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Social Security and Veterans' Affairs Legislation Amendment (Retirement Assistance for Farmers) Bill 1998
IRS Publications Office
Ó Copyright Commonwealth of Australia 1998
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Published by the Department of the Parliamentary Library, 1998
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To provide farmers on low incomes who have reached pension age with the ability to gift their farm to a younger generation without affecting their access to the age pension. The opportunity will only be available for a period of three years commencing on 15 September 1997 and will be subject to the circumstances of the farmer meeting a number of criteria.
In February 1996, the now Deputy Prime Minister committed a coalition government to establishing a Special Rural Task Force (Task Force) to investigate the impact of the Social Security assets tests on rural customers. This was in response to concerns across the rural communities that the current social security assets tests and hardship provisions may disadvantage farming families.
The establishment of the Task Force was announced on 11 September 1996 by the Minister for Social Security. The terms of reference of the Task Force included considering and making recommendations to the government on:
- the impact of the social security assets tests on rural customer including how the assets test:
- operate when farmers cannot sell their pr operties due to market conditions;
- affect farmers on small holdings which cannot generate income beyond the age pension limit; and
- affect farmers who cannot subdivide and sell their land due to government restrictions
- the operation of the assets test hards hip provisions; and
- the social and economic implications of changing the assets test rules relating to inter-generational transfer of farms.
This Bill relates to findings and recommendations of the Task Force in respect of the last of these points, i.e. in tergenerational transfer of farms.
Social Security payments are, in general, means tested on the basis of both income and assets. Pensions have a tapered assets test under which the rate of pension is reduced depending on the l evel of assets held. The value of assets above a threshold reduces the rate of pension by $3 for every $1000 of assets owned. To determine the pension rate, Social Security applies either the income or the assets test, whichever produces the lower rate of payment.
At present, the aged pension asset test limits are:
Circumstances of the customer
Single home owner
Single non-home owner
Homeowner couple (combined)
Non-home owner coup le (combined)
The allowable income limits are:
Circumstances of the customer
Free area (pa)
Cut-out point (pa)
If a person disposes of an asset for less than it is worth (for exa mple, by giving it away or selling it at an undervalue), then for the purposes of the assets test the amount by which the value of the asset (or the difference between what it was worth and what the person received for it) exceeds $10 000 is included in the value of the person?s assets for a period of five years after the disposition. 1 Clearly this is to prevent people giving away assets to children and other relatives so as to make themselves eligible for the age pension. This provision of the Social Security Act 1991 and its associated provisions are often referred to as the ?gifting provisions?.
Payment can be made under the pension assets hardship provisions if it is considered that the claimant would suffer ?sever financial hardship? if payment was not granted. ?Severe financial hardship? is not legislatively defined. For administrative purposes, where a customer?s total income is less than the maximum rate of Social Security payment that applies to them, and they have liquid assets less than the limit ($6000 for singles and $10,000 for couples), then they are considered to be in ?severe financial hardship?.
Some customers with substantial assets claim a pension under the assets test hardship provisions because they are unable or unwilling to sell or draw upon their assets to support themselves. A test of reasonableness is applied in each case. If a farmer has their property on the market at a realistic price and is unable to find a buyer, the test is satisfied relatively easily. However, some farmers want to keep their property and still get a pension. Although it is recognised that some farmers have a long term attachment to their properties or wish to keep the property and pass it to their heirs, an unwillingness to rearrange assets does not mean in itself that an asset is considered ?unrealisable? under the pensions assets test.
The Social Security Act 1991 defines an unrealisable asset as one that a person could not be reasonably expected to sell or use as security for borrowing. Existing policy is that if a person has a long term attachment to a property (for example, has lived there for 20 years or more), it is unreasonable to expect them to sell the property unless they can subdivide and keep the portion on which they live.
A number of concessions have been introduced to assist those suffering hardship and who are not entitled to payment because they have high levels of assets. Some exclusions relevant to farmers claiming pensions are:
- as mentioned above, under the gifting provisions, any amount which a pensioner gifts to another person in excess of $10 000 in a year is assessed under the assets test, for the subsequent five years, as if the person still owned the asset. Further, deemed income is calculated on the amount gifted over $10,000 and this is counted as income under the pensions income test during the five year period.
Where a pensioner farmer legally transfers their property to an immediate family member, Social Security will deduct the value of some contributions, e.g. wages forgone and capital contributions, made in the past by the family member, from the value of the property transferred.
- When assessing the value of primary production assets, the total value of all the assets can be off-set against the total primary production debt. This is not the case for non-farmers who can only off-set debt against the encumbered assets.
- Farm houses are valued by reference to housing values in nearby rural centres. The value of houses in regional centres is usually higher than that of farm houses. Using an implied value based on a similar house in the nearest regional centre means that the farmer?s assets total is reduced by a higher home and curtilage amount than could be expected if an actual value was used.
- When a property is transferred and the person retains a granny flat or life interest in a private residence which is valued at more than the difference between the homeowner and non-home owner allowance assets levels, the person can be counted as a homeowner and have the value of the granny flat or life interest deducted from the value of the asset transferred.
The Task Force completed its report in January 1997. 2 Recommendation 15 provided:
to facilitate the inter-generational transfer of farm assets, a short term (e.g. two year) moratorium on the five year gifting provisions be applied for farmers planning retirement (from 63 years) or of pension age to give individual families a one off ?window of opportunity? to plan and transfer the family farm. Qualification would be conditional upon:
- active involvement of the second generation in the farm operation over a minimum of the previous three years;
- an off farm asset test not exceeding the applicable asset test threshold
- an income test consisting of average income over the previous three year period being less than the pension rate
- application to one farming enterprise. 3
The gifting provisions mean that if a farmer wishes to retire and give the farm to the next generation, they could be precluded from receiving a pension for five years. In such situations, two or more generations could be dependent on one farm enterprise that can only realistically support one generation.
The Task Force stated:
The Task Force believes that structures to support long term planning have either not been available or have been too expensive for many farmers to access. The Committee believes that there is a need to create a window of opportunity for older farmers to address the lack of planning that now results in ineligibility for income support for those farmers wishing to transfer the property to their children. 4
On 14 September 1997 the Prime Minister and the Minister for Primary Industries and Energy announced the government?s rural policy package, entitled ?Agriculture ? Advancing Australia?.
That package includes the government?s response to recommendation 15 of the Task Force in the form of the Retirement Assistance for Farmers Scheme. Farmers who qualify for retirement assistance (see the conditions below) will be able to transfer their interest in their farm to a younger generation without affecting their eligibility for the age pension. The transfer will not be regarded as a disposition of assets for the purposes of assessing whether a social security payment is payable to the farmer. The essential elements of the scheme are:
- it will be effective for a period of three years from 15 September 1997 but will also apply to those who transferred legal title of their property in the five years preceding 15 September 1997 (the scheme therefore effectively applies for eight years)
- it will be open to farmers or farming partners who have equity of up to $500 000
- farmers must have owned the property for at least 15 years or have been actively involved in farming for 20 years.
- farmers must have had an average income of less than the age pension over the preceding three years (from both farm and non-farm activities) and the younger generation must have been actively involved in the farm for the preceding three years.
- where the property transfer has taken place after 14 September 1997, pension entitlements will be backdated to the time of the transfer. Where the property transfer took place before that date (within the previous 5 years), pension entitlements will be backdated to 15 September 1997.
Item 14 of Schedule 1 inserts proposed new Part 3.14A into the Social Security Act 1991 . That part is entitled ?Retirement assistance for farmers?. Item 11 of Schedule 2 inserts proposed new Division 8 into the Veterans? Entitlements Act 1986 . Those provisions mirror the proposed new sections in the Social Security Act 1991 because the retirement assistance scheme is to apply equally to Veterans? Affairs support payments.
Retirement assis tance will available to a person where all of the following conditions are satisfied ( proposed new section 1185B ):
- the person must be a ?qualifying farmer? at any time between 14 September 1992 and 15 September 2000. A person is a ?qualifying farmer? where:
- the person has had a legal interest in a farm (including being a shareholder in a private company that has a legal interest in a farm) continuously for a period of 15 years and the person or their partner has contributed a significant part of his or her labour and capital to the development of the farm; or
- the person has a legal interest in a farm which was acquired before 15 September 1997 and the person or their partner has been involved in farming in Australia for a continuous period of 20 years or for periods totalling 20 years, by contributing a significant part of his or her labour to farm enterprises and deriving a significant part of his or her income from farm enterprises.
- the person must transfer his or her interest in the farm or farms and all of the farm assets to an ?eligible descendant? at any time between 14 September 1992 and 15 September 2000. The transfer must be by way of a gift. An ?eligible descendant? in relation to a person means a child, step child, adopted child of the person or partner of the person or a descendant in direct line of such a child. The Secretary of the Department of Social Security has a discretion to treat any other person as an eligible descendant.
- the person or his or her partner must have reached pension age (65 years for males, 60 to 65 for females depending on when they were born) or must be going to reach pension age by 15 September 2000.
- the total value of the farm and farm assets must not exceed $500 000.
- during the three years prior to the transfer the eligible descendant must have been actively involved with the relevant farm.
- if the person is a member of a couple, the person?s partner must not have an interest in the farm or farm assets.
- the person must satisfy the farmers? income test. The farmers? income test is contained in proposed new section 1185K . It consists of totalling the persons farm and non-farm incomes over the period of 3 financial years prior to the date of the transfer and comparing that to three times the maximum basic rate pension (maximum basic entitlement). If the total income is less than the maximum basic entitlement the farmers? income test is satisfied.
Retirement assistance will also be available where a person who is an eligible former partner of a qualifying farmer transfers his or her interest in the farm and all farm assets to an eligible descendant. A person is an eligible former partner of a quali fying farmer where at the time of ceasing to be the partner of another person, the other person was a qualifying farmer and the first person had a legal interest in a farm or farm assets.
If the conditions fo r obtaining retirement assistance are satisfied (under proposed new section 1185B ), proposed new section 1185D will operate to deem the transfer of the farm and farms asset not to be a disposal. It will similarly deem any transfer by the person?s partner not to be a disposal. Clearly the intended consequence is that a farmer and his or her partner will be able to transfer their farm to their children or grandchildren and immediately following the transfer they may be eligible for the pension (the eligibility will, of course, be determined in the ordinary manner apart from disregarding the disposition of the farm).
This concession has been granted exclusively to the farming community. No similar concession exists for the non-farming sm all businessperson, who are owner operators, to allow him or her to transfer their business to a younger generation and become eligible for the age pension.