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7.6.5 Calculation of penalty interest

7.6.5.1Section 205AAE VEA specifies that penalty interest is calculated daily at the rate in force under section 1229B in the Social Security Act 1991. Penalty interest is treated as simple interest and not compound interest. Under section 1229B in the SSA the penalty interest rate is 20% per year, or may be determined in writing by the Minister for FaCS to be a lower rate. At the time penalty interest was introduced into the VEA on 1 July 2001, a determination was made under the Social Security (Penalty Interest) Determination 2001 that the penalty interest would be 3% per year, as permitted by subsection 1229B(2) in the SSA. The current determination can be found on the ComLaw website.    

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Social Security (Penalty Interest) Determination 2001

http://www.comlaw.gov.au/Series/F2007B00363

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7.6.5.2This section outlines the method for calculating the penalty interest applied to a debt:

Step 1

Determine the daily percentage rate

[annual interest rate expressed as a decimal]
divided by
[365 days]

Step 2

Determine the penalty interest daily amount

[daily percentage rate]
multiplied by
[amount of debt]

Step 3

Determine the amount of penalty interest to be added to the debt

[penalty interest daily amount]
multiplied by
[number of days being applied for]

Example
  •       original debt = $2,000
  •       penalty interest rate = 3% (as at 1 July 2001)
  •       penalty interest is applied to a debt balance at the end of each month
  •       months are June and July, therefore the number of days the penalty interest is applied for is 30 and 31 days respectively.

June

Step

Action

1

[0.03] ? [365] = 0.0000821

2

[0.0000821] ? $2,000 = $0.1642

3

[0.1642] ? [30 days] = $4.93

Debt now

$2,004.93

July

Step

Action

1

[0.03] ? [365] = 0.0000821

2

[0.0000821] ? $2,000 = $0.1642

3

[0.1642] ? [31 days] = $5.09

Debt now

$2,004.93 + $5.09 = $2,010.02