C43/1996 BUDGET INITIATIVE : REVISED PENSION LOAN SCHEME (PLS)

DATE OF ISSUE:  13 AUGUST 1996

BUDGET INITIATIVE : REVISED PENSION LOAN SCHEME (PLS)

TABLE of CONTENTS

INTRODUCTION.................................................................................................  3

LEGISLATION.....................................................................................................  3

BACKGROUND...................................................................................................  3

SUMMARY OF CHANGES.................................................................................  4

ELIGIBILITY.......................................................................................................  4

CLIENTS AFFECTED..........................................................................................  5

REAL ASSETS.....................................................................................................  5

GUARANTEED AMOUNT..................................................................................  6

ASSESSING THE MAXIMUM LOAN AVAILABLE..........................................  6

CALCULATING THE FORTNIGHTLY 'LOAN RATE' PAYABLE....................  7

Assessing the loan rate................................................................................  7

Adjustments to certain Asset tested pension cases.......................................  8

SECURING A CHARGE ON THE PROPERTY...................................................  8

DETERMINING PLS APPLICATIONS ..............................................................  9

FRINGE BENEFIT ELIGIBILITY........................................................................  9

INTEREST CHARGED ON THE LOAN............................................................10

Notification of PLS debt amount................................................................10

Maintenance of loan - Excel ......................................................................10

Original scheme.........................................................................................10

Revised scheme.........................................................................................11

ADMINISTRATION OF THE PLS.....................................................................11

Applications..............................................................................................11

Interviews.................................................................................................12

Financial Hardship Provisions....................................................................12

Revised PLS working arrangements...........................................................13

REVIEWS............................................................................................................13

AVO Valuations........................................................................................13

Reviews.....................................................................................................13

DEBT RECOVERY...............................................................................................14

Marriage.....................................................................................................14

Separation..................................................................................................14

Death of a PLS debtor................................................................................14

Discretion to recover..................................................................................15

Recovery limits...........................................................................................15

TAXATION...........................................................................................................16

APPEALS PROVISIONS AND OBLIGATIONS..................................................16

CLIENT CONTACT..............................................................................................16

Publicity and Advice...................................................................................16

Contact with Existing clients.......................................................................17

AUDIT REQUIREMENTS....................................................................................17

CONCLUSION......................................................................................................17

APPENDICES

Age Component Amount table........................................................Appendix A

Request for placement of charge......................................................Appendix B

Advice to pensioner of placement of charge.....................................Appendix C

Six monthly advice to pensioner of loan details................................Appendix D

Excel Spreadsheet for original PLS..................................................Appendix E

Excel Spreadsheet for revised PLS..................................................Appendix F

REVISED PENSION LOAN SCHEME (PLS)

INTRODUCTION

This Departmental Instruction provides information on the May 1995 Budget initiative to revise and replace the eligibility criteria for the existing Pension Loan Scheme (PLS) which was originally implemented in 1985.  These changes commencing from 10 July 1996 relax or abolish a number of the current conditions applicable to the PLS making eligibility for the revised PLS less restrictive and more attractive to the veteran community.

2.The changes are aimed at improving flexibility in the way service pension and ISS payments are paid and will encourage pensioners to improve their lifestyles by accessing capital tied up in property by means of an income stream.

LEGISLATION

3.The legislative amendments associated with the changes to the PLS are contained in Schedule 17 of the Social Security and Veterans' Affairs Legislation Amendment Act No 1 of 1996.  These changes do not impact on those clients who are currently participating under the current scheme as they are protected by the enactment of a savings provision.

4.It should be noted the legislation does not include eligibility for all ISS recipients or service pension widow/ers.  The only ISS recipients and service pension widow/ers who would be eligible under the PLS are those who are veterans in their own right or ISS recipients who are the partner of a veteran.  Where the person is not a member of a couple, subsection 52ZA(1) still requires the person to be a veteran.  A legislative amendment to the Veterans' Entitlements Act 1986 (VEA) is proposed to include ISS recipients and service pension widow/ers under PLS legislation.  Any applications from this group should be accepted and referred to National Office (Policy Advice and Administration Section) for consideration.  Further policy guidelines will be issued once a final decision is made.

BACKGROUND

5.With the introduction of the assets test in 1984 (which was designed to ensure persons who owned substantial assets utilised them to produce income to meet living expenses), it was recognised that situations may arise where a person is unable, or for good reason is unwilling, to rearrange those assets.  The original PLS therefore allowed asset tested pensioners of pension age to receive a 'top-up' of their pension in the form of a loan, up to the amount they would be entitled to under the income test.  It was intended to assist people who owned relatively valuable assets that produced little or no income, and who were unwilling or unable to realise them.  Take-up was extremely low.

6.The pension loans scheme is purely voluntary.  Applications for pension loan must be in writing and a person must agree to the terms and conditions of the loan.  Both members of a couple are required to sign the application irrespective of whether both are applying for a loan.

7.The accumulated principal under PLS attracts interest and is generally repayable from the person's estate.  Loan payments may be paid for a short period while the person's income or assets are being rearranged, or for an indefinite period whilst eligibility is maintained.

SUMMARY OF CHANGES

8.New conditions have been included which did not apply to the old scheme.  The conditions include the following:

• A person is eligible to participate in the PLS if they are assessed as being entitled to some rate of pension under either the assets test or the income test (even if a pension is not payable because either income or assets are in excess of the threshold) when calculated independently of each other.

• The rate of assessed pension payable can be topped up by a loan, the combined total of which is limited to and payable at either the maximum pension rate applicable to a person's circumstances inclusive of allowances, or a lower rate nominated by the person.

• A method has been developed, based on a person's age and assets offered as security, for determining the maximum amount of loan available to a person under the PLS.

• The concept of an optional "guaranteed amount" has been introduced which, if exercised, ensures an agreed amount of money for use by the pensioner or their estate after settlement of the debt.

• The value of a person's real assets offered as security (less any "guaranteed amount") must be sufficient to secure the payment of any debt to the Commonwealth.

• A person wishing to participate in the PLS need only specify those assets they are offering as security thereby excluding particular items of 'real property' from operation under the PLS.

• The interest rate set is based on compound interest.

• Interest continues to accrue on the debt after ongoing payments cease and after a person's death until the debt is recovered.

ELIGIBILITY

9.Section 52ZA of the VEA prescribes that to participate in the revised pension loans scheme a person or couple must satisfy the following criteria:

• be receiving or eligible to receive a service pension or an Income Support Supplement; and

• be a veteran or partner of a veteran; and

• the rate of service pension or Income Support Supplement rate is or is to be:

(i)an income reduced rate or an adjusted income reduced rate (ISS); or

(ii)an asset reduced rate; and

at least one of those reduced rates is not a nil rate (ie they must qualify for some pension under either the assets test or the income test); and

• the person has reached pension age (if not a member of couple) or is the partner of a veteran who has reached pension age (if a member of a couple); and

• the value of the person's real assets (less any guaranteed amount) is sufficient to secure the payment of any debt that may become payable to the Commonwealth.

CLIENTS AFFECTED

10.The legislation has been amended to extend access to the PLS to the following two groups of people:

(a)all part rate pensioners of pension age or the partner of a veteran of pension age being paid under normal income and asset testing provisions; and

(b)persons who would be entitled to some payment under either a separately assessed income test or assets test.  For example pension is not payable under the ordinary income/assets test if a person has an entitlement of:

-      $20 under the income test but a nil entitlement under the assets test; or

-      $30 under the assets test but a nil entitlement under the income test,

however, because they have an entitlement under one of the tests, they are eligible to apply in either example for a loan under the Pension Loans Scheme.

REAL ASSETS

11.A further amendment introducing two new PLS terms provides that a pensioner will need to have sufficient "real assets" less any "guaranteed amount" that he or she is prepared to offer as security against the loan before payment under the PLS can be considered.

12."Real assets" are defined at subsection 52ZAAA(1) VEA, for the purposes of the PLS, as real property (including the principal home) of the person held in Australia but not including any 'specified property' which the person wishes to exclude from the overall calculation of the value of the real property.  In practice however, a person need only specify those assets to be included as security without the need to specify all the exclusions on the claim form.

For example:

A person may own a holiday house which is used by the children and their families and they have notified the Department of their intention to keep it in the family.  Therefore, this property is not included when assessing eligibility for payment under PLS.  This decision to exclude the property has the effect of reducing a person's total loan amount limit (paragraph 17 refers).

Note:  Whilst the secured property needs to be in Australia, the same portability provisions apply to PLS payments as apply to payments of service pension and ISS.

GUARANTEED AMOUNT

13.As explained in the previous paragraph, when quantifying the value of a client's real assets, we allow the exclusion of 'specified property' from the operation of the Scheme.  A "guaranteed amount" differs in that it is an 'agreed amount of money' that a pensioner can elect to have kept aside at the time of settlement of the debt from the value of the property used as security against the debt.

For example:

A pensioner offers as security for his PLS loan debt a property valued at $125,000.  He wishes to leave $30,000 for example to his two grandsons for their education or to ensure that the cost of a Retirement Village Entry Contribution can be met.  This $30,000 represents the "Guaranteed Amount" which can be accessed by the pensioner if the property is sold, or left to their estate upon their death.  The available security remaining in this example is therefore $95,000.

14.Nominating a "Guaranteed Amount" and thereby excluding a portion of the asset value over which a charge is to be placed, also reduces the total loan amount limit because it has the effect of reducing the value of the real property.

Note:   A participant in the PLS has the choice to exclude a property and/or nominate a guaranteed amount.

15.A request to change the Guaranteed Amount or withdraw from the Pension Loans Scheme can be made at any time but must be made to the Department in writing and signed by the veteran and their partner, if they are a member of a couple.  Any request to increase the guaranteed amount will be subject to the pensioner(s) remaining under the total loan amount limit applicable to their circumstances (ie. age and secured assets).  a — n increase in the Guaranteed Amount will require a re-assessment of the pension loan to ensure that the assets on which the charge is placed is still sufficient (this may require a re-valuation of assets from the Australian Valuer's Office (AVO).

ASSESSING THE MAXIMUM LOAN AVAILABLE

16.There is a limit to the total amount of the loan that can be received, which once reached prevents on-going payments.

17.A method for determining the maximum amount of loan available to a person involves a calculation according to a formula set out as follows:

    Age Component Amount     x     Value of real assets (less the Guaranteed Amount)

$10,000

18.When working out the value of a person's real assets, the value is to be rounded down to the nearest multiple of $10,000.  If the value of the real assets is less than $10, 000, the value is taken to be nil.

19.The "age component amount" is defined by reference to an actuarial table set out in subsection 52ZCA(3) (see Attachment A).  The table sets out an "age component amount" for ages 55 (and younger) to 91 (and beyond) which is used in setting a loan limit as a percentage of secured assets.  The "age component amount" is intended to take into account the risk of debt exposure to the Commonwealth by reference to a pensioner's current age.  It is aimed at ensuring that there will be sufficient real assets secured to repay the loan at the time of recovery.  A spreadsheet is currently being prepared to assist in determining an approximate date on which the maximum loan amount will be attained and further details will be provided when it is finalised.

*Note:  A person's age (for the purpose of the table) is defined as his or her age on his or her last birthday.  In the case of a couple, it is defined as the age of the younger member of the couple on his or her last birthday.  The maximum loan amount increases on each relevant birthday taking into account the latest asset valuation on the secured assets.

CALCULATING THE FORTNIGHTLY 'LOAN RATE' PAYABLE

Assessing the loan rate

20.If a person is eligible for payment under the pension loans scheme, the 'loan rate' is determined by establishing the difference between the rate of pension, if any, assessed under the normal income/assets test and either the maximum pension rate including allowances applicable to the pensioner's circumstances or a lower amount nominated by the pensioner.

For Example:

A person's actual entitlement is $50 per fortnight under the combined income and assets test.  If the person was eligible under PLS and applied for a total payment of $210 per fortnight, $210 per fortnight would be payable of which $160 per fortnight would be the 'loan rate' and a debt to the Commonwealth.  A pensioner rather than notifying of a total payment (ie SP/ISS+ PLS) could nominate a fixed amount of PLS payment thereby negating the necessity for a pension examiner to alter the loan rate every time there is a change to the assessed rate of payment.

Note:  Members of a couple can nominate differing 'loan rates' or only one member of a couple might apply for payment under the scheme.  The loans are not a joint loan but rather individual loans to each member of a couple and can be paid off separately.

Adjustments to certain Asset tested pension cases

21.If the PLS participant is being paid service pension or ISS under the ordinary asset test, the amount owed by a person under the loans scheme may be deducted from the value of the person's assessable assets used as security against the debt reducing their total assessable assets.  As the loan amount increases, the value of assessable assets reduces (assuming the value of the assets is not appreciating significantly) and pension entitlement under the assets test should increase.  A subsequent reduction in the fortnightly loan amount would be expected.

22.Entitlement under the assets test and PLS would potentially need to be reassessed as often as fortnightly.  The new asset tested rate should be recorded by the examiner on file and the PLS file similarly updated with the new fortnightly loan details (note: the majority of cases will be neither asset tested nor provide assessable assets as security but rather offer non-assessable/disregarded assets such as the family home as security.  The assessed rate of pension would therefore not be affected).

Note: Where a property/ies comprising assessable and non-assessable assets (including properties on one title) are security for the loans, the PLS debt is deducted proportionally from the assessable and non-assessable components.

SECURING A CHARGE ON THE PROPERTY

23.A debt arising from a pension loan is secured by a statutory charge over a person's real assets by virtue of section 52ZF VEA.  Under subsection 52ZL(4) VEA, the pensioner is responsible for the costs incurred by the Commonwealth in placing the charge.  The pensioner has the option of paying the costs up front or adding them to the total loan amount (note: these costs do not attract interest).  The subsequent cost of removal of the charge is also borne by the pensioner or their estate upon their death.  A legislative change to align DVA with DSS is being considered whereby these charges will attract interest.

24.The Australian Government Solicitor's (AGS) office in each Sate is responsible for handling both the placement and removal of a charge for PLS cases on behalf of the Commonwealth.  A copy of the form to be sent to the AGS office relating to the placement of a charge is at Attachment B with the letter to the client advising of the placement of a charge at Attachment C.  We are investigating the possibility of arranging a fixed cost for this service from AGS.  This will allow accurate disclosure of the costs of placing a charge to a pensioner when making enquiries about a pension loan.  Further information in relation to these costs will be provided when finalised.

25.Instances may arise where a person wishes to rearrange his/her assets and consequently it becomes necessary to remove the charge from one property and place it on another.  Again, these costs are borne by the pensioner.  This rearrangement of assets is not an impediment to continuation under the revised Scheme provided the substitute property's value is sufficient to allow continuing participation in the PLS.  The issue of recoverability may need to be reassessed (ie a full review and AVO valuations may be necessary to determine if the new assets are sufficient).  In the event of a partial sale being requested, a full review should be undertaken and an AVO valuation will be necessary if no recent valuation is recorded.

26.AGS is to be instructed to act on the Department's behalf to ensure that the Commonwealth's interests are protected during the sale/settlement process and when negotiating a Notice of Charge on an alternative property if necessary.

Note:  The lifting of a charge on a property is only to occur where the Department is not compromising the likelihood of recovery.

DETERMINING PLS APPLICATIONS

27.When determining an application under the PLS, the Delegate will need to satisfy themselves, that any debt that becomes payable by the person to the Commonwealth under this scheme is "readily recoverable".  Some examples of when this issue will have to be addressed include:

• if a property is not comprehensively insured and building structures comprise a significant value of the property, only a valuation based on the land content should be obtained if  comprehensive insurance is not be sought;

• if there is a mortgage, life interest on the property or a third party is living on the property offered as security, the application should be carefully examined to determine whether on the death of the pensioner/s, the debt will be readily recoverable via sale of the secured property; and

• if a property is offered as security with the possibility of significant volatility and a downturn in the market value of the property, the AVO valuation as provided may have to be devalued to the lower end of the potential sale price range over the next 12 months when determining the maximum loan available.

28.It is not possible in this Instruction to deal with the range of differing scenarios likely to be encountered in respect of PLS cases.  Where doubt exists as to whether future recovery may be compromised, particularly where a legal interpretation is required, the case should be referred to Policy Advice and Administration in National Office for direction.  Given the complexities of the pension loans scheme, it is suggested that the States limit PLS delegations accordingly.

FRINGE BENEFIT ELIGIBILITY

29.Generally, under the revised PLS, if a pensioner receives any payment under the normal income and asset test, they are eligible to receive a Pensioner Concession Card and Telephone Allowance.  However, if the entire payment received by the person is as a loan under the Pension Loans Scheme, there is no eligibility for a Pensioner Concession Card.

30.Similarly treatment benefits are available only to those pensioners who qualify under the normal income and assets test or as Disability pensioners.  For the purposes of treatment eligibility, payments under the PLS are paid as a loan and are not service pension for the purposes of section 53D VEA.

INTEREST CHARGED ON THE LOAN

31.Interest under the revised pension loans scheme is charged at a rate set by the Minister for Social Security by notice in the Public Gazette.  The rate has been set initially at 7.9% (compound interest) being 1% below the lowest current variable home loan interest rate.  This will be subject to review and varied at the direction of the Minister of Social Security.  A range of factors such as the Commonwealth long-term bond rate and current lending rates in the private sector will be considered when determining any variation to the rate.

Notification of PLS Debt amount

32.All pensioners and ISS recipients who have a debt outstanding under the Pension Loans Scheme will be issued with statements every six months in June and December advising them of the interest rate, interest amount payable, loan repayments made and total debt.  Advice of indebtedness will also be sent to a loan recipient:

• at each change in the loan interest rate;

• at any time the pensioner requests notification of the debt outstanding, and

• when the maximum loan amount is reached.

33.The advice to PLS participants will comprise of a letter (a copy of the letter is at Attachment D) and a printout of the six monthly debt statement from the relevant Excel spreadsheet for either the original or the revised scheme. (Attachments E and F refer respectively).

Maintenance of Loans - Excel

34.Pension Loan Debt calculations are maintained on an Excel spreadsheet.  There are two separate spreadsheets, one each for the original and revised schemes.  The Excel spreadsheets for the original PLS based on simple interest contains current loan details of existing clients.  The spreadsheet for the revised Scheme based on compound interest is blank awaiting the input of the loan details.  These sheets are being issued to each State in conjunction with the implementation of the revised PLS.

Original Scheme

35.The spreadsheet for the original scheme is based on simple interest being calculated at a rate of 0.003836%, which equates to 10% interest per annum, on the principal only (interest excluded) owing each fortnight.  The principal is composed of total loan payments received by the pensioner but not repaid.  AGS costs are added after interest has been calculated.  When repayment in full is sought, interest will be charged up to the date of last payment of a loan instalment.  If repayment is made within 28 days of advice of indebtedness, no further interest will accrue.  If payment is not received within 28 days, interest on the loan will continue to accrue from the date of last payment of the loan instalment until the debt is repaid.

36.Partial repayments by the recipient of the loan will first be deducted from the total amount of interest owing.  Where the amount repaid exceeds the interest debt, the balance of the repayment will be offset against the principal owing.

Revised Scheme

37.The revised scheme spreadsheet is based on a 'compound' interest rate which calculates interest fortnightly based on the outstanding balance of:

• combined loan payments and accrued interest ; less

• any repayments made by the pensioner.

AGS costs are recorded separately and added to the loan balance after interest is calculated.

38.Interest will continue to accrue on the outstanding balance until such time as the loan has been repaid in full.  Where a repayment of the loan is made, that repayment is to be deducted on the Excel spreadsheet from the outstanding balance of the debt on the pension payday immediately prior to the date the repayment is made.  If repayment is made on a payday, that repayment is deducted from the total loan balance before interest is calculated for the payday on which the repayment was made.

For example:

If a client makes a loan repayment of $500 on 22 August and that day is a pension

payday, the $500 is deducted from the total debt amount outstanding on 22 August before interest is calculated for the period 22 August to 5 September inclusive.

39.If a participant withdraws from ongoing participation in the Pension Loans Scheme, they can either repay the debt in full or defer recovery to occur from their estate after their death.  Ongoing payments under the scheme will cease to operate from the pension payday after the request to withdraw from the Scheme is made and interest will continue to accrue until the debt is repaid in full.  If a request to withdraw from a forward payday is made, this request should be accommodated.

ADMINISTRATION OF THE PLS

Applications

40.Responsibility for the administration of the both the original and revised schemes have been transferred from the Tasmanian Branch Office to the respective State Offices.  The relevant files providing loan details of current debtors have already been forwarded to those offices.  Officers in each State need to be familiar with administrative practices and the provisions of the old and new schemes to ensure they can correctly answer enquiries on both.  In particular this would involve becoming familiar with processing applications for payment under the revised scheme and identifying factors which may affect continued eligibility under either scheme.

41.A person who intends to test their eligibility under the PLS must complete the form, "Pensions Loan Application".   This form gives the Department the authority to collect information relevant to establishing whether or not a person meets the requirements of the PLS (the form is not yet finalised but will be shortly.  In the interim please contact Policy Administration and Advice Section in National Office).

42.The extent of the data collection will depend on how much information we already have about the client's income and assets.  Clients are likely to fall into the following three groups:

• current part-rate pensioners; or

• persons previously rejected under the income and assets tests; or

• persons lodging a PLS claim who are not receiving a pension under the normal income and assets test.

43.Where a person has not previously applied for service pension or ISS, eligibility will have to be established and a full claim for Service Pension or ISS must be completed.

44.Completion of the PLS application form will also be required to obtain full details of the property/ies offered as security and will provide the necessary information to assist with the registration of the charge.

Interviews

45.An interview should be conducted in all cases by the appropriate officer to ensure that the applicant is aware of all the conditions associated with the PLS payments.

46.Interviews are essential in order to negotiate and explain the terms of the PLS agreement.  The applicant/s will need to sign the application form which details the terms of the loan.  Where only one member of a couple applies for a loan, it is still necessary for both members to sign the Pension Loan Application.

The application contains PLS information and provision to supply information essential  to determining eligibility as follows:

• property/ies nominated to be included as security against the PLS debt;

• the current interest rate applicable on the loan;

• a "guaranteed amount" (if any) to be excluded from the value of secured assets available for settlement of the loan;

• that a charge will be placed against any of the person's property used as security for the loan and forms the contract for the loan; and

• the rate of loan to be paid each fortnight.

Financial Hardship Provisions

47.The availability of the pension loans scheme will not preclude consideration under the hardship provisions.  In some cases where a person applies for payment under the loans scheme, it may be appropriate to first consider whether there is any additional entitlement under the hardship provisions.  Payment however can not be made under both the Hardship Provisions and the PLS.

Revised PLS working arrangements

48.The administration of the PLS consists of the following tasks:

• interview clients;

• accept claims for PLS;

• perform all necessary data collection;

• arrange initial valuations by AVO;

• instruct the Australian Government Solicitor to undertake Titles searches, to secure the debt by arranging placement of a Notice of Charge over the property and to remove the charge when the debt is to be recovered;

• update PLS clients records on the CDB;

• maintain and update PLS debts on the Excel Spreadsheet developed for that purpose; and

• obtain annual valuations by the AVO;

• notify PLS participants every six months of the status of their debt; and

• effect recovery of the PLS debt.

49.Location of the area/s to accept claims, process claims, process variations and manage the debt will be determined at State level.

REVIEWS

AVO Valuations

50.Property valuations are undertaken without cost to the client.  A valuation of the real estate used as security on the loan should be conducted at grant and annually thereafter through the AVO.   A check should be made following the revaluation to ensure that the PLS recipients have not exceeded their total loan amount limit and are therefore still entitled to ongoing payments under the scheme.

Reviews

51.Upon completion of departmental or pensioner initiated reviews, the appropriate section in each State Office administrating the loan debt should be advised of any changes in income and/or assets and any resultant variations in pension.  Any variations in pension entitlement (other than Amending Legislation increases for pensioners requesting 'top ups' to maximum rate) will necessitate adjustments to the loan amounts recorded on the loan payments spreadsheet administered by the relevant section in each State.

52.Where a participant in the scheme does not qualify for an assessed rate of pension (ie does not receive a pension due to their income or assets exceeding the maximum allowable limits) but still qualifies for a PLS loan (ie only exceeds maximum allowable limits for income or assets but not both), they should be advised to notify the Department if both their income and assets exceed those maximum allowable limits.  If both maximum allowable limits are exceeded then PLS eligibility ceases.  If it is likely that a pensioner might exceed both limits, an annual advice should be forwarded to the person to reflect the increasing limits.

DEBT RECOVERY

53.A person may repay all or part of the debt and accrued interest at any time, if he or she wishes to do so.  A debt under the pension loans scheme is not normally recoverable until after the death of the debtor.  However, in some cases, recovery may be sought before the debtor's death (eg. where a person wishes to sell the asset the charge is on).

Marriage

54.If a pensioner becomes a member of a couple, a review based on the new circumstances will be necessary to establish continuing entitlement to any payment of pension under the Scheme.  Payment under PLS will need to be suspended until the new member of a couple signs a Pension Loan Application.  The suspension can then be lifted and payment resumed to one or both members of the couple if continuing eligibility is established and a valid application by the new partner is made.

Separation

55.In the event of the separation of a couple with a debt under the PLS, a full review of pensioners' circumstances is required.  The review will need to focus on:

• whether the asset securing the debt is to be affected by any property settlement;

• what impact this may have on continuing eligibility for payment under the Scheme; and

• what impact this has on recovery of the debt.

56.If the separation is permanent, the debt may be recovered when the property settlement occurs or at an appropriate time dependant upon the circumstances of the case (ie. the pensioner may wish to use the sale proceeds to purchase another home).

57.If the pensioner/s decides to relocate and their principal residence is the secured asset, the person's entitlement must be reassessed to decide whether it is appropriate to allow transfer of the charge to a new property.  This can only occur where there is no gap between the sale of the old property and the purchase of the new property (ie we can not release the charge on the old property until we are able to place a charge on the new property).  This will depend on the value of the new property offered as security.  If the new property offered is a lower value, discretion exists at any time to seek a partial or full recovery of the loan dependent on the circumstances.

58.Each of the separated persons will need to qualify for payments in their own right if they wish to continue in the Scheme.

Death of a PLS debtor

59.If a member of a couple receiving a pension loan payment dies, any payment made under the PLS is not included as part of the bereavement payment.

60.If a single pensioner dies and there is an outstanding debt at the time of the pensioner's death, the Department will usually enforce the charge on the real estate and recover the debt immediately
61.If there is a surviving partner, that person may choose to repay the loan debt at any time by making repayments or by withholding of an amount from any actual pension entitlement.  If the surviving partner is entitled to loan payments and wishes to continue receiving them, payments will continue and recovery of the debt may be deferred until the death of the surviving partner.  If the surviving partner is not qualified to receive payments under the Scheme as they are below pension age, the loan debt may be recovered after the bereavement period.  However, discretion exists to phase, delay, or accept partial recovery particularly where the family home is involved.

Discretion to recover

62.Where the amount of the debt is recovered from a person's estate, it is expected that the full amount of the debt should normally be repaid by the executor/executrix of the estate in a lump sum.  However, the manner of recovery can be negotiated between the Commission and the executor/executrix.

63.Subsection 52ZG(2) VEA prescribes two sets of circumstances in which the Commonwealth is not entitled to recover a PLS debt immediately after a person's death:

• where a member of a couple dies and the partner receives bereavement payment, the debt can only be recovered after the last pension payday on which an amount of bereavement payment is payable; or

• where a member of a couple dies and the partner (who has turned 551/2 years if a woman, or 60 years if a man) has use of all or part of the assets subject to the charge, the debt can be recovered only after the death of the partner.

64.Notwithstanding the above restrictions to recovery, subsection 52ZG (4) VEA gives the Commission the discretion to seek recovery prior to a person's death.  The legislative authority for this action is contained in section 52ZH VEA.  Such instances include a loan recipient who sells or disposes of an asset which is subject to a charge.

Recovery limits

65.Where the Department is given prior notification of the sale or disposal of a property, the maximum amount of debt repayable by a person is limited by the guaranteed amount.  Where the value of the estate less the guaranteed amount exceeds the value of the loan, only that remaining portion of monies after the guaranteed amount is deducted can be recovered.

For Example:

The value of a person's estate is $125,000 and he dies owing the Commonwealth $70,000 under the Pension Loans Scheme.  The guaranteed amount has been approved at $60,000.  The full amount owing can not be recovered as this would leave only $55,000 left in the estate which is less than the guaranteed amount.  Therefore only $65,000 would be recovered leaving a guaranteed amount of $60,000 in the estate.

TAXATION

66.The Australian Taxation Office (ATO) recently withdrew its taxation Ruling number IT2413 in relation to payments under the PLS and substituted Taxation Determination TD 96/14.

67.TD 96/14 now acknowledges a change in view from that outlined in TR 2413.  Accordingly, amounts received under the PLS are not assessable income as payments under the PLS are in the nature of loans.  This view applies for both the original and revised PLS.  TD 96/14 is retrospective in its application.  However, as the Department previously deducted from the loan balance any additional tax liability incurred by a pensioner as direct result of participation in the PLS, no retrospective action should be required in respect of participants under the original scheme.  Existing files should be checked to ensure that this procedure has been followed.

68.PLS payments are recorded as manual rates cases on the Client Data Base.  The Payment Master File makes no distinction between the PLS payment and the service pension/ISS component recording the entire payment as either service pension or ISS.  At least one month prior to the end of each financial year the area managing the debt should flag PLS cases for the attention of the tax clerk, who should ensure automatic group certificates for PLS participants are extracted and a manual group certificate issued.   Only the taxable component of their actual pension entitlement (excluding any loan component) should be recorded on the replacement group certificate.

69.  The information held on the Tax Data base on pay 26 (the last payday for the financial year) is used in the production of Statements of Pension therefore all adjustments must be made by the relevant cutoff date for that payday.

70.The Department is no longer required to:

• provide the ATO with details of the loan; and

• deduct from the accrued loan debt any extra tax liability incurred by the pensioner as a result of payment under the pension loans scheme.

APPEALS PROVISIONS AND OBLIGATIONS

71.As applies to the original scheme, pensioners participating in the revised PLS do not have any statutory appeal rights or obligations imposed on them under the VEA.

CLIENT CONTACT

Publicity and Advice

72.VAFIS officers will be available to interview existing and new PLS pensioners providing them with the necessary information regarding the scheme to assist pensioners in making a decision.  Participants in the scheme are also encouraged to seek independent financial advice prior to commencing in the scheme.

Contact with existing clients

73.Those existing clients currently receiving payment under the existing PLS will be contacted by VAFIS officers and asked whether they wish to consider transferring to ongoing payments under the new scheme.  Eligibility to transfer to the new scheme will depend on a combination of factors such as the balance currently outstanding as a loan, the length of current participation in the scheme, accrued interest, the age of the applicant(s), the value of the real estate owned and the level of the Guaranteed Amount, if any, that the pensioner wishes to nominate.

74.Any current PLS recipient who wishes to transfer to the revised Scheme will have their outstanding debt transferred to that Scheme.  Interest will be calculated at the rate applicable to the revised scheme from the first pension payday after the request is lodged.  Any pensioner wishing to remain under the original scheme will continue to have the debt and loan administered under those original provisions (Transitional and savings provisions of Schedule 5 section 6(3) VEA refers).

AUDIT REQUIREMENTS

75.Finance Direction 23D of the Department of Finance's Finance Manual, requires the Departmental Secretary to provide details of loans and liabilities outstanding at the end of each financial year to the Secretaries of the Department of Finance and Treasury.  The outstanding balance of debts under both the old and new Pension Loans Scheme should be forwarded on the spreadsheet which has been developed for this purpose to the Financial Statements Co-ordinator in each State office in order that a report for the previous financial year can be supplied to the Secretary, Department of Treasury by 31 July each year.

CONCLUSION

76.Should you have any queries concerning aspects of this instruction, please contact Tim Adams, telephone on (03) 9284 6306, fax (03) 9284 6794 or E-Mail V-B-PDI1.

PETER REECE

DIVISION HEAD

COMPENSATION AND SUPPORT

ATTACHMENT A

AGE COMPONENT AMOUNT TABLE
Column 1 age	Column 2 age component amount	Column 1 age	Column 2 age component amount
55 and under 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74	$1,710.00 $1,780.00 $1,850.00 $1,920.00 $2,000.00 $2,080.00 $2,160.00 $2,250.00 $2,340.00 $2,430.00 $2,530.00 $2,630.00 $2,740.00 $2,850.00 $2,960.00 $3,080.00 $3,200.00 $3,330.00 $3,460.00 $3,600.00	75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 and each year later	$3,750.00 $3,900.00 $4,050.00 $4,210.00 $4,380.00 $4,560.00 $4,740.00 $4,930.00 $5,130.00 $5,330.00 $5,550.00 $5,770.00 $6,000.00 $6,240.00 $6,490.00 $6,750.00 $6,750.00

The figures in Column 2 are multiplied by each multiple of $10,000 held as secured assets (ie $156,500 of secured assets equals 15 - rounded down).

Therefore a pensioner with the secured assets of $156,000, aged 71 would have a maximum loan amount limit of 15 x $3200 or $48,000.

ATTACHMENT B

LETTER TO AGS REQUESTING PLACEMENT OF NOTICE OF CHARGE

Department of Veterans' Affairs

PO Box [123]

[CAPITAL CITY   STATE   POSTCODE]

[Date]

Australian Government Solicitor

Attorney-General's Department

PO Box [123]

[Capital City   State   Postcode]

Dear Sir/Madam,

VETERANS' ENTITLEMENTS ACT, REGISTRATION OF CHARGE UNDER SECTION 2ZF

I advise that the client named hereunder has lodged a request in accordance with section 52ZD of the Veterans' Entitlements Act 1986 (the Act) to participate in the Pension Loans Scheme.

Section 52ZF of the Act provides for the registration in certain circumstances of a charge in favour of the Commonwealth over the assets of the applicant.  Under section 52ZL, if assets are subject to a charge under section 52ZF, the Commission may lodge a notice in writing of the charge with the appropriate officer of the State or Territory in which the assets are situated.

Accordingly, I instruct you to register a charge in favour of the Commonwealth to secure the Commonwealth's interests over the property listed below.

Client's name(s):........................................................................................................................

Address of property:................................................................................................................

Description of Lot:....................................................................................................................

County:.....................................................................................................................................

Parish:......................................................................................................................................

Please note that further instructions from the instructing officer should be sought if this task involves any unusual complexity.  If you require any additional information, please do not hesitate to contact me on Ph. ...........................

I would be grateful for confirmation in writing that the above charge has been registered for retention on our files.  Please address correspondence to the "Pension Loans Scheme Officer".

Yours sincerely

[SIGNATORY]

for DEPUTY COMMISSIONER

ATTACHMENT C

NOTICE TO PLS PARTICIPANT REGARDING CHARGE COSTS

PENSION LOANS SCHEME

DEPARTMENT OF VETERANS' AFFAIRS

GPO BOX [123]

[CAPITAL CITY  STATE  POSTCODE]

Reference:  [Veteran's Reference no.]

Contact:     [Contact name]

Telephone:  [Contact no.]

[Date]

[Client's name: Title, first name, surname]

[Client's address]

Dear [Client's name]

I am writing to you about your payment under the Pension Loans Scheme.  As advised in the letter to you dated [date of grant letter], the Repatriation Commission has placed a charge over your property at [address of property secured] to provide security for your loan.

The Australian Government Solicitor, acting on behalf of the Commission, has advised that the costs involved in registering this charge are $ [amount].  This amount will be added to your Pension Loan debt unless you would like to pay us these costs upfront.  If so, please contact [Examiner's name] on the above number or if you have any questions about this matter.

Yours sincerely

[SIGNATORY]

for DEPUTY COMMISSIONER

ATTACHMENT D

SIX MONTHLY ADVICE TO PLS PARTICIPANTS OF THE PLS DEBT AMOUNT

Department of Veterans' Affairs

PO BOX  XYZ

CAPITAL CITY  STATE  POSTCODE

Reference: [Veteran's reference no.]

Contact: [Contact name]

Telephone:  [Contact no.]

[Date]

[Client's name: Title, first name, surname]

[Client's address]

Dear [Client's name]

I am writing to you about your payments under the Pension Loans Scheme.

The total amount of all the payments made to you from [date of commencement of loan] to

[last pension payday in June or December] under the Pension Loans Scheme is $[amount].

An additional $[amount] of lgal costs have also been incurred.

Interest on the loan payments is currently compounding fortnightly at XX% per annum.  Total interest accrued up to and including [the day before the first pension payday in July or January] is [amount].

[A total of $[amount] has been repaid on the loan.]

       insert if applicable

The total debt including interest {less repayments of $[amount]} is therefore $[amount].  A fortnightly breakdown of these details is attached.

The Pension Loans Scheme is a voluntary arrangement and you may withdraw whenever you wish.  If you do so, the accumulated debt will continue to attract interest until it is repaid.  You may repay the loan in full or in part or change the loan amount at any time.  Your total payment under PLS inclusive of any payments under the ordinary income and assets test is $[amount].

You are reminded that it is in your best interest to notify the Department immediately of any changes to your circumstances such as:

a change of address;

a change of bank details for your payment;

the disposal of any assets; or

a change in your marital status.

Please contact [Examiner's name] on the number above if you have any questions about this matter.

FREEDOM OF INFORMATION

Under the Freedom of Information Act 1982 you may seek access to your personal files or any other non-exempt documents.  You may also inspect the manuals, guidelines, rules and instructions which may be used by officers in making decisions relating to members of the public.

For further details contact the Freedom of Information Section on [telephone no.] or if you are calling from outside the metropolitan area, dial our Toll-free number [telephone no.].

Yours sincerely

[SIGNATORY]

for DEPUTY COMMISSIONER