EXPLANATORY STATEMENT
Veterans’ Entitlements (Kind, Extent and Purchase Amount for Asset-tested Income Streams (Lifetime)) Determination 2019
(Instrument 2019 No. R32)
PURPOSE
The Veterans’ Entitlements (Kind, Extent and Purchase Amount for Asset-tested Income Streams (Lifetime)) Determination 2019 (Instrument) is made under subsections 5JE(3), 52BAA(7) and 52BAB(16) of the Veterans’ Entitlements Act 1986 (the Act).
The Instrument determines the extent to which certain income stream products that contain a lifetime income stream component (a lifetime component) are to be assessed as an ‘asset‑tested income stream (lifetime)’ under the new means testing rules inserted into the Act by the Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Act 2019 (the Supporting Retirement Incomes Act).
Certain income stream products contain a lifetime component but also contain a component that is an account-based pension, account-based annuity, allocated pension or an allocated annuity. This Instrument ensures that it is only the lifetime component of these income stream products that is assessed as an asset-tested income stream (lifetime) for the purposes of the new means testing rules under the Act. The instrument is required to ensure that a recipient who purchases an incomes steam with multiple components is assessed similarly under the means test as if they had purchased the components, or similar income stream products, separately. It therefore promotes means test equity and neutrality.
The Instrument also sets a purchase amount for the lifetime component of these income stream products. This purchase amount is then used for the purposes of the assets test under the Act.
BACKGROUND
Schedule 1 of the Supporting Retirement Incomes Act will, from 1 July 2019, amend the Act to establish new means testing rules to accommodate the development of new innovative income streams, resulting from recent changes to the Superannuation Industry (Supervision) Regulations 1994 (the SIS Regulations). The Schedule also amended the rules for lifetime income streams, to create fairer, more equitable means test outcomes. This was part of the 2018-19 Budget measure ‘More Choices for a Longer Life – Finances for a Longer Life’.
Subsection 5JE(3) of the Act
Schedule 1 of the Supporting Retirement Incomes Act will insert new section 5JE into the Act. Section 5JE of the Act establishes a new category of income stream called an ‘asset-tested income stream (lifetime)’. This new category of income stream will be subject to the new means testing rules provided for in the Supporting Retirement Incomes Act.
This Instrument is made under subsection 5JE(3) for the purposes of subsection 5JE(2) of the Act and provides that certain kinds of income streams that would otherwise meet the definition of an asset-tested income stream (lifetime) in section 5JE will only to be treated as asset-tested income streams (lifetime) to the extent outlined in this Instrument.
This Instrument applies to three kinds of income stream products. These are ‘Guaranteed minimum income for life’ income streams, ‘Lifetime income streams packaged with or within an account based income stream’ and ‘Lifetime income streams packaged with a term-limited income stream’.
These income stream products contain a lifetime component. Therefore it is appropriate to assess this component of the income stream as an asset-tested income stream (lifetime) for the purposes of the Act.
However, these income stream products also contain a component that is either an account-based pension, account-based annuity, allocated pension, an allocated annuity or a term-limited income stream. It is not appropriate that this component of the income stream product should be assessed as an asset-tested income stream (lifetime) under the Act as this component does not have the characteristics of a lifetime income stream.
This Instrument ensures that only the lifetime component will be assessed as an asset-tested income stream (lifetime) under the Act.
Subsections 52BAA(7) and 52BAB(16) of the Act
Schedule 1 of the Supporting Retirement Incomes Act will, from 1 July 2019, insert new sections 52BAA and 52BAB into the Act.
Subsections 52BAA(7) and 52BAB(16) of the Act allow the Commission to determine the circumstances in which an asset-tested income stream (lifetime) is to have a purchase amount that differs from the standard purchase amount for an asset-tested income stream (lifetime) (determined under paragraphs 52BAA(4)(b) and 52BAB(13)(b) of the Act).
This Instrument sets out a specific method for determining a purchase amount for the lifetime component of the two categories of income streams to which the section 5JE(3) determination made under this Instrument applies (as detailed above).
The purchase amount is used when ascertaining the value of an asset‑tested income stream (lifetime) for the purposes of assessing the income stream under the assets test.
COMMENCEMENT
This Instrument commences on 1 July 2019 immediately after the commencement of Schedule 1 of the Supporting Retirement Incomes Act.
ACTS INTERPRETATION ACT PROVISIONS
Commencement: for clarity, section 4 of the Acts Interpretation Act 1901 applies to this Instrument. This is because the Instrument is made after the Supporting Retirement Incomes Act received Royal Assent and before the commencement of that Act.
CONSULTATION
The policy enacted by this Instrument has been widely consulted on. Consultation included a preliminary discussion paper released publicly for comment in early 2017, a position paper released publicly for comment in early 2018, and a private consultation on Schedule 1 of the Supporting Retirement Incomes Act. Stakeholders from the financial product and seniors advocacy sectors engaged in these consultations. Additionally, government bodies including the Australian Government Actuary, the Treasury, the Department of Social Services and Services Australia were consulted on this policy.
Consultation on the text of the Instrument was undertaken with the Treasury, the Department of Social Services and Services Australia. Consultation was also undertaken with key stakeholders in the financial product sector. This included the Australian Institute of Actuaries and members of the Australian Tax Office’s Superannuation Industry Stewardship Group.
REGULATORY IMPACT STATEMENT
The Office of Best Practice Regulation has advised that the new means test rules for lifetime income streams are non-regulatory/machinery in nature and have a zero regulatory cost (OBPR reference 23186). The Instrument is a part of the implementation of the new means test rules for lifetime income streams.
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Human rights implications
The Instrument 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 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 Instrument is compatible with Australia’s obligations not to take any backward steps in relation to the right to social security. The Instrument does not unreasonably restrict a person’s eligibility to receive a benefit under the Act or reduce the benefits to which a person may be entitled.
This Instrument has been created to ensure fair and equitable means test outcomes for asset-tested income streams (lifetime) products. If the Instrument were not in place, hybrid income stream products would be wholly assessed as an asset-tested income stream (lifetime), rather than being assessed as their separate components.
This would result in a person’s means for self-support not being accurately captured by the means test under the Act. This would be unfair and inequitable when compared with those who purchase discrete lifetime products and account-based products.
By ensuring only the lifetime component of these hybrid products are assessed as asset-tested income streams (lifetime), the Instrument promotes an accurate and fair assessment through 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 the right to social security.
Repatriation Commission
Rule-Maker
FURTHER EXPLANATION OF PROVISIONS
See Attachment A.
Attachment A
EXPLANATION OF THE PROVISIONS
Section 1
This section provides that the name of this Instrument is the Veterans’ Entitlements (Kind, Extent and Purchase Amount for Asset-tested Income Streams (Lifetime)) Determination 2019.
Section 2
This Instrument commences on 1 July 2019 immediately after the commencement of Schedule 1 of the Supporting Retirement Incomes Act.
Subsection 4(3) of the Acts Interpretation Act 1901 provides that anything may be done before the start time (of the Act) for the purpose of enabling the exercise of the power, or of bringing the appointment or instrument into effect, as if the commencement had occurred. This provision enables the instrument to be lawfully made after the Act has received Royal Assent and prior to the commencement of the Act.
Section 3
This section provides that the authority for making this Instrument is new subsections 5JE(3), 52BAA(7) and 52BAB(16) of the Act.
These subsections were inserted into the Act by the Supporting Retirement Incomes Act and empower the Commission to make instruments:
- to determine that only part of a hybrid product is an asset-tested income stream (lifetime); and
- to determine the purchase amount of a product.
Section 4
This section contains various definitions used in the Instrument. The following expressions in the Instrument are defined by reference to the meanings given in the SIS Regulations:
- account‑based annuity;
- account‑based pension;
- allocated annuity; and
- allocated pension.
The references to these expressions in the SIS Regulations are references to those expressions as in force from time to time (see section 14 of the Legislation Act 2003).
In addition, the following definitions are included “Act” to mean the Veterans’ Entitlements Act 1986 and “lifetime component”. Lifetime component meaning is given by section 5 and each component within paragraph (b) of each subsection.
A note to section 4 notes that three expressions that are used in the Instrument are defined in the Act.
Section 5
This section is made under subsection 5JE(3) of the Act and determines three kinds of income streams for the purposes of paragraph 5JE(2)(b) of the Act.
These are ‘Guaranteed minimum income for life’ income streams, ‘Lifetime income streams packaged with or within an account based income stream’ and ‘Lifetime income streams packaged with a term-limited income stream’.
These are the three kinds of income streams to which this Instrument applies. This Instrument will determine the extent to which these three kinds of income streams are to be assessed as an asset-tested income stream (lifetime) (see paragraph 6(2)(a) of this Instrument) and will determine a purchase amount for the lifetime component of these three kinds of income streams (see paragraph 6(2)(b) and subsections 6(3), (4) and (5) of this Instrument).
Subsection 5(1) provides that section 5 applies to an income stream in relation to which paragraphs 5JE(1)(a) to (d) of the Act are satisfied.
Subsection 5(2) provides that an income stream (called a ‘Guaranteed minimum income for life’ income stream) is a kind of income stream for the purposes of paragraph 5JE(2)(b) of the Act if, under the contract or governing rules for the provision of the income stream, the income stream includes:
(a) a part that is an ‘account based annuity’, an ‘account based pension’, an ‘allocated annuity’ or an ‘allocated pension’ (as noted above, these expressions are defined in the SIS Regulations); and
(b) a part (the lifetime component) that makes regular payments to an individual and has the following elements:
(i) once they start, the payments are payable for the remainder of the life of one or more individuals;
(ii) the payments become payable only after the account balance of the individual’s annuity or pension mentioned in paragraph (a) is reduced below a threshold specified in the contract or governing rules;
(iii) the value of the payments is specified in the contract or governing rules.
Subsection 5(3) provides that an income stream (called a ‘Lifetime income stream packaged with or within an account based income stream’) is a kind of income stream for the purposes of paragraph 5JE(2)(b) of the Act if, under the contract or governing rules for the provision of the income stream, the income stream includes:
(a) a part that is an ‘account based annuity’, an ‘account based pension’, an ‘allocated annuity’ or an ‘allocated pension’ (as noted above, these expressions are defined in the SIS Regulations); and
(b) a part (the lifetime component) that makes regular payments to, or for the benefit of, an individual and has the following elements:
(i) once they start, the payments are payable for the remainder of the life of one or more individuals;
(ii) age, life expectancy or other factors relevant to the individual’s mortality;
(iii) in order to obtain the payments, the individual is (directly or indirectly) required to pay an amount or amounts into a specified fund or investment option held for the collective benefit of individuals who have invested in that fund or investment option;
(iv) amounts paid into the specified fund or investment option (whether by the individual or any other individual) can be forfeited if an income stream is commuted or a person dies;
(v) payments made by the specified fund or investment option are financed partly from amounts so forfeited.
Subsection 5(4) provides that an income stream (called a ‘Lifetime income stream packaged with a term-limited income stream’) is a kind of income stream for the purposes of paragraph 5JE(2)(b) of the Act if, under the contract or governing rules for the provision of the income stream, the income stream includes:
(a) a part that makes regular payments to an individual for a specified term; and
(b) a part (the lifetime component) that makes regular payments to an individual and has the following elements:
(i) once payments start, the payments are payable for the remainder of the life of one or more individuals;
(ii) the value of the payments is determined by having regard to the age, life expectancy or other factors relevant to the individual’s mortality.
Section 6
Subsection 6(1) provides that section 6 of the Instrument is made for the purposes of the following provisions of the Act:
(a) subsection 5JE(2);
(b) paragraph 52BAA(4)(b);
(c) paragraph 52BAB(13)(b).
This section is made under subsection 5JE(2) of the Act as it determines the extent to which the two categories of income stream products referred to in section 5 of this Instrument are to be treated as an asset-tested income stream (lifetime).
Paragraphs 52BAA(4)(b) and 52BAB(13)(b) determine a purchase amount for the lifetime component of the two categories of income stream products referred to in section 5 of this Instrument.
Subsection 6(2) provides that if, under section 5 of this Instrument, an income stream is determined to be a kind of income stream for the purposes of paragraph 5JE(2)(b) of the Act:
(a) the lifetime component of the income stream is an asset‑tested income stream (lifetime); and
(b) the purchase amount for the lifetime component is:
(i) if the lifetime component is financed, wholly or partly, by fees or charges—the amount of any such fees or charges paid by the individual; and
(ii) if the lifetime component is financed, wholly or partly, by a specified fund or investment option into which the individual was required (directly or indirectly) to pay an amount or amounts in order to obtain the payments made by the lifetime component—the amount worked out in accordance with subsection 6(3) or 6(4).
For an income stream that has the characteristics detailed above in subparagraph 6(2)(b)(ii), it is necessary to look to either subsection 6(3) or (4) to work out the purchase amount for the lifetime component of the income stream.
Subsection 6(3) will apply where an income stream is subject to section 52BAA of the Act. Section 52BAA applies to a person’s asset-tested income stream (lifetime) that does not arise under arrangements that are regulated by the Superannuation Industry (Supervision) Act 1993. Section 52BAA only applies in relation to a day that is before the person’s assessment day (within the meaning of section 52BAB of the Act) for the income stream.
Subsection 6(3) provides that, for the purposes of paragraph 52BAA(4)(b) of the Act, the amount is the sum of each compounded amount in relation to amounts paid by the individual into the specified fund or investment option. For the purposes of subsection 6(3), a ‘compounded amount’ is worked out by applying the formula set out in subsection 52BAA(5) of the Act, as if references in that subsection to an amount paid for the income stream were references to an amount paid into the specified fund or investment option.
Subsection 6(4) will apply where an income stream is subject to section 52BAB of the Act. Section 52BAB applies to a person’s asset-tested income stream (lifetime) in relation to a day that is on or after the person’s assessment day for the income stream.
Subsection 6(4) provides that, for the purposes of paragraph 52BAB(13)(b) of the Act, the amount is the sum of:
(a) each compounded amount in relation to amounts paid by the individual into the specified fund or investment option; and
(b) each amount paid by the individual into the specified fund or investment option on or after the assessment day.
For the purposes subsection 6(4) a ‘compounded amount’ is worked out by applying the formula set out in subsection 52BAB(14) of the Act, as if references in that subsection to an amount paid for the income stream were references to an amount paid into the specified fund or investment option.
Subsection 6(5) provides that, if the Commission is satisfied that the lifetime component is not wholly financed by a means specified in paragraph 6(2)(b) of this Instrument, the purchase amount is the value that is certified by an actuary who is a Fellow or Accredited Member of the Institute of Actuaries of Australia as being attributable to the individual in relation to the lifetime component under the contract or governing rules for the income stream.