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# Annual Rate

**Last amended: 22 June 2006**

##### Income from earnings is assessed as an annual rate

VEA ?

The legislative basis for the income test is contained in the Pension Rate Calculator, at Module E (Ordinary/adjusted income test) in Schedule 6 of the VEA*.* This Module provides that the initial step in the income test is to work out the annual rate of the person's ordinary/adjusted income.

The reference to the 'annual rate' of income means that it is necessary, in all earnings cases, to firstly determine both the actual amount and the circumstances of a pensioner's current earnings, and to then use that income amount, and the circumstances in which it was earned, to calculate a rate that best reflects the pensioner's annual rate of income. The current earnings and pattern of earnings is extrapolated over the following 12 months, to arrive at the annual rate of income. This means that known or expected changes in the pensioner's earnings pattern are an important consideration, when determining the annual rate of income.

##### Definition of annual rate of income

The High Court of Australia (in *Harris v Director-General of Social Security 1985*) defined the annual rate of income as being, at whatever time it is ascertained:

“...the total income that would be received during the ensuing year assuming current sources of income continue at the current level.”

From this High Court judgment it can be seen that the annual rate of income held in a pension assessment is, in practically all cases, an assumed amount. This is because an estimation of the income likely to be received in future is needed. As a person's actual earnings change, the assumed rate of income to be received over the ensuing year will also change. For this reason it is generally necessary to periodically review a person's earnings, so that the best possible assessment of the person's annual rate of earnings is always held.

##### Annual rate is determined administratively

In the AAT case of '*Rolley v FaCS 1999'*, the AAT relied on the outcomes in 'Harris*'* to find that there is no single correct way of ascertaining the annual rate of income. The annual rate is ascertained by an administrative process, having regard to the particular circumstances of each earnings case. These circumstances include known (current) income, together with expected changes to employment as advised by the pensioner. The current earnings rate (for example, derived over a three month review period) is then extended over the ensuing review period. Both the averaging of income over a certain period, or alternatively the annualising of a source of income over a year, were found to be acceptable approaches to calculating the annual rate, provided that these approaches were reasonably based on the known circumstances of the earnings.

##### Difference between income rate and income amount

The key difference between an income amount and an income rate is variability. While an income amount (e.g. the figure included in a yearly income tax return) is a static figure that arises in respect of employment over the entire year, the income rate over the course of the year will vary as the pattern of employment changes. The annual income amount reflects the total of each respective annual rate, multiplied by the period during the year in which that annual rate held.

Unlike an annual income amount, an annual income rate is determined at a particular point in time, is only held for a certain length of time (the review period), and is likely to change over the course of the year.

##### Determining the annual income rate

To determine the annual income rate:

- the assessor first obtains information about the income amount received by the person over a given period (generally the three month review period just completed),
- the assessor then considers any known factors that may affect future earnings, such as the likely pattern and duration of employment, past employment history, new employment, and any additional information provided by the person, and
- taken together, the known income amount and the likelihood of employment changes over the following review period will then allow the assessor to determine a relevant annual income rate for that period.

##### Converting annual rate to fortnightly rate

The determined annual rate of earnings is converted to a fortnightly rate by dividing the annual rate by 26.

##### Examples of determining annual income rate

- the pensioner confirms earnings of $3,500 over the recently completed three month review period. The pensioner does not advise of any intended or known change in his pattern of earnings in the immediate future, and his employment history shows a consistent pattern of earnings. His annual rate of income will therefore be unchanged from the previous review period, at ($3,500 x 4) = $14,000.
- the pensioner confirms earnings of $3,500 over the past review period, but advises that his expected hours of employment will reduce due to business requirements. He anticipates his reduced hours of employment will result in earnings of $2,000 over the next three months. His revised annual rate of income for the next review period will be ($2,000 x 4) = $8,000.
- the pensioner confirms that his rate of earnings of $3,500 over the previous quarter will remain unchanged, but that he intends retiring one month into the following review period. His annual rate of income of $14,000 will extend one month into the next review period, and then be removed from the assessment. (Confirmation of the cessation of employment is still a notifiable event, and advice of this should be received from the pensioner at the time).
- the pensioner received $3,500 over the previous quarter, and advises that during the next quarter he will receive the same rate plus a one-off yearly bonus payment of $5,000. As the bonus payment is in respect of the entire year and is not to be repeated over subsequent quarters, the assessment of the bonus amount is not restricted solely to the next quarter but is instead averaged (assessed as received over the entire year). The pensioner's annual rate will be reassessed as ($3,500 x 4) + $5,000 = $19,000. It is not correct to find a refreshed annual rate of $34,000 ($8,500 x 4), as this calculation wrongly attributes the yearly bonus payment as arising entirely out of the next earnings period.

One element of the means test for income support pensions whereby the rate of pension payable to a pensioner reduces progressively as their income increases above a certain threshold known as the income free area (IFA).

Administrative Appeals Tribunal.