DATE OF ISSUE: 6 NOVEMBER 1995
CONCESSIONAL INCOME TEST TREATMENT OF MERIDIAN INVESTMENT TRUST (EX ESTATE MORTGAGE) INVESTMENTS
The purpose of this Departmental Instruction (DI) is to advise of the implementation of new concessional treatment of Meridian Investment Trust (ex Estate Mortgage) investments for service pension purposes.
Background
2.The Estate Mortgage group failed in 1990. Global Funds Management took control of the six funds of Estate Mortgage in October 1990. In December 1993 the Estate Mortgage Trusts were merged and renamed the Meridian Investment Trust (MIT). "A" and "B" class MIT units were created and both listed for trading on the stock exchange.
3.DVA policy was that upon listing, investments in MIT were to be assessed under the normal managed investment rules. For income test purposes, this meant that MIT investments were to be assessed with the "rate of return" methodology introduced in March 1993.
4.This treatment extended to original Estate Mortgage investments acquired prior to 1/1/88 as these investments were taken to be non-saved accruing return investments for income test purposes and therefore also subject to the rate of return rules.
5.However, a concession was made by DSS and adopted by DVA that in the year after listing, the rate of return was to be modified and calculated by comparing the current market price for the investment to the issue price of $1.00. In subsequent years the rate of return was to revert to being calculated on the usual basis of the performance over the previous 12 months. (See DI B43/93).
6.This concessional treatment reached the end of its 12 month life in December 1994. Since that time significant gains in value for units in the Trust have been recorded such that rates of return of up to 50% have been calculated for both A and B class units.
7.Representations were subsequently made to both the Minister for Veterans' Affairs and the Minister for Social Security from pensioners, Global Funds Management and pensioner representative organisations. Those representations noted that the high rates of return calculated under the income test had brought marked reductions in rates of service and DSS pension and that the special circumstances of pensioner investors in MIT (related to capital loses and pending class action litigation) called for some concessional treatment.
Cabinet decision
8.On 27 October 1995, the Minister for Veterans' Affairs announced (see Attachment A) that the Government had taken into account the particular circumstances surrounding the Estate Mortgage Trust collapse and the current situation of the MIT, and that the Governement had decided:
for service pensioners who held MIT units on or before 24 October 1995 (the date of the Cabinet decision to grant the concessional treatment to both DVA and DSS pensioners), a concessional income test treatment would apply to MIT investments; and
all post 24 October 1995 acquisitions of MIT units will be assessed in the normal manner with the prevailing rate of return calculated for the Trust and will not benefit from the concessional treatment.
New concessional income test treatment
9.The concessional treatment is to take the form of "ex-gratia" payments to service pensioners holding MIT units on or before 24 October 1995.
10.In a press release dated 27 October 1995, the Minister for Veterans' Affairs announced that payments made under the concessional treatment would be backdated to the "next pension payday" ie., 9 November 1995.
11.It is important to note that the concessional treatment also applies to service pensions which were cancelled in the September 1995 automatic quarterly update of managed investments due to MIT income (paragraphs 21 to 23 refer).
12.The ex-gratia payments will be made through the application of the 5 and 7 percent deeming rates in line with the extended deeming provisions announced in the 1995/96 Budget (which come into full operation in 1 July 1996).
13.For service pension income test purposes, this means that the total combined asset value of all holdings of both A and B class MIT investments will be assessed as earning:
5% rate of return for amounts under $30,000 for single pensioners;
5% rate of return for amounts under $50,000 for pensioner couples; and
7% rate of return over the $30,000 and $50,000 thresholds.
14.It is important to note that in the case of pensioner couples, the asset value of all MIT investments is combined regardless of unit class and whether the investments are owned in joint or single names.
15.It should also be noted that the above-mentioned treatment is Government policy and that no amendments to the Veterans' Entitlements Act 1986 have been made or are currently planned. Further, the specific application of the extended deeming rules to MIT investments ends on 30 June 1996, as all managed investments will become assessable under the extended deeming rules from 1 July 1996.
Estimated number of pensioners affected
16.It is estimated that a maximum of some 1,100 pensioners (610 assessments) held units in MIT on or before 24 October 1995.
Updating of service pensions
Automatically reassessed cases
17.An ad hoc automatic fortnightly managed investment reassessment routine (MIFORT) has been scheduled to run on 1 November 1995, effective for pension payday 9 November.
18.The managed investment database has been reset such that the rate of return for MIT A and B class units has been set at 5% with effect from 9 November. This rate of return will be automatically applied by the MIFORT reassessment routine to all MIT holdings currently recorded as being held by service pensioners, and the rate of payment of service pension automatically adjusted accordingly.
Manual reassessment cases - 5% and 7% composite rate of return
19.It is anticipated that only a small number of pensioners will have total MIT holdings in excess of the $30,000 single threshold and $50,000 pensioner couple threshold. These cases will be identified through browsing of the MIFORT run Processing Report Schedule and will be required to be manually processed to apply the composite 5% and 7% deeming concession.
20.Procedural information related to automatic and manual case reassessment is detailed in the attached processing guide issued by the Investment Database Unit (IDU) on 31 October (see Attachment B).
Manual reassessment cases - September 1995 quarterly run cancellations
21.As noted in paragraph 11 of this DI, the concessional treatment also applies to service pensions which were cancelled in the September 1995 automatic quarterly update of managed investments due to increased MIT income.
22.State Office Systems Support Officers should identify these cancellation cases by browsing the Report Type 6 - Schedule of Service Pension Calculations produced for the September quarterly update (run on 9 September for payday 28 September) and checking if any cancellation was caused by inclusion of increased MIT income in the assessment.
23.Where it is found that:
increased MIT income caused the cancellation; or
that cancellation was caused by increased income from other managed investments or shares and that an amount of pension is now payable due to the concessional income test treatment of MIT investments,
payment of service pension should be reinstated with effect from 9 November 1995.
Note: this reinstatemnent of pension only applies if the MIT units were held on or before 24 October 1995 (paragraph 8 refers).
Manual reassessment cases - cancellation due to income from other sources
24.Staff may also receive queries from veterans who held MIT units on or before 24 October 1995 and who have had payment of service pension cancelled since the September quarterly automatic update due to income from other sources eg., business income. MIT income for these cases should be recalculated through application of the MIT income test concession to ascertain if service pension is now payable. Where service pension is payable, payment should be reinstated with effect from 9 November 1995.
Advice letters
25.Standard fortnightly reassessment run advices will be generated for automatically reassessed cases by the ad hoc MIFORT run. The advice letter will advise service pensioners of the adjustment of the performance data for their MIT holdings, and the standard managed investment table will show both the revised 5% rate of return and revised income now being held for their MIT holdings.
26.Manually processed cases (including cancellation cases discussed above) will require a manually generated advice which should contain the standard text noted at paragraph 16 of the IDU guide.
Pensioners who purchase MIT units after 24 October 1995
27.It is believed that only very small numbers of service pensioners will acquire MIT units after 24 October 1995, particularly given that no income distributions are currently made for the Trust, that no date has been set to recommence distributions other than "early 1996" and no predictions have been made regarding likely distribution levels.
28.As noted earlier, all post 24 October 1995 acquisitions of MIT units will be assessed with the prevailing rate of return calculated for the Trust and will not benefit from the concessional treatment.
29.Staff should refer cases/enquires regarding post 24 October 1995 MIT units to their Investment Policy Officer for discussion with the Manager of the Investment Database Unit and or the Policy Administration and Advice Section, National Office.
General publicity
30.The December 1995 issues of "Age Pension News" and "Vetaffairs" will both carry articles explaining the concessional treatment of MIT investments. Both publications are due for release in early December.
Social Security treatment
31.The above-mentioned concessional treatment is identical to that announced by the Minister for Social Security on 25 October 1995. The Minister for Social Security also announced that the treatment would be applied and backdated to the "next pension payday".
32.However, because DSS age pension and DVA service pension paydays always fall on alternating weeks, the concessional treatment will be applied to DSS age pensions backdated to the next DSS payday (after announcement) of 2 November. Processing action to effect this change will occur on 16 November.
Queries
33.Any queries in respect of the concessional policy described in this DI should be referred to Martin Dibb, Policy Administration and Advice, telephone 06-2896751.
34.Any queries related to the reassessment routine or processing should be referred to Eddie Bolanac, Manager Investment Database Unit, telephone 02-2137875.
MURRAY HARRISON
DIVISION HEAD
COMPENSATION
ATTACHMENT A
48/95
27 October, 1995
INCOME TEST TREATMENT OF MERIDIAN INVESTMENTS
Service pensioners will benefit from the concessional income test treatment announced by the Federal Government this week for pensioners affected by the failure of the Estate Mortgage Trust investments in 1990.
The Minister for Veterans' Affairs, Con Sciacca, said the payments to service pensioners would be calculated promptly and backdated to the next pension payday. Approximately 2,000 service pensioners will benefit from this concession, he said.
The original Estate Mortgage funds were taken over by Global Funds Management in 1990 and subsequently merged into a single trust called the Meridian Investment Trust, which was listed on the stock exchange in December 1993.
Since listing, income for service pensioners' investments in the Meridian Investment Trust has been calculated through application of the rate of return rules. These rules take into account the change in unit price of managed investments and shares.
"Service pensioners have expressed concern to me that their service pensions have in many cases been reduced because recent sharp increases in the unit price of the Meridian Investment Trust have resulted in greater income being calculated for service pension purposes under the rate of return rules" said Mr Sciacca.
"It is the Government's view that there was a case for special treatment to be provided to this group of service pensioners.
"The Government has therefore decided to apply concessional income test treatment, in the form of ex-gratia payments, to service pensioners holding Meridian Investment Trust units on or before 24 October 1995.
"This will be done through application of the 5 and 7 percent deeming rates in line with the extended deeming provisions announced in the 1995/96 Budget and which come into operation in July 1996," he said.
Media Adviser:Amanda Lampe(06) 277 7820 (W)
(0411) 241 356
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MEMORANDUM Department of Veterans' Affairs INVESTMENT DATABASE UNIT - SYDNEY 280 Elizabeth Street, Surry Hills NSW - GPO Box 3994, SYDNEY 2001 |
31 OCTOBER 1995 |
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AD (INCOME SUPPORT) A-K L-Z D&P PAYMENT ADMINISTRATION VAN OMU EXEC. OFFICER DETERMINATIONS
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QUALITY ASS. CO-ORDIN. QUALITY CONTROL DEL. ADMINISTRATION OFFICER TRAINING OFFICER SYSTEMS SUPPORT OFFICER
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VIC NSW QLD SA & WA TAS |
DIR (PA&A) DSS (MIN/SIN) DSS (II&AP)NSW DSS (II&AP)VIC |
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SPECIAL MI FORTNIGHTLY RUN
REASSESSMENT OF MERIDIAN INVESTMENT TRUST
GUIDE FOR PROCESSING STAFF
RUN ON: 1.11.95
CUT OFF: 3.11.95
PAYDAY: 9.11.95
1.This ad hoc APPBFORT Run will only include the Managed Investment (MI Fort) components.
2.Manual cases generated by this Fort Run can be identified on the 'Manual Variations Required Report - Type 20' output, which clearly lists the 'Reason' for the manual action.
3.In addition to the standard manual MI reasons, specific managed investment product changes will appear on this run, as follows:
Reason:'PERFORMANCE'
GLOBAL FUNDS MANAGEMENT - N
MERIDIAN INVESTMENT TRUST - A CLASS UNITS
MERIDIAN INVESTMENT TRUST - B CLASS UNITS
4.The Government has decided to apply concessional income test treatment to certain pensioners affected by the failure of the Estate Mortgage group in 1990.
Background
5.Global Funds Management took over the funds of the Estate Mortgage group in 1990 and consolidated them into the Meridian Investment Trust.
6.The Meridian Investment Trust (A and B Class units) were subsequently listed on the Australian Stock Exchange in December 1993.
7.The listing meant that the trust became assessable under the 'Rate of Return' rules used to calculate ongoing income for non-saved managed investments.
8.Recent unit price increases have generated annual rates of return of over 50%, resulting in a capped rates of 50% being assessed against the current value of the investment.
Concessional Income Test Treatment
9.Given the circumstances of the Estate Mortgage failure in 1990 and the impact of recent unit price increases, the Government has decided to apply concessional income test treatment to these investments. However, this treatment only applies to service pensioners who had MIT holdings on or before 24/10/95 (the date of the Cabinet decision).
10.The concessional income test treatment involves applying the 5% and 7% deeming rates in line with the extended deeming provisions that will come into operation in July 1996.
11.This means that Meridian Investment Trust investments will be assessed as earning:
5% for amounts under $30,000 for single clients,
5% for amounts under $50,000 for pensioner couples, and
7% for amounts over these $30,000 and $50,000 thresholds.
12.This concessional income test treatment is effective from DVA payday 9 November 1995, and will continue until extended deeming comes into operation in July 1996.
Automatic Reassessment wef payday 9.11.95
13.All DVA pensioners holding Meridian Investment Trust A and B Class units will have their investment holdings automatically reassessed using a 5% deemed rate of return wef payday 9.11.95.
14.The asset value of each investment holding will be determined by applying unit prices of $1.07 per unit for both A and B Class units.
15.If Meridian investments appear on a manual case, you must refresh these investments on the PP.MI screen from payday 9.11.95, by entering a 'C' for Change in the action field.
16.The following advice text should be entered on the PP.AD screen for manually processed cases:
Your Meridian Investment Trust has been reassessed in line with the Government's decision to apply a concessional income test treatment to pensioners affected by the failure of the Estate Mortgage group.
Follow Up Manual Processing Required
17.The automatic processing outlined in paragraphs 14 to 16 above will ensure that all DVA pensioners will immediately receive the concessional income test treatment announced by the Government by applying a 5% deemed rate of return to all investment holdings.
18.However, it is anticipated that a small number of pensioners will have Meridian Investment Trust holdings valued over the $30,000 single threshold and $50,000 pensioner couple threshold.
19.To identify these pensioners, the Investment Policy Officer in each State Office must arrange for the output listed in the 'Report Type 3 - Processing Report Schedule' to be examined.
20.This schedule will list all of the cases selected for automatic reassessment which have Meridian Investment Trusts recorded on the PP.MI screen. The cases will be listed with an assessment type of 'MI PERFORMANCE DATA'.
21.If examination of the PP.MI screen reveals that the total value of Meridian Investment Trust (A and/or B Class units) held by a single pensioner or pensioner couple exceeds the $30,000 and $50,000 thresholds, you must manually perform a follow up reassessment of the case using the data collection procedures detailed below.
Single Pensioner - Total Meridian Trust Investments Exceed $30,000
22.If the total combined value of all Meridian Investment Trust (A and/or B class) investments recorded on the PP.MI screen exceeds $30,000 you must:
Step 1:Add all of the 'A Class' and 'B Class' units together and multiply them by a buy back price of $1.07 to arrive at a total combined current asset value for all of the Meridian Investment Trust holdings held by the client.
Step 2:Multiply $30,000 by 5% and divide by 26 to calculate the fortnightly income to be assessed for the first $30,000
(i.e. $30,000 x 5% ÷ 26 = $57.69 income pf).
Step 3:Subtract $30,000 from the total current combined asset value for all Meridian Investment Trust holdings calculated at Step 1 to determine the Excess $ Amount' over the $30,000 threshold.
Step 4:Multiply the 'Excess $ Amount ' calculated in Step 3 by 7% and divide by 26 to calculate the income to be assessed on the amount over the $30,000 threshold.
(i.e. $Excess x 7% ÷ 26 = $XX.XX income pf)
Step 5:Add the fortnightly income calculated in Step 2 to the fortnightly income calculated in Step 4 to arrive at the total income per fortnight to be assessed for pension purposes.
Follow Up Manual Processing
Single Pensioner - Total Meridian Trust Investments Exceed $30,000 (continued ...)
Step 6:Delete all of the existing Meridian Investment Trust A and/or B Class Unit entries recorded on the PP.MI screen.
Step 7:Use PP.MS to data collect one Global Funds Management - N entry for 'Meridian Investment Trust - A&B Class 5%&7% Deemed' units, usinthe earliest date of acquisition recorded for the investments you have now combined.
Step 8:You must manually enter the total combined asset and income details calculated at Steps 1 and 5 above, as this 'Special' product entry will not perform any automatic income or asset calculations.
Step 9:You must enter the total combined unit holding calculated at Step 1 in the 'Units:' field and set the 'Relation:' field according to the identity of the single pensioner (either 'VET', 'SPS' or 'DEF').
Step 10:Complete the advice text on the PP.AD screen as follows:
As the value of your total Meridian Investment Trust holdings exceeds the $30,000 threshold, they have been combined and reassessed by applying a composite 5 and 7 percent deeming concession.
Pensioner Couple - Total Combined Meridian Trust Investments Exceed $50,000
23.If the total combined value of all Meridian Investment Trust (A and/or B class) investments recorded on the PP.MI screen exceeds $50,000 you must:
Step 1:Add all of the 'A Class' and 'B Class' units together and multiply them by buy back price of $1.07 to arrive at a total combined current asset value for all of the Meridian Investment Trust holdings held by the pensioner couple.
Step 2:Multiply $50,000 by 5% and divide by 26 to calculate the fortnightly income to be assessed for the first $50,000
(i.e. $50,000 x 5% ÷ 26 = $96.15 income pf)
Step 3:Subtract $50,000 from the total current combined asset value for all Meridian Investment Trust holdings calculated at Step 1 to determine the 'Excess $ Amount' over the $50,000 threshold.
Step 4:Multiply the 'Excess $ Amount ' calculated in Step 3 by 7% and divide by 26 to calculate the income to be assessed on the amount over the $50,000 threshold
(i.e. $Excess x 7% ÷ 26 = $XX.XX income pf).
Step 5:Add the fortnightly income calculated in Step 2 to the fortnightly income calculated in Step 4 to arrive at the total income per fortnight to be assessed for pension purposes.
Follow Up Manual Processing
Pensioner Couple - Total Combined Meridian Trust Investments Exceed $50,000 (continued ...)
Step 6:Delete all of the existing Meridian Investment Trust A and/or B Class Unit entries recorded on the PP.MI screen.
Step 7:Use PP.MS to data collect one Global Funds Management - N entry for 'Meridian Investment Trust - A&B Class 5%&7% Deemed' units, using the earliest date of acquisition recorded for the investments you have now combined.
Step 8:You must manually enter the total combined asset and income details calculated at Steps 1 and 5 above, as this 'Special' product entry will not perform any automatic income or asset calculations.
Step 9:You must enter the total combined unit holding calculated at Step 1 in the 'Units:' field and set the 'Relation:' field according to whether the total combined unit holding belongs only to one member of the pensioner couple (either 'VET', 'SPS' or 'DEF') or is a combination of both members holdings, in which case you must enter 'JNT'.
Step 10:Complete the advice text on the PP.AD screen as follows:
As the value of your total Meridian Investment Trust holdings exceed the $50,000 threshold, they have been combined and reassessed by applying a composite 5 and 7 percent deeming concession.
24.If you have any problems or questions regarding processing of manual cases produced as a result of this special MI Fort Run, or in calculating or data collecting combined Meridian Investment Trust holdings which are in excess of the $30,000 and $50,000 thresholds, please contact your local Investment Policy Officer for advice.
25.Investment Policy Officers can contact me on (02) 213 7875 for assistance with interpreting manual case processing.
Eddie Bolanac
Manager - Investment Database Unit
31 October 1995