EXPLANATORY STATEMENT
Social Security Act 1991
Social Security (Exempt Lump Sums – Financial Product Rebate Payments – Ending Conflicted Remuneration) Determination 2020
Purpose
Paragraph 8(11)(d) of the Social Security Act 1991 (the Act) allows the Secretary of the Department of Social Services (DSS) to determine, by legislative instrument, that an amount or class of amounts received by a person is an exempt lump sum for the purposes of the Act.
The effect of the Social Security (Exempt Lump Sums – Financial Product Rebate Payments – Ending Conflicted Remuneration) Determination 2020 (the instrument) is that a payment (referred to as a rebate payment) made as a result of the Australian Government’s (the Government) implementation of Recommendation 2.4 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Financial Services Royal Commission), is an exempt lump sum under paragraph 8(11)(d) of the Act.
Background
Under the social security law, an income test is used to determine a person’s eligibility for a social security payment, and if they are eligible, the rate of a social security payment that is payable. An income amount earned, derived or received for a person’s own use or benefit is generally assessable as income. However, some amounts that would otherwise be income are specifically exempted.
Paragraph 8(11)(d) of the Act allows the Secretary of DSS to determine that an amount, or class of amounts, is an ‘exempt lump sum’ for the purposes of the Act. An exempt lump sum is excluded from the definition of ‘ordinary income’ under subsection 8(1) of the Act, meaning the lump sum amount is not to be taken into account under the social security income test.
Grandfathering of Conflicted Remuneration
Division 4 of Part 7.7A of the Corporations Act 2001 defines conflicted remuneration as “any benefit, whether monetary or non-monetary, given to a financial services licensee or a representative of the licensee, who provides financial product advice to persons as retail clients that, because of the nature of the benefit or the circumstances in which it is given:
- could reasonably be expected to influence the choice of financial product recommended by the licensee or representative to retail clients; or
- could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative.”
From 1 July 2013, the payment of conflicted remuneration to a holder of an Australian Financial Services Licence (AFSL holder) or a representative of an AFSL holder (collectively referred to as Financial Advisers) was banned under the Future of Financial Advice (FOFA) reforms (see Corporations Amendment (Future of Financial Advice) Act 2012 and Corporations Amendment (Further Future of Financial Advice Measures) Act 2012).
However, Financial Advisers could continue to receive conflicted remuneration even after the commencement of the FOFA reforms, if the conflicted remuneration was paid under an arrangement entered into before the commencement of the FOFA reforms. The provisions in the FOFA reforms that allowed for this practice are commonly referred to as the ‘grandfathering provisions’, and the resulting conflicted remuneration is commonly referred to as ‘grandfathered conflicted remuneration’.
Recommendation 2.4 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
On 14 December 2017, the Government established the Financial Services Royal Commission, which made recommendations for the Government to implement as a means of preventing similar issues from occurring in the future.
The Financial Services Royal Commission gave its final report to the Government on 1 February 2019.
Recommendation 2.4 of the report provides that grandfathering provisions for conflicted remuneration should be repealed as soon as practicable. The repeal of grandfathering provisions would give full effect to the ban on conflicted remuneration, by extending the ban to remuneration arrangements entered into before the commencement of FOFA. This would mean that, going forward, Financial Advisers will not be able to accept conflicted remuneration regardless of when the arrangement under which that remuneration was paid was entered into.
In response to this recommendation, the Government announced that it would end the payment of grandfathered conflicted remuneration from 1 January 2021. In addition, entities that currently pay grandfathered conflicted remuneration (for example, the issuers of financial products) would be required to rebate the grandfathered conflicted remuneration, that would have otherwise been paid to Financial Advisers, to consumers.
On 14 October 2019, the Parliament formalised the Government’s response to Recommendation 2.4 by passing the Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Act 2019 (the Grandfathering Act). The Grandfathering Act is supported by the Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Regulations 2019 (the Regulations). The Regulations specify the rebating arrangements that entities will be required to comply with when rebating grandfathered conflicted remuneration to consumers.
This instrument ensures that one-off payments made as a result of the removal of the grandfathering arrangements by the Grandfathering Act will be exempt lump sums for the purposes of the Act. This applies both to a one-off payment made in accordance with the Grandfathering Act or a one-off payment made in advance of the commencement of the Grandfathering Act that arises from entities preparing for the removal of the grandfathering arrangements from 1 January 2021. The extension of the exemption to one-off payment made in advance of the Grandfathering Act is intended to provide comparable treatment for product holders where the financial product provider elects to move early and end the payment of grandfathered conflicted remuneration in advance of 1 January 2021.
The effect is that a rebate payment will not be regarded as income under the Act, so that if a social security recipient receives a rebate payment, it will be exempt from the social security income test. Payments that are not one-off are not covered by this exemption.
Commencement
The instrument commences the day after it is registered on the Federal Register of Legislation.
Consultation
The Department of Social Services consulted with the Treasury in relation to this instrument.
The Department of Agriculture and the Department of Veterans’ Affairs were notified of the instrument as this income test exemption may affect payments administered by those agencies.
The Australian Securities and Investments Commission, and Challenger Group were also consulted.
Public consultation was not undertaken due to the beneficial nature of the instrument.
Regulation Impact Statement (RIS)
The Office of Best Practice Regulation (OBPR) was consulted on 19 December 2019 and confirmed that the instrument does not require a Regulatory Impact Statement (OBPR Reference: 25924). The instrument will operate in a beneficial manner. It is not regulatory in nature, will not impact business activity and will have no, or minimal, compliance cost or competition impact.
Explanation of the provisions
Section 1 provides that the name of the instrument is the Social Security (Exempt Lump Sums – Financial Product Rebate Payments – Ending Conflicted Remuneration) Determination 2020.
Section 2 provides that this instrument commences on the day after this instrument is registered on the Federal Register of Legislation.
Section 3 provides that the authority for making the instrument is paragraph 8(11)(d) of the Act.
Section 4 contains definitions of certain terms used in the instrument.
“Act” is defined to mean the Social Security Act 1991.
“conflicted remuneration” is defined to have the meaning given in Division 4 of Part 7.7A of the Corporations Act 2001.
“exempt lump sum” is defined to have the meaning given in subsection 8(11) of the Act.
“rebate payment” is defined to mean an amount received by a person that is:
- not a periodic payment; and
- made as a result of the removal of grandfathering arrangements for conflicted remuneration and the legislative amendments made by the Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Act 2019; and
- paid pursuant to section 963P of the Corporations Act 2001 (on or after 1 January 2001) or in anticipation of the commencement of section 963P of the Corporations Act 2001 (before 1 January 2021).
Section 5 specifies that, if an individual receives a rebate payment, that amount is an exempt lump sum for the purposes of paragraph 8(11)(d) of the Act. Such an amount will be regarded as an exempt lump sum from the date the payment is received by the person.
Andrea Wallace-Green, Acting Branch Manager, Older Australians Branch, as a delegate of the Secretary of the Department of Social Services
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Social Security Act 1991
Social Security (Exempt Lump Sums – Financial Product Rebate Payments – Ending Conflicted Remuneration) Determination 2020
Overview of the legislative instrument
The Social Security (Exempt Lump Sums – Financial Product Rebate Payments – Ending Conflicted Remuneration) Determination 2020 (the instrument) is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
The effect of the instrument is that if an individual receives a rebate payment paid as a result of recommendation 2.4 of the report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, then that payment will not be assessed as income under the social security law.
Human rights implications
The instrument engages the right to social security under Article 9 of the International Covenant on Economic, Social and Cultural Rights (ICESCR). The right to social security requires that a system be established under domestic law, and that public authorities must take responsibility for the effective administration of the system. The social security scheme must provide a minimum essential level of benefits to all individuals and families that will enable them to acquire at least essential health care, basic shelter and housing, water and sanitation, foodstuffs, and the most basic forms of education.
The instrument will operate beneficially as a rebate payment will not be taken into account when assessing a person’s eligibility or rate of social security entitlements under the social security income test. If the payments were not exempted, a person in receipt of these payments may not be eligible for social security payment or, if they are eligible, their rate of payment might be reduced. The instrument is therefore consistent with the promotion of the right to social security.
The exemption of these payments from the income test on receipt does not alter the fact that any ongoing income generated by the lump sum is not exempt from the income test, and any assessable asset produced from the lump sum is counted under the social security assets test. This is consistent with the treatment of other lump sum payments under paragraph 8(11)(d) of the Act.
Conclusion
The instrument is compatible with human rights as it supports a person’s right to social security.
Andrea Wallace-Green, Acting Branch Manager, Older Australians Branch, as a delegate of the Secretary of the Department of Social Services