EXPLANATORY STATEMENT
Issued by the authority of the Minister for Families and Social Services
Social Security Act 1991
Social Security (Financial Investment) (Requirements for Annuity Contracts) Determination 2019
Purpose
The Social Security (Financial Investment) (Requirements for Annuity Contracts) Determination 2019 (Determination) is made under subsection 9(1EA) of the Social Security Act 1991 (Act).
The Determination is made for paragraph (j) of the definition of ‘financial investment’ in subsection 9(1) of the Act, which provides that an annuity is a financial investment if:
- it meets the definition of annuity in the Superannuation Industry (Supervision) Act 1993; and
- is provided under a contract that meets the requirements determined in an instrument made by the Minister under subsection 9(1EA).
Therefore, the purpose of the Determination is to prescribe requirements that an annuity contract must satisfy in order for the annuity to be a financial investment for social security purposes.
Background
Income from financial investments is assessed under the deeming rules in the Act for the social security income test. Based on the market value of the investment, the deeming rules assume that financial investments earn a certain rate of income, regardless of the actual income earned. This means that a similar assessment under the deeming rules will apply regardless of the way the financial investment is invested (for example, by way of listed shares or account-based pensions). If a person earns more than the deemed rate of income from the financial investment, the extra income is not assessed in the income test.
The Social Security and Other Legislation Amendment Act 2014 extended the deeming rules in the Act to account-based income streams that commenced after 1 January 2015. This extension was intended to capture account-based products that are equivalent to account-based pensions, such as account-based annuities and allocated annuities.
Account-based pensions within the meaning of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) are financial investments for social security purposes. A person who has purchased such an account-based pension therefore benefits from the deeming rules when their income from the account-based pension is assessed.
The Determination ensures that annuities, including allocated and account-based annuities, are treated in the same way as account-based pensions for social security purposes. This encourages people to choose investments on their merit, rather than on the effect the investment income may have on the person’s pension entitlement.
The requirements prescribed in the Determination incorporate by reference relevant provisions from the SIS Regulations from time to time. As new retirement income products are developed and introduced to the market, this ensures standards are consistent across social security and tax law.
Commencement
The Determination commences on the day after it is registered on the Federal Register of Legislation.
Consultation
Consultation on this instrument occurred with the Treasury, the Australian Taxation Office, and the Department of Veterans’ Affairs.
Regulation Impact Statement (RIS)
This instrument does not require a Regulatory Impact Statement (RIS). This instrument will have no more than a minor regulatory impact on business, community organisations or individuals and will have no, or minimal, compliance costs or competition impact.
Explanation of the provisions
Section 1 provides that the name of the instrument is the Social Security (Financial Investment) (Requirements for Annuity Contracts) Determination 2019.
Section 2 provides that the Determination commences on the day after it is registered on the Federal Register of Legislation.
Section 3 provides that the authority for making the Determination is subsection 9(1EA) of the Social Security Act 1991.
Section 4 provides definitions of terms used in the Determination: Act means the Social Security Act 1991 and SIS Regulations means the Superannuation Industry (Supervision) Regulations 1994.
Section 5 provides that for paragraph (j) of the definition of financial investment in subsection 9(1) of the Act, the requirements are the standards mentioned in subregulation 1.05(4) of the SIS Regulations, or subregulation 1.05(11A) of the SIS Regulations.
The note clarifies that if an annuity (within the meaning of the Superannuation Industry (Supervision) Act 1993) meets the requirements in either paragraph 5(a) or (b), that asset-tested income stream (long term) is a financial investment under subsection 9(1) of the Act.
Section 5 incorporates subregulations 1.05(4) and (11A) of the SIS Regulations without modification. Subsections 14(1) and (3) of the Legislation Act 2003 provide that a legislative instrument may apply, adopt or incorporate provisions of a disallowable legislative instrument with or without modification, as in force at a particular time or as in force from time to time. The SIS Regulations are a disallowable legislative instrument.
The Determination incorporates the standards in subregulations 1.05(4) and (11A) of the SIS Regulations to ensure consistency across social security and tax law. The Determination incorporates those provisions in the SIS Regulations as in force from time to time, which allows any future amendment to those provisions to be automatically incorporated. This reflects that new retirement income products, including annuity products, are being developed and introduced to the market.
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Social Security (Financial Investment) (Requirements for Annuity Contracts) Determination 2019
The Determination 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.
Overview of the legislative instrument
Under subsection 9(1AE) of the Social Security Act 1991, the Minister for Families and Social Services has the power to determine certain classes of annuities, as outlined in the Superannuation Industry (Supervision) Regulations 1994, to be financial investments for social security purposes.
This Determination specifies that assets which meet the standards mentioned in subregulations 1.05(4) or 1.05(11A) of the Superannuation Industry (Supervision) Regulations 1994 are financial investments for social security purposes.
Human rights implications
The instrument engages the right to social security under Article 9 of the International Covenant on Economic, Social and Cultural Rights. 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 Determination is compatible with Australia’s obligations not to take any backward steps in relation to the right to social security. The Determination does not unreasonably restrict a person’s eligibility to receive a social security benefit or reduce the benefits to which a person may be entitled.
The Determination specifies that financial products that meet the standards mentioned in subregulations 1.05(4) or 1.05(11A) of the Superannuation Industry (Supervision) Regulations 1994 are financial investments for social security purposes. Assets that meet these standards are similar in nature to other financial investments, particularly account‑based pensions, which were classed as financial investments following the passage of the Social Security and Other Legislation Amendment Act 2014. This Determination ensures that these financial products receive the same treatment under the social security means test as other financial investments. This helps make sure that assets assessed under the Social Security Act 1991 are assessed equitably between recipients of social security payments, regardless of how a person holds their wealth.
If this Determination were not in place, the asset value and income received from these investments would not be accurately or fairly assessed under the social security means test.
The Determination helps make sure that Australia’s social security system is fair and properly targeted to those most in need. By updating the definition of financial investments to include those that meet the standards mentioned in subregulations 1.05(4) or 1.05(11A) of the Superannuation Industry (Supervision) Regulations 1994, the social security system appropriately recognises individuals’ capacity for self‑support when determining their rate of income support, and remains sustainable for future generations.
Therefore on balance, the Determination is compatible with the right to social security.
Conclusion
The Determination is compatible with a person’s human right to social security.
The Hon Paul Fletcher MP, Minister for Families and Social Services