EXPLANATORY STATEMENT
Veterans’ Entitlements Act 1986
Veterans’ Entitlements (Asset-test Exempt Income Stream (Market-linked) — Payment Factors) Principles Amendment Instrument 2022
(Instrument 2022 No. R33)
PURPOSE
The Veterans’ Entitlements (Asset-test Exempt Income Stream (Market-linked) — Payment Factors) Principles Amendment Instrument 2022 (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).
The Instrument will further extend the halving of the minimum draw-down rate for the 2022-2023 financial year in response to the ongoing financial market volatility, caused by the continuing economic impact of the coronavirus known as COVID-19.
The Payment Factors Principles had previously been amended to halve the minimum draw-down rate for the financial years 2019-2020, and 2020-2021 and 2020-2022.
Background
Income streams that are market-linked income streams which commenced during the period from 20 September 2004 to 19 September 2007 that also meet all of the other conditions of section 5JBA of the Act are classified as an ‘asset-test exempt income stream’ for the purposes of means testing under the Act.
For one of the conditions to be met, an income stream must pay an amount of income in each year that is within the limits determined by the formula set out in subsection 5JBA(5) of the Act.
Under subsection, 5JBA(5) the payments made under the income stream must be between a minimum of 90 per cent and a maximum 110 per cent of the amount worked out under the formula.
The purpose of the formula is to ensure that a person with an asset-test exempt 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.
The payment factors that are used for the purposes of the formula in subsection 5JBA(5) are derived from the table in the Payment Factors Principles and are the same as those set out in Schedule 6 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).
The 2020 amendments to the Payment Factors Principles were 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 amended 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, 2020-2021 and 2021-22 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.
Further amendments have been made by the Superannuation Legislation Amendment (Superannuation Drawdown) Regulations 2022, to reduce the minimum payment amounts that apply to account-based annuities and pensions, allocated annuities and pensions, and market linked annuities and pensions for the 2022‑23 financial year by half.
Proposed Amendments
The 2020 amendments provided 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 2021 amendments extended the concession for the financial year commencing 1 July 2021.
The 2022 Instrument amends subsection 2.1(1A) of the Payment Factors Principles to extend the doubling of the payment factor for the financial year commencing on 1 July 2022.
The doubling of the payment factor to be applied to working out the minimum drawdown amount, effectively halves the minimum drawdown required from the income stream 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 provide for the continuation of the option for income stream recipients to reduce the minimum drawdown during the specified financial years but do not require the recipients to reduce the maximum amount that they may drawdown from their income streams.
Commencement
The Instrument commences on the day after it is registered.
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. Equivalent legislative instruments are made by the Repatriation Commission and the Secretary, Department of Social Services, respectively.
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 equivalent instrument made under the SSA, 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)
The Instrument extends the measure implemented for the 2019-2020 and 2020-2021 financial years for a further year and is not regulatory in nature. It will not impact on business activity and will have no, or minimal, compliance costs or competition impact.
OBPR Reference (DSS ID: 44156).
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 2022.
Section 2 provides that this Instrument commences on the day after it is registered.
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 omits the reference in subsection 2.1(1A) of the Payment Factors Principles to
“1 July 2020” and substitutes the words “, 1 July 2021 or 1 July 2022”.
The effect of the amendment is to extend the halving of the required minimum drawdown to include the 2021-2022 financial year.
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 2022
The Instrument 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 Payment Factors Instrument) to further extend the changes to the requirements for minimum payment amounts from income streams that were made for the 2019-2020, 2020-2021 and 2021-2022 financial years to include the 2022-2023 financial year. The changes have effectively halved 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.
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 within the limits of the minimum or maximum amounts 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 being made by the Instrument the minimum amount payable for the 2022-2023 financial year will again effectively be 45 per cent of the maximum amount that would otherwise have been 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 annual payment rules are designed so that retirees draw down on their superannuation capital over their retirement.
The interim measure implemented by the 2020 amendments to the superannuation legislation and to the Payment Factors Instrument was 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.
The amendments being made by the Instrument will extend the interim measure for a further 12 months to include the 2022-2023 financial year and aligns with the amendments made by the Superannuation Legislation Amendment (Superannuation Drawdown) Regulations 2022.
Human rights implications
The amendments to the Payment Factor 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 Payment Factor 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 Instrument is compatible with human rights because the amendments provide additional flexibility for retirees in receipt of income support in managing their market-linked investments in an economic environment that continues to be affected by COVID-19.
Simon Hill
Delegate of the Repatriation Commission
Rule-Maker