EXPLANATORY STATEMENT
Veterans’ Entitlements Act 1986
Veterans’ Entitlements (Asset-test Exempt Income Stream (Market-linked) — Payment Factors) Principles Amendment Instrument 2020
(Instrument 2020 No. R17)
PURPOSE
The Veterans’ Entitlements (Asset-test Exempt Income Stream (Market-linked) — Payment Factors) Principles Amendment Instrument 2020 (the Instrument) is made under subsection 5JBA(5A) of the Veterans’ Entitlements Act 1986 (the Act).
The Instrument will amend the Veterans’ Entitlements (Asset-test Exempt Income Stream (Market-linked) – Payment Factors) Principles 2005 (Payment Factors Principles) made under subsection 5JBA(5A) of the Veterans’ Entitlements Act 1986 (the Act) to implement changes to the minimum payment amounts for income streams payable during the 2019-2020 and 2020-2021 financial years.
Background
A ‘grandfathered’ market-linked income stream (being an income stream that commenced during the period from 20 September 2004 to 19 September 2007) that meets all of the other requirements of section 5JBA of the Act will be classified as an ‘asset-test exempt income stream’ for the purposes of means testing under the Act.
To meet the definition of an ‘asset-test exempt income stream’ in section 5JBA of the Act, an income stream must pay an amount of income in each year that is equal to the amount worked out by the formula in subsection 5JBA(5). The purpose of the formula is to ensure that a person with such an income stream will draw down an increasing proportion of the income stream each year so that the income stream is exhausted at the expiry of its fixed term.
Subsection 5JBA(5) of the Act states the general rule for the total amount payable under the income stream in each financial year and provides the formula for working out the amount. The subsection also specifies that the payments made under the income stream must be between a minimum 90 per cent and a maximum 110 per cent of the amount worked out under the formula.
The payment factors in the table in the Payment Factors Principles are the same as those in Schedule 6 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations, and are used as the denominator in the same formula at subsection 5JBA(5) of the Act and at clause 1 of Schedule 6 of the SIS Regulations.
The amendments to the Payment Factors Principles are being made to ensure consistency with the amendments made by Schedule 10 to the Coronavirus Economic Response Package Omnibus Act 2020 (Coronavirus Omnibus Act).
Schedule 10 to the Coronavirus Omnibus Act introduced amendments to the SIS Regulations and the Retirement Savings Accounts Regulations 1997, reducing the minimum payment amounts that apply to account-based annuities and pensions, allocated annuities and pensions, and market linked annuities and pensions for the 2019-20 and 2020-21 financial years by half.
The measures in the Coronavirus Omnibus Act were introduced as part of the Government’s commitment to provide financial assistance to those who are financially impacted by the Coronavirus health crisis.
Asset test rules for certain asset-test exempt income streams
The grandfathering provision applicable to these market-linked income streams, subsection 52(1AA) of the Act provides that asset-test exempt income streams which meet the criteria set out in subsections 5JA(1) or (1A), 5JB(1) or 5JBA(1) and which commenced during the period from 20 September 2004 to 19 September 2007 (both dates inclusive) will be partially asset-test exempt as under paragraph 52(1)(daa) only “half of the value of any partially asset-test exempt income stream of the person” is to be disregarded for the purposes of the means test.
Proposed Amendments
The amendments provide that for the financial years commencing on 1 July 2019 and 1 July 2020, the payment factor (PF) for working out the minimum amount payable in each of those financial years for an income stream under subsection 5JBA(5) of the Act is to be double the relevant payment factor specified in the table at subsection 2.1(3) of the Payment Factors Principles. The payment factors for working out the maximum amount payable in each of those financial years for an income stream under subsection 5JBA(5) of the Act remains unchanged.
The doubling of the payment factor to be applied to working out the minimum drawdown amount, effectively halves the minimum drawdown required from an income stream in order to maintain the ‘grandfathered’ status for the relevant financial years. The effect of the amendments is to halve the minimum drawdown to 45 per cent of the amount that would otherwise have been calculated under the formula if new subsection 2.1(1A) of the Payment Factor Principles had not been inserted.
The amendments will provide income stream recipients with the option of reducing the minimum drawdown during the specified financial years but do not require the recipients to reduce the amount that they drawdown from their income streams.
Commencement
The Instrument commences on the day after this instrument is registered on the Federal Register of Legislation. The retrospective application of the Instrument means the amended payment factors will apply from the financial year beginning 1 July 2019, however the effect of the amendments is beneficial.
Consultation
The department has closely consulted with the Department of Social Services on the drafting of the instrument which mirrors the instrument made by that Department under subsection 9BA(5) of the Social Security Act 1991 (SSA).
The VEA and the SSA have equivalent provisions for the means test treatment of income streams which include numerous provisions under which the equivalent legislative instruments are made by the Repatriation Commission and the Secretary, Department of Social Services, respectively.
The responsible policy area of the Department of Veterans’ Affairs, the Policy Development Branch of the Veterans’ Services Design Division works with the Retirement Incomes & Concessions Section of the Older Australians Branch of the Department of Social Services to ensure that the legislative instruments that are developed for the purposes of the application of the means test to income streams under the SSA are also duplicated for the purposes of the VEA.
The Department is not required to consult externally in making these instruments as the consultation process undertaken by DSS is applicable to the instruments made under both Acts.
For the SSA equivalent of the proposed instrument, DSS consulted closely with and obtained the approval of the Tax and Transfers Unit, Retirement Income Policy Division of Treasury.
That approval was obtained on the basis that the changes to the means test treatment of the minimum drawdown requirements for market-linked pensions under the SSA would mirror the changes to the Superannuation (Supervision) Regulations 1994 made under the Coronavirus Economic Response Package Omnibus Act 2020.
Regulation Impact Statement (RIS)
An exemption from Regulation Impact Statement requirements was granted by the Prime Minister for the measures included in the Coronavirus Omnibus Act as there were urgent and unforeseen events.
The Determination is not regulatory in nature and will not impact on business activity and will have no, or minimal, compliance costs or competition impact.
OBPR Reference (DSS ID: 26371).
Explanation of the provisions
Section 1 provides how this Instrument is to be cited, that is, as the Veterans’ Entitlements (Asset-test Exempt Income Stream (Market-linked) — Payment Factors) Principles Amendment Instrument 2020.
Section 2 provides that this Instrument commences on the day after the instrument is registered on the Federal Register of Legislation.
Section 3 provides that this Instrument is made under subsection 5JBA(5A) of the Veterans’ Entitlements Act 1986.
Section 4 specifies that the Veterans’ Entitlements (Asset-test Exempt Income Stream (Market-linked) — Payment Factors) Principles 2005 are amended as set out in the Schedule.
Schedule – Amendments to the Veterans’ Entitlements (Asset-test Exempt Income Stream (Market-linked) – Payment Factors) Principles 2005
Item 1 repeals and substitutes a new subsection 2.1(1) into the Payment Factors Principles. New subsection 2.1(1) provides that for the formula in subsection 5JBA(5) of the Act, subject to new subsection 2.1(1A), ‘PF’ means the payment factor specified in column 3 of the table in subsection 2.1(3) that corresponds with the remaining term of the income stream.
The payment factor is applied on 1 July of each financial year, except in the first year of the income stream’s term, where this is done on the day the income stream commences.
New subsection 2.1(1A) provides that if the financial year for which the total amount is being worked out is either of the financial years commencing on 1 July 2019 or 1 July 2020 the ‘PF’ to be used in applying the formula in subsection 5JBA(5) of the Act to determine the minimum amount (being 90 per cent of the payments to be made under the income steam) is the number twice the payment factor specified in column 3 of the table in subsection 2.1(3) that corresponds with the remaining term of the income stream.
The ‘PF’ to be used for working out the maximum amount (being 110 per cent of the payments that may be made under the income stream) under subsection 5JBA(5) remains unchanged.
Example
Maya has a market-linked pension with a remaining term of 19 years. On 1 July 2020, its account balance was $200,000. According to item 52 of the table in subsection 2.1(3), the payment factor of a market-linked pension with a remaining term of 19 years is 13.71.
To work out the minimum payment requirement of Maya’s market-linked pension for the 2020-21 financial year for the purposes of the means test, a payment factor of 27.42 (double 13.71) is applied to the formula at subsection 5JBA(5) of the Act. This means the minimum amount Maya needs to drawdown from her market-linked pension in the 2020-21 financial year is 90% of $200,000 ÷ 27.42, which is $6,564.55.
To work out the maximum payment limit of Maya’s market-linked pension for the 2020-21 financial year for means testing purposes, a payment factor of 13.71 is still applied to the formula at subsection 5JBA(5) of the Act. This means the maximum amount Maya may drawdown from her market-linked pension in the 2020-21 financial year is 110% of $200,000 ÷ 13.71, which is $16,046.68.
This means for the financial year 2020-21, Maya must drawdown from her market-linked pension a total amount between a minimum amount of $6,564.55 and a maximum amount of $16,046.68 for the purposes of the means test.
Without this measure, the minimum payment requirement of Maya’s market‑linked pension in the 2020-21 financial year for the purposes of the means test would be 90% of $200,000 ÷ 13.71, which is $13,129.10. The change effectively halves the minimum assessable income from a market-linked pension.
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Veterans’ Entitlements (Asset-test Exempt Income Stream (Market-linked) – Payment Factors) Principles Amendment Instrument 2020
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 amends the Veterans’ Entitlements (Asset-test Exempt Income Stream (Market-linked) – Payment Factors) Principles 2005 (the Principal Instrument) to implement consequential amendments that flow from the changes to the requirements for minimum payment amounts from income streams during the 2019-2020 and 2020-2021 financial years. The changes will effectively halve the allowable minimum amount payable during those years.
A market-linked income stream that meets the requirements of section 5JBA of the Veterans’ Entitlements Act 1986 (the Act) will be classified as an ‘asset-test exempt income stream’ for the purposes of means testing under the Act, and provided with a 50 per cent asset test exemption.
Subsection 5JBA(5) of the Act provides the general rule for the total allowable amount payable under a market-linked income stream in each financial year in order for the income stream to be regarded as being “asset-test exempt’. To meet the criteria in order to be defined as an ‘asset-test exempt income stream’ under section 5JBA of the Act, an income stream must pay an amount of income in each year that is equal to the amount worked out by the formula in subsection 5JBA(5).
Under the general rule the total amount payable under the income stream in each financial year must be between a minimum of 90 per cent and a maximum 110 per cent of the amount worked out by using the formula set out in subsection 5JBA(5).
As a consequence of the amendments the minimum amount payable for the financial years 2019-2010 and 2020-2021 will effectively be 45 per cent of the amount that would usually be allowable.
Background
The Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) and the Retirement Savings Accounts Regulations 1997 (RSA Regulations) were amended by Schedule 10 of the Coronavirus Economic Response Package Omnibus Act 2020.
The purpose of the amendments was to reduce the minimum payment amounts for account based pensions, allocated pensions and market linked pensions (and for the equivalent annuity products) by half for the 2019-20 and 2020-21 financial years.
The SIS Regulations and RSA Regulations provide that a minimum payment be made from a pension or annuity at least annually. Minimum payments are determined by age and the value of the account balance at 1 July of each year. The minimum annual payment rules are designed so that retirees draw down on their superannuation capital over their retirement.
The interim measure being implemented by the amendments to the superannuation legislation and to the Principal Instrument is designed to assist pension and annuity account balances to recover from capital losses associated with economic shock from the Coronavirus health crisis by allowing retirees to adjust their drawdowns to their depreciated asset holdings and avoid being forced to sell assets in loss positions to fund income stream payments.
Human rights implications
The amendments to the Principle Instrument engage 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 amendments to the Principle Instrument will promote an accurate and fair assessment through the application of the means test under the Act. This supports the aims of the system in appropriately recognising an individuals’ capacity for self-support when determining their rate of income support. It also supports DVA’s social security system to remain sustainable into the future.
Conclusion
The Principles are compatible with human rights as they do not raise any human rights issues.
Janice Silby
Delegate of the Repatriation Commission
Rule-Maker