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C08/1996 EXTENDED DEEMING: ROYAL ASSEN CHANGES TO SAVED MANAGED INVESTMENTS
DATE OF ISSUE: 24 JANUARY 1996
EXTENDED DEEMING: ROYAL ASSEN CHANGES TO SAVED MANAGED INVESTMENTS
The purpose of this instruction is to provide information about policy changes, relating to "pre-88 saved" managed investments, which commenced on Royal Assent of the Social Security and Veterans' Affairs Legislation Amendment Bill 1995.
2.Extended deeming, announced in the 1995/96 Budget, is the Government's response to pensioner concerns, detailed in a report prepared by the consultant, Ageing Agendas. Pensioner concerns included the complexity and perceived inconsistency of the income test rules for managed investments and shares and the frequent changes to pension payments which result from movements in financial markets.
3.From 1 July 1996, the deeming system will be extended to all "financial assets". Income from financial assets will be assessed at a specific (deemed) rate, regardless of the actual income earned. This will simplify the way income is assessed on these assets and will provide a fairer, more equitable way of providing income support entitlements (Attachment A refers).
4.The Social Security and Veterans' Affairs Legislation Amendment Bill 1995 received Royal Assent on 9 January 1996.
5.Although the bulk of the extended deeming rules will commence from 1 July 1996, certain legislative amendments commenced with effect from the date of Royal Assent. These amendments removed the savings provisions which allowed for the assessment of returns from the realisation of:
friendly society investments made or acquired before 1 January 1988;
certain accruing return investments made or acquired before 1 January 1988 which did not allow partial withdrawals to be made; and
market linked investment made or acquired before 9 September 1988.
6.These investments are commonly known as "pre-88 saved" investments.
7.The savings provisions provided that where a pre-88 saved investment was realised (ie. matured, sold, surrendered, transferred, deprived, or where it was fully or partially withdrawn), any capital growth that accrued since the investor received an income support pension, would be held as income in the pension assessment for 12 months, from the date of realisation.
8.'Saved' managed investments can be identified on PIPS. This can be done by using either the:
PP.MS - Managed Investment search facility - by entering the date the investment was acquired and browsing that investments assessment details; or
PP.MI - Managed Investment data collection screen - by entering an 'H' (for History) in the action field, which will automatically display the investment assessment details on the PP.MS screen.
9.In both cases the investment assessment details will clearly display a message in the 'WHEN ASSESSED:' field, advising how the investment is assessed. Provided you have selected the correct investment name and date of acquisition, all 'saved' managed investments will have the following text displayed:
WHEN ASSESSED : ON REALISATION (PRE 1/1/88 ARI); or
WHEN ASSESSED : ON REALISATION (PRE 9/9/88 MLI)
FROM ROYAL ASSENT
10.From the date of Royal Assent of the extended deeming legislative amendments, the 12 month income assessment rule, on pre-88 saved investments, ceased to apply. This provides pensioners with the opportunity to withdraw funds from these investments, prior to the introduction of extended deeming on 1 July 1996, without having capital growth assessed as income.
11.This is a special concession that ensures pensioners are not deterred from making changes to their investments before extended deeming is introduced.
12.Sections 46B and 46J of the Veterans' Entitlements Act (VEA) were repealed, from the date of Royal Assent, to provide legislative authority for the changes.
13.It is estimated that 10,280 married couples and single pensioners hold investments subject to the savings provisions.
PRE-88 INVESTMENT REALISED PRIOR TO ROYAL ASSENT
14.Where an investment is realised before Royal Assent, income will continue to be held in the pension assessment until 30 June 1996, or until the 12 month income assessment period expires, whichever is the sooner (Social Security and Veterans' Affairs Legislation Amendment Bill 1995, Schedule 16, Part 1, subclauses (3)(5)(1) and (2) refer).
15.For example, a veteran withdrew his MLI on 1 September 1995. Under the savings provisions which were in force at the time of withdrawal, income was assessable on an ongoing basis for a period of 12 months.
16.The changes introduced at Royal Assent mean that the veteran will only have income assessed up to and including 30 June 1996. The income which would have been assessed from 1 July 1996 up to and including 31 August 1996, under the former savings provisions, is forgiven under the Royal Assent changes.
SUPERANNUATION FUND INVESTMENTS
17.The Royal Assent legislative amendments do not apply to pre pension age withdrawal from superannuation fund investments (ie. superannuation bonds, approved deposit funds, deferred annuities). Superannuation fund investments are covered separately under sections 46S(1) and 46SA VEA. The rules applying to these investments remain unchanged.
18.After Royal Assent, profit or loss must continue to be calculated on pre pension age withdrawals from superannuation fund investments. For DVA purposes 'pension age' is defined as follows:
For Veterans — Male Veteran=60 years
Female Veterans=55.5 years
For ISS Recipients — Male ISS Recipient=60 years
Female ISS Recipients=55.5 years
For Partners — Male Partner=65 years
(SP, DSS, Carer or non pensioner)Female Partner=60.5 years
19.At the commencement of extended deeming in on 1 July 1996, any profit or loss recorded as a result of pre pension age super withdrawal will continue to be assessed for the full 12 month period.
20.For future calculations of profit or loss on pre pension age superannuation fund withdrawals, any realised loss will be offsettable against a realised profit, but only where the 12 month periods overlap.
21.Superannuation fund investments can be identified on PIPS by using the PP.MS - Managed Investment search facility. All superannuation fund investments will display the text message "PRODUCT EXEMPT IF CLIENT < PENSION AGE" at the base of the screen after a particular investment has been browsed.
22.If a client is currently the holder of an exempt superannuation fund investment (ie. they have not yet attained pension age), the text message "SUPER EXEMPT" will appear on the PP.MI screen under the product name.
23.Staff must always check the date of withdrawal against the client's pension age, to determine if a profit or loss calculation is applicable.
24.Currently, the managed investment tables which appear in advice letters, display the text "Income Plus Profit" directly under the product name of any pre-88 saved managed investment. The 'Guide To Table' which follows the managed investment table explains the meaning of the text, as follows:
Income Plus Profit - In addition to any income distributions that may currently be assessable, capital growth profit may also be assessable if the investment matures, or it is sold, surrendered, transferred, gifted, or it is fully or partially withdrawn.
25.Advices have been amended to reflect the Royal Assent changes. Where a pre-88 saved managed investment appears in a managed investment table, the display text which appears directly under the product name has been changed to read "Dividend Income Only". The explanation for this text which appears in the 'Guide To Table', has also been changed, as follows:
Dividend Income Only - Income is assessed based on any dividends paid over the last 12 months, and only while the investment is held.
26.Examiners should note the assessment of profit or loss in the free text field on PP.AD. This will ensure that the advice sent will inform the pensioner that capital growth will be assessed. Wording of the text, should take into account any income which may be forgiven (paragraph 14 refers).
27.The Department of Social Security (DSS) has prepared an article, outlining the Royal Assent changes, for publication in the December edition of the Age Pension News (APN) (Attachment B refers). A copy of this article has been previously circulated.
28.It will no longer be necessary to record profit or loss on PP.PF, where pre-88 saved investments are redeemed on or after the date of Royal Assent.
29.Before making a decision not to record profit or loss, examiners should verify the redemption date. If the date of redemption is prior to the date of Royal Assent, profit or loss must continue to be recorded in accordance with State office procedures.
30.If you have any queries regarding this instruction, please direct them in the first instance to Policy Development Project Officer, Fiona Thompson on (02) 213-7770.
A.....................General information about extended deeming
B.....................December APN article wording
A/G DIVISION HEAD
1.Financial assets will be deemed to earn a certain level of income. Two deeming rates will apply to all financial assets. Interest rates will be closely monitored and the deeming rates adjusted where necessary. The deeming rates with effect from 1 July 1996 are:
5% for the first $30,000 (single) or $50,000 (partnered) of financial assets;
7% for financial assets in excess of these amounts.
2.An exception to the extended deeming rules is that the first $2,000 (single) or $4,000 (partnered) held as available money (ie. cash), or as deposit money (ie. in banks, building societies, credit unions), will have the actual interest rate assessed, up to a maximum of 5%. This concession recognises that pensioners usually keep small cheque or savings accounts for regular expenses. (The $2,000/$4,000 amount will be counted as part of the first $30,000/$50,000).
3.The lower deeming rate (5%) has been set so pensioners have plenty of money "at call". The higher deeming rate (7%) has been set at a rate which is easily obtainable from safe investments, such as term deposits. Any income earned above the deeming rates will not affect the rate of service pension or income support supplement payable. The $30,000 and $50,000 amounts will be indexed annually.
4.Financial assets are defined as:
available money (ie. cash);
deposit money (ie. bank, building society and credit union accounts);
unlisted public securities;
loans (that have not been repaid in full);
gold, silver and platinum bullion;
VALUATION OF FINANCIAL ASSETS
5.The value of most listed securities and managed investments fluctuates, depending on the market. When extended deeming is introduced on 1 July 1996, the total value of listed securities and managed investments will be determined as follows:
an initial total valuation will be recorded on 1 July 1996, or when a new claim is determined; and
Re-valuation must then occur:
on 20 March in each calendar year, after 1996;
on 20 September in each calendar year, after 1996;
where a client requests a re-valuation; or
following a change of circumstances which affects the relevant listed securities or managed investments, providing these investments are the subject of an obligation advice sent to the client.
NOT SUBJECT TO EXTENDED DEEMING
6.The following items will continue to be assessed under the current rules:
home and contents;
exempt superannuation funds;
collectables (eg. antiques, paintings, stamp/coin collections);
assets held in trusts;
exempt funeral bonds;
pre-paid funeral expenses;
assets held in private companies.
DECEMBER AGE PENSION NEWS ARTICLE
ROYAL ASSENT TO EXTENDED DEEMING
At the time of going to print, the legislation for extended deeming was before the Parliament. This means Royal Assent has not yet been given to the legislation introducing the extended deeming rules.
While extended deeming does not start until July 1996, you will be able to cash in a "saved" managed investment (and not have past capital growth on the investment assessed as income) as soon as Royal Assent to the legislation has been given.
"Saved" managed investments include:
Friendly Society investments made before 1 January 1988; and
"market linked" managed investments made before 9 September 1988.
You can get the latest information on the progress of the legislation by calling Age Pension TeleService on 13 2300 for an update.
As extended deeming does not start until July 1996, you have plenty of time to decide whether you wish to make any changes to your investments. You should note that if you cash in a "saved" managed investment and you reinvest the proceeds, your new investment will be assessed under the current rules until extended deeming starts in July 1996.
Before you do make any changes to your investments you should contact Social Security's free Financial Information Service (FIS). You can be put in touch with your nearest FIS Officer by calling the Age Pension TeleService on 13 2300, for the cost of a local call. Mobile phone calls are charged at the mobile phone rates.