C24/1999 CALCULATION OF INCOME

Introduction

The purpose of this Departmental Instruction is to replace DI No. B45/95 Calculation of Income.

Background

The need for clarification of existing policy/procedures has been highlighted by the introduction of the Date of Effect (DoE) rules in respect of income support payments, commencing on 13 July 1999.

DoE rules – overview

The rules for determining the effective date for a pension variation will depend on whether pension is increased or reduced as a result of changes in the pensioner's circumstances.

DoE rules - increases

The effective date for increases, is the day of notification of the event or change in circumstances.

DoE rules - reductions

The effective date for reductions will depend on whether the pensioner notifies within the notification period.  If notified:

•      within the notification period – effective date is the day after the end of the notification period;
•      outside the notification period – effective date is the day of the event.

To calculate daily entitlement

Under DoE rules, which commenced 13 July 1999, fortnightly pension instalments are calculated based on daily entitlement.  When a person's payments commence or there is a variation to pension, a fortnightly instalment may be made up of daily amounts at different rates of pension.  To derive a daily amount, the fortnightly amount is divided by 14

(see DI C19/99 Date of Effect).

Overpayments - causes

An overpayment occurs when the amount of income support paid exceeds the actual entitlement due.  The overpayment may exist where pension entitlement was exceeded as a result of:

•      the client's failure to fulfil their obligations (failure to notify); or
•      where obligations have been met, but reduction not processed in time; or
•      misrepresentation by the client – e.g. false statement of earnings; or

•      where loss of eligibility has occurred –e.g. Divorce.

Calculation of overpayments

The amount overpaid is calculated as follows:

amount of pension paid  minus  actual  pension due

equals

TOTAL OVERPAID AMOUNT

Investigation of overpayments

Where the overpayment has not arisen from a delay in processing, the only factor which should be investigated is the reason for the overpayment - ie the notifiable event.  All other income/assets should not be investigated.  If however, during the course of the investigation other discrepancies in income and/or assets come to light, these should be taken into consideration in the overall overpayment calculation.

Example

Veteran and spouse have a number of investments which produce a total fortnightly income of $100.  They fail to notify the Department that the spouse commenced part time employment with gross earnings of $500 per fortnight.

When calculating the actual entitlement rate, fluctuations in earnings will be taken into account, whilst investment income will continue to be maintained at $100 per fortnight (or whatever rate had been previously held).  If it becomes apparent that investment income had been reduced during the period of the overpayment, this would require investigation.

Earnings credit

Prior to 20 March 1997, income support recipients not receiving any income from earnings, were able to accrue an 'earnings credit'.  Where a pensioner who had accrued an earnings credit commenced employment, income from that employment was not held in the assessment of pension, until such time as the wages received exhausted their earnings credit.

When calculating an overpayment which has a commencement date prior to 20 March 1997, earnings credit will need to be taken into account.

More information:  Refer to DI B45/95 and C21/97 for details of earnings credit.

Issues

Broadly speaking, guide-lines and policy/procedures need to address the following issues:

•      the methodology to be used in determining the rate of income for income support pension assessments
•      the methodology to be used in determining the rate of income for overpayment purposes where the obligations -

• have been met by the client
• have been met by the client, but not processed in time
• have not been met by the client

•      advising and pensioner obligations -

• ensuring that clients are provided with clear instructions as to their obligations
• ensuring that these obligations can be met

•      the review strategy to be applied in various employment situations.

Effective Dates

The effective date for a retrospective assessment will depend on whether or not the client has complied with notification provisions under the Veterans' Entitlements Act 1986 (VEA), and if the overpayment occurred as a result of a "loss of basic eligibility" or a "change in payability" (ie the rate payable).

Automatic termination

Sections 56 and 56A VEA contain the provisions for automatic termination of income support pension where loss of basic eligibility has occurred.

Where the income support pensioner has been served with a notice under s54 of the VEA, and a notifiable event has occurred which renders them ineligible for the pension, and

• the client has complied with s54 notification obligations – income support pension is cancelled from the day after the end of the notification period; or
• the client has not complied with s54 notification obligations – income support pension is cancelled from the day of the event.

Automatic reduction

Automatic reduction of income support pension (i.e. change in payability) is contained in section 56B of the VEA.

Where a recipient has been served with a notice under s54 of the VEA, and a notifiable event has occurred which causes the person's rate of pension to be reduced and the client has not complied with s54 notification obligations - income support pension is reduced from day of the event.  Where the client has complied with s54 notification obligations, income support pension is reduced from the day after the end of the notification period.

Income types

The following types of income will be addressed in this instruction:

•      full and part time employment
•      casual employment - regular/irregular
•      contract workers
•      self employed
•      rental income - full/part time
•      family trusts/private companies

Calculation of earnings – notification received

Client notifies the Department of the commencement of employment and estimated gross earnings.  Actual gross earnings (or the client's estimate) - ie before tax or personal deductions - are held in the income support pension assessment from the day after the end of the notification period.  Note, salary or wages includes overtime, penalty rates, incentive payments and other employment related payments.

Review initially after 3 months.  Thereafter, if earnings remain consistent, review annually; that is, total 12 monthly earnings averaged out over 26 fortnights and held for the next 12 months.

Verification of earnings

Income tax returns (ITRs) plus Notice of Assessment; or information from an employer should be obtained to verify the current level of earnings.

Retrospective calculation of earnings - notification not received

Gross fortnightly earnings (i.e. before tax or personal deductions) are held in the assessment from the day work commenced.  The fortnightly rate is calculated based on actual earnings received as per income tax returns or payslips provided by the employer.

Note: salary or wages includes overtime, penalty rates, incentive payments and other employment related payments.

If earnings are based on tax returns, the annual amount received will need to be converted to a fortnightly amount (i.e. divide total by 26).

Advice requirements

The re-assessment advice must clearly show the fortnightly rate of earnings currently being held, the method of calculation and the gross fortnightly amount actually earned.

Notification requirements

Client is required to notify the Department if gross earnings increase.

Overview

The rules governing full time employment also apply to part time employment.

Calculation of earnings - notification received

As per full-time earnings - ie held on an ongoing basis.  Notification of the commencement of part time employment is received within the notification period.  Income support pension is re-assessed from the day after the end of the notification period, holding estimated gross earnings on a fortnightly basis for a period of 3 months.

Review of earnings

At the end of this period, pay-slips should be requested to confirm earnings.

To work out average fortnightly rate of actual earnings:

total amount earned in the period

number of fortnights in that period.

If actual earnings have increased, pension should be varied from the day of notification.   For the first year review on a regular basis every 3 months.  Thereafter, if earnings remain constant, review annually.

Verification of earnings

Confirmation of earnings should be sought directly from the employer.

Retrospective calculation of earnings - notification not received

Where notification of the commencement of part time employment is received outside the notification period, re-assess income support pension from the day of commencement of employment, (or hold averaged fortnightly gross earnings on an ongoing basis (as per Review of Earnings above).

Advice requirements

The re-assessment advice must clearly show the fortnightly rate of earnings currently being held, the method of calculation and the gross fortnightly amount actually earned.

Notification requirements

Client is required to notify the Department if the estimate of gross earnings for a 3 month period changes significantly enough to impact on the payment they receive.

Calculation of earnings - notification received

Notification of commencing casual employment is received within the notification period.  Re-assess pension from the day after the end of the notification period, holding estimated gross earnings on a fortnightly basis for a period of 3 months.

Review of earnings

At the end of this period, pay-slips should be requested to confirm earnings.

To work out average fortnightly rate of actual earnings:

total amount earned in the previous 3 monthy period

number of fortnights in that period

This is regardless of any breaks in employment which may have occurred during the 3 month period.  If actual earnings have increased, pension should be varied from the day of notification.  The new average fortnightly earnings are then held for the ensuing 3 months, until the next review.

Example

Estimated fortnightly earnings on 12/8/99 equal $120

•      hold for 3 months
•      review on 12/11/99
•      pensioner advises actual earnings from 12/8/99 to and including 11/11/99 total $800
•      $800 divided by 7 (being number of fortnights in the period) equals $114.30 pf.

Ongoing

review

For the first year review on a regular basis every 3 months. Thereafter, if earnings remain constant, review every 12 months using income tax returns (ITRs), group certificates or pay-slips.

Retrospective calculation of earnings - notification not received

Overpayment is calculated from the day of commencement of employment being the day of event, and actual earnings are averaged over a 12 month period as follows:

•      total 12 monthly earnings averaged out over 26 fortnights; and

•      held for the next 12 months.

Advice requirements

The re-assessment advice must clearly show the fortnightly rate of earnings currently being held, the method of calculation and the gross fortnightly amount actually earned.

Notification requirements

Client will be required to notify the Department if actual gross earnings exceed the amount listed in the advice - ie the higher amount.  Therefore, in the previous example, client would be required to notify the Department if gross actual earnings exceeded $120 per fortnight.

Client would also be required to notify if work ceases altogether, at which time income support pension would be re-assessed holding NIL for earnings.  Under no circumstances is the amount of earnings averaged over a specified period to be re-calculated, even though the period over which these earnings have been averaged has been reduced.

Example

Client advises earnings from 1/1/99 to and including 30/12/99 were $3000

•      averaged out over 26 pays - equals $115.4 pf
•      income support pension is re-assessed holding  $115.4 pf
•      on 1/4/2000 client advises employment ceased
•      re-assess, holding NIL earnings from day of notification.

No overpayment exists, even though the fortnightly rate of earnings being held in the assessment was lower than the actual amount earned per fortnight.

Calculation of earnings - notification received

Notification of commencement of casual irregular employment is received within the notification period.  Client is requested to provide an estimate of earnings which are held in the assessment of pension from the day after the end of the notification period.

Review of earnings

Review after 3 months (client will be required to provide pay slips). To work out average fortnightly rate of actual earnings:

total amount earned in the previous 3 monthy period

number of fortnights in that period.

If actual earnings have increased, pension should be varied from day of notification.  The new average fortnightly earnings are then held for the ensuing 3 months, until the next review.

Ongoing

review

For the first year, review on a regular basis every 3 months. Thereafter, if earnings remain constant, review every 12 months using income tax returns (ITRs), group certificates, or pay-slips.

Retrospective calculation of earnings - notification not received

Where notification of casual irregular earnings was  received outside the notification period, a retrospective re-assessment is undertaken.  Date of effect is the day of commencement of employment being the date of event, and fortnightly income is calculated by averaging the actual amount earned over the period of employment, as follows:

actual amount earned

number of fortnights in period of employment.

Period of employment

Under the VEA , assessment of income support pension is based on annual income.  Therefore, where the period of employment is less than twelve months, average earnings over the whole period.  However, where the period of employment is greater than twelve months, average earnings for each twelve monthly period, from the date employment commenced.

Example

Date of commencement 1/1/98, therefore the amount earned in the period 1/1/98 -31/12/98 is converted to a fortnightly amount and held in the re-assessment.  The new amount earned between 1/1/99 and 31/12/99 is converted to a fortnightly rate and held for that period, etc.

Advice requirements

The re-assessment advice must clearly show the fortnightly rate of earnings currently being held, the method of calculation (as above).

Notification requirements

As per notification requirements for casual regular employment.

Overview

Contract income is held in the pension assessment for the period of the contract.

Calculation of earnings - notification received

When notification is received that a client has entered into a contractual agreement, a copy of the contract must be obtained to determine the amount to be received and the period of the contract.

The total amount is then averaged out over the period of the contract and held on a fortnightly basis in the assessment of income support pension from the day after the end of the notification period, if notification is within the notification period.

Example

Veteran advises that he has contracted to undertake consultancy work for the period 9/9/99 to and including 17/11/99 for a total payment of $10,000.  Income support pension is re-assessed from 9/9/99 and income at the fortnightly rate of $2,000 is held in the assessment until 17/11/99.

Payment in a lump sum

The averaging rules above will apply to all contracts, including those where payment is in the form of a lump sum payable at the end of the contract period.  Where there is no clear lump sum amount in the contract, the pensioner will be required to provide an estimate.  This is consistent with the treatment of other sources of income such as managed investments and shares, and correctly reflects current legislation.

Retrospective calculation of earnings - notification not received

Retrospective re-assessment is undertaken from the day of the contract.  Income to be held in the re-assessment is calculated as above - ie the amount of the contract is held for the period of the contract and converted to a fortnightly rate using the following formula:

total amount of contract

number of fortnights in the period of the contract

Advice requirements

The re-assessment advice must clearly show the fortnightly rate of contract income held in the assessment and the method of calculation (as above).

Notification requirements

Client will be required to notify the Department within 14 days of signing a contract or commencing work, whichever occurs first.

Calculation of income - notification received

Notification that client has commenced to be self-employed is received within the notification period.  Estimation of income is required.  This amount is held in the assessment of income support pension from the day after the end of the notification period.  Review after 3 months.

On initial review

Annualise the amount earned in the previous 3 month period, and hold average fortnightly earnings until the end of the financial year, as follows:

• estimated fortnightly earnings on 1/8/99 equal $130
• hold for 3 months, review on 1/11/99
• pensioner advises actual earnings from 1/8/99 to and including 31/10/99 total $800
• annualize: $800 * 4 = $3200 per annum
• average out over 26 pays: $3200/26 = $123.10 pf

• re-assess and hold $123.10 pf until end of financial year.

Review at the end financial year

At the end of the financial year ITRs are requested.  Net income is converted to a fortnightly amount (total amount divided by 26), and held in the assessment of income support pension for the next financial year.

Retrospective calculation of income - notification not received

If notification of income was received outside the notification period an overpayment exists.  The date of effect is the day work commenced, being the day of event.  Income to be held is calculated as follows:

• in the 1st financial year - actual income received is converted to a fortnightly amount by dividing total amount by the number of fortnights in that period
• for the ensuing years - as per tax returns (ie income earned in the previous financial year, is held for the ensuing financial year).

Example

Veteran commenced self-employment on 1/8/99 - no notification received.

• overpayment date is 1/8/99
• actual income received from 1/8/99 to 30/6/00 is averaged out and held in the assessment for that period

• from 1/7/00 to 30/6/01 income is held as per 1999/00 ITRs etc.

Advice requirements

Initial assessment advice must clearly show the fortnightly rate of income held and the method of calculation – i.e. annual amount converted to a fortnightly rate.

Notification requirements

Client is required to notify the Department when employment ceases altogether. Following receipt of such advice, the fortnightly rate of income is deleted and pension re-assessed.

Calculation of earnings - notification received

Notification received that client has commenced to be self-employed and is drawing a salary.  Salary would be treated in the same manner as other full time regular earnings – i.e. fortnightly amount held on an ongoing basis.  Fortnightly earnings should be held for a 12 month period and reviewed at the end of the financial year, at the same time as business income is reviewed.

Retrospective calculation of earnings - notification not received

If notification of earnings was received outside the notification period an overpayment exists.  The date of effect is the day salary became payable.  Earnings to be held are calculated as above.

Advice requirements

Initial assessment advice must clearly show the fortnightly rate of earnings held.

Notification requirements

Client is required to notify the Department when salary is increased or ceases altogether.  Following receipt of such advice, the fortnightly rate of earnings is updated or deleted altogether and pension reassessed.

Calculation of income - notification received

Client has commenced to receive rental income and notifies within the notification period.  Income support pension is re-assessed from the day after the end of the notification period, holding 2/3 of the gross rental amount (i.e. 1/3 is allowed for deductions such as maintenance etc).  At the end of the financial year ITRs are requested.  Net income is converted to a fortnightly amount (total amount divided by 26), and held in the assessment of income support pension for the next financial year.  Thereafter, review at the end of each financial year using ITRs and Notices of Assessment.

Retrospective calculation of income - notification not received

Where notification is received outside the notification period, an overpayment arises and is calculated as above – date of effect is the day rental period commenced.

Advice requirements

Client must be advised of the current fortnightly rate of rental income being held in the assessment of income support pension, the methodology used in calculating the net amount and the gross amount used in the calculation.

Notification requirements

Client must be advised that notification is required when actual gross rental (the amount of rental being paid) varies.

Calculation of income - notification received

Income received from properties which are rented on a part-time basis should be assessed in the same manner as full time rentals, if rental is constant - for example, a holiday home which is rented every weekend.  In this instance the amount of rental received in the first 12 months period is averaged out (total divided by 26), and the fortnightly amount held for the next 12 months, as per ITRs.

Seasonal rental

Where rental is seasonal, for example a Ski Lodge which is rented for a specific period, total net rent received for the period is averaged out over the period of rental, and held in the assessment of income support pension for an ensuing period.

Example: a ski lodge is rented for 2 months (4 fortnights) at a gross rental of $3,000. Net rental after expenses totals $2,000.  This is averaged out over period of rental –

• $2,000/by 4 fortnights = $500 pf

$500 pf is held in the assessment of income support pension for the next 4 fortnights.

Retrospective calculation of income - notification not received

Where notification is received outside the notification period, an overpayment arises and is calculated as above.  The date of effect is the day the rental period commenced.

Advice requirements

Client must be advised of the current fortnightly rate of rental income being held in the assessment of income support pension, and the methodology used in calculating the net amount - ie gross rental reduced by 1/3 and averaged out over a 12 months period, or the period of rental (whichever applies).

Notification requirements

Client must be advised that notification is required when actual gross rental (the amount of rental being paid) varies.

Calculation of income - notification received

Notification received within the notification period that client has commenced to receive income from a family trust or private company.  Estimation of income is required.  This amount is held for the first fortnight and followed up at the end of that fortnight.  If changed, rate of income amended and income support pension reassessed.  No overpayment exists.

Estimation not available

If client is unable to provide estimation, statements of income should be requested from the client's account after 3 months.  Where information about income is not available until the end of the financial year when ITRs have been completed, the client must be made aware of the requirement to notify the Department as soon as this information is available.

Review of income

At the end of the financial year ITRs are requested.  Net income is converted to a fortnightly amount (total amount divided by 26), and held in the assessment of pension for the next financial year.

Retrospective calculation of income - notification not received

If notification of income was not received within the notification period, an overpayment exists.  The date of effect is the day the trust or company commenced to distribute income.  Income to be held is calculated as follows:

• in the 1st financial year - actual income received or income which is receivable *, is converted to a fortnightly amount by dividing total amount by the number of fortnights in that period
• for the ensuing years - as per tax returns (ie income earned in the previous financial year, is held for the ensuing financial year)

* Note - this covers situations where a client elects to forego income to which he/she is entitled.

Advice requirements

Initial assessment advice must clearly show the fortnightly rate of income held and the method of calculation – i.e. annual amount converted to a fortnightly rate.

Notification requirements

Client is required to provide full ITRs each year (both personal and trust/company, including all attachments such as profit and loss statements, balance sheets etc).

Notification will also be required when income ceases altogether.  Following receipt of such advice, the fortnightly rate of income is deleted and pension reassessed.  However, should the trust or company continue to operate, ITRs will continue to be required on a yearly basis for review of distribution for income and assets purposes.

General

An overpayment on the basis of assets can only exist because of failure to notify within the notification period of the acquisition of a new asset, or the disposal of an old one.

No overpayment exists purely because the value of an existing asset has increased (unless the pensioner is income tested and current assets increase above the pensioner's prescribed assets limit).  This is in line with current legislation and reflects the original Cabinet Decision on the introduction of the assets test, which did not allow for assets tested pensioners to be required to re-value their own assets.

New asset acquired - notification received

Client advises of a new asset within the notification period.  Hold estimated value and re-assess income support pension from the day after the end of the notification period.  If the asset is a property (eg real estate, farm etc), where appropriate, submit immediately for valuation and re-assess from the first day in the pension period, immediately after receipt of the valuation, holding the new value.

Ongoing assessment

Thereafter, the property is valued in accordance with Australian Valuation Office guidelines – i.e. each November for application on AVL threshold adjustment date.

Example

Property acquired in October 1999 - value as per client's estimate.

Re-valuation undertaken in November 1999 and pension re-assessed from day new valuation is available.

New value held to and including 30/6/00, re-valuation undertaken in November 2000.

New asset acquired – no notification received

Overpayment is raised from date of acquisition.  Asset valued and amount held in the assessment of income support pension until next AVL adjustment date.  Re-assessment occurs as above – i.e. re-valuation occurs each November and new value held from the subsequent AVL adjustment dates.

Further information

The information contained in this instruction seeks to provide the policy and guide-lines on the calculation of income, and in particular, income derived from earnings.

Further information about the investigation, calculation and recovery of debt is contained in the Overpayment Management Manual (OMM) which is currently being revised.  Should you have any queries specific to the items discussed above, please contact Freda Widawski on telephone (02) 92137487.

Type

Definition

Example

Full time employment

working on a regular basis, each day, for a number of days per week, (usually five), for a set number of hours per day (eg 7 to 8)

a full time mechanic

Part time employment

working on a regular basis, for a number of days per week (for example 2 days) for a set number of hours per day (for example 4 to 5)

administrative officer working every Monday and Tuesday, for 9 hours per day

Casual employment (regular)

similar to part time, but could be less regular, (for example 2 to 3 hours every week, but on different days).  Unlike permanent part time, salary is only for the actual hours worked and does not include sick leave or recreational leave.

cleaner working 1 day per week, for 2 to 3 hours

Casual employment (regular - with breaks)

as casual employment (regular) but with clear breaks

traffic warden working usually 5 days per week, 2 to 3 hours per day, but only during school term

Casual employment (irregular)

no arrangement exists for hours/days of work (for example may work 5 consecutive days, at 7 hours each day, and then not be employed for weeks)

a temporary stenographer, or a gardener who is hired intermittently

Contract workers

contracted to undertake a special task, to be completed within a specified period

a computer programmer hired to develop certain programs during a 3 month period