DATE OF ISSUE: 6 April 1993
PROCEDURAL CHANGES RELATING TO EXEMPT FUNERAL BOND INVESTMENTS
PURPOSE
The purpose of this Departmental Instruction is to provide details of procedural changes relating to the recording (on PIPS) of funeral bonds that are exempt under the service pension income and assets tests.
2.It should be noted that there has been no change to the legislation concerning funeral bond exemptions. The changes outlined in this DI are purely procedural. Details on current income and asset testing rules are in DIs B46/91 and B42/90; and the relevant sections of the General Orders Service Pension.
BACKGROUND
3.With effect from 1 April 1993 a range of Budget 1992 initiatives relating to managed investments will be implemented.
4.The managed investment changes to be implemented required major alterations to the Managed Investment system and provided the opportunity to introduce additional system enhancements which will streamline procedures for recording and assessing funeral bonds.
FUNERAL BOND EXEMPTION
5.For service pension purposes there are 2 types of exempt funeral bonds:
.TYPE A funeral bonds are taken out by an individual. The bond matures on the death of the investor or the investor's partner and cannot be realised before maturity. Any return on the investment cannot be paid until maturity of the investment and the bond must be fully utilised on funeral expenses.
.TYPE B funeral investments can be made by a married couple either in the name of the individual or in both names. Maturity can be either at the time of death of the first member of the couple or when the last member of the couple dies. This type of funeral bond cannot be realised before maturity nor is any return payable prior to maturity. The amount paid on maturity must be utilised on funeral benefits.
LEGISLATION
6.The definitions and rules applying to funeral bonds are set out in the VEA under:
.subsection 5Q(1)which defines an "exempt funeral bond", "type A funeral
investment" and "type B funeral investment";
.paragraph 5H(8)(zj)which excludes a return on an exempt funeral bond
from the definition of income;
.paragraph 52(1)(ja)which excludes an amount invested in an exempt funeral
investment and any return on the investment from the definition of assets.
7.Again I emphasise that there has been no change to the legislation concerning funeral bond exemptions. The changes outlined in this DI are purely procedural in nature.
EXEMPTION RULES
8.For exemption purposes the initial amount invested in a funeral bond must be $5,000 or less. Top ups to a funeral bond investment can be made as long as the total amount of top ups (as opposed to capital growth) does not exceed $5,000.
9.A further restriction for funeral bond exemption purposes is that the client(s) has no other form of prepaid funeral expense.
10.An individual can only have one exempt funeral bond.
11.A pensioner couple may purchase:
1) one type B funeral investment for the couple. (This can be purchased by an individual or jointly); or
2) a type A funeral investment for each member of the couple. Both bonds would be regarded as exempt if the initial amount invested in each bond does not exceed the $5000 and the couple does not have any other funeral bond investment in either individual or joint names.
12.Although the amount invested in an exempt funeral bond cannot exceed $5000, the actual value of the bond can increase beyond this level without affecting exemption.
13.If more than $5000 is invested initially, then the funeral bond is not exempt and must be assessed under the normal Managed Investment Rules.
14.For a detailed explanation and examples of how exempt funeral bond rules are applied please refer to DIs B46/91 and B42/90; and the relevant sections of the GOSP.
PROCEDURES PRE 1 APRIL 1993
15.If a service pensioner satisfied the exemption criteria, the exempt funeral bond was recorded on PP.OA with a $0.01 asset value and nil income value.
16.Non-exempt funeral bonds were recorded on the managed investment screen (PP.MI) where normal MI rules applied.
17.This procedure was cumbersome and had the potential for overpayments to be made if a previously exempt funeral bond was overlooked.
SYSTEM ENHANCEMENTS TO DISTINGUISH BETWEEN FUNERAL BONDS
POST 1 APRIL 1993
18.The managed investment system has been enhanced so that it will be possible to identify funeral bonds from data transferred automatically from DSS.
19.All funeral bond investments, whether exempt or not, must be recorded on PP.MI after 1 April 1993.
20.Once recorded on PP.MI a message will be automatically displayed warning that the funeral bond "may be exempt".
21.The examiner will be required to do a search of PP.MI to ensure that no other funeral bond investment exists and decide whether the funeral investment currently being recorded should be exempt or not.
22.Once the examiner has ascertained the exempt status of the investment, the income and asset values of the investment should be recorded in the relevant fields. If the funeral bond is exempt, then zero (i.e. $0.00) values should be entered.
23.If examiners are still uncertain about whether a funeral bond investment is exempt or not (the DIs and relevant section of the GOSP should be consulted) they should seek advice from the Investment Policy Officer (IPO) in their Branch.
MANUAL ACTION
24.Nationally, 6 cases with exempt funeral bond investment(s) recorded on PP.OA screen have been identified.
25.It will be necessary for Branches to take manual action to delete the funeral bond details of these cases from PP.OA and re-record the investment details on PP.MI following the procedures outlined above (paragraph 19-23). This may involve obtaining the file so that all necessary details of the investment can be recorded.
26.The list of existing exempt funeral bonds has been forwarded to the managed investment contact officer in each Branch Office in conjunction with the list relating to similar manual action on superannuation fund investments currently recorded on PP.OA. (The superannuation changes are the subject of a separate DI.)
27.A decision on when this manual conversion action should be taken will be up to the discretion of the individual Branches based on existing workloads and priorities after 1 April 1993. Until Branches have taken this manual action, it will be necessary for examiners to check the PP.OA screen for funeral bonds any time that a new funeral bond investment is being recorded. This will enable officers to correctly determine whether exemption action should be taken or not.
CONTACT OFFICERS
28.If Branch Officers require further assistance concerning the procedural changes to recording of funeral bonds they should first contact their local Investment Policy Officer (IPO). If the IPO is unable to answer the query then either the project manager, Peta Stevenson on (06) 289 6408 or the project officer, Oona O'Beirne on (02) 213 7771 should be contacted.
KAY GRIMSLEY
ASSISTANT SECRETARY
BENEFITS INCOME SUPPORT
25 March 1993