C23/2008 Date of Effect of Pension Reviews - Annual Reviews based on Income Tax Returns

Purpose

This Departmental Instruction outlines the accepted policy position regarding the date of effect (DoE) of pension determinations which are based on an annual review of a pensioner's income or assets from income tax returns (ITRs) and associated financial statements.

Background

Annual reviews of a pensioner's income and assets generally arise in circumstances where documentation confirming a pensioner's income over the course of a year, or changes in a pensioner's asset position, only becomes available on a yearly basis.  This frequently occurs where a pensioner owns or is attributed with ownership or control of a private trust or company, is involved in a partnership, is a sole trader or owns a rental property.

In these cases, the preparation of an annual ITR or financial statements generally provides the first available and reliable evidence of the annual rate of income, or changes in asset value, over the course of the year.

It is also possible that pensioners may receive sources of income, other than through a business or rental property arrangement, where confirming evidence of the income received or changed asset value is not available until after the year is completed.  The DoE policy outlined in this Departmental Instruction applies in all review cases where a pensioner is not reasonably able to notify changes in income or asset value during the course of the year, but is instead reliant on end-of-year confirming documentation such as ITRs.

Date of effect for pension increases

Where annual reviews of income and asset value are required, the accepted policy position is that the DoE of an increase in income support payment is when the confirming documentation (ITRs or financial statements) is received.

Pension increases resulting from a reduction in income or assets ascertained from the receipt of an ITR or associated financial statements will not be retrospectively made to an earlier date, for example the start of the year being reviewed.  The proven rate of income/asset value is instead held from the time that the confirming evidence is received, and is then maintained for the following year.

Pensioners are able to notify of a change in circumstances which reduces their income or assets during the year

While this DoE arrangement of not backdating a pension increase generally applies in cases where the Department conducts annual reviews, a pensioner always has the right to seek an earlier pensioner-initiated review.  This may occur during the course of the review year, for example where there is a specific event such as a pensioner winding-up a business or ceasing employment, where acceptable evidence is available from that earlier date of a change in the rate of income or asset value.

In these cases the standard DoE rules for increases based on the notification of an event or change in circumstances, being from the date of notification, apply.  This arrangement protects pensioners who are otherwise subject to an annual review but where there is a significant decline in the expected and held rate of income or asset value during the course of the year.

Date of effect for pension reductions

Income support pensioners who own or are attributed with ownership or control of a private trust or company, are involved in a partnership, are a sole trader or own a rental property are considered to have an obligation to provide their annual ITR to the Department within 14 (or 28) days of preparation of the ITR.  The date of finalisation of the ITR and associated financial statements is considered to be the date of an event of which the pensioner is obliged to notify.

Reductions in pension resulting from information ascertained from an ITR or associated financial statements will therefore take effect from:

• the date of event (date of finalisation of the ITR) where the pensioner has failed to provide the ITR within the notification period; OR
• the day after the notification period where the pensioner has provided the ITR within the notification period.

Notification obligations still apply during the review year

Where there is a significant increase in income or asset value of the business etc. during the course of the review year, the notification requirements under the VEA, which oblige pensioners to notify events or changes in circumstances which may affect their rate of pension, still apply.

An identifiable change in the rate of income received or asset value, for example arising out of a change in business practice or a property acquisition, is a notifiable event.  An agreement by the Department to apply an annual review, in recognition that evidence of income or asset value may in certain cases only be available on a yearly basis, does not mean that the normal notification rules are disregarded.  Where pensioners who are subject to an annual review do not notify significant changes in income/assets which are known to them at the time, their pension should reduce from the date of the event of which they failed to notify.

Annual reviews are appropriate where changes in income/asset value are not known or expected

Although variations in income or assets value during the review year may result in pension variations during the review year in some cases, annual reviews remain an appropriate and effective arrangement for assessing cases where earlier confirming evidence of changes in income/asset value is not otherwise available, and where sustained changes to income/asset value during the year are not anticipated or are unlikely.  In these cases, the holding of a reassessed rate of income or asset value over the ensuing 12 month period from the date evidence is received represents an acceptable determination of income and asset value, and retrospective adjustments are not required.

Basis for annual reviews  is the absence of an identifiable event

The acceptance of a delayed DoE in these cases, based on the later receipt of evidence rather than the earlier date of an income or asset event, arises because of the difficulty in applying the DoE rules in the VEA to situations where there isn't a discernable income/asset event.

On the introduction of the revised private trust and company rules in 2002, it was agreed with the Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) that the DoE policy in both agencies must be able to recognise and respond to those cases where changes to income and asset value are not immediately apparent.  Unlike most employment income assessments, where there is a regular payslip, a full audited examination of the financial performance of a trust, company or similar entity over a year may be required before a change in the income or asset value of the entity can be confirmed.

Pensioners may not be aware of income/asset changes

The DoE provisions in the VEA (sections 56 – 56N) are based on an understanding that pensioners will generally be aware straight away of a change in their rate of income or asset value.  For this reason, the notification requirements on which DoE is usually based apply in respect of “the occurrence of the event or change in circumstances...”.

However, it is accepted that pensioners will not always be aware, either within the allowed notification period or until the later completion of an ITR, of a change in the income or asset value of a trust or business entity.  For this reason, an undiscerned change in the performance of these entities is not considered to be a “specified event”, and the normal DoE approach based on a known discrete event will not produce a reliable DoE.

You and Your Pension gives an obligation to provide ITRs

This understanding is recognised by the advice in You and Your Pension, that the notification obligations for pensioners involved in trusts or companies may be delayed –

When you have finalised your financial statements for the year you should forward a copy within 14 days (28 days if you live overseas or receive remote area allowance) to DVA.  The financial statements include the trust and company tax returns, balance sheet, profit and loss statement, depreciation schedule and your personal income tax return.

In relation to partnerships, sole traders and farm businesses, You and Your Pension obligations recognise that increases in income “would usually be apparent when your tax return is completed or when a profit and loss statement is prepared by your accountant”.  In relation to rental income You and Your Pension makes no specific reference to ITRs in the obligations section.  However, whilst an increase in gross rental income would be readily apparent to a pensioner, an increase in assessable income due to a reduction in expenses may not be apparent until an ITR is prepared.

These references in You and Your Pension will be updated to better reflect the obligations provided in relation to trusts and companies and the policy that pensioners must provide their ITR within 14 (or 28) days of its finalisation.

Comparison with reviews of variable earnings which are retrospectively adjusted

The practice of not retrospectively applying pension determinations where annual reviews arise differs to the current DoE policy position in respect of the regular review of variable earnings.  The CLIK Policy Library at P10/C1/S4/Variable Earnings Income provides that:

At the end of the review period the availability of payslips and other supporting documentation will allow the correct rate of earnings to be established. The previously held rate is then adjusted, with the payment of arrears or recovery of overpayments as appropriate.

This different policy approach, in requiring the retrospective adjustment of variable income to the start of the review period, recognises that there are several key differences compared with cases of annual review of trusts and companies and similar entities:

• the income is known at the outset to be variable;
• the wage earner is able to provide regular payslips confirming actual income received.  If favourable retrospective adjustment was not made, a pensioner would be able to initiate this in any event by providing payslips on a fortnightly basis, and requesting that his payability be redetermined each fortnight.  The practice of an extended review period for variable income recognises that it assists both the pensioner and the Department by avoiding onerous fortnightly reassessments.  The Department's decision to apply an extended review period should provide for retrospectivity so as not to disadvantage pensioners; and   
• the review periods are generally shorter, allowing retrospective adjustments to the start of the review period to be more easily processed.

Changes in the rate of income can be determined in  variable earnings cases

The essential difference is the availability of confirming documentation (payslips) during the review period which provides evidence of specified  events which affect the rate of income.  If the review period of variable earnings were to extend beyond the current three month approach, this essential difference still remains.  As a result, in those cases where annual reviews of variable income may be preferred, the basis for not retrospectively adjusting other annual review cases (the absence of discernable income events affecting the rate of income) is not present.

Retrospective adjustment should still occur because the basis for extended review periods for variable income is to facilitate the assessment of cases, rather than sharing the primary characteristic of other annual review cases, that evidence is not available until the end of the review period.

Unrelated reviews are subject to the usual DoE rules

A pensioner with a source of income/asset value being reviewed annually may also have income/asset value from other sources, and be subject to a number of separate and unrelated reviews.  The DoE policy concerning annual reviews where evidence of changes to income/asset value is not available during the review year will not apply to the other reviews, where this evidence is available.  The notification obligations applying to specific events are satisfied in these cases, with the DoE being based on the date of the event, and the person's compliance within the notification period.

ITRs and financial statements to be provided within the notification period

As the DoE of annual reviews is based on the receipt of ITRs and other financial statements that confirm income received or changes in asset value over the review year, this documentation must be provided to the Department as soon as possible after finalisation.  The same notification period of 14 days (after the event of finalisation) that applies to other income events is considered an appropriate period of notice.

Where the provision of ITRs and other documentation is unreasonably delayed, delegates should take the known finalisation date (when the documentation is first available to the pensioner) as the “date of event” for DoE purposes.

Pension reassessment of asset value - DoE may differ

The DoE for pension determinations which reflect changes in asset value arising out of confirming documentation received at the end of the review period will also be based on the date the information is received.  As with changes to the rate of income over the year, there is unlikely to be a discrete event during the review period on which a pension reassessment with an earlier DoE can be based.  Where there is a discernable event affecting asset value, that event date is preferred.

However, this DoE for changed asset value may be affected if there are other valuation considerations.  For example, if the stated property value within an updated balance sheet is not accepted by a delegate and an AVO valuation is requested, the date of effect will be the date that the amending determination is made, following receipt of the AVO valuation.  The DoE policy in these case is covered in CLIK P11/C1/S4/Date of Effect of AVO Valuations.

CLIK Policy Library changes

A new section has been included in the CLIK Policy Library at P11/C1/S4, titled Date of Effect for Annual Reviews, covering the matters outlined in this Departmental Instruction.

Corresponding amendments have also been made to the policy content of –

P10/C1/S4/Evidence of Earnings

P10/C1/S4/Specific (Periodic) Reviews

P10/C3/S2/Summary of Assessable Income for Sole Traders and Partnerships

P10/C3/S2/Summary of Assessable Assets of Sole Traders and Partnerships

P10/C3/S9/Valuation of the Assets of a Designated Private Trust & Company

P10/C3/S12/Income Attribution

P11/C1/S1 Overview of Effective Dates and Pension Periods

Contact

The contact person is Brian Butler, Policy Development and Advice Section, Compensation and Income Support Policy Group.  Enquiries can be directed to the Income Support in-box at NAT Policy Advisings Income Support.