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Family and Community Services and Veterans' Affairs Legislation Amendment (Sugar Reform) 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 (SUGAR REFORM) BILL 2004

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

 

 

 

 

 

 

 

 

(Circulated by the authority of the Minister for Family

and Community Services,

Senator the Hon Kay Patterson)

 

 



FAMILY AND COMMUNITY SERVICES AND VETERANS’ AFFAIRS LEGISLATION AMENDMENT (SUGAR REFORM) BILL 2004

 

 

OUTLINE AND FINANCIAL IMPACT STATEMENT

 

This Bill gives effect to one aspect of the Government’s comprehensive range of initiatives to help the nation’s sugar industry that were announced by the Prime Minister on 29 April 2004.

 

Many sugarcane industry stakeholders have emphasised the need to ensure that sugarcane farms can more readily be handed from one generation to the next.  Amendments will be made to the social security law and the Veterans’ Entitlements Act 1986 to provide for a 3 year window of opportunity during which the intergenerational transfer of sugarcane farms (by persons of pension age) will be exempt from the usual ‘gifting’ rules.

 

The Bill commences on Royal Assent.

 

Financial impact:

(social security)

2004-05

$2.6m

2005-06

$3.7m

2006-07

$5.9m

2007-08

$6.7m

 

Financial impact:

(veterans’ entitlements)

2004-05

$0.6m

2005-06

$0.8m

2006-07

$1.2m

2007-08

$1.4m

 

 



FAMILY AND COMMUNITY SERVICES AND VETERANS’ AFFAIRS LEGISLATION AMENDMENT (SUGAR REFORM) BILL 2004

 

NOTES ON CLAUSES

 

Clause 1 sets out how the Act is to be cited, that is, the Family and Community Services and Veterans’ Affairs Legislation Amendment (Sugar Reform) Act 2004 .

 

Clause 2 provides that the Act commences on the day on which it receives the Royal Assent.

 

Clause 3 provides that each Act that is specified in a Schedule is amended or repealed as set out in that Schedule.

 

This Explanatory Memorandum uses the following abbreviations:

 

·          ‘Social Security Act’ means the Social Security Act 1991 ;

·          ‘Social Security Administration Act’ means the Social Security (Administration) Act 1999 ; and

·          ‘Veterans’ Entitlements Act’ means the Veterans’ Entitlements Act 1986 .

 



Schedule 1 - Amendment of the Social Security Act 1991

 

Summary

 

This Schedule provides for a 3 year window of opportunity during which the intergenerational transfer of sugarcane farms (by persons of pension age) will be exempt from the usual ‘gifting’ rules.

 

Background

 

Many sugarcane industry stakeholders have emphasised the need to ensure that sugarcane farms can more readily be handed from one generation to the next.  Accordingly, the Government will make changes to the social security law and the Veterans’ Entitlements Act 1986 which will facilitate intergenerational transfer in the sugarcane industry.  Such a scheme has the potential to support sugarcane growers dealing with challenge and change while, at the same time, increasing the involvement of young people in setting the future directions of the sugar industry.

 

Under the Social Security Act, there are limits to the assets a person can hold without those assets affecting their entitlement to social security payments and may preclude a person from payments altogether.  Further, a person who gives away an asset is treated, for a 5 year period, as if the person still owned the asset when assessing entitlement to social security payments.  The operation of these provisions can make it difficult for farmers endeavouring to retire and access social security payments as well as presenting an impediment to the intergenerational transfer of the family farm.

 

The amendments will provide a 3 year window during which qualified sugarcane farmers (and their partners) will be able to transfer their farm to eligible descendants (ie children and grandchildren who have had an active involvement in farming for at least 3 years prior to the transfer) without the usual gifting rules applying in respect of that transfer.

 

Key features of the scheme include:

 

·          the net value of the farm enterprise must not exceed $500,000;

·          the sugarcane grower (or partner, where applicable) must either be pension age (or veteran pension age where applicable) or will reach that age in the 3 year window;

·          the sugarcane growers’ (and partners’ where applicable) income from all sources over the previous three financial years must be less than the applicable maximum annual rate of pension for that same period;

·          the transfer must be by way of gift and must divest the sugarcane grower (and partner where applicable) of all interests in sugarcane farming (excluding the family home);

·          during the 3 years prior to the transfer, the eligible descendant must have been actively involved in the sugarcane farm enterprise;

·          the retiring farmer must have owned the property for at least 15 years or been actively involved in farming for at least 20 years and acquired an eligible interest in a sugarcane farm before 29 April 2004;

·          the scheme will apply only to transfers occurring after the passage of the legislation;

·          where the requirements of the scheme are met, the usual gifting rules will not apply to the transfer of the sugarcane farm enterprise and relevant sugarcane farm assets (although the usual rules will apply in respect of all other assets and income).

 

Explanation of changes

 

Amendments to the Social Security Act 1991

 

Item 1 inserts a reference to new Part 3.14B into the Reader’s Guide.

 

Item 2 inserts new subsection 12A(2B).  Under the scheme, where a farm is transferred in accordance with the new provisions, it will be possible for the farmer to retain a life interest in the principal home on the farm.  The effect of the new subsection is to make that life interest immune from the application of the social security law provisions relating to "granny flat" interests.

 

Item 3 inserts new section 17B which sets out certain definitions relevant to the operation of the scheme.  Various terms that were relevant for the purposes of the previous Retirement Assistance for Farmers scheme (see Part 3.14A of the Social Security Act) are also relied upon for the purposes of this scheme (for example, the term ‘ eligible descendant ’).

 

As the focus of the new scheme is assistance for sugarcane growers, the terms ‘ sugarcane farm ’, ‘ sugarcane farm enterprise ’ and ‘ relevant sugarcane farm asset ’ are specifically defined.

 

Paragraph (a) of the definition of a ‘ sugarcane farm enterprise ’ states that it means a farm enterprise (which is a defined term in section 17A) where a majority of the enterprise is undertaken for the purposes of growing commercial quantities of sugarcane.  This definition recognises that a proportion of a farm enterprise might involve growing produce other than sugarcane.  However, provided the majority of the enterprise is undertaken for growing sugarcane, it is intended that the benefit of the scheme should be available.  The definition also makes it clear that the enterprise must involve growing sugarcane.  Accordingly, an enterprise that essentially involves (for example) only contract planting or harvesting will not satisfy the definition of sugarcane farm enterprise and will not be able to attract the benefits of the scheme.

 



Paragraph (b) provides that a farm enterprise might still be a sugarcane farm enterprise even though a majority of the enterprise is not undertaken for the purposes of growing commercial quantities of sugarcane if:

 

·          a significant proportion of the enterprise is undertaken for the purposes of growing commercial quantities of sugarcane; and

·          the Secretary has determined that there are special circumstances that mean the enterprise should be treated as a sugarcane farm enterprise.  The determination must be in accordance with any guidelines made by the Secretary.

 

While paragraph (b) still requires that a significant proportion of the enterprise involves growing commercial quantities of sugarcane, it provides the Secretary with flexibility in appropriate cases to allow people to have access to the scheme who would not otherwise have been able to benefit from the scheme if a rigid definition was applied.  For example, an enterprise might historically have involved 80% sugarcane growing while the remainder of the enterprise was undertaken for other produce.  With the downturn in the world sugar market, the farmer might have recently made a commercial decision to adjust that mix of production, with sugarcane growing reduced to only 45% of the enterprise.  While the Secretary would need to consider all relevant factors prior to making a determination, considerations like those above would be relevant in reaching a decision.

 

The term ‘ sugarcane farm ’ is defined as meaning a farm (which is a defined term in section 17A) that is used predominantly for the purposes of a sugarcane farm enterprise.  Again, this definition recognises that not 100% of the farm might be directed to sugarcane farming.  However, provided that that is the predominant purpose, the farm will meet the definition of a ‘sugarcane farm’.

 

A ‘ relevant sugarcane farm asset ’ is any relevant farm asset (which is a defined term in section 17A) that is a produce of, or is used for the purposes of, a sugarcane farm enterprise.

 

In broad terms, the scheme operates where a ‘ qualifying sugarcane farmer ’ has ‘ transferred ’ his or her ‘ eligible interest ’ in a sugarcane farm to an ‘ eligible descendant ’.  A ‘ transfer ’ in relation to an eligible interest in a sugarcane farm has the meaning given by subsections (7), (8), (10), (11) and (12).  A transfer in relation to an eligible interest in a relevant sugarcane farm asset has the meaning given by subsections (9), (11) and (12).

 

According to subsection 17B(2), a person is an ‘ eligible former partner of a qualifying sugarcane farmer ’ if:

 

(a)       the person was, but no longer is (for whatever reason), the partner of another person; and

(b)       on the day on which the person ceased to be the partner of the other person, that other person was a qualifying sugarcane farmer; and

(c)        after ceasing to be the partner of the other person, the person has not again become a member of a couple; and

(d)       the person has an eligible interest in a sugarcane farm or sugarcane farms in which the other person had an eligible interest.

 

The scheme requires, among other things, a long term association with the farming industry in Australia, either through ongoing, long term involvement with particular farm property or through current involvement with a sugarcane farm enterprise combined with long term involvement in farming.  The term ‘ qualifying sugarcane farmer ’ is used to describe a person who can demonstrate the required association.

 

Subsection 17B(3) defines a qualifying sugarcane farmer firstly as a person who currently has, for at least 15 years continuously, an eligible interest in a farm and the farm is, and has been for at least the last 2 years, a sugarcane farm.  The farm must have been a sugarcane farm at all times since 29 April 2004 (ie the date of the announcement of the scheme by the Prime Minister).  Further, during a period of 15 years, the person or their partner must have contributed a significant part of his/her labour and capital to the development of a farm (or farms) and have derived a significant part of his/her income from that farm (or farms).  During at least the last 2 years, the contribution of labour and capital as well as the derived income must relate to sugarcane farms.

 

Subsection 17B(4) alternatively defines a ‘ qualifying sugarcane farmer ’ as a person who, before 29 April 2004, has acquired an eligible interest in a sugarcane farm (or sugarcane farms) and the person, their partner or their former partner has been involved in farming for at least 20 years or for periods totalling 20 years.  Persons will be taken to have been involved in farming for the purposes of subsection (4) if they have contributed a significant part of their labour to farm enterprises and have derived a significant part of their income from farm enterprises.  During at least the last 2 years, the contribution of labour and capital as well as the derived income must relate to sugarcane farm enterprises.

 

A significant concept for the purposes of the scheme is the concept of an ‘ eligible interest ’ in a sugarcane farm (and/or any relevant sugarcane farm assets).  Subsection 17B(5) states a person has such an eligible interest if:

 

(a)       the person has a legal estate or interest in the farm; or

(b)       the person has a transferable legal right or a transferable licence to occupy the farm for a particular purpose of the farm enterprise; or

(c)        as the mortgagor of a legal estate or interest in the farm (being an estate or interest that is not registered under a relevant State land law), the person has an equitable estate or interest in the farm; or

(d)       the person is a shareholder in a proprietary company that has a legal estate or interest in the farm; or

(e)       the value of the person’s assets includes an amount calculated (in accordance with section 1208E) by reference to the value of the sugarcane farm.

 

Section 1208E which is referred to in paragraph (e) is contained in Part 3.18 of the Social Security Act.  That Part was inserted by the Social Security and Veterans’ Entitlements Legislation Amendment (Private Trusts and Private Companies - Integrity of Means Testing) Act 2000 .  The explanatory memorandum to that Act described the effect of the amendments as follows:

 

This measure aims to ensure that customers who hold their assets in private companies or private trusts receive comparable treatment under the means test to those customers who hold their assets directly.  The assets and income of the structure will be attributed to the person or persons who control the company or trust, or to the person or persons who were the source of the capital or corpus of the company or trust.

 

Where section 1208E applies, its broad effect is that, for social security purposes, the value of a person’s assets includes an amount equal to the amount attributed to the person in respect of assets owned by a company or trust.  The purpose of paragraph 17B(5)(e) is to cover those situations where the assets that make up the sugarcane farm enterprise (and related farm assets) are held in a private company or private trust.  Where the value of a person’s assets includes an amount calculated (in accordance with section 1208E) by reference to the value of a sugarcane farm, the person has an ‘ eligible interest ’ in the sugarcane farm.

 

The purpose of the Note is to make it clear that, provided that the other requirements of the scheme are satisfied, it does not matter that the transfer was undertaken prior to the person lodging a claim for a social security payment.  That is, an actual determination under section 1208E in relation to a claim is not required before a person can have an ‘ eligible interest ’ as contemplated by paragraph 17B(5)(e).

 

For the purposes of what constitutes an ‘ eligible interest ’ in a relevant sugarcane farm asset, paragraphs 17B(6)(a), (b) and (c) respectively mirror paragraphs 17B(5)(a), (d) and (e).

 

Subsections 17B(7) to (13) deal with the issue of when will an eligible interest  that a person has in a sugarcane farm or sugarcane farm asset be treated as having been ‘ transferred ’.  The intention behind these various provisions is to avoid any potential for it to appear that a transfer of an eligible interest has been undertaken (thereby attracting the benefit of the scheme) when in fact the control/ownership of the sugarcane farm enterprise has not passed from the qualifying sugarcane farmer to an eligible descendant (or descendants).

 

Subsection (7) provides that, subject to subsections (8), (10), (11) and (12), the eligible interest that a person has in a sugarcane farm is transferred to another person only if the eligible interest ceases to be vested in the person and becomes vested in that other person.  To avoid any doubt, subsection (8) states that if a person who transfers a legal estate or interest in a sugarcane farm to another person is, under a relevant State land law, registered as being the proprietor of that estate or interest, the legal estate or interest is taken not to have become vested in the other person until the transfer is registered in accordance with that law.

 

Subsection (9) provides that an eligible interest that a person has in a relevant sugarcane farm asset is transferred to another person only if the eligible interest ceases to be vested in the person and becomes vested in that other person.

 

According to subsection (10), if, as a mortgagor of a legal estate or interest in a sugarcane farm, a person has an eligible interest in the farm, the person is taken to have transferred that eligible interest to another person only if the person has become registered as the proprietor of the legal estate or interest under a relevant State land law and has then transferred that legal estate or interest to the other person.  This subsection is intended to provide for the transfer of a sugarcane farm held under old system title which is subject to a mortgage.  Its purpose is to prevent "sham" transfers whereby transactions purporting to be deeds of transfer are entered into, provided as evidence of a transfer, but are not completed in fact.  The effect of the subsection is to require the mortgagor to convert the land to the Torrens system (thereby acquiring legal title) and then transfer that legal estate or interest to the eligible descendant.

 

According to subsection (11), if a person has an eligible interest in a sugarcane farm or a relevant sugarcane farm asset because the person is a shareholder in a proprietary company that has a legal estate or interest in the farm (or a legal interest in the relevant farm asset), the person is taken to have transferred to another person his/her eligible interest in the farm or relevant farm assets only if the person has acquired the company's legal estate or interest in the farm (or the company's legal interest in the relevant farm asset) and has then transferred it to the other person.

 

Subsection (12) is concerned with situations where the person’s eligible interest arises in the circumstances covered by paragraph 17B(5)(e) or paragraph 17B(6)(c), namely, the qualifying sugarcane farmer would be attributed with the value of assets owned by a trust or company and at least a part of those assets include a sugarcane farm enterprise and/or relevant farm assets.

 

Subsection (12) is expressed in sufficiently broad terms so as to allow for the various arrangements under which a person whose eligible interest arises in this specific manner could divest themselves of that interest and appropriately attract the benefit of the scheme.  For example, rather than the interest remaining part of the assets of a company or trust, the transferor might choose to acquire the legal estate or interest from the company/trust and then transfer it to the eligible descendant(s).  The critical issue is to establish whether, in line with the rationale underlying this measure, the qualifying sugarcane farmer is divested of all interests in sugarcane farm enterprises and whether an eligible descendant (or descendants) has acquired those interests.

 

In order for the person to be divested of the eligible interest relevant to subsection (12), the transferor could no longer be an attributable stakeholder of any company or trust whose assets included those giving rise to the eligible interest that is the subject of the transfer.  The transferor could no longer hold any interest in those assets.  However, the means by which the qualifying sugarcane farmer could do this are various and can depend on the nature of the farmer’s relationship to the company or trust (eg. in relation to a trust, he or she might be a settlor, trustee, beneficiary or some combination of those).  The appropriate means might also depend on such matters as whether the eligible interests constitute the sole assets of a company or trust or whether they constitute merely a part of those assets.

 

In one scenario, the farmer may have been the settlor and the trust includes a power to revoke or otherwise terminate the trust, including an express statement that, on the exercise of that power, the assets of the trust revest in the settlor.  If that power was exercised, the farmer may chose to undertake the transfer by passing the revested legal estate directly to an eligible descendant.  Alternatively, after the revesting, the farmer might choose to again rely on a trust structure for the purposes of the transfer.  The diversity of scenarios that might arise makes it impossible to exhaustively identify the different approaches that would be sufficient to meet the requirement as to ‘divesting’ but the critical consideration is whether it is clear that the farmer no longer has any interest in, nor can exert control in relation to, the sugarcane farm enterprise.

 

It is also necessary to show that the eligible descendant (or descendants) gains an interest of a value that is referable to the full value of the eligible interest divested.  Part 3.14B would not apply if a person other than an eligible descendant can be taken to have acquired an interest in the sugarcane farm enterprise as a result of the transfer.

 

Again, the diversity of approaches available when undertaking the transfer here make it impossible to exhaustively list the methods by which this requirement would be satisfied.  However, what must be evident is that the relevant eligible interest has been acquired by an eligible descendant (or eligible descendants).  One example of where that would be satisfied is where, following the transfer, the sugarcane farm enterprise constituted at least part of the assets of a company or trust and an eligible descendant’s asset attribution percentage in relation to that company or trust (ie as contemplated under Part 3.18) would be 100%.  Similarly, if, prior to the transfer, the qualifying sugarcane farmer had an attribution percentage of 100% but, after the transfer, two eligible descendants each had an attribution percentage of 50%, the interest gained would be referable to the full value of the interest divested.

 

As both subsections 17B(11) and (12) may be concerned with situations where the person is a shareholder in a proprietary company that has a legal estate or interest in the sugarcane farm (or sugarcane farm assets), subsection (13) makes it clear that the person’s eligible interest will be taken to have been transferred if the requirements of either subsection (11) or subsection (12) are satisfied.

 

The definition of the term ‘pension age’ in section 23 of the Social Security Act provides that when that term is used in Part 3.14A in relation to a person who is a veteran (within the meaning of the Veterans’ Entitlements Act), it has the meaning that it has in section 5QA of that Act.  In all other cases, it has the meaning given by subsections (5A), (5B), (5C) or (5D) of the Social Security Act.  The effect of Item 4 is to apply that approach to the meaning of that term in Part 3.14B.

 

Item 5 adds a Note to subsection 1074(2) (which relates to business income) concerning the concept of the sugarcane farmers' income test.  Its effect is to alert readers of that subsection to the fact that different provisions apply when working out a person's ordinary income from a sugarcane farm in order to find out whether a person satisfies the sugarcane farmers' income test for the purposes of Part 3.14B.

 

Item 6 adds a Note concerning the concept of the sugarcane farmers' income test to subsection 1075(1) which relates to permissible reductions for business income.  Its effect is to alert readers of that subsection to the fact that different provisions apply when working out a person's ordinary income from a sugarcane farm in order to find out whether a person satisfies the sugarcane farmers' income test for the purposes of Part 3.14B.

 

Item 7 adds a Note concerning the concept of the sugarcane farmers' income test to subsection 1076(1) which relates to deemed income from financial assets for single persons.  The effect of the note is to advise readers that the provisions relating to deemed income from financial assets are inapplicable when applying the sugarcane farmers' income test.

 

Item 8 adds a Note concerning the concept of the sugarcane farmers' income test to subsection 1077(1) which relates to deemed income from financial assets for members of pensioner couples.  The effect of the note is to advise readers that the provisions relating to deemed income from financial assets are inapplicable when applying the sugarcane farmers' income test.

 

Item 9 adds a Note concerning the concept of the sugarcane farmers' income test to subsection 1078(1) which relates to deemed income from financial assets for members of non-pensioner couples.  The effect of the note is to advise readers that the provisions relating to deemed income from financial assets are inapplicable when applying the sugarcane farmers' income test.

 

Item 10 adds a Note concerning the concept of the sugarcane farmers' income test to subsection 1083(1) which relates to the actual returns on financial assets.  The note advises that, in applying the sugarcane farmers' income test, actual returns on financial assets are to be treated as ordinary income.

 

Item 11 adds a Note to subsection 1123(1) which is concerned with conduct constituting a disposal of assets.  The effect of the note is to alert readers that, where there is a divestment of property which satisfies the provisions of the retirement assistance for sugarcane farmers scheme, that transfer of property is not to be taken as a disposal of assets.

 

Item 12 inserts new Part 3.14B into the Social Security Act.

 

Division 1 - General

 

Section 1185M sets out the purpose of Part 3.14B.

 

Section 1185N is concerned with the concepts of the ‘ RASF commencement day ’ and the ‘ RASF closing day ’.  Subsection (1) provides that the RASF commencement day is the day on which Part 3.14B commences and, subject to any determination made under subsection 1185N(2), the RASF closing day is 3 years after the RASF commencement day.

 

Subsection (2) provides that the Minister may, by written determination, change the RASF closing day to a later day.  This approach allows flexibility in relation to the duration of the scheme and reflects the fact that changes were required to the primary legislation dealing with the previous scheme (see Part 3.14A) to allow farmers who had been unable to complete the transfer (but who were otherwise qualified for the scheme) extra time to finalise the transfer.  Subsection (3) ensures that any proposal to change the closing day will be subject to Parliamentary scrutiny by providing that a determination under subsection (2) is a disallowable instrument.

 

Section 1185P is concerned with the concept of the ‘ applicable cut-off day ’.  In basic terms, this is the day by which the relevant transfer must be completed in order for Part 3.14B to apply (see for example the effect of paragraph 1185R(1)(a) in this context).  The general rule, contained in paragraph (b), is that the applicable cut-off is the RASF closing day.  However, where:

 

(i)             the transfer was not completed before the RASF closing day; and

(ii)           a pre-assessment request was lodged within 28 days after the RASF closing day; and

(iii)          an affirmative response is given to that request

 

the applicable cut-off day is the first day after the end of the period of 13 weeks beginning on the day on which the request was responded to.

 

Section 1185Q

 

New subsection 1185Q(1) provides a definition of a pre-assessment request for the purposes of Part 3.14B of the Social Security Act.  A pre-assessment request is a written request by a person, for advice about whether Part 3.14B would apply to the person, or to the person’s partner, if the proposed transfer of the farm were to take place.  The request must set out sufficient information to enable advice to be given in relation to whether the Part would apply to the person in the event that the proposed transfer takes place.

 

New subsection 1185Q(2) provides that, for the purposes of subsection (1), an e-mail will not be accepted as a written request.

 

The effect of new subsection 1185Q(3) is that, if a person contacts the Department or Agency by telephone, fax, e-mail or in person, and the person follows up that initial contact by lodging a pre-assessment request within 21 days after the day of the initial contact, then the day of lodgement of the pre-assessment request is taken to be the day of the person’s initial contact with the Department or Agency.

 

New subsection 1185Q(4) sets out, for the purposes of Part 3.14B, the only circumstances that will be considered to be an affirmative response from the Department or Agency to the pre-assessment request lodged by the person.  For the purposes of this Part, a person is taken to have received an affirmative response to a pre-assessment request only if the Secretary or an officer of the Agency gives the person a dated written response containing advice to the effect that Part 3.14B would apply to the person, or to the person’s partner, in the event that the proposed transfer of the farm were to take place.

 

New subsection 1185Q(5) provides that the Department or Agency is taken to have responded to the pre-assessment request on the date specified in the notice as the date on which the notice was issued.

 

Section 1185R

 

New subsection 1185R(1) provides that, subject to subsection (3), Part 3.14B applies to a person if:

 

(a)       at any time after the RASF commencement day but before the applicable cut-off date, the person, being a qualifying sugarcane farmer (see subsections 17B(3) and (4) above), transfers by way of gift to one, or more than one, eligible descendant (either solely or jointly to the eligible descendant and his or her partner):

 

(i)         his/her eligible interest (see subsections 17B(5) and (6) above) in the sugarcane farm or farms in which he/she had such an interest; and

(ii)        all the eligible interests that he/she had in relevant sugarcane farm assets; and

 

(b)       the person, or (if a member of a couple), the person or his/her partner has reached pension age or will reach pension age before the RASF closing day; and

(c)        the total net value (see section 1185S) of the sugarcane farm or farms and the relevant sugarcane farm assets, in which the person has eligible interests does not exceed $500,000; and

(d)       during the 3 years prior to the transfer, the eligible descendant (or each of the eligible descendants) either had been actively involved (see subsection 1185R(4) below) with any of the farms or, in the opinion of the Secretary, would have been so involved but for exceptional circumstances beyond his/her control; and

(e)       if the person is a member of a couple, the person's partner does not have an eligible interest in any sugarcane farm or relevant sugarcane farm asset; and

(f)        the person satisfies the sugarcane farmers’ income test (see section 1185Y below).

 

New subsection 1185R(2) deals with the circumstances in which Part 3.14B applies to a person who is an eligible former partner of a qualifying sugarcane farmer (see subsection 17B(2) above).  The conditions that are required to be satisfied under subsection (2) correspond with those specified in subsection (1) (although, for subsection (2), it must be the eligible former partner that must have reached pension age or will reach that age before the RASF closing day).

 

New subsection 1185R(3) provides that Part 3.14B does not apply if, immediately before the transfer, the eligible descendant had an eligible interest (acquired after 29 April 2004) in the sugarcane farms or assets and any part of the consideration given for that interest was the wages forgone by the eligible descendant while an employee on any of the farms.  The purpose of this provision is to prevent, after the commencement of Part 3.14B, the use of policy provisions relating to forgone wages as well as the RAFS provisions.

 

Where a trust is a concessional primary production trust in relation to a person, the person may have the power to appoint the trustee in certain circumstances or the power to veto or direct the decisions of the trustee in relation to certain matters.  However, where a trust is a concessional primary production trust in relation to a person, the effect of Part 3.18 of the Social Security Act is that the person cannot be an attributable stakeholder of that trust and the person cannot be attributed a percentage of the assets of the trust.  This measure has both welfare and adjustment objectives and that latter objective might be undermined if the transferor retained powers that restricted the options that might otherwise be considered by the transferee.  Accordingly, subsection 1185R(4) provides that Part 3.14B does not apply to a person if, immediately after the transfer, the relevant eligible interest is held by a trust that is a concessional primary production trust in relation to the transferor.

 

New subsection 1185R(5) deals with the issue of whether a person has been ‘ actively involved with a sugarcane farm ’.  This is relevant to the question of whether an eligible descendant is able to demonstrate sufficient involvement with the farm for the purposes of paragraphs 1185R(1)(d) and (2)(d).  A person is taken to have been actively involved with a sugarcane farm during a particular period if, during the period, the person:

 

(a)       contributed a significant part of his/her labour to the development of the farm; or

 

(b)       has undertaken studies or training that, in the opinion of the Secretary, is relevant to the development or management of the farm.

 

Paragraph (b) recognises the fact that members of the younger generation may undertake courses such as agricultural degrees or management courses specifically with the intention of gaining skills relevant to increasing the viability of sugarcane farm enterprises.

 

Section 1185S

 

In order for Part 3.14B to apply to a person, the ‘ total net value ’ of the sugarcane farm or farms as well as the relevant sugarcane farm assets cannot exceed $500,000 (see paragraphs 1185R(1)(c) and (2)(c) above).  It is not the total net value of the person’s eligible interest that is relevant in this context but rather the total net value of the farm (or farms) and relevant assets.  Subsection 1185S(1) provides the following formula for working out the total net value:

 

Market value of sugarcane farm assets less Sugarcane farm debts

 

The term ‘ market value of sugarcane farm assets ’ means the total of the market values of the sugarcane farm (or farms) and relevant assets immediately before the transfer of the eligible interests.  The term ‘ sugarcane farm debts ‘ means the total of any amounts that had been borrowed for the purposes of undertaking a sugarcane farm enterprise and which had not been repaid prior to the transfer.

 

The Note at the end of subsection 1185S(1) makes it clear that the total net value is not affected by the number of persons who have interests in the sugarcane farm (or farms) and relevant sugarcane farm assets.

 

Subsection 1185S(2) provides that subsection (1) has effect subject to subsections (3), (4) and (5).

 

Subsection 1185S(3) provides that, if immediately before the transfer, the transferee had an eligible interest in the sugarcane farm or sugarcane farm assets, the total net value of the sugarcane farm or relevant sugarcane farm assets is the amount worked out pursuant to the formula in subsection (1) less the value of the transferee's eligible interest at that time.

 

Subsection 1185S(4) deals with situations where, at some time after 29 April 2004, the transferor entered into a transaction or transactions the effect of which was that the total net value of the farm, farms or relevant farm assets immediately before the transfer is less than it would have been if the person had not entered into the transaction or transactions.  In those situations, the effect of subsection (4) when determining the total net value is basically that those transactions are treated as though they had not occurred.

 

New subsection 1185S(5) deals with the situation where a person, on transferring his/her eligible interest in a sugarcane farm, retains a life interest or a freehold title or a leasehold interest in the dwelling house and adjacent land that constitutes the person's principal home.  In those circumstances, the person is taken to have transferred the whole of his/her eligible interest and, in assessing the market value of the farm for the purposes of subsection (1), the value of the dwelling house and the adjacent private land that has been retained is disregarded.  This subsection effectively extends the concession available to all recipients of social security payments whereby the value of the principal home is disregarded in determining the value of the person's assets.

 

Division 2 - Modification of provisions relating to assets test

 

Section 1185T

 

The effect of new paragraph 1185T(1)(a) is that, where new Part 3.14B applies to a person because of subsection 1185R(1), the transfer of an eligible interest is not taken to be a disposal of assets within the meaning of section 1123.  New paragraph 1185T(1)(b) provides that, if the person's partner has also transferred by way of gift any eligible interest to an eligible descendant of the person, that transfer is not taken to be a disposal of assets within the meaning of section 1123.

 

New subsection 1185T(1) is subject to the provisos contained in new subsections 1185T(4) and (6).  The broad effect of subsection 1185T(4) is that if when the transfer was completed (being a transfer in relation to which the applicable cut-off day was the RASF closing day) neither the person nor his/her partner had reached pension age, then new subsection 1185T(1) only applies after one of them reaches that age (which, pursuant to paragraph 1185R(1)(b), must occur no later than the RASF closing day).  This reflects the policy intention of encouraging pension age farmers to retire from the industry.

 

New subsections 1185T(2) and (5) deal with the situation of transfers by eligible former partners of qualifying sugarcane farmers.  Their combined effect corresponds with the effect of subsection 1185T(1) and (4) except that it is only transfers by the eligible former partners themselves that is not taken to be a disposal of assets and it is only the age of the eligible former partner that is relevant.

 

Subsection 1185T(3) makes it clear subsections (1) and (2) apply despite sections 1208L and 1208M.  The effect of those latter provisions is that a disposal of assets is taken to have occurred in the specified circumstances.  As the intention of this measure is for that outcome to be avoided where the relevant asset is a sugarcane farm enterprise (and other conditions are met), subsection (3) ensures that, where applicable, the provisions of Part 3.14B prevail over sections 1208L and 1208M.

 

Subsection 1185T(6) deals with the interaction of the Pension Bonus scheme and the new measure.  Its effect is that, in working out the rate of pension that will be used to calculate the amount of bonus payable, subsections 1185T(1) and (2) are to be disregarded (ie a transfer that satisfies the provisions of Part 3.14B is still regarded as a disposal of an asset for the purposes of calculating the pension bonus).

 

Division 3 - Requests for increase in rate of social security payment

 

Section 1185U to 1185X

 

The combined effect of sections 1185U to 1185X is as follows.

 

Where a person (or a person's partner) to whom this Part applies is:

 

·          of pension age; and

·          receiving a social security payment; and

·          the value of the transferred eligible interests has been included in the value of the person's assets, or the partner's assets, when calculating the rate of the person's social security payment;

 

then the person may request that the value of the transferred interest be disregarded under this Part; and that the social security payment be paid at the applicable increased rate.

 

If the person wants the social security payment to be paid at the increased rate the person must make a request to that effect and that request must be in writing and in accordance with a form approved by the Secretary.

 

New subsection 1185X(1) provides that where a person makes a request and the Secretary is satisfied that the rate of payment is less than the increased rate referred to in section 1185V, then the Secretary is to determine that the request for the increased rate is to be granted.

 

New subsection 1185X(2) details how to calculate the date that the determination takes effect.  If the person makes the request during the period of 13 weeks that starts on the day on which the transfer was completed, the determination takes effect on the day on which the transfer was completed.  In all other cases, the determination takes effect on the day on which the request was made.

 

Division 4 - Sugarcane farmers’ income test

 

Section 1185Y

 

To be eligible, the farmer's total income from all sources over the previous 3 financial years must have been less than the applicable pension rate (ie single/married rate).  This calculation takes into account the following factors:

 

·          income is based on the 3 preceding financial years and is averaged over that period.  For members of a couple, the income of both partners is calculated;

·          farm income is assessed separately from non-farm income.  Assessment of farm income involves deducting the cost of running the business from the gross income.  The calculation of farm income is different from the approach used in calculating non-farm income in that, when calculating farm income, off-setting profit and losses is capable of producing a negative balance in respect of any given financial year;

·          farm income and non-farm income, having been separately calculated, are added together.  If the farm income produces a negative result, this can be used to off-set any non-farm income at this point;

·          certain payments are not treated as income for the purposes of the farmers’ income test, for example, income support payments paid under the Social Security Act or the Veterans’ Entitlements Act and payments under the Farm Household Support Act 1992 ;

·          if a person was a member of a couple at any time during the 3 year period, the applicable pension rate is an amount equal to twice the maximum basic rate for a partnered person;

·          income will be measured according to the definitions currently contained in the Social Security Act, except for the provisions that deem income on financial assets.  In the case of any income from financial assets, the actual income from those assets will be assessed for the purposes of determining a farmer's eligibility for this scheme.

 

The Table appearing in new subsection 1185Y(1) sets out the steps to be followed in working out whether the farmers' income test is satisfied.

 

Step 1  -   Use subsection (2) to work out the amount of the person's ordinary income (other than income from farming) for each of the preceding 3 financial years prior to the applicable completion day.  If the person was a member of a couple on the applicable completion day, work out the amount of the partner's ordinary income (other than income from farming) for each of the 3 years.  The total of the amounts obtained is called the person's total non-farm income.

 

Step 2  -   Use subsection (3) to work out the person's ordinary income from farming for each of the 3 years.  If the person was a member of a couple on the applicable completion day, work out the amount of the partner's ordinary income from farming for each of the 3 years.  Add all positive amounts for both the person and the person's partner and deduct from that total the amounts of any negative income.  The result may be either positive or negative and is called the ‘ total farm income ’.

 

Step 3  -   Work out the person's total income for the 3 years by, if the total farm income is a positive amount, adding that amount to the amount of the farmer's total non-farm income or, if the person's total farm income is a negative amount, by deducting that amount from the amount of the person's total non-farm income.

 

Step 4  -   Use subsection (4) to work out the maximum basic rate of age pension applicable to the person.  Multiply this rate by 3.  The result is the person's ‘ maximum basic entitlement’ .

 

Step 5  -   If the person's total income for the 3 years is less than the person's maximum basic entitlement, the person satisfies the farmers’ income test.  If it equals or exceeds the person's maximum basic entitlement, the person does not satisfy the test.

 

New subsection 1185Y(2) provides that, in working out a person's ordinary income from all sources other than farming, the provisions of Part 3.10 (other than Division 1B which deals with deemed income from financial assets - see Items 7 to 9 above) apply to the person as if any reference in Division 1A to a tax year was instead a reference to that financial year.  Any return on a financial asset that has been received by the person during the financial year is taken to be the ordinary income of the person (see Item 10 above).

 



New subsection 1185Y(3) deals with calculating the person's ordinary income from farming and states that the following provisions have effect:

 

(a)       the provisions of Part 3.10 (other than Division 1B which deals with deemed income from financial assets - see Items 7 to 9 above).  Any reference in subsection 1074(1) to a tax year is taken as referring to that financial year.  Subsection 1074(2) (which deals with business losses) and section 1075 (which deals with permissible reductions of business income) are treated as if they were omitted;

 

(b)       actual returns on financial assets received in a financial year that relate to a farm or relevant farm assets are treated as ordinary income of the person from farming;

 

(c)        if, at the end of the financial year, the value of all trading stock on hand that relates to a farm is less than the value of all such trading stock on hand at the beginning of that financial year - the amount of the difference is to be deducted from the person's ordinary income from farming for that financial year that is income in the form of profits;

 

(d)       there is also to be deducted from the person's ordinary income from farming:

 

(i)         losses and outgoings that relate to a business of primary production and are allowable deductions under section 8-1 of the Income Tax Assessment Act 1997 ; and

 

(ii)        depreciation for the cost of depreciating assets that are used in a business of primary production and are allowable deductions under Subdivisions 40-A to 40-E (inclusive) or Division 328 of the Income Tax Assessment Act 1997 ; and

 

(iii)       contributions that are allowable deductions under sections 82AAC, 82AAD, 82AADA and 82AAF of the Income Tax Assessment Act 1936 ;

 

(e)       if a negative result is obtained after applying paragraphs (c) and (d) - the person's ordinary income from farming for the financial year is a negative income;

 

(f)        if paragraph (e) does not apply - the person's ordinary income from farming for the financial year is a positive income.

 

New subsection 1185Y(4) deals with the method of calculating a person's maximum basic rate for age pension.  According to paragraph 1185Y(4)(a), if a person was a member of a couple at any time during the 3 years immediately preceding the applicable completion day (see definitions below), the maximum basic rate of age pension applicable to the person is an amount equal to twice the sum of:

 

(i)         the amount that was, on the applicable completion day, the maximum basic rate for a partnered person under Module B of Pension Rate Calculator A in section 1064; and

(ii)        the amount that was, on the applicable completion day, the person’s pension supplement.

 

Paragraph (b) provides that, where paragraph (a) is not applicable, the maximum basic rate of age pension applicable to the person is an amount equal to the sum of the amount that was, on the applicable completion day, the maximum basic rate for a person who is not a member of a couple and the amount that was the person’s pension supplement on that day.

 

Subsection (5) contains definitions relevant to the sugarcane farmers’ income test.

 

The ‘ applicable completion day ’ means the earlier of:

 

·          the day on which the transfer was completed; and

·          the RASF closing day.

 

The term ‘ income ’ has its usual meaning under the social security law except that payments under the Veterans’ Entitlements Act and the Farm Household Support Act 1992 are not treated as income for the purposes of sugarcane farmers’ income test.

 

The term ‘ ordinary income from farming ’ is also defined.  It means the ordinary income of the person arising from any farm, farms or relevant farm assets in which the person has an interest.  That is, for the purposes of the sugarcane farmers’ income test, it is not just the income from sugarcane farming that is treated as income from farming.

 



Schedule 2 - Amendment of the Social Security (Administration) Act 1999

 

Social Security (Administration) Act 1999

 

Schedule 2 to the Social Security Administration Act is concerned with rules for working out what a person’s ‘start date’ is in relation to a claim for social security payment.  Part 3 of Schedule 2 sets out certain specific situations in which a person’s start date can be backdated.  Item 1 adds new section 14A into Part 3 of Schedule 2.  It is concerned with situations where a person (or their partner) has reached pension age; Part 3.14B applies to the person (or the person’s partner); and the person makes a claim for a social security payment within 13 weeks following the transfer of the sugarcane farm or relevant sugarcane farm assets.  In those situations, the person’s start date is the later of either:

 

·          the day on which the transfer was completed; or

·          the day on which the person becomes qualified for the social security payment.

 



Schedule 3 - Amendment to the Veterans’ Entitlements Act 1986

 

Summary

 

This Schedule amends the Veterans’ Entitlements Act to provide for a 3 year window of opportunity during which the intergenerational transfer of sugarcane farms (by persons of retirement age) will be exempt from the usual ‘gifting rules’.  These amendments largely duplicate the Schedule 1 amendments to the Social Security Act.

 

Background

 

Many sugarcane industry stakeholders have emphasised the need to ensure that sugarcane farms can more readily be handed from one generation to the next.  Accordingly, the Government will make changes to the social security law and the Veterans’ Entitlements Act which will facilitate intergenerational transfer in the sugarcane industry.  Such a scheme has the potential to support sugarcane growers dealing with challenge and change while, at the same time, increasing the involvement of young people in setting the future directions of the sugar industry.

 

Under the Veterans’ Entitlements Act, there are limits to the assets a person can hold without those assets affecting their entitlement to service pension or income support supplement and may preclude a person from payments altogether.  Further, a person who gives away an asset is treated, for a 5 year period, as if the person still owned the asset when assessing entitlement to a service pension or income support supplement.  The operation of these provisions can make it difficult for farmers endeavouring to retire and access veterans’ entitlements payments as well as presenting an impediment to the intergenerational transfer of the family farm.

 

The amendments will provide a 3 year window during which qualified sugarcane farmers (and their partners) will be able to transfer their farm to eligible descendants (ie children and grandchildren who have had an active involvement in farming for at least 3 years prior to the transfer) without the usual gifting rules applying in respect of that transfer.

 

Key features of the scheme include:

 

·          the net value of the farm enterprise must not exceed $500,000;

·          the sugarcane grower (or partner, where applicable) must either be retirement age or will reach that age in the 3 year window;

·          the sugarcane growers’ (and partners’ where applicable) income from all sources over the previous three financial years must be less than the applicable maximum annual rate of pension for that same period;

·          the transfer must be by way of gift and must divest the sugarcane grower (and partner where applicable) of all interests in sugarcane farming (excluding the family home);

·          during the 3 years prior to the transfer, the eligible descendant must have been actively involved in the sugarcane farm enterprise;

·          the retiring farmer must have owned the property for at least 15 years or been actively involved in farming for at least 20 years and acquired an eligible interest in a sugarcane farm before 29 April 2004;

·          the scheme will apply only to transfers occurring after the passage of the legislation;

·          where the requirements of the scheme are met, the usual gifting rules will not apply to the transfer of the sugarcane farm enterprise and relevant sugarcane farm assets (although the usual rules will apply in respect of all other assets and income).

 

Explanation of changes

 

The amendments to the Veterans’ Entitlements Act contained in Schedule 3, largely duplicate the amendments to the social security law contained in Schedules 1 and 2.

 

Item 1 inserts the new terms used in the new Division, in alphabetical order, into the index of definitions in section 5 of the Veterans’ Entitlements Act.

 

Item 2 inserts new subsection 5MA(2B).  Under the scheme, where a farm is transferred in accordance with the new provisions, it will be possible for the farmer to retain a life interest in the principal home on the farm.  The effect of the new subsection is to make that life interest immune from the application of the provisions relating to "granny flat" interests.

 

Item 3 inserts new section 5PAA which sets out certain definitions relevant to the operation of the scheme.  Various terms that were relevant for the purposes of the previous Retirement Assistance for Farmers scheme (see Division 8 of Part IIIB of the Veterans’ Entitlements Act) are also relied upon for the purposes of this scheme (for example, the term ‘ eligible descendant ’).

 

The terms and the associated definitions in new section 5PAA duplicate those contained in Item 3 of Schedule 1 for new section 17B of the Social Security Act, except for minor nomenclative differences.  For example, under the Veterans’ Entitlements Act , guidelines and determinations referred to in the definition of sugarcane farm enterprise are made by the Repatriation Commission, instead of the Secretary as is the case under the Social Security Act.

 

Item 4 adds a Note to subsection 46B(2) (which relates to business income).  The amendment has the equivalent effect of Item 5 of Schedule 1.

 

Item 5 adds a Note concerning the concept of the sugarcane farmers' income test to subsection 46C(1) which relates to permissible reductions for business income.  The amendment has the equivalent effect of Item 6 of Schedule 1.

 

Item 6 adds a Note concerning the concept of the sugarcane farmers' income test to subsection 46D(1) which relates to deemed income from financial assets for single persons.  The amendment has the equivalent effect of Item 7 of Schedule 1.

 

Item 7 adds a Note concerning the concept of the sugarcane farmers' income test to subsection 46E(1) which relates to deemed income from financial assets for members of a couple.  The amendment has the equivalent effect of Item 8 of Schedule 1.

 

Item 8 adds a Note concerning the concept of the sugarcane farmers' income test to subsection 46K(1) which relates to the actual returns on financial assets.  The amendment has the equivalent effect of Item 10 of Schedule 1.

 

Item 9 inserts new Division 8A into the Veterans’ Entitlements Act.  Under the Veterans’ Entitlements Act, the new Division is relevant to claims for, or requests for increase in, service pension or income support supplement.

 

Subdivision A - General

 

Section 49L sets out the purpose of Division 8A.  The section is the Veterans’ Entitlements Act equivalent of section 1185M of Schedule 1.

 

Section 49M is the Veterans’ Entitlements Act equivalent of section 1185N of Schedule 1 concerned with the concepts of the ‘ RASF commencement day ’ and the ‘ RASF closing day ’.

 

Section 49N is the Veterans’ Entitlements Act equivalent of section 1185P of Schedule 1 concerned with the concept of the ‘ applicable cut-off day ’.

 

Section 49P is the Veterans’ Entitlements Act equivalent of section 1185Q of Schedule 1 which provides a definition of a pre-assessment request.

 

Section 49Q is the Veterans’ Entitlements Act equivalent of section 1185R of Schedule 1 and provides for the circumstances under which new Division 8A applies to a transfer of a sugarcane farm.  Under the Veterans’ Entitlements Act a person must be “retirement age”, rather than “pension age” as applies under the Social Security Act.  “Retirement age” is defined in subsection 5Q(1) of the Veterans’ Entitlements Act.

 

Section 49R is the Veterans’ Entitlements Act equivalent of section 1185S of Schedule 1.

 

Subdivision B - Modification of provisions relating to assets test

 

Section 49S is the Veterans’ Entitlements Act equivalent of section 1185T of Schedule 1.

 

Subdivision C - Claims for service pension or income support supplement

 

Section 49T is the Veterans’ Entitlements Act equivalent of section 14A of Schedule 2 and provides the provisional commencement date in relation to a claim for service pension or income support supplement.

 

Section 49T provides that, where:

 

  • a person, or the person’s partner, has reached retirement age; and
  • Division 8A applies to the person, or the person’s partner; and
  • the person makes a claim for service pension or income support supplement within 13 weeks following the transfer of the sugarcane farm or relevant sugarcane farm assets;

 

the person’s provisional commencement day is the later of either:

 

  • the day on which the transfer was completed; or
  • the day on which the person becomes qualified for the service pension or income support supplement.

 

By default, where:

 

  • a person, or the person’s partner, has reached retirement age; and
  • Division 8A applies to the person, or the person’s partner; and
  • the person makes a claim for service pension or income support supplement more than 13 weeks after   the transfer of the sugarcane farm or relevant sugarcane farm assets;

 

the usual commencement day provisions apply, as per subsections 36B, 37B, 38B and 45C of the Veterans’ Entitlements Act.  Thus, the person’s commencement day is the day on which the person claimed, or is taken to have claimed, the pension or supplement.

 

Subdivision D - Requests for increase in rate of service pension or income support supplement

 

Sections 49U to 49X are the Veterans’ Entitlements Act equivalent of sections  1185U to 1185X of Schedule 1. Under the Veterans’ Entitlements Act a person, or a person’s partner, must be of “retirement age”, rather than “pension age” as applies under the Social Security Act.  “Retirement age” is defined in subsection 5Q(1) of the Veterans’ Entitlements Act.

 

Under the Veterans’ Entitlements Act, the Repatriation Commission, rather than the Secretary, performs the functions required by the provisions, such as determining that a request for an increase is to be granted under subsection 49X(1).

 

Subdivision E - Sugarcane farmers’ income test

 

Section 49Y is the Veterans’ Entitlements Act equivalent of section 1185Y of Schedule 1.

 

Item 10 adds a Note to subsection 52E(1) which is concerned with conduct constituting a disposal of assets. The amendment has the equivalent effect of Item 11 of Schedule 1.