You are here
B58/1995 ASSETS TEST: CALCULATION OF VALUE OF FOREGONE WAGES WHERE FARM OR BUSINESS TRANSFERRED TO CLOSE RELATIVE
DATE OF ISSUE: 24 OCTOBER 1995
ASSETS TEST: CALCULATION OF VALUE OF FOREGONE WAGES WHERE FARM OR BUSINESS TRANSFERRED TO CLOSE RELATIVE
1.The Department of Social Security (DSS) recently implemented a change in policy when calculating the value of foregone wages. The purpose of this Departmental Instruction is to provide details of an equivalent policy change by this Department.
2.Under the disposal of assets provisions of the Veterans' Entitlements Act (VEA), a portion of the value of any asset that a pensioner transfers to another party as a 'gift' may be held in the pensioner's assessment as a disposed asset. The amount held as a disposed asset is generally the total value of the asset less the allowable gifting limit.
3.This assessment applies where a pensioner legally transfers a farm or business, or an interest in a farm or business, to a close relative as a gift. The value of the farm or business in excess of the allowable gifting amount, currently $10,000, is the amount held as a disposed asset.
4.However, where the relative to whom the farm or business is transferred has worked on the farm, or in the business, without receiving wages (ie. has foregone wages), the value of the wages foregone is deducted from the amount held as a disposed asset in the pensioner's assessment. The purpose of this deduction is to exempt from assessment that part of the value of the asset transferred which represents recompense to the relative for wages they have foregone.
CURRENT DVA POLICY
5.Currently, the value of wages foregone by the recipient of a gift is determined by calculating the value of wages that would have been payable if the person had worked comparable hours under award rates. The value of any wages actually received is then subtracted to determine the value of the wages foregone. This policy is not stated as such in the GOSP text but is mentioned in an example in the GOSP section "Disposal of Assets & Income - Transfer of Assets for Services".
6.This method of calculation has involved identifying the type of work that was performed on the farm or in the business and applying the appropriate wage rate for that occupation. This approach has led to difficulties when calculating the value of foregone wages as there may be several wage categories for certain types of work and awards can vary from State to State to the extent that some States do not have specific awards for some workers (eg farmhands).
NEW DVA POLICY
7.In order to overcome these inconsistencies, the Average Weekly Ordinary Time Earnings of Australian Employees (AWOTE) for full time adults is to be used instead of award rates to calculate the value of foregone wages. This figure (currently $646) is obtained from Table 1 of the Australian Bureau of Statistics publication, "Average Weekly Earnings States and Australia" which is updated quarterly. The current figure should be obtained from Sue Pilley, Budget Officer, Resources Branch on telephone (06) 289 6629.
8.It is also necessary to adjust that value to take into account the actual wages received, the value of free accommodation (10% of AWOTE is assumed) and the tax liability the employee would have had. A notional tax liability of 20% is assumed on the annual wage amount in excess of $10,000.
CALCULATION OF NET DISPOSED AMOUNT
9.The following example shows how the net disposed amount is calculated:
A service pensioner and his wife transfer a property worth $210,000 to their son as a gift. However, the son has worked on the property for the last five years earning $200 per week. He has been provided with free accommodation over that period.
Step (1)Calculate assumed annual tax liability:
annual wages (Table 1 AWOTE $646 x 52)$33,592
deduct current gifting amount$10,000
gives 'taxable' amount$23,592
20% tax liability applied$4,718
Note 1: The AWOTE figure used in this calculation should be that which was current at the date of disposal.
Note 2: In this step, the full gifting amount should be used, regardless of whether the gifting amount has already been fully or partly used up.
Step (2)Calculate the value of foregone wages to be deducted from the value of the transferred farm (or interest in the farm):
annual wage amount$33,592
less tax liability$4,718
less accommodation costs (10% of AWOTE)$3,359
less actual wages/Job Search Allowance received
($200 x 52 weeks)$10,400
gives net annual foregone wages rate$15,115
convert to weekly rate
($15,115 divided by 52 weeks)$290
multiply by the period(s) of unpaid work
($290 x 52 weeks x 5 years)
gives total forgone wages amount$75,400
Step (3)Calculate the net disposed amount to be maintained in pensioner's assessment:
value of transferred asset$210,000
less current available gifting amount$10,000
gives gross disposed amount$200,000
less foregone wages amount$75,400
gives net disposed amount$124,600
The net disposed amount is the amount to be maintained in the pensioner's assessment.
10.The GOSP section which describes the treatment of foregone wages currently gives little detail on the different circumstances which may arise and how to deal with them. Therefore, significant amendments relating to the policy change described above and the different circumstances which may be encountered are to be included to broaden the coverage of the GOSP section. These amendments will cover the following issues:
Transfer of Farm/Business for Past Contributions
- Close relative
- Legal transfer
Types of Contributions
Calculation of Foregone Wages
Transfer of Farm/Business Assets for Unpaid Care
11.The contact officer for enquiries on this Instruction is Laurie Howell on telephone (06) 289 6706.
R J HAY
A/G BRANCH HEAD