C28/2002 DISPOSAL OF ASSETS RULE CHANGES 2002

Purpose

This instruction provides information relevant to the service pension and income support supplement assessment of disposal of assets.  The instruction explains the impact on disposal of assets rules resulting from amendments to the Veterans' Entitlements Act 1986 (VEA) and the Social Security Act 1991 (SSA) commencing 1 July 2002.

What has changed?

The VEA/SSA disposal of assets rules have changed as follows:

• The disposal of assets “pension year” rules will be replaced with a more readily understood “tax year” rule for disposals that occur on or after 1 July 2002; and

• Disposals of assets in excess of $30,000 during a five-year rolling period will be assessed as deprived assets for five years from the date that the $30,000 “free area” is exceeded.  That is, the date(s) that any excess deprivation occurred during any five-year rolling period that does not commence prior to 1 July 2002.

The $30,000 “free area” rule will work concurrently with the existing $10,000 annual disposal of assets limit.  There will however, be no double counting of deprived assets as a result of the change.

ROGER WINZENBERG

BRANCH HEAD

INCOME SUPPORT

Rationale

There has been growing concern that “gifting” has become a favourite tool for many financial planners who exploit gifting to increase the income support pension entitlements of their clients.

Allowing people to increase their pension by giving away $10,000 of assets year after year is inconsistent with a targeted, needs based, income support system and the stated Government goal of encouraging people to support themselves where possible.

The Government recognises that there may however be compelling reasons why a welfare recipient may from time to time need to provide financial assistance to for example, a family member.  Accordingly the $10,000 “free area” that applied to a pension year will continue to be applicable but the pension year rule will be replaced by a tax year rule.  This will work concurrently with a $30,000 “free area” that applies over a 5-year rolling period and thereby further limiting the opportunity to adopt regular gifting strategies to gain higher pension amounts.

The change from “pension year” to a “tax year” concept aims to simplify the annual periods to which the annual disposal “free area” applies.  Tax or financial year is a concept that is widely understood.

Target Population

As this initiative provides disincentives to pensioners to dispose of substantial asset amounts, the numbers that will be affected in the future is anticipated to be minimal.

Commencement date

The commencement date for the changes is 1 July 2002.  The pension year rule will be replaced by a tax year rule for all disposals on or after that date.

Although the initial five-year rolling period rule will commence on 1 July 2002, the earliest possible date that a person (or couple) could exceed the $30,000 asset disposal “free area” would be 1 July 2005.  Prior to that date, the $10,000 annual disposal “free area” rule only, would impact on a person's income support pension.

Legislation

The changes to the VEA/SSL disposal of assets rules are contained in the Social Security and Veterans' Entitlements Legislation Amendment (Disposal of Assets – Integrity of Means Testing) Act 2002 No. 54, 2002 that received Royal Assent on 29 June 2002.

Note:  The social security law changes mirror the VEA changes.  When assessing social security age/wife pension cases affected by the 1 July 2002 disposal of assets rule changes please refer to the Social Security Policy and Legislation guidelines available via:

Start/Departmental/Service delivery reference tools/Social security PAL.

What legislative references have changed?

The policy changes are relatively simple in concept however there are new legislative references and certain existing references have been amended.

New subdivision BB, Dispositions of assets on or after 1 July 2002 and amended subdivision B-Dispositions of Assets before 1 July 2002 both in Div 11, Part IIIB of the VEA impact on:

• Part I, VEA Definitions relevant to disposal of assets;
• The 'disposal preclusion period' that applies for the purposes of the Part IIIAB, VEA Pension Bonus Scheme rules;
• Disposal of assets by or to a private trust or private company and disposal of assets rules specific to concessional primary production trusts.
• Section 48D, VEA treatment of transactions that constitute both a disposal of ordinary income and a disposal of assets;
• Amounts not excluded under section 52(1), VEA where disposal of assets has occurred; and
• other minor changes to the assets test including special residence and hardship rules.

$10,000 allowable asset disposal limits

Prior to 1 July 2002, a person or a couple could dispose of assets to the value of $10,000 per pension year without that disposal impacting on the pension assessment.  Sections 52G and 52H have been amended so that this rule is limited to disposals of assets that occur prior to 1 July 2002.

Disposals of assets in excess of the $10,000 assets disposal “free area” in a pension year are considered to be a deprived assets for five years from the date of disposal.  This rule has not changed however, for disposals that occur on or from 1 July 2002:

• The $10,000 yearly limit will work concurrently with the $30,000 limit over a five-year rolling period; and

• the pension year rule will be replaced with a tax year rule.

New sections 52JA and 52JC refer to the $10,000 free limit in a tax year.

$30,000 Free Area

The $10,000 annual limit remains unchanged however the total amount of assets that a person (or a couple) can dispose over a rolling period of five years is restricted to $30,000.  Amounts in excess of the $30,000 “free area” are assessed as deprived assets for a period of five years from the date(s) that deprivation of assets occurred.

This means that even though a person may not have exceeded the $10,000 per year limit, any amount in excess of $30,000 over the five year rolling period may be assessed as a deprived asset and deemed.

The earliest possible date that the new $30,000 free area can be exceeded is

1 July 2005.  Prior to that date the $10,000 deprivation limit would be applicable (see example below that demonstrates the interaction between the two limits).

Important note:  Disposals of assets that occur prior to 1 July 2002 are not assessable as part of the $30,000 limit over a five year rolling period (subsections 52JB(4) and 52JD(6) of the VEA refer).

Example

1 July 2002

A veteran service pensioner gives away $30,000 held in his bank account.  He has exceeded the tax year limit and accordingly $20,000 is assessed as a deprived asset for 5 years commencing 1 July 2002.  The other $10,000 counts towards the 5-year rolling period limit that commenced on 1 July 2002.

1 July 2003

The veteran gives away a further $10,000 cash.  The amount does not exceed the tax year limit.  It does however count toward the allowable limit for the 5-year rolling period.  There is now $20,000 accumulated over the 5-year period.

1 July 2004

The veteran gives away $15,000 in cash.  He has exceeded the tax year limit by $5,000.  The $5,000 is assessed as a deprived asset for 5 years commencing 1 July 2004.  The other $10,000 is added to the $20,000 already disposed in the 5-year rolling period bringing it up to the maximum $30,000 that a person can dispose of over the 5 year rolling period without affecting pension.

1 July 2005

The veteran gives away $5,000.  This is below the tax year limit of $10,000 however it is added to the 5-year rolling period limit.  The veteran has disposed of $35,000 over the 5-year rolling period exceeding the allowable limit by $5,000.  The $5,000 is therefore assessed as a deprived asset for 5 years from 1 July 2005.

No double counting

Although the $10,000 annual disposal limit and the $30,000 five year rolling period disposal limit will work concurrently, there will be no double counting of amounts assessed as a deprived asset.  Sections 52JA, 52JB, 52JC and 52JD and a definition of “Equal amounts” (section 5QAA) interact to ensure that no double counting of a disposal amount can occur.

Deprived assets

If a pensioner or pensioner couple dispose of an asset for no consideration or less than adequate consideration for that asset, any amount in excess of either of the allowable disposal of assets limits are considered to be deprived assets.

The term, deprived asset is defined in subsection 5J(2B) of the VEA as a financial asset and is subject to the deemed income rules.  The meaning of deprived asset has not changed however, it has been extended to the new sections 52JA to 52JD of the VEA.  These references relate to assets disposals on or after 1 July 2002 that are:

• in excess of the $30,000 “free area” applicable during a five year rolling period; and
• assets disposals in excess of $10,000 in a tax year.

Pension Year

For the purposes of disposal of assets prior to 1 July 2002, a pension year is defined in subsection 5L(9) of the VEA.  Determination of a pension year is dependent on whether a person is a member of a couple or not.  Pension year may vary based on:

• The marital status of the person at any particular time while in receipt of an income support pension; and

• The date of commencement of income support pension (nb this may have been a social security pension, service pension or income support supplement).

A new pension year begins on each anniversary of the relevant date.  Pension year is not relevant to disposals of assets that occur on or after 1 July 2002 however the rule will continue to apply to disposals of assets occurring to and including 30 June 2002

(Subsection 5L(9A) refers.)

Final Pension Year

The final pension year applicable to any pensioner(s) ends on 30 June 2002.  From 1 July 2002, the $10,000 assets disposal limit will be applicable to tax years.

Because pension years will be different for each pensioner, the final pension year ending on 30 June 2002 will be less than 12 months in duration unless the pension year of a pensioner or pensioner couple commenced on 1 July.

The duration of the final pension year ending 30 June 2002 will not alter the duration that a deprived asset is assessed.  That is, the deprived assets are assessed for a period of five years from the date that the deprivation occurred.

(subsection 5L(9A) refers.)

Pre-pension Year

Where a person is a claimant for a pension, benefit or allowance, a

pre-pension year for disposal of assets purposes is a period of 12 months prior to the date of the commencement of pension and each preceding period of 12 months (subsection 5L(10A) refers).

If a person disposes of an amount in excess of $10,000 in any of the five

pre-pension years prior to commencement of an income support pension or benefit, the excess amount is assessable as a deprived asset for five years from the date that the disposal(s) occurred.

New subsection 5L(10B) limits the pre-pension year rule to disposals of assets to and including 30 June 2002.  From 1 July 2002, either of the two disposal limits may apply to a disposal of assets during the 5 tax years prior to commencement of pension.  Disposals that occur prior to 1 July 2002 must not be assessed under the 5-year rolling period rule.

Final

Pre-Pension Year

It should be noted that the final pre-pension year that ends on 30 June 2002 will be less than 12 months in duration unless the pension year of a pensioner or pensioner couple commenced on 1 July.

The duration of the final pre-pension year ending 30 June 2002, will not alter the duration that a deprived asset is assessed.  That is, the deprived assets are assessed for a period of five years from the date that the deprivation occurred.

Pre-pension year rules do not apply to disposals of assets occurring on or after 1 July 2002.

(Section 5L(10B) refers)

Tax year rule

For disposal of assets on or after 1 July 2002, sections 52JA (for an individual) and 52JC (for members of a couple) introduces a tax year rule that replaces the pension year rule.

A tax year is defined in subsection 5Q(1) and means a year of income (within the meaning of the Income Tax Assessment Act 1936 or the Income Tax Assessment Act 1997.  Basically a tax year is a period commencing on 1 July and ending on 30 June of each year.  Having wider application than the disposal of assets rules, the subsection 5Q(1) definition of tax year did not require amendment.

NB under the SSL changes the references are to financial year rather than a tax year.

Rolling Period rule

Subsection 52JB(4) (for individuals) and subsection 52JD(6) (for members of a couple) define the rolling period relevant to the $30,000 disposal of assets “free area” rule.

If there is a disposition of assets on or after 1 July 2002, the rolling period is the period comprising the tax year in which the relevant disposition took place and such (if any) of the 4 previous tax years as occurred after 30 June 2002.  This means that disposals that occurred prior to 1 July 2002 are not counted in the rolling period.

For disposals of assets that occur after 30 June 2002, the rolling period rule replaces the pre-pension year rule.  This means that whether or not a disposal of assets occurs prior to commencement of pension it will be counted as a deprived asset if the $30,000 disposal of assets “free area” is exceed.  This contrasts with the pre-pension year rule that applied to dispositions that occurred before 1 July 2002.  Prior to 1 July 2002 a person could dispose of $10,000 in each pre-pension year (that is a total of $50,000 over the five year period) without adversely impacting on the rate of pension.

Tax year applicable to rolling period

It is important to note that the 5-year rolling period rule is based on tax years commencing 1 July 2002.

(Subsections 5JB(4) and 5JD(6) refer.)

Transition between pension year and tax year

In the transition from pension year to tax year assessment it is possible that a person can dispose of $10,000 in the 12 months after the pension year without exceeding their annual disposal of assets limit.

For example, in the case of a person who has a pension year that commences on 20 June, he/she could dispose of $10,000 on 25 June 2002 and then dispose of a further $10,000 on 5 July 2002.  As the person's pension year ceased on 30 June 2002, he/she has not exceeded the annual limit applicable prior to 1 July 2002.  If the person does not dispose of further amounts prior to 30 June 2003, ie the end of the tax year, he/she will not exceed the initial annual limit applicable from 1 July 2002.

NB this transitional arrangement may also impact on the switch from pre-pension year and pension bonus preclusion arrangements.  For more information refer to the relevant blocks.

Ceasing to be a member of a couple

If a pensioner couple cease to be members of a couple.  The amount of disposed assets is counted in the assessment of the person who made the disposition only.

If a pensioner couple jointly dispose of assets and the couple separate, the disposed assets are split between the two former members of a couple.

This includes amounts that are part of the amount accumulating towards the $30,000 limit over a 5-year rolling period.

(Subsections 52JC(3) and 52JD(3) refers.)

Effect of death

In the event that a person who has disposed of an asset passes away and that person had a partner, any amount of disposals that were held in the pension assessment in respect of the deceased person will no longer be assessable.  This includes amounts that are part of the amount accumulating towards the $30,000 limit over a 5-year rolling period.

In the event that a person passes away and that person's partner had disposed of assets, any amount of disposals that were held in the pension assessment in respect of the surviving partner will continue to be assessable.  This includes amounts that are part of the amount accumulating towards the $30,000 limit over a 5-year rolling period.

(Subsections 52JC(4), 52JC(5), 52JD(4) and 52JD(5) refer.)

Section 48D

Section 48D relates to transactions that constitute both a disposal of income and a disposal of assets.  The rule ensures that where there is no assessable deprived asset, the disposed income is not assessable.

The section has been amended so that it cannot be applied to disposals that occur on or after 1 July 2002.  Effective 1 July 2002, all disposed income relating to transactions that constitute both a disposal of income and a disposal of assets will have the disposal of income ignored.  Deemed income rules will apply to the deprived asset.

Pre-1 July 2002 Pension Bonus Preclusion Rules

Under section 45UT of the VEA a member(s) of the Pension Bonus Scheme (PBS) can not dispose of assets in excess of $10,000 without attracting the PBS disposal preclusion period rule.

If a disposal in excess of $10,000 was made in a designated year the scheme member(s) is classed as a non-accruing member of the scheme for a period of five years that commences on the day that the disposal exceeded the $10,000 disposal limit.

A designated year is defined in subsection 45UT(3) of the VEA as the twelve-month period ending on the person's special date of eligibility for a designated pension and each preceding twelve month period.

A person's special date of eligibility for a designated pension is the relevant pension age for service pension and qualifying age for income support supplement.  (Section 45TB refers.)

Section 45UT cannot be applied to disposals of assets that occur on or after 1 July 2002.

1 July 2002 PBS Preclusion Rules

Commencing 1 July 2002 the PBS disposal preclusion rules apply if a person (or couple) make a disposal of assets in excess of:

• $10,000 in a tax year commencing on or after 1 July 2002; or
• $30,000 in a five year rolling period commencing on or after 1 July 2002.

Once a member of the scheme exceeds one of the disposal limits he or she will be classed as a non-accruing member of the scheme for five years commencing on the date that the relevant disposal limit was exceeded.

(Section 45UTA refers.)

Disregarded Assets rule change

Subsection 52(1) that relates to disregarded assets has been amended to prevent assets from being disregarded under the post 30 June 2002 disposal of assets rules.

This means that even though an asset may have been disregarded as an asset previously, if that asset has been disposed of and the amount of the disposal exceeds:

• $10,000 in a tax year that occurs on or after 1 July 2002; or
• $30,000 over a five year rolling period (not including pre-July 2002 assets disposals),

the excess disposal amount will be assessed under the disposal of assets provisions for a period of five years commencing on the date that the excess disposal(s) occur.  This is an extension of pre-existing assets deprivation rules.

Effect of a Charge or Encumbrance

If a person disposes of assets in excess of:

• $10,000 in a tax year that occurs on or after 1 July 2002; or
• $30,000 over a five year rolling period (not including pre- July 2002 assets disposals),

section 52C cannot be utilised to reduce the value of the deprived asset.  This is an extension of pre-existing assets deprivation rules.

Special Residences & Special Residents

Minor amendments have been made to VEA paragraph 52Q(3)(e) and 52U(4)(e) that relate to special residences and special residents.  The existing references to disposals of assets applicable to pre-1 July 2002 disposals of assets are extended to disposals of assets that occur on or after 1 July 2002.  That is, where the person(s) disposes or assets in excess of:

• $10,000 in a tax year that occurs on or after 1 July 2002; or
• $30,000 over a five year rolling period (not including pre-July 2002 assets disposals).

Hardship Provisions

Minor amendments have been made to VEA subparagraph 52Y(1)(b)(i) and paragraph 52Z(7)(a) so that existing references to disposals of assets applicable to pre-1 July 2002 disposals of assets are extended to disposals of assets that occur on or after 1 July 2002. That is, where the person(s) disposes or assets in excess of:

• $10,000 in a tax year that occurs on or after 1 July 2002; or
• $30,000 over a five year rolling period (not including pre-1 July 2002 assets disposals).

Private Trusts & Private Companies

Minor amendments have been made to Subdivision I of Division 11A, Part IIIB – Modification of asset deprivation rules so that existing references to disposals of assets applicable to pre-1 July 2002 disposals of assets are extended to disposals of assets that occur on or after 1 July 2002. That is, where the person(s) disposes or assets in excess of:

• $10,000 in a tax year that occurs on or after 1 July 2002; or
• $30,000 over a five year rolling period (not including pre-1 July 2002 assets disposals).

Amendments to paragraphs 52ZZZG(1)(c) and 52ZZZG(1)(d) references are also extended to assets deprivations occurring on or after 1 July 2002.  These two references are specific to concessional primary production trust assessments.

System Impact

With the exception of wording changes to advice letters produced via IAS, there are no visible changes to the various systems.  Therefore the same system procedures should be adopted when entering disposal of assets data.

Once the correct data is entered the behind the scenes programming will determine whether the disposal is a pre-1 July 2002 or a post 30 June 2002 assessment.  Based on the date that a disposal occurred, the system will determine the case based on the applicable pre-1 July 2002 or post 30 June 2002 rules.

Please note there is no overlap in the pre 1 July 2002 and post 30 June 2002 assessments.  It is however possible that the total amount of deprived assets assessable up to 30 June 2007 (ie 5 years) may include both pre-1 July 2002 and post 30 June 2002 deprived assets.  All deprived assets would remain assessable until the relevant fifth anniversary of the date that the deprivation occurred.  On 1 July 2007 no pre-1 July 2002 disposals should be assessed except for overpayment purposes.

Recording of the pension year on the deprived asset continues to be mandatory although it will only be applicable to pre-1 July 2002 disposals.

An updated version of the 'Guide to changes to Deprived Assets' will be made available via Clik.

IAS advice wording changes

A paragraph in the 'Full Obligations' section has been amended as follows:

Some examples of what you need to tell us about

• If you give away $10,000 or more worth of assets in a tax year or $30,000 or more in a five-year rolling period that commences on, or any time after 1 July 2002.  Assets may be cash or non-cash assets such as a car or other property.

Gifts paragraphs of the 'New Grant General Information Sheet' has also been amended as follows.

Gifts

A gift is an asset that is given away or disposed of without receiving the market value of that gift in return.  A gift may be either a cash amount or non-cash assets such as a car or other property.

You must notify us if you give away a total of $10,000 or more in a tax year or  $30,000 over a rolling five-year period.

The amount above either limit will continue to be counted as if it were still your asset for a period of 5 years and may therefore continue to affect your pension.  We will also deem income on the value of any gift above either limit for 5 years.

Standard Letters

A range of standard letter paragraphs have been amended to reflect the 1 July 2002 rule changes.

Fact Sheets & Y&YP

Amendments have been made to the electronic version of 'You and Your Pension' and 20 Fact Sheets so that they reflect the 1 July 2002 disposal of assets rule changes.

To prevent defective administration care should be taken to ensure that the latest information is disseminated to pensioners.

If you are providing a hard copy of 'You and Your Pension', 2001 edition please insert Fact Sheet IS92, 'Giving Away Income and Assets'.  The 2003 edition of 'You and Your Pension' will reflect the 1 July 2002 rules.

Contact Officers

For further information in relation to the changes to the disposal of assets rules, information should initially be sought from your local office contact.

• Adam Bridge – TAS

• Kristie Chynoweth – T&C and DM

• Geraldine Howard – QLD

• Scott Sandercock – SA

• Ritu Gosain – NSW

• Kim Gooding – WA

• Asanka De Silva – VIC

Should additional information be sought please contact:

Oona O'Beirne in income support policy or Peter Feinler in the system development sections of National Office income support.