Social Security (Pension Loans Scheme—Market Value) Determination 2022

EXPLANATORY STATEMENT

Issued by the authority of the Secretary of the Department of Social Services

Social Security Act 1991

Social Security (Pension Loans Scheme – Market Value) Determination 2022

Purpose

This Instrument sets out the methods for determining market value and adjustments to be made to the market value of real property or real assets securing a debt to the Commonwealth under the Pension Loans Scheme (known publicly as the Home Equity Access Scheme). When the Pension Loans Scheme participant has the benefit of the no negative equity guarantee under the Scheme, this will limit the amount of the debt repayable by the participant to the Commonwealth under the Scheme to no more than the adjusted value of the property. 

Background

The Pension Loans Scheme (the Scheme) allows eligible Australians of Age Pension age who meet certain residency requirements to access a loan payment, either by fortnightly instalments or as a lump sum (or both), from the Australian Government.

Amounts borrowed under the Scheme accrue as a debt to the Commonwealth, secured by a charge or caveat against nominated Australian real assets/property. The costs of registering and removing the charge or caveat are payable by the Scheme participant and can be added to the debt. An annual interest rate is charged, compounding fortnightly on the outstanding loan balance. The total debt is usually recovered when the securing property is sold or from the person's estate. Voluntary repayments, in part or in full, can be made at any time. The debt will also be recoverable if the participant loses qualification for the Scheme. This may occur, for example, if the person does not maintain insurance of the securing property, or allows the property to become underinsured over time.

The Scheme also provides most participants with a ‘no negative equity’ guarantee that means the Commonwealth is not entitled to recover a debt amount that exceeds the adjusted value of a debtor’s real assets or property. The debt and charge securing the debt are discharged to the extent they exceed the adjusted value of the debtor’s real assets or property, determined by applying this instrument. This instrument sets out methods to value real assets or real property to generate the maximum value of the debt.

Authority

This instrument is made under subsection 1144AA(6) of the Act.

This instrument is a legislative instrument for the purposes of the Legislation Act 2003. This instrument is disallowable.

Commencement

This instrument commences the day after it is registered on the Federal Register of Legislation.

Consultation

Services Australia, the Department of Veterans’ Affairs and the Australian Securities and Investments Commission were consulted on the making of this instrument.

Regulation Impact Statement (RIS)

This instrument does not require a Regulatory Impact Statement. This instrument is not regulatory in nature, will not impact on business activity and will have no, or minimal, compliance costs (OBPR Reference ID: 43662).

Availability of independent review

A decision made as informed by this instrument under section 1144AA of the Act as to the amount of a person’s Pension Loans Scheme debt is reviewable both internally and externally under the enabling Act and Parts 4 and 4A of the Social Security (Administration) Act 1999.

Explanation of the provisions

Part 1- Preliminary

Section 1 provides that the name of this instrument is the Social Security (Pension Loans Scheme – Market Value) Determination 2022.

Section 2 provides that this instrument commences the later of either 1 July 2022, or the day after this instrument is registered on the Federal Register of Legislation.

Section 3 provides that the authority for making this instrument is subsection 1144AA(6) of the Act.

Section 4 contains definitions of certain terms used in this instrument.

accredited valuer is defined to mean, in relation to property, a person who is:

• accredited as a certified practising valuer by the Australian Property Institute; or
• a professional member of the Royal Institution of Chartered Surveyors who is entitled to be described as a Chartered Valuation Surveyor; or
• is registered or otherwise authorised, under the laws of the State of Territory in which the property is situated, to value that kind of property

Act is defined to mean the Social Security Act 1991.

Part 2 – Adjusted value for real assets and real property

Section 5 sets out the methods for working out the market value of real assets and real property and the methods by which to make adjustments to that value. The term ‘property’ applies when the participant personally owns the real estate securing the loan, which covers most participants. More rarely, the person may secure the loan by a guarantee given by a company or trustee of a trust in which the participant is an attributable stakeholder (defined in section 1207X of the Act). In this case, the guarantee given by the company or trustee must be secured against real property of the company or trust, which is the ‘asset’ of the body.

Subsection 5(1) provides that the market value of real assets or real property, at the time a person seeks to repay their debt, or the Commonwealth seeks to recover the debt (known as the event time), is the amount worked out under subsection 5(2).

Subsection 5(2) provides that the market value of real assets or real property is worked out under one of four alternatives, depending upon the circumstances.

Paragraph 5(2)(a) provides that if the assets or property are sold before the event time the person seeks to repay or the Commonwealth seeks to recover the debt referred to in subsection 5(1), then the market value is the sale price for the assets or property, provided the Secretary does not reasonably believe the property is undervalued, such that subsection 5(3) applies. Paragraph 5(2)(a) is subject to subsection 5(3).

Paragraph 5(2)(b) provides that if paragraph 5(2)(a) does not apply i.e. the assets have not been sold, the Secretary and the person seeking to repay the debt, or the person from whom the Commonwealth seeks to recover the debt, may agree a value of the assets or property. The value may be the Commonwealth’s last recorded value of the assets or property, if agreed by both parties.

Paragraph 5(2)(c) provides that if neither paragraph 5(2)(a) or paragraph 5(2)(b) apply i.e. the value is not a sale price or otherwise agreed, and a market value for the property has been determined by an accredited valuer (defined at section 4 above), then if the Secretary is satisfied that:

• the market value for one or more days, (called a valuation day), within the period of 3 months before the time the person seeks to repay or the Commonwealth seeks to recover the debt, has been determined by an accredited valuer/s, and
• there has been no material change in circumstances affecting the market value since the most recent valuation day;

then the market value is the value determined for the most recent valuation day. The later day in respect of which the value of the asset is determined (the valuation day) takes priority, even if the day on which the valuation was undertaken by the valuer is more recent.

The example in the table below shows the practical operation of paragraph 5(2)(c). In this scenario, the market value would be Valuation A because it has a more recent valuation day even though the valuation itself is older than Valuation B. 

Paragraph 5(2)(d) provides that if paragraph 5(2)(a) (property sold), paragraph 5(2)(b) (value agreed) and paragraph 5(2)(c) (an applicable valuation exists) do not apply, then the market value is the market value as determined by an accredited valuer. The value must be determined as at the time the person seeks to repay, or the Commonwealth seeks to recover the debt (the event time).

Subsection 5(3) limits paragraph 5(2)(a) in situations where the Secretary reasonably believes that the sale price of real assets or real property has been reduced because the real assets or real property have been undervalued.

The undervaluation could occur because:

• the sale was not conducted in good faith. This may occur if for example the property was sold without due consideration given to the interests of the mortgagee; or
• the sale was not conducted on fair and reasonable terms. This may occur if for example:
  • the property or assets were sold without reasonable steps to advertise its sale;
  • the property or assets were not presented for sale in a reasonable condition such as being in need of essential repairs;
  • reasonable evidence of the property’s or assets’ value were not obtained prior to the sale; or
  • the property or assets were not sold by auction, unless it was appropriate to sell it in another way; or
• the sale was conducted between parties who were not dealing with each other at arm’s length; or
• or any other circumstance.

If the Secretary reasonably believes undervaluation of this nature has occurred, subsection 5(3) applies so that the market value at the time of sale is taken to be the value determined by an accredited valuer. Subsection 5(3) is intended as a mechanism to prevent the market value and the Scheme’s Guarantee from being deliberately manipulated to reduce the amount of debt that could be recovered by the Commonwealth.

Subsection 5(4) provides that the market value of real assets or real property worked out under this section is reduced by the total value of any charges or encumbrances over the real assets or real property, other than the charge created to secure payment of a debt to the Commonwealth under the Scheme. The resulting amount is taken to be the adjusted value under section 1144AA of the Act and is the amount that is subject to the Scheme’s Guarantee. No adjustments are made for sales commissions, taxes or other costs associated with a sale.

The total value of any charges or encumbrances is worked out:

• if the assets or property is sold before the person seeks to repay or the Commonwealth seeks to recover the debt, immediately before the assets or property is sold; or
• if paragraph 5(2)(b) applies and the value is agreed, at the time of the agreement; or
• if paragraph 5(2)(c) applies and there is a recent, reliable valuation, at the end of the most recent valuation day; or
• if paragraph 5(2)(d) applies and a fresh valuation is undertaken, at the time the person seeks to repay or the Commonwealth seeks to recover the debt.

Examples

PLS loan less than adjusted value and the Guarantee not triggered

A person has a property worth $500,000, with a $100,000 mortgage. This provides equity of $400,000 to secure a Scheme loan.

On the person’s passing, the market value is $600,000, their mortgage is $80,000 and their Scheme debt is $340,000. The adjusted value of their property is $520,000 ($600,000 - $80,000).

The maximum amount the Commonwealth can recover is capped by the adjusted value of $520,000. As the debt is less than the adjusted value, the Commonwealth can take steps to recover the full outstanding debt balance of $340,000.

PLS loan greater than adjusted value and the Guarantee triggered

A person has a property worth $500,000, with a $100,000 mortgage. This provides equity of $400,000 to secure a Scheme loan.

On the person’s passing, the market value is $400,000, their mortgage is $80,000 and their Scheme debt is $340,000. The adjusted value of their property is $320,000 ($400,000 - $80,000).

The maximum amount the Commonwealth can recover is capped by the adjusted value of $320,000. As the debt is greater than the adjusted value, the Guarantee is triggered. The Commonwealth recovers the adjusted value of $320,000 and cannot recover the remaining $20,000 of debt.

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Social Security (Pension Loans Scheme – Market Value) Determination 2022

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

This Instrument sets out the methods for determining market value and adjustments to be made to the market value of real property or real assets  securing a debt to the Commonwealth under the Pension Loans Scheme (known publicly as the Home Equity Access Scheme ). When the Pension Loans Scheme participant has the benefit of the no negative equity guarantee under the Scheme, this will limit the amount of the debt repayable by the participant to the Commonwealth under the Scheme to no more than the adjusted value of the property

Human rights implications

The Determination 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 Pension Loans Scheme allows eligible Australians to improve their living standards in retirement by taking out a loan from the Australian Government, generally secured against the person’s Australian real estate assets.

The Pension Loans Scheme has a no negative equity guarantee (the Guarantee) that ensures the Commonwealth is generally not entitled to recover a debt amount that exceeds the adjusted value of a debtor’s real assets or property.

This Instrument provides for the true market value of real assets or real property to be determined at the time a participant seeks to repay their debt under the Scheme, or the Commonwealth seeks to recover that debt. In general, this will limit the amount of the Pension Loans Scheme debt which they must repay.

The Determination will give senior Australians greater protection when it comes to repaying their Scheme debt, either voluntarily or from their estate, by valuing their property fairly and realistically. Provided the person has dealt with their property in a way which does not allow it to be sold under its value or the equity in the home reduced inconsistently with their obligation to repay their loan, the value determined under the instrument will limit their debt to the Commonwealth. The Scheme supports the human right to adequate income (given as a loan) during their lifetime, as a form of social security, and only be required to repay the loan to the extent of the value in their home.

Conclusion

The Determination is compatible with human rights as it does not raise any human rights issues and supports a person’s access to social security.

Ray Griggs, Secretary of the Department of Social Services