EXPLANATORY STATEMENT
Social Security (Modification of Income Deprivation Rules) Principles 2002
Summary
Section 1209E of the Social Security Act 1991 (the Social Security Act) provides that the Secretary may formulate principles to be complied with by him or her when making decisions under a number of provisions of the Social Security Act, including subsections 1208Q(1), 1208R(3), 1208S(1) and 1208T(1).
The purpose of this instrument is to set out decision-making principles that the Secretary must comply with in making determinations under sections 1208Q, 1208R, 1208S and 1208T of the Social Security Act. These determinations relate to modifying the way in which the standard ‘disposal of income’ rules would affect an individual.
Background
The Social Security and Veterans’ Entitlements Legislation Amendment (Private Trusts and Private Companies – Integrity of Means Testing) Act 2000 amended the Social Security Act to give effect to a measure in the Government's 2000-2001 Budget to revise the means test treatment of private companies and private trusts. The 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.
Sections 1208Q, 1208R, 1208S and 1208T of the Social Security Act define the way in which the ‘disposal of income rules’ in the Act, which appear at Division 3 of Part 3.10, will operate in relation to an individual affected by this measure. These decision-making principles will assist the Secretary in modifying the application of those disposal rules, where this is necessary.
Explanation of the provisions
Part 1
Section 1 of the Principles states the name of the disallowable instrument and section 2 states that the Principles commence on gazettal. Section 3 contains interpretation provisions. Section 4 sets out the purpose of the instrument.
Part 2
Section 5 sets out the purpose of Part 2 of the instrument, which is to provide decision-making principles that can be used in making a determination, under paragraph 1208Q(1)(e) or (f), that where an individual disposes of ordinary income to a trust or company on or after 1 January 2002, and is an attributable stakeholder of that trust or company, or becomes one as a result of the transfer, then the amount of the disposal for the purposes Division 3 of Part 3.10 can be taken to be nil, or an amount less than the amount of the original disposal, as the Secretary determines.
Section 6 provides definitions that are used in this part of the instrument.
Section 7 states that in the case of an individual, who is not a member of a couple, the Secretary should take into account whether at the time of, or as a result of, the disposal to the company or trust, the individual was the sole attributable stakeholder of the company or trust. Often, where this is the case, the individual will be attributed with the full value of the disposed income in any event, being the only attributable stakeholder of the company or trust which is holding the income, and therefore it would be unfair on the customer to also hold the value of the disposal against them for income test purposes.
Section 8 states that in the case of an individual, who is a member of a couple, the Secretary should take into account whether at the time of, or as a result of, the disposal to the company or trust, one or both members of the couple were the sole attributable stakeholders of the company or trust. Often, in these circumstances, the members of the couple will be attributed with the full value of the disposed income in any event, being the only attributable stakeholders of the company or trust which is holding the income, and therefore it would be unfair on the customers to also hold the value of the disposal against them for income test purposes.
Section 9 applies where an attributable stakeholder of a company or trust disposes of income to that entity and either before the time of the disposal there were two or more attributable stakeholders in regard to that entity or, as a result of the disposal, there were two or more attributable stakeholders. In this situation the Secretary must take into account the attribution percentage of all attributable stakeholders of the company or trust both prior to and as a result of the disposal.
Section 10 applies where an individual, who is not an attributable stakeholder of a company or trust, disposes of income to that entity and as a result of the disposal the individual became an attributable stakeholder of the company or trust. In this case the Secretary must take into account the attribution percentages of all attributable stakeholders prior to, and as a result of, the disposal. Where an individual disposes of income to a company or trust, but ends up with an income attribution percentage of less than 100% in relation to the company or trust, then the Secretary may decide only to reduce the amount of the original disposal by an amount equal to the percentage of the income that the individual now is being attributed with, as a result of being an attributable stakeholder of the company or trust.
Part 3
Section 11 sets out the purpose of Part 3 of the instrument, which is to provide decision-making principles that can be used in making a determination, under paragraph 1208R(3)(a) or (b). The effect of subsection 1208R(1) is that, where a company or trust, in regard to which the individual is an attributable stakeholder, disposes of income then, for the purposes of Division 3 of Part 3.10, it will taken as if the individual had disposed of income, or a percentage of the income equal to the individual’s income attribution percentage, that he or she had owned personally. Paragraphs 1208R(3)(a) and (b) allow the Secretary to exempt a disposal of specified income from the operation of subsection 1208R(1), or reduce the percentage of the income that the individual is taken to have disposed of.
Section 12 states that the Secretary must take into account whether a disposal of income, under this Part, is to a person who is an attributable stakeholder of the company or trust making the disposal.
Part 4
Section 13 sets out the purpose of Part 4 of the instrument, which is to provide decision-making principles that can be used in making a determination, under paragraph 1208S(1)(e) or (f). The effect of subsection 1208S(1) is that, where an individual disposes of income to a trust or company before 1 January 2002, and on 1 January 2002 he or she becomes an attributable stakeholder of that trust or company, then the continuing effect of the income disposal rules, which are set out by Division 3 of Part 3.10, can be taken to cease, or only apply to the value of the income disposed of reduced by a percentage equal to the attributable stakeholder’s income attribution percentage, or a higher percentage, as the Secretary determines, on 1 January 2002.
Section 14 provides definitions that are used in this part of the instrument.
Section 15 will apply where an individual disposes of income to a company or trust prior to 1 January 2002 and on 1 January 2002 the income is still owned by the company or trust that received it from the individual and the value of the income is the same or more than it was on the date of the original disposal. If this section applies, the Secretary must consider whether, taking all the circumstances into account, it would be unfair or unreasonable to apply the income deprivation rules to the individual.
Section 16 applies where an individual disposes of income to a company or trust prior to 1 January 2002 and on 1 January 2002 the income is still owned by the company or trust that received it from the individual and the value of the income decreased from what it was on the date of the original disposal. The Secretary must also be satisfied that the decrease is not due to any conduct undertaken to avoid or minimise the trust and companies rules at Part 3.18 of the Social Security Act. If this section applies, the Secretary must consider whether, taking all the circumstances into account, it would be unfair or unreasonable to apply the income deprivation rules to the individual.
Section 17 will apply where an individual disposes of income to a company or trust that then transfers that income to another party for an arms-length price, all prior to 1 January 2002, and on 1 January 2002 the company or trust has retained the sale price as a part of its assets. In this case, the Secretary must consider whether, taking all the circumstances into account, it would be unfair or unreasonable to apply the income deprivation rules to the individual.
Section 18 applies where an individual, who is a member of a couple, disposes of income to a company or trust prior to 1 January 2002 and on 1 January 2002 one or both members of the couple are the only attributable stakeholders of the company or trust. If this section applies, the Secretary must consider whether, taking all the circumstances into account, it would be unfair or unreasonable to apply the income deprivation rules to the individual. Often, in these circumstances, the members of the couple will be attributed with the full value of the disposed income in any event, being the only attributable stakeholders of the company or trust, which is holding the income, and therefore it would be unfair on the customers to continue to also hold the value of the disposal against them for income test purposes
Part 5
Section 19 sets out the purpose of Part 5 of the instrument, which is to provide decision-making principles that can be used in making a determination under paragraph 1208T(1)(e) or (f). The effect of subsection 1208T(1) is, that where an individual disposes of income to a trust or company before 1 January 2002, and on 1 January 2002 his or her spouse becomes an attributable stakeholder of that trust or company then the continuing effect of the income disposal rules, which are set out by Division 3 of Part 3.10, can be taken to cease, or only apply to the original value of the disposed income reduced by a percentage equal to the spouse’s asset attribution percentage, on 1 January 2002.
Section 20 provides definitions that are used in this part of the instrument.
Section 21 will apply where an individual disposes of income to a company or trust prior to 1 January 2002 and on 1 January 2002 the income is still owned by the company or trust that received it from the individual and the value of the income is the same or more than it was on the date of the original disposal. If this section applies, the Secretary must consider whether, taking all the circumstances into account, including the fact that the individual’s spouse is an attributable stakeholder of the company or trust, it would be unfair or unreasonable to apply the income deprivation rules to the individual.
Section 22 applies where an individual disposes of income to a company or trust prior to 1 January 2002 and on 1 January 2002 the income is still owned by the company or trust that received it from the individual and the value of the income decreased from what it was on the date of the original disposal. The Secretary must also be satisfied that the decrease is not due to any conduct undertaken to avoid or minimise the trust and companies rules at Part 3.18 of the Social Security Act. If the section applies, the Secretary must consider whether, taking all the circumstances into account, including the fact that the individual’s spouse is an attributable stakeholder of the company or trust, it would be unfair or unreasonable to apply the income deprivation rules to the individual.
Section 23 will apply where an individual disposes of income to a company or trust that then transfers that income to another party for an arms-length price all prior to 1 January 2002 and on 1 January 2002 the company or trust has retained the sale price as a part of its assets. In this case, the Secretary must consider whether, taking all the circumstances into account, including the fact that the individual’s spouse is an attributable stakeholder of the company or trust, it would be unfair or unreasonable to apply the income deprivation rules to the individual.