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Family and Community Services and Veterans' Affairs Legislation Amendment (Income Streams) Bill 2004

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2002-2003-2004

 

 

 

 

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

 

 

 

 

 

 

 

 

 

FAMILY AND COMMUNITY SERVICES AND VETERANS’ AFFAIRS LEGISLATION AMENDMENT (INCOME STREAMS) BILL 2004

 

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

 

 

 

 

 

 

 

 

 

(Circulated by authority of the Minister for Family and Community Services, Senator the Hon Kay Patterson)

 



FAMILY AND COMMUNITY SERVICES AND VETERANS’ AFFAIRS LEGISLATION AMENDMENT (INCOME STREAMS) BILL 2004

 

Outline:

 

The Bill gives effect to the Treasurer’s announcement in February 2004 to simplify superannuation measures.  These new measures include:

 

·          the provision of a 50% assets test exemption for a new product, ‘market-linked income streams’ from 20 September 2004; and

·          a change in the assets test exemption from 100% to 50% for certain non-commutable income streams purchased from 20 September 2004.

 

The Bill also contains amendments to align the characteristics of life expectancy income streams with those of the new market-linked income stream product and a variation to the guarantee period for asset-test exempt lifetime income streams.

 

Date of effect:          20 September 2004.

 

Financial Impact Statement:

 

The financial impact of this measure is set out below.

 

Savings

 

 

2003/04

2004/05

2005/06

2006/07

2007/08

Total

 

 

 

 

 

 

 

Department of Family and Community Services

-$0.7 m

-$3.5 m

$25.7 m

$53.8 m

$86.6 m

$162.0 m

Department of Veterans’ Affairs

-$0.8 m

-$0.2 m

$2.3 m

$5.6 m

$9.9 m

$16.8 m

 

 



FAMILY AND COMMUNITY SERVICES AND VETERANS’ AFFAIRS LEGISLATION AMENDMENT (INCOME STREAMS) BILL 2004

 

NOTES ON CLAUSES

 

Clause 1 of the Family and Community Services and Veterans’ Affairs Legislation Amendment (Income Streams) Act 2004 sets out how the amending Act is to be cited.

 

Clause 2 provides for the commencement of the Act.  Sections 1 to 3 of the Act commence on the day on which it receives Royal Assent.  Schedules 1 and 2 commence on 20 September 2004.

 

Clause 3 provides that each Act specified in a Schedule to the Family and Community Services and Veterans’ Affairs Legislation Amendment (Income Streams) Act 2004 is amended as set out in the applicable items in the Schedule concerned.

 

 

 

Schedule 1 - Amendment of the Social Security Act 1991

 

Summary

 

 

This Schedule amends the Social Security Act 1991 (the Social Security Act) to change the means test assessment of certain income streams.  These changes include:

 

·          the provision of a 50% assets test exemption for a new product, ‘market-linked income streams’ from 20 September 2004; and

·          a change in the assets test exemption from 100% to 50% for certain non-commutable income streams purchased from 20 September 2004.

 

The Schedule also contains amendments to align the characteristics of life expectancy income streams with those of the new market-linked income stream product and a variation to the guarantee period for asset-test exempt lifetime income streams.

 

Background

 

 

Social security pension and allowance payments are intended for people who, because of age, disability, unemployment, or caring responsibilities, are unable to adequately support themselves.  Social security payments are targeted to those most in need through the assets and income tests.  These are collectively known as ‘the means test’.  The means test is the fairest way to ensure that the limited taxpayer funds available for social security expenditure go to those in greatest need.The assets test is based on the principle that people with substantial assets apart from their home should use those assets either directly or to produce income to meet day to day living expenses before calling upon community resources for income support through the social security system.  In order to encourage customers to maximise their private income from employment or investments, an ‘income free area’ is allowed before income starts to affect social security payments.

At present, income streams that meet certain criteria are “asset-test exempt” for the purposes of the means test.  This means that the asset value of the income stream is not taken into account when determining a person’s eligibility for a social security payment.This Bill gives effect to two measures announced earlier this year in the Government’s Statement “ A more flexible and adaptable retirement income system ”.  These measures change the social security and veterans’ entitlements means test assessments of income streams to:

 

·          extend asset-test exempt status for a new product, 'market-linked income streams' from 20 September 2004. This product will offer market returns but the purchaser will not be able to withdraw his or her capital before the term of the product has ended (ie it is non-commutable); and

·          changing the social security assets test exemption from 100% to 50% for non-commutable income streams that are purchased from 20 September 2004 and meet the requirements for exemption from the assets test.

 

The extension of assets test exempt status to the new 'market-linked income streams' is intended to increase competition in the provision of income stream products.  Customers will also benefit from having greater choice in selecting an income stream that best meets their retirement needs.

 

Currently insurance-based income streams, because they provide stable income payments over a guaranteed period, are given concessional tax and social security treatment.  Consumers can only select a product that offers a guaranteed but generally low return.  This new product will offer potentially higher, but more variable market returns.  As with current income streams that receive concessional treatment under the assets test, the purchaser will not be able to withdraw his or her capital before the term of the product has ended.

 

The change in the assets test exemption from 100% to 50% for 'purchased' asset test exempt income streams is intended to ensure that the age pension is paid to those who need it most.  Despite the change, a 50% exemption retains a significant incentive for individuals to purchase income streams.  Even after the commencement of this legislation, it will be possible for couples to invest up to $900,000 in a complying income stream and still receive some age pension.

 

All asset-test exempt income streams purchased before 20 September 2004 will continue to receive a 100% assets test exemption.  This means that no current customers will be affected by this change.

 

The Bill also contains provisions to align the characteristics of life expectancy income streams products with those of the new market-linked income stream products.  The alignment will ensure that these products are treated in a consistent manner under the means test.  This will allow individuals to compare the products based on their characteristics, and not short term differences between the expected annual payments.

 

Currently, life expectancy income streams only retain assets test exempt status on reversion to a reversionary beneficiary where the remaining term of the income stream matches the beneficiary's life expectancy at the time of death.  This requirement has the consequence that, for most life expectancy income streams, assets test exempt status is lost when the income stream reverts.

 

The new rules will allow individuals who purchase life expectancy and market-linked income streams on or after 20 September 2004 to have greater confidence that the income stream will retain its asset test exempt status on reversion to a partner.  The Bill allows for the retention of asset-test exempt status on reversion to a specified reversionary beneficiary who is a member of a couple (a reversionary partner).  The income stream must also be non-commutable while either of the members of the couple remain alive other than in limited circumstances specified in the provisions covering life expectancy or market-linked income streams.

 

The Bill also extends the guarantee period for asset-test exempt lifetime income streams.  The current means test rules stipulate that an asset test exempt lifetime income stream may only be commuted if the primary beneficiary dies within a 10 year period of purchasing the income stream.  The Bill will extend this period to allow a lifetime income stream to be commuted provided the primary beneficiary dies within a period equal to his or her life expectancy or within 20 years of purchasing the income stream, whichever is the lesser.

 

 

Explanation of the changes

 

This Schedule amends the Social Security Act 1991 .

 

Item 1 amends the definition of “asset-test exempt income stream” at subsection 9(1). The new definition includes the new “market linked income streams” being introduced by this bill.

 

Item 2 repeals and replaces paragraphs 9A(2)(d) and (e) to clarify the commencement day of an income stream that is purchased (paragraph 9A(2)(d)) or acquired (paragraph 9A(2)(e)).  For an income stream to meet either of these criteria the first income stream payment must relate to the period commencing on the day on which the income stream was either purchased or acquired by or for the primary beneficiary.

 

Item 3 changes the period mentioned in subparagraph 9A(2)(h)(ii) from 10 years to the life expectancy period (defined at item 12 ) that relates to the income stream.  Currently, an income stream will satisfy the requirement of this subparagraph if its contract or governing rules allow, where a primary beneficiary dies, the reversionary beneficiary, or his or her estate, or the estate of the primary beneficiary to be paid an amount equal to the remaining payments that would have been paid to the primary beneficiary if he or she had lived for a period of up to 10 years from the commencement day of the income stream.  This amendment replaces the 10-year period with the life expectancy period that relates to the particular income stream.

 

Item 4 amends subparagraph 9A(2)(h)(iii).  Currently this provision provides that an income stream will meet the requirements for asset-test exemption where, among other things, the contract or governing rules of that income stream allow the income stream to be commuted, as long as the commuted funds are used to purchase another income stream that meets the requirements of either subsection 9A(2) or 9B(2).  This amendment will mean that where an income stream’s contract or governing rules allow commuted funds from the income stream to be used to purchase a new income stream, then this new income stream must now meet the definition of an “asset-test exempt income stream” at section 9A, 9B or 9BA, rather than just the contract or governing rules of the new income stream needing to meet the requirements of subsection 9A(2) or 9B(2), which is currently the case.  This amendment means that the contract or governing rules of an income stream that is asset-test exempt for social security purposes are now permitted to allow commuted funds to be transferred into an income stream that the Secretary has determined to be asset-test exempt for social security purposes under either subsection 9A(5), 9B(4) or 9BA(11), even though the income stream’s contract or governing rules does not meet the requirements of subsection 9A(2), 9B(2) or 9BA(2).

 

Item 5 removes the phrase, “arising under a contract, or governing rules, that meet the requirements of this subsection or subsection 9B(2)” from subparagraph 9A(2)(h)(iv) and substitutes, “relating to”.  This amendment means that an income stream’s contract or governing rules may allow any superannuation surcharge contribution amount that relates to the income stream to be commuted from the income stream, rather than just amounts the purchaser was liable to pay in their capacity as the purchaser of the income stream.

 

Item 6 changes the first reference to the period mentioned in paragraph 9A(3)(a) from 10 years to the life expectancy period that relates to the income stream.

 

Item 7 changes the second reference to the period mentioned in paragraph 9A(3)(a) from 10 years to the period already referred to, (as a result of the changes made by item 6 ) ie the life expectancy period that relates to the income stream.

 

Item 8 changes the reference to the period mentioned in subparagraph 9A(3)(b)(i) from 10 years to the life expectancy period.

 

Item 9 changes the reference to the period mentioned in subparagraph 9A(3)(b)(iii) from 10 years to the period mentioned in subparagraph 9A(3)(b)(i), being the life expectancy period.  This follows as a result of the amendments at items 7 and 8 above.

 

Item 10 changes the reference to the period mentioned in subparagraph 9A(3)(c)(i) from 10 years to the life expectancy period.

 

Item 11 adds the words, “(if any)” after “guidelines” in subsection 9A(5).  This provision clarifies that the Secretary is still able to determine that an income stream, whose contract or governing rules do not meet the requirements of subsection 9A(2), is an asset-test exempt income stream for social security purposes even if there are no guidelines determined for this purpose under subsection 9A(6).

 

Item 12 inserts a definition of “life expectancy period” into subsection 9A(7) of the Social Security Act.  The life expectancy period starts on the day on which the income stream was acquired or purchased by the primary beneficiary and is equal to the primary beneficiary’s life expectancy on that day or 20 years, whichever is the shorter.

 

Item 13 repeals subsection 9B(1) and inserts a replacement provision.  This new provision removes the necessity for an income stream to be purchased by a customer on or after the day that he or she reaches pension age.  It still requires an income stream to meet the requirements of either subsection 9B(1A) or (1B).

 

Item 14 inserts new paragraph 9B(1A)(aa), which is a new criterion required for a life-expectancy income stream to be treated as asset-test exempt for social security purposes.  To meet this criterion the income stream must be provided to either the primary beneficiary or the person who was the primary beneficiary’s reversionary partner on the day the primary beneficiary died.  Item 21 inserts a definition of “reversionary partner”.

 

Item 15 repeals and replaces paragraph 9B(2)(a).  This new provision requires that the contract or governing rules of an income stream must specify a term for the income stream.  This term must comply with either subsection 9B(2B) or (2C) (see item 19 ).  This new provision also requires that payments from the income stream are to be made at least annually during this term.  It also removes the existing requirements regarding allowable terms for life expectancy income streams.

 

Item 16 repeals and replaces paragraphs 9B(2)(d) and (e).  Before the amendment, these provisions provided that the first income stream payment needed to relate to the period commencing on the day the income stream was either purchased or acquired.  The new provisions clarify that the relevant period is that period commencing on the day that the income stream was purchased or acquired by or for the primary beneficiary.

 

Item 17 repeals and replaces subparagraphs 9B(2)(h)(ii), (iii) and (iv).  Subparagraph 9B(2)(h)(i) to (v) set out the conditions under which an asset-test exempt income stream’s contract or governing rules will allow the income stream to be commuted.

 

Currently subparagraph 9B(2)(h)(ii) provides that an income stream will meet the requirements for asset-test exemption where the contract or governing rules of that income stream allow the income stream to be commuted, as long as the commuted funds are used to purchase another income stream that meets the requirements of either subsection 9A(2) or 9B(2).  This amendment will mean that where an income stream’s contract or governing rules allow commuted funds from the income stream to be used to purchase a new income stream, then this new income stream must now meet the definition of an “asset-test exempt income stream”, rather than just the contract or governing rules of the new income stream needing to meet the requirements of subsection 9A(2) or 9B(2), which is currently the case.

 

This amendment means that the contract or governing rules of an income stream that is asset-test exempt for social security purposes are now permitted to allow commuted funds to be transferred into an income stream that the Secretary has determined to be asset-test exempt for social security purposes under either subsection 9A(5), 9B(4) or 9BA(11), even though the income stream’s contract or governing rules does not meet the requirements of subsection 9A(2), 9B(2) or 9BA(2).

 

New subparagraphs 9B(2)(h)(iii) and (iiia) provide that an income stream will meet the requirements for asset-test exemption where the contract or governing rules of the income stream allows that income stream to be commuted, on the death of the reversionary partner, where there is a reversionary partner, or on the death of the primary beneficiary, where there is no reversionary partner.  An income stream cannot be commuted on the death of the primary beneficiary where there is a reversionary partner.

 

New subparagraph 9B(2)(h)(iv) provides that an income stream will meet the requirements for asset-test exemption where the contract or governing rules of the income stream allows that income stream to be commuted to the extent necessary to pay any superannuation contributions surcharge that relates to the income stream.

 

Item 18 repeals and replaces paragraph 9B(2)(i).  This new paragraph provides that an income stream will meet the requirements for asset-test exemption where, among other things, the contract or governing rules of an income stream allow that income stream to only be transferred to another person on the death of the current beneficiary.

 

Item 19 inserts new subsections 9B(2B) and (2C).  The term of a life-expectancy income stream must comply with either one of these subsections.  Subsection 9B(2B) provides that an income stream’s term must be a whole number and start on the income stream’s commencement day.  It also provides that, where the term is based on the primary beneficiary’s life expectancy only, it must have a range between the primary beneficiary's life expectancy (rounded up) and the primary beneficiary's life expectancy if he or she were five years younger (rounded up).  Subsection 9B(2C) provides that where the pension is set up to revert to a reversionary partner on death then an income stream’s term must be a whole number, start on the income stream’s commencement day and must have a range between the longer of the two partner's life expectancies (rounded up) and the longer of the two partner's life expectancies at an age five years younger (rounded up).

 

Item 20 adds the words, “(if any)” after “guidelines” in subsection 9B(4).  This provision clarifies that the Secretary is still able to determine that an income stream, whose contract or governing rules do not meet the requirements of subsection 9B(2), is an asset-test exempt income stream for social security purposes even if there are no guidelines determined for this purpose under subsection 9B(5).  This is a similar change to item 11 .

 

Item 21 inserts a definition of “reversionary partner” into subsection 9B(6).  A reversionary partner of the primary beneficiary will be a person who is member of a couple.  Where a reversionary partner is specified, the income stream must be paid to this individual on the death of the primary beneficiary.  However, if the income stream reverts to a reversionary beneficiary who is not a reversionary partner, the income stream will lose its assets test exempt status (see item 14 ).

 

Item 22 sets out the application of items 2 to 21 of this schedule.  These items will only apply to an income stream that commences on or after 20 September 2004.

 

Item 23 provides that if an income stream that is asset-test exempt, for social security purposes, prior to 20 September 2004 has its contract or governing rules amended to allow for the income stream to be commuted where the customer is going to transfer those funds directly to purchasing a market linked income stream, which falls within the scope of subsection 9BA(1), then the original income stream will retain its asset-test exempt status.  This does not necessarily mean that, if the original income stream had a 100% exemption from the assets test, the new income stream would retain this 100% exemption.

 

Item 24 inserts new section 9BA.  This section provides for a new category of asset-test exempt income streams, being market-linked income streams. It is worth noting that whilst these income streams are called “asset-test exempt” in this item, they will only ever attract a 50% asset test exemption (see amendments to section 1118 in item 29 ).

 

New subsection 9BA(1) sets out the requirements that a market-linked income stream must satisfy to attract the asset-test exemption for the purposes of the Act. Such an income stream must either have had a determination made by the Secretary, under subsection (11), in regard to it or else meet all of the following criteria:

 

·          The income stream commences on or after 20 September 2004;

·          The income stream is either provided to the primary beneficiary or the reversionary partner of the primary beneficiary;

·          The contract or governing rules of the income stream satisfy the requirements of subsection 9BA(2);

·          The Secretary, or his or her delegate, has not made a determination in regard to the income stream under subsection 9BA(10).  Subsection (10) allows the Secretary, in certain circumstances, to determine that an income stream, whose contract or governing rules would otherwise meet the requirements of subsection (2), is not an asset-test exempt income stream for social security purposes.  These circumstances are specified in new subsection 9BA(10); and

·          The Secretary is satisfied that the income stream has complied with the requirements of subsection (2) from its commencement date.

 

New subsection 9BA(2) sets out the characteristics that the contract or governing rules of an income stream must possess so that the income stream can qualify for asset-test exempt status under section 9BA.  Those contract/governing rules must specify all of the following:

 

·          The term of the income stream, which must comply with either subsection 9BA(3) or (4);

·          The income stream’s obligations to make payments, which must satisfy subsections 9BA(5) to (9);

·          The first payment from the income stream relates to the period commencing on the day on which the income stream was purchased by or for the primary beneficiary;

·          Where the income stream was not purchased, the first payment from the income stream relates to the period commencing on the day on which the income stream was acquired by or for the primary beneficiary;

·          There must be no residual capital value;

·          The income stream cannot be commuted except in the following circumstances:

 

(i)      Where the income stream has not been funded by the prior commutation of another income stream, the current income stream is commuted within six months of the income stream’s commencement date;

(ii)     Where the income stream is commuted to fund the purchase of another income stream that would be asset-test exempt for social security purposes;

(iii)    If there is a reversionary partner who survives the primary beneficiary then on the death of the reversionary partner;

(iv)    Where subparagraph 9BA(2)(f)(iii) does not apply, after the primary beneficiary’s death;

(v)     To cover any superannuation contributions surcharge that relates to the income stream, but only to the extent necessary to pay this surcharge;

(vi)    To give effect to an entitlement of a person’s spouse or former spouse under a payment split under Part VIIIB of the Family Law Act 1975 , but only to the extent necessary to pay this entitlement; or

(vii)   To pay a hardship amount, but only to the extent necessary to pay the amount.

 

·          The income stream cannot be transferred except on the death of a beneficiary;

·          Neither the capital nor the income from the income stream can be used to secure a borrowing;

·          If the income stream reverts to a reversionary beneficiary, the amount of that reversion cannot be greater than the income stream’s account balance immediately before the death of the former beneficiary; and

·          If the income stream is commuted, the amount commuted cannot be greater than the income stream’s account balance immediately before the commutation.

 

New subsection 9BA(3) provides that an income stream’s term must be a whole number and start on the income stream’s commencement day.  Where the term is based on the primary beneficiary’s life expectancy only, it must have a range between the primary beneficiary's life expectancy (rounded up) and the primary beneficiary's life expectancy if he or she were five years younger (rounded up).  The term of an income stream must satisfy either this provision or subsection 9BA(4).

 

New subsection 9BA(4) provides that where the income stream is set up to revert to a reversionary partner on death then an income stream’s term must be a whole number, start on the income stream’s commencement day and must have a range between the longer of the two partner's life expectancies (rounded up) and the longer of the two partner's life expectancies at an age five years younger (rounded up).

 

New subsection 9BA(5) specifies rules for calculating the amount of income that a market-linked income stream is required to pay to the customer in a financial year for the income stream to meet the requirements of paragraph 9BA(2)(b).  This provision specifies a formula for working out the amount of income that must be paid from the income stream in a financial year.  The amount of income to be paid out in a full financial year is the account balance divided by the “payment factor” for the financial year.  This figure will be adjusted as specified in subsection 9BA(6), where the income stream does not commence on 1 July.

 

The account balance of the income stream is the account balance at the start of the financial year unless the income stream commences part way through a financial year.  If the income stream commences part way through a financial year, then the account balance is the account balance at the time when the income stream commences.

 

The legislation states that the “payment factor” will be worked out with reference to principles determined by the Secretary.  When the Secretary determines principles for working out the payment factor (see subsection 9BA(12)) he or she may adopt the approach to working out this factor that is used in the Superannuation Industry (Supervision) Regulations 1994.   However, this does not limit the Secretary’s discretion to determine such principles as he or she sees fit.

 

New subsection 9BA(6) provides that, where an income stream does not commence on 1 July, then it must pay a pro-rata amount of income to the customer for the remaining portion of the first financial year.  The payment that would have been made if the income stream had commenced on 1 July is calculated under subsection 9BA(5).  The number of days in the financial year to which the income stream payments apply is divided by the number of days in the financial year.  This figure is then multiplied by the payment amount worked out under 9BA(5) to calculate the amount of income that should be paid in the remaining portion of the financial year.

 

New subsection 9BA(7) states that neither subsection 9BA(5) or (6) apply where the income stream in question commences between 1 June and 30 June in a financial year and no income payment is made in that period.  This provision allows individuals who purchase a market-linked income stream between 1 June and 30 June to defer the first payment until the following financial year and have the payments calculated in accordance with the payment factors and other requirements for the following financial year.

 

New subsection 9BA(8) addresses the situation where the account balance for market-linked income streams is not sufficient to meet the total amount specified under subsections 9BA(5) and 9BA(6) for a particular financial year.  Where this occurs, the remaining account balance is to be paid out to the recipient of the income stream and the total amount specified to be paid for that financial year is reduced accordingly.

 

New subsection 9BA(9) provides that where an income stream still has a residual balance at the end of its term then this amount must be paid out within 28 days of the income stream’s term ending.  This covers the situation where the last payment made at the end of the income stream’s term does not exhaust the account balance.

 

New subsection 9BA(10) provides that where the contract or governing rules of an income stream would otherwise meet the requirements of subsection 9BA(2), but the primary beneficiary has previously commuted an income stream that was asset-test exempt for social security purposes three or more times since the person first received a social security payment, then the Secretary may determine that the income stream is not to be treated as an asset-test exempt income stream for social security purposes.  It is a further requirement that on at least three of the times that an asset-test exempt income stream was commuted, the commutation occurred within six months of the commencement day of the income stream.  This provision has a similar operation to subsection 9A(4) and 9B(3), which apply to lifetime and life expectancy income streams.

 

New subsection 9BA(11) provides that where the contract or governing rules of an income stream would not otherwise meet the requirements of subsection 9BA(2), the Secretary may make a determination that the income stream in question is an asset-test exempt income stream for social security purposes.  In making such a determination the Secretary needs to have regard to any guidelines made for this purpose under subsection 9B(5).  If there are no such guidelines then the Secretary is still able to make a determination in this regard.  This provision has a similar operation to subsection 9A(5) and 9B(4), which apply to lifetime and life expectancy income streams.

 

New subsection 9BA(12) provides the Secretary with power to make guidelines to be used in making a determination under subsection 9BA(11).  These guidelines are disallowable instruments for the purposes of section 46A of the Acts Interpretation Act 1901 .

 

New subsection 9BA(13) provides that a determination made by the Secretary in relation to the definition of a “PF” in subsection 9BA(5) is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901.

 

New subsection 9BA(14) defines a number of terms used in section 9BA.  The terms, “a hardship amount” and “non-commutation funded income stream” have the same meaning as in section 9A.

 

A “reversionary partner” has the same meaning as in item 21 .

 

Item 25 provides transitional rules relating to the use of the “new life tables”.  Subsection (1) provides that where the Australian Government Actuary publishes the new life tables in 2004 then this item will apply to an asset-test exempt income stream with a commencement day after that publication but prior to 1 January 2005.  Subsection (1) also provides that where the Australian Government Actuary publishes the new life tables in 2005 then this item will apply to an income stream with a commencement day after that publication but prior to 1 January 2006.

 

Subsection (2) provides that where the life expectancy relating to an income stream needs to be calculated for the purposes of determining whether the income stream is an asset-test exempt income stream under section 9A, 9B or 9BA then that period can be calculated either having regard to the new life tables, or the life tables that would have been used apart from this item.  The choice of which set of life tables to use will depend on those that are used already in relation to the income stream.

 

Subsection (3) provides that where a certain set of life tables has been chosen in regard to a particular income stream, under subsection (2) of this item, then this same set of life tables should be used for the purposes of determining the income stream's “relevant number” for social security purposes.

 

Item 26 amends the note at the end of section 1098.  This note refers readers to the definition of an asset-test exempt income stream, which currently is defined only in relation to sections 9A and 9B.  This definition now needs to be expanded to include reference to section 9BA.

 

Item 27 amends paragraph 1118(1)(d), which currently excludes asset-test exempt income streams from the social security assets test.  This amendment removes an income stream that is a “partially asset-test exempt income stream” from the exemption this paragraph provides.

 

Item 28 inserts new paragraph 1118(1)(da) which provides an asset-test exemption of 50% of the value of a partially asset-test exempt income stream.  The definition of this term has been inserted in subsection 1118(1A), described below.

 

Item 29 inserts the definition of a “partially asset-test exempt income stream” into subsection 1118(1A).  A partially asset-test exempt income stream is an income stream that is:

 

·          either a market linked income stream or an “asset-test exempt income stream” that is not a defined benefit income stream; and

·          commences on or after 20 September 2004; and

·          is not covered by principles that the Secretary has determined in relation to this issue.

 

The principles determined by the Secretary, and specified in a disallowable instrument (see item 30 ), will cover certain asset-test exempt income streams that are purchased or acquired before 20 September 2004, commuted on or after 20 September, and rolled over to purchase another income stream that satisfies the requirements of sections 9A or 9B.  These income streams will be allowed to retain the 100% exemption from the assets test in certain circumstances specified in the disallowable instrument.

 

Item 30 inserts new subsection 1118(5).  This provision provides that where the Secretary has determined principles under paragraph (c) of the definition of a “partially asset-test exempt income stream” then that determination will be a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901 .

 

Item 31 inserts new section 1120B.  This section provides that for working out the value of the exemption that a “partially asset-test exempt income stream” receives under paragraph 1118(1)(da) the value of the income stream should firstly be worked out as if the income stream were an “asset-tested income stream” for social security purposes under either section 1120A, in the case of a family law affected income stream, or section 1119, in every other case.

 

Item 32 amends subsection 1223A(5) so that it also refers to an income stream that the Secretary has determined to be asset-test exempt income stream under subsection 9BA(11), as well as those determined by the Secretary under either subsection 9A(5) or 9B(4), which were already referred to.

 

 

Commencement

 

 

The amendments contained in Schedule 1 commence on 20 September 2004.

 

 



Schedule 2 - Amendment of the Veterans’ Entitlements Act 1986

 

 

Summary

 

 

This Schedule amends the Veterans’ Entitlements Act 1986 (the VEA) to change the means test assessment of certain income streams.  These changes include:

 

·          the provision of a 50% assets test exemption for a new product, ‘market-linked income streams’ from 20 September 2004; and

·          a change in the assets test exemption from 100% to 50% for certain non-commutable income streams purchased from 20 September 2004.

 

The Schedule also contains amendments to align the characteristics of life expectancy income streams with those of the new market-linked income stream product and a variation to the guarantee period for asset-test exempt lifetime income streams.

 

Background

 

 

A comprehensive background concerning the changes made by these amendments is contained in Schedule 1 .

 

 

Explanation of the Changes

 

 

Although the VEA legislation mirrors the social security law legislation, there are a number of minor variations within the legislation necessary to reflect differences in administrative arrangements and legislative formats.

 

These variations are:

 

·          the proposed VEA legislation refers to the Repatriation Commission as the decision-maker, instead of the Secretary as in the proposed social security law;

·          references to related provisions within each Act are different eg. the assets test provisions, which required amendment, are at different section numbers within the respective Acts.

 

Set out below is a Comparative Table of the items referring to the amendments made under Schedules 1 and 2 .  The explanation provided for an item in Schedule 1 is to be read as the explanation for the equivalent amendment to the VEA in Schedule 2 .

 

A number of the Schedule 2 amendments have no equivalent in Schedule 1.  The amendments are minor and for those items details are provided previously in the outline of the changes above.

 

 

Comparative Table of Provisions

 

 

Schedule 2 Item Number

Description

Schedule 1

Item Number

1

Amendment to subsection 5J(1) definition of “asset-test exempt income stream”

1

2

Repeal and substitution of paragraphs 5JA(2)(d) and (e)

2

3

Amendment to subparagraph 5JA(2)(h)(ii)

3

4

Amendment to subparagraph 5JA(2)(h)(iii)

4

5

Amendment to subparagraph 5JA(2)(h)(iv)

5

6

Insertion of Notes1A and 1B in paragraph 5JA(2)(h)

No equivalent Schedule 1 item

7

Amendment to paragraph 5JA(3)(a)

6

8

Further amendment to paragraph 5JA(3)(a)

7

9

Amendment to subparagraph 5JA(3)(b)(i)

8

10

Amendment to subparagraph 5JA(3)(b)(iii)

9

11

Amendment to subparagraph 5JA(3)(c)(i)

10

12

Amendment to subsection 5JA(5)

11

13

Insertion of definition of “life expectancy period” in subsection 5JA(7)

12

14

Repeal and substitution of subsection 5JB(1)

13

15

Insertion of new paragraph 5JB(1A)(aa)

14

16

Repeal and substitution of paragraph 5JB(2)(a) and insertion of new paragraph 5JB(2)(aa)

15

17

Repeal and substitution of paragraphs 5JB(2)(d) and (e)

16

18

Repeal and substitution of subparagraphs 5JB(2)(h)(ii), (iii) and (iv)and insertion of new paragraph 5JB(2)(h)(ivaa)

17

19

Insertion of Note 1A in paragraph 5JB(2)(h)

No equivalent Schedule 1 item

20

Repeal of subparagraph 5JB(h)(v)

No equivalent Schedule 1 item

21

Repeal and substitution of paragraph 5JB(2)(i)

18

22

Insertion of new subsection 5JB(2B) and (2C)

19

23

Amendment to subsection 5JB(4)

20



 

Schedule 2 Item Number

Description

Schedule 1

Item Number

24

Repeal of subsection 5JB(6)

No equivalent Schedule 1 item

25

Insertion of definition for “reversionary partner” in subsection 5JB(7)

21

26

Application provision concerning amendments made to sections 5JA and 5JB

22

27

Transitional provision concerning commutation of asset-test exempt income streams to purchase market linked income streams

23

28

Insertion of new section 5JBA

24

29

Transitional provision concerning the early use of the new Australian Life Tables for determining life expectancies

25

30

Amendment to the Note to section 46T

26

31

Amendment to paragraph 52(1)(d)

27

32

Insertion of new paragraph 52(1)(daa)

28

33

Insertion of new subsections 52(1AA) and (1AB)

29 and 30

34

Insertion of new section 52BB

31

35

Amendment to subsection 52ZMA

32

 

 

Commencement

 

 

The amendments contained in Schedule 2 commence on 20 September 2004.