. There will also be provision for concessions, in the form of reduced repayment rates or temporary halts to repayment arrangements, for people experiencing financial hardship and other special circumstances.

These amendments will mean that the existing penalty interest charge scheme contained in the Social Security Act and the Student Assistance Act will no longer apply to debtors covered by the new arrangements.

The amendments made by this Schedule commence on 1 January 2014.

Explanation of the changes

Part 1 - Amendments

Amendments to the Social Security Act

Item 1 makes technical amendments for the purpose of identifying what methods of recovery will be available for the interest charge.

Item 2 inserts new section 1228B(2A) to clarify that a 10 per cent penalty added to a debt for the understatement of income is part of the debt. For the purposes of imposing an interest charge, this will mean that a reference to 'debt' will include the amount of the payment that a person has obtained to which they were not entitled, as well as any additional 10 per cent penalty added to the debt under section 1228B.

Item 3 amends subsection 1228B(5) so that an additional 10 per cent penalty imposed for the understatement of income does not apply to a debt due to the Commonwealth under section 1229G (as inserted by item 6).

The purpose of this amendment is to clarify that an additional 10 per cent penalty cannot apply to an interest charge under section 1229G. This is because section 1229B only imposes an additional 10 per cent penalty where a person has refused or failed to provide information in relation to the person's income or knowingly or recklessly provided false or misleading information in relation to the person's income. The interest charge debt due to the Commonwealth under section 1229G is not dependent on an individual providing information on their income, so an additional 10 per cent penalty cannot apply to an interest charge debt under section 1229G.

Item 4 inserts new paragraph 1229(1)(ea) to ensure that a notice in respect of a debt given to a person under section 1229 specifies the effect of an interest charge if it is applied to their debt. This will ensure that the person is fully informed of how the new interest charge will operate.

Item 5 inserts subsection 1229(5) to provide that the existing penalty interest scheme, as provided for in sections 1229A and 1229AB, does not apply if an interest charge applies in relation to a person and a social security debt under section 1229E or 1229F.

Item 6 inserts new sections 1229D to 1229H, which relate to the interest charge.

New section 1229D - Interest charge payable under section 1229E or 1229F on certain social security debts

New subsection 1229D(1) provides that an interest charge will apply to a person and a debt if the debt has not been wholly paid and the debt relates to either youth allowance (student and apprentices), austudy payment, fares allowance or any other social security payment prescribed in a legislative instrument. The power to prescribe other social security payments in a legislative instrument will provide the flexibility to extend the interest charge, at a later point in time, to debts relating to other payments under social security law.

This subsection further clarifies that the interest charge will only apply to youth allowance students who undertake full-time study or are new apprentices.

New subsection 1229D(1) also provides that the interest charge will apply to a person and a debt where qualification for youth allowance was in circumstances prescribed by a legislative instrument. This will allow the flexibility to extend the interest charge, at a later point in time, to debts relating to youth allowance payments where qualification for the payment was in circumstances other than where the student was undertaking full time study or was a new apprentice.

As any extension of these rules would be made through a legislative instrument, it would be subject to Parliamentary scrutiny and disallowance.

New subsections 1229D(2) and (3) provide that the Minister may make the above mentioned legislative instruments.

It is relevant that provisions within the social security law (see sections 1229A and 1229B of the Social Security Act 1991) already provide the Minister with the power to apply, via a legislative instrument, a penalty interest charge on any income support payment debt. This power is greater than that set out in Schedule 5 because the Schedule carefully prescribes a formula for the rate of the new interest charge, whereas the existing provisions give the Minister unfettered discretion in setting the rate of the interest charge.

Taking into account that any instrument seeking to extend application of the interest charge will be subject to the scrutiny of Parliament, and that the power given to the Minister under the new interest charge scheme is more restrained than that available under the existing scheme, the new provision in item 6 is not considered to be an inappropriate delegation of power.

For the purposes of discussion in this explanatory memorandum, the debts that relate to the payments prescribed in paragraphs 1229D(1)(b) and 1229(1)(c) are referred to as 'relevant social security debts'.

New section 1229E - No repayment arrangement in effect

New subsection 1229E(1) provides that, if a person has an unpaid amount on a relevant social security debt and, by the end of the due day, has not entered into an arrangement for the repayment of the debt (under section 1234), then the person is liable to pay, by way of penalty, an interest charge on the debt for each day in a period.

New subsections 1229E(2) and (3) allow for the Minister to make a legislative instrument to prescribe circumstances in which the interest charge would not apply if a person has an unpaid amount on a relevant social security debt and, by the end of the due day, has not entered into an arrangement for the repayment of the debt.

It is envisaged that the instrument would prescribe circumstances in which a person would not have an interest charge applied to their debt if the amount that is being withheld from their payments (under current section 1231 of the Act) is satisfactorily repaying the debt. This instrument would also allow flexibility to exempt the application of the interest charge in prescribed circumstances at a later point in time.

In the event that a person is no longer in the circumstances prescribed in the legislative instrument, subsection 1229E(4) allows the Secretary to give a notice to the person, specifying the information provided in paragraphs 1229E(4)(a)(i) to (iv). It also provides that the outstanding amount of the debt is due and payable on the 28th day after the day on which the notice was issued.

New subsection 1229E(5) provides that, if a person has been given such a notice, the person has an outstanding debt at the end of the due date, and has not entered into an arrangement for the repayment of the debt, then the person is liable to pay, by way of penalty, an interest charge on the debt for each day in a period.

New subsection 1229E(6) provides that the period for which the interest charge will be applied to the debt starts at the beginning of the day after the due day. It further provides that the period will end on the earliest of either the last day on which the unpaid amount (and any interest charge on the unpaid amount) remains unpaid or the day before the first day on which the person makes a payment under an arrangement for repayment of the debt.

This subsection is intended to ensure that a person will be able to end the application of the interest charge by entering into, and making a payment under, an arrangement for repayment of the debt. This, in addition to entering into an arrangement before the due date, will mean that the person can entirely avoid the interest charge applying to their debt.

New subsection 1229E(7) provides that the interest charge on any unpaid amount is worked out by multiplying the interest charge rate for that day by the sum of the remaining unpaid amount and the interest charge from previous days. This provision ensures that the interest is compounded on a daily basis. New section 1229H prescribes the calculation of the 'interest charge rate' for that day, and is explained below.

New subsection 1229F - Failure to comply with or termination of repayment arrangement

New subsection 1229F(1) provides that, if a person has an unpaid amount on a relevant social security debt, the person has entered into a repayment arrangement under section 1234, and the person fails to make a payment under the arrangement, then the person is liable to pay, by way of penalty, an interest charge for each day in a period.

New subsection 1229F(2) provides that the period for which the interest charge will be applied to the debt starts at the beginning of the day after the due day. It further provides that the period will end on the earlier of the last day on which the outstanding amount (and any interest charge on any of the outstanding amount) remains unpaid, the day before the first day on which the person has paid all the payments that have so far become due and payable under the arrangement, or the day before the day the arrangement is terminated.

This subsection is intended to ensure that a person may end the application of the interest charge to their debt at the point where they catch up on any missed payments under the arrangement. To avoid doubt, while the interest charge will apply to the debt during the period, a person is only required to pay an amount equal to the missed payments (rather than an amount equal to the missed payments and the interest charge) to end the period of the application of the interest charge. The interest charge will otherwise be payable as a debt due to the Commonwealth, as explained below.

New subsection 1229F(3) prescribes the calculation of an interest charge for a day. The interest charge is calculated in the same way as in new subsection 1229E(7), which is explained above.

Repayment arrangement is terminated

New subsection 1229F(4) provides that, if a person has an unpaid amount on a relevant social security debt, the person has entered into an arrangement under section 1234, and the arrangement is terminated, then the outstanding debt, and any interest charge on the outstanding debt, is due and payable on the 14th day after the termination. If, at the end of the 14th day, any amount remains unpaid, the person is liable to pay, by way of penalty, an interest charge each day in a period.

New subsection 1229F(5) provides that the period for which the interest charge will be applied to the debt starts at the beginning of the day after the 14th day. It further provides that the period will end on the earliest of the last day on which the outstanding amount (and any interest charge on the outstanding amount) remains unpaid or the day before the first day after the 14th day on which the person makes a payment on another arrangement for the repayment of the debt.

This subsection is intended to ensure that a person may end the application of the interest charge at the point where they enter into another arrangement for repayment of the debt.

New subsection 1229F(6) prescribes the calculation of an interest charge for a day. The interest charge is calculated in the same way as in new subsection 1229E(7), which is explained above.

New section 1229G - Other rules for interest charge

New subsection 1229G(1) provides that the interest charge under section 1229E or 1229F for a day is due and payable to the Commonwealth at the end of that day.

New subsection 1229G(2) provides that an interest charge under section 1229E or 1229F for a day is a debt due to the Commonwealth by the person.

New subsection 1229G(3) clarifies that subsection 1229(1) and paragraph 1229D(1)(b) do not apply to a debt which is also an interest charge (as provided for under new sections 1229E and 1229F). This means that, for the interest charge, a notice in respect of a debt is not required to be issued under subsection 1229(1) and it is not a debt to which new section 1229D would apply. This avoids a situation where an interest charge is subject to further interest charges.

New section 1229H - What is the interest charge rate?

New section 1229H provides for the calculation of the interest charge rate. New subsections 1229H(1) and 1229H(2) provide that the rate is based upon the 90-day Bank Accepted Bill rate, plus an additional seven per cent, as is currently applied by the Australian Taxation Office for tax debts under the Taxation Administration Act. This is an appropriate method for calculating the rate of the interest charge to apply to income support debts because the rate is high enough to encourage repayment without being punitive, it provides a return to the Commonwealth (commensurate with the time value of the monies overpaid) and it will help align tax and income support debt recovery policy.

New subsection 1229H(2) specifies what the base interest rate is, with reference to the monthly average yield of 90-day Bank Accepted Bills. The rate is currently published by the Reserve Bank of Australia in the 'Interest Rates and Yields - Money Market - Monthly' table on the Bank's website. This subsection also provides a table identifying the appropriate monthly average to be used for each quarter.

Where the Reserve Bank of Australia has not published the specified rate by the start of a quarter, new subsection 1229H(3) substitutes the last published monthly average.

New subsection 1229H(4) provides for the rounding of the base interest rate to the second decimal place.

Item 7 is to clarify that, if a person has entered into an arrangement for the payment of a debt, it is a statutory requirement for the person to make a payment under an arrangement before the end of the day that the arrangement requires such a payment.

Amendments to the Student Assistance Act

Item 9 inserts into section 38 a definition of ABSTUDY debt, which means an amount paid under the ABSTUDY Scheme (which is also known as the Aboriginal and Torres Strait Islander Study Assistance Scheme) that should not have been paid.

An ABSTUDY debt is a special educational assistance scheme overpayment (or a debt under paragraph 38(a)), which, under section 39, is a debt owed by the person to the Commonwealth.

Item 10 amends paragraph (c) of the definition of debt in section 38 to ensure that an interest charge, imposed under section 41CA or section 41CB, is an amount payable to the Commonwealth and is therefore a debt.

In view of these amendments, item 8 makes a technical amendment to simplify the heading to section 38.

Item 11 inserts new sections 41A to 41H.

New section 41A - Sections 40 and 41 do not apply to ABSTUDY debts

New section 41A provides that sections 40 and 41 do not apply in relation to a person and an ABSTUDY debt owed by the person the Commonwealth. This will have the effect that a person and an ABSTUDY debt will not be subject to the existing provisions in the Student Assistance Act relating to late payment charges and interest in relation to an overpayment of a benefit, but will instead be subject to the interest charge provisions contained in new sections 41CA and 41CB.

New section 41B - Notice in respect of ABSTUDY debt

New section 41B provides for a notice in respect of an ABSTUDY debt. This section mirrors the notice of debt provisions in the Social Security Act (that is, subsections 1229(1) and (2), as amended by this Schedule), and ensures consistent treatment of debts relating to ABSTUDY payments and relevant social security debts.

New subsection 41B(1) provides that, if an ABSTUDY debt has not been wholly paid, the Secretary must provide a notice specifying the information contained in paragraphs 41B(1)(a) to 41B(1)(h), which mirrors the notice of debt provisions in the Social Security Act. The subsection also provides that the outstanding amount of the debt is due and payable on the 28th day after the date on the notice.

New section 41C - Interest charge payable on ABSTUDY debts

New section 41C provides that the interest charges (provided by sections 41CA and 41CB) only apply if the debt is an ABSTUDY debt that has not been wholly paid.

New section 41D - No repayment arrangement in effect

New section 41D mirrors the operation of new section 1229E of the Social Security Act (as inserted by item 6 of this Schedule), but with respect to an ABSTUDY debt that has not been wholly paid.

New section 41E - Failure to comply with or termination of repayment arrangement

New section 41E mirrors the operation of new section 1229F of the Social Security Act (as inserted by item 6 of this Schedule), but with respect to an ABSTUDY debt that has not been wholly paid.

New section 41F - When interest charge becomes due and payable

New section 41F mirrors the operation of new subsection 1229G(1) of the Social Security Act (as inserted by item 6 of this Schedule), but with respect to an ABSTUDY debt that has not been wholly paid.

New section 41G - What is the interest rate charge

New section 41G mirrors the operation of new section 1229H of the Social Security Act (as inserted by item 6 of this Schedule) to provide the calculation of the interest rate charge referred to in sections 41CA and 41CB.

New section 41H - Arrangement for payment of ABSTUDY debt

New section 41H provides that the Secretary may, on behalf of the Commonwealth, enter into an arrangement with a person for payment of an ABSTUDY debt. This section mirrors subsections 1234(1) to 1234(4) of the Social Security Act to ensure consistent treatment of debts related to ABSTUDY payments and relevant social security debts.

Item 12 amends paragraph 51(1)(b) to ensure that a certificate by the Secretary (stating that, on a specified day, a notice, to a specified effect, in respect of an ABSTUDY debt, was given to a specified person by the Secretary) is prima facie evidence of the matters stated in the certificate.

Part 2 - Application and transitional provisions

Subitem 13(1) provides that section 1229D, as inserted by this Bill, only applies in relation to a debt that arises on or after the commencement of item 13 and a pre-existing debt that is outstanding immediately before the commencement of the Bill. This will mean that the amendments contained in item 7 will not apply to debts that are no longer outstanding immediately before the commencement of item 13.

Subitem 13(2) provides that paragraph 1229E(1)(b), as inserted by this Bill, applies to a notice given on or after the commencement of item 13. This will mean that a person is not liable to pay an interest charge under section 1229E if there was not a notice given to a person under subsection 1229(1) on or after the commencement of item 13.

Subitem 13(3) provides that, if section 1229D, as inserted by this Bill, applies to a debt that arose before the commencement of item 13 and, before the commencement of this item, the Secretary gave a person a notice under subsection 1229(1) of the Social Security Act, the Secretary must give the person another notice under section 1229(1) of that Act, as amended by this Bill. This means that the person will be informed in the new notice of the effect of the application of the interest charge, and that the Secretary can issue a second notice under subsection 1229(1) of the Social Security Act.

Subitem 13(4) provides that paragraph 1229F(1)(c), as inserted by this Bill, only applies in relation to a failure that occurs on or after the commencement of item 13, regardless of whether the arrangement was entered into before, on or after that commencement. This means that a person is not liable to pay an interest charge under section 1229F if a failure occurs before the commencement of item 13. It also means that an arrangement that was entered into prior to commencement of the Bill will continue in effect after commencement.

Subitem 13(5) provides that paragraph 1229F(4)(c), as inserted by this Bill, only applies to a termination that occurs on or after the commencement of item 13, regardless of whether the arrangement was entered into before, on or after that commencement. This means that a person is not liable to pay an interest charge under section 1229F if a termination occurs before the commencement of item 13. It also means that an arrangement that was entered into prior to commencement of the Bill will continue in effect after commencement.

Item 14 provides that interest charges under sections 41A to 41H, as inserted by this Bill, apply to an ABSTUDY debt that arises on or after the commencement of item 14, and to one that arose before the commencement of item 14, to the extent that the debt is outstanding immediately before that commencement.