EXPLANATORY STATEMENT
SOCIAL SECURITY (PRESENT VALUE OF UNPAID AMOUNTS - INTEREST RATE) NOTICE No. 1
The Social Security Legislation Amendment (Carer Pension and Other Measures) Act 1995 inserted new section 1237AAB in the Social Security Act 1991 (the Act) from 1 January 1996. Subsections 1237AAB(4) to (6) of the Act extended the waiver provisions to allow recovery of part of a debt in full satisfaction of the whole debt where it is more cost effective to do so based on commercial considerations. Part of the debt may be waived where the person makes a current offer in full settlement of the debt and the amount offered is greater than the "present value" of the outstanding balance of the debt.
The concept of "present value" recognises that it may be cost effective to accept a smaller sum of money rather than pursue a larger sum of money as a series of instalments over a future period.
Subsection 12337AAB(6) of the Act provides a formula for calculating the "present value" of the outstanding balance of the debt. Part of this formula requires the Minister for Social Security to specify an annual rate of interest by written notice.
Accordingly, this Instrument sets the annual rate of interest at 10%.
If the interest rate is on a par with market interest rates it may be beneficial for a person owing a debt to the Commonwealth to borrow to repay their debt.
The interest rate of 10% is seen as a reasonable compromise which balances the competing objectives of protecting the public purse versus the desirability of setting the interest rate at a level that provides an incentive to repay debts early.