DATE OF ISSUE: 22 June 2007
Changes to Deductible Amount
Purpose |
This Departmental Instruction explains changes occurring from 1 July 2007 to the calculation of the deductible amount for defined benefit income streams. The changes affect the amount of income that may be held in assessing the rate of income support pensions payable under the Veterans' Entitlements Act 1986 (VEA) and the Social Security Act 1991 (SSA). |
Legislation |
From 1 July 2007, the definitions of deductible amount in the VEA and the SSA will change. The changes result from the Plan to Simplify and Streamline Superannuation, an initiative of the 2006-2007 Budget. Item 16 of Schedule 9 of the Tax Laws Amendment (Simplified Superannuation) Act 2007, Act No 9 of 2007, amends the VEA definition of deductible amount to reflect changes made to tax law, including the repeal of the provisions under which the deductible amount was calculated within the Income Tax Assessment Act 1936 (ITAA 1936), and the introduction of a tax free component in the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax (Transitional Provisions) Act 1997 (IT(TP) 1997). The tax free component under the tax law will be the deductible amount under the VEA. Similar amendments are also being made to the SSA. Further amendments are included in the Families, Community Services and Indigenous Affairs (Child Support Reform Consolidation and Other Measures) Bill 2007 (FaCSIA (Child Support) Bill). The Bill passed Parliament on 12 June 2007 and is expected to receive Royal Assent and become law prior to 1 July 2007. |
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Deductible amount overview |
The deductible amount is relevant to the calculation of assessable income from defined benefit income streams for the purposes of income support pensions paid under the VEA and the SSA. The assessable income from defined benefit income streams is determined by subtracting the deductible amount from the gross income paid from the income stream. The deductible amount does not affect the pension assets test, disability pensions, war widow(er)'s pension or payments under the Military Rehabilitation and Compensation Act 2004. The deductible amount as currently defined in subsection 5J(1) of the VEA refers to an amount calculated under subsection 27H(2) of the ITAA 1936. The changes to the ITAA 1936 repeal subsection 27H(2). The VEA definition will instead refer to tax free components calculated under Subdivision 307‑C of the ITAA 1997 or under section 307‑125 of the IT(TP) 1997 for certain cases. Similar amendments will be made to the SSA. |
Forms changes |
Relevant forms will be amended to reflect the changes occurring on 1 July 2007. The revised forms will be available on the intranet from 1 July 2007. A draft of the revised defined benefit income stream schedule is at Attachment 1 to illustrate the information defined benefit income stream providers will be required to supply in relation to the changes from 1 July 2007. |
Policy amendments |
Complete details of the policy changes including examples will be available from 1 July 2007 in the CLIK Policy Library at Part 10, Chapter 5. Special provisions regarding the date of effect for the deductible amount are described at Part 11, Chapter 1, Section 6. You and Your Pension and relevant factsheets have also been reviewed and updated as required. An updated VEA compilation is expected to be available in the CLIK legislation library in the first week of July 2007. |
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Systems changes |
A summary of the systems changes is provided at Attachment 2. |
Advices |
Any letters generated as a result of batch processing will only state that the increase is due to a change in the pensioner's circumstances. A Questions and Answers document is included at Attachment 3 to assist in responding to any questions arising from these letters. Where a manual reassessment is undertaken, the free text paragraph should be used to explain the reason for the change in the pension rate. |
Publicity |
No separate publicity is planned regarding these changes, however, there is ongoing publicity about the Plan to Simplify and Streamline Superannuation generally, under the banner “Better Super.” |
Training |
David Turner of the Operational Policy Implementation Team in Income Support Service Delivery will be delivering training in mid-June. |
Contact officer |
The contact officer for:
|
Jeanette Ricketts — Peta Stevenson — John Sadiek
National Manager — National Manager — National Manager
Income Support and Business Modernisation &Income Support
Aged Care Policy — Integration — Service Delivery
June 2007 — June 2007 — June 2007
Attachment 1
Draft revised defined benefit income stream schedule
Attachment 2
Systems changes
Defined Benefit Income Streams screen |
A new data item has been added to the Defined Benefits Income Streams Screen. The new data item is the Deductible Amount Calculation Method. The deductible amount calculation method is selected from a pre defined pick list. The available options in the pick list can vary depending on the date of the worksheet. Worksheets with a date of effect before 1 July 2007 will only have the options of No Deductible Amount and Old Pre 1 Jul 07 Rules. |
No conversion of existing deductible amounts |
Existing deductible amounts will not be automatically converted to one of the calculation method types. The first time a worksheets is created after 1 July 2007 the deductible amount calculation method will default to Old Pre 1 Jul 07 rules and it should be updated if appropriate. There are a series of Information and Edit message to assist users to data collect correctly. |
Other systems changes |
Print Authority and VIEW have been changed to include the Deductible Amount Calculation Method as part of the assessment items displayed. Changes have been made to $Fort program to report out clients when the aged 60 trigger event occurs. Changes have also been made to the Death Processing System. |
Attachment 3
Questions and Answers – Why did my pension change?
Why has my pension increased from 1 July?
Your pension may have increased from 1 July for a number of reasons.
Scenario 1 – Assets tested
The assets value limits (the amount of assets you can have before your pension starts to reduce) increased from 1 July.
If your pension was reduced because of your assets, the changes mean that your pension rate will have increased.
Scenario 2 – Income tested
The income free area (the amount of income you can receive before your pension starts to reduce) increased from 1 July.
If your pension was reduced because of your income, the changes mean that your pension rate will have increased.
Scenario 3 – income from a defined benefit income stream in the assessment
Your pension may have increased as a result of changes to the assessment of income from defined benefit income streams. The changes commenced from 1 July.
What are the changes from 1 July?
From 1 July, the deductible amount for defined benefit income streams is calculated in a different way. The deductible amount is calculated by income stream providers and notified to DVA. The new rules may result in an increase in your rate of pension if you had not previously notified us of your deductible amount. The new rules for calculating the deductible amount are contained in the tax law.
Optional – if deductible amount calculation method is 'New 1 Jul 07 Rules'
Your income stream provider can explain to you how your deductible amount was calculated.
Why has my pension reduced from 1 July?
Your pension has reduced from 1 July because we received notification from your income stream provider of the new income amount. The higher income amount from your income stream increases your assessable income, and this means your rate of pension is reduced.
Optional – new deductible amount provided
We have also taken into account your new deductible amount as advised by your income stream provider. The new deductible amount reduces the increase in your assessable income.
Optional – no deductible amount provided
We currently do not have a deductible amount recorded for your income stream. The deductible amount may reduce your assessable income, resulting in an increase to your rate of pension. If your income stream has a deductible amount, you should let us know as soon as possible.
Why did I receive a letter saying my circumstances have changed?
We have updated our records following notification by your income stream provider of the deductible amount for your income stream. You had not previously notified that you had a deductible amount.
The deductible amount is subtracted from the gross income paid by the defined benefit income stream. Previously, we assessed the full amount of the defined benefit income stream as income, but we are now assessing the net amount after subtracting the deductible amount. This means that you will now be paid a higher rate of pension because your assessable income has reduced.
I receive a defined benefit income stream but my pension has not increased. Why not?
Scenario 1 – new deductible amount not yet notified by income stream provider.
We have not yet been advised by your income stream provider of the new deductible amount. We have continued to use our existing information to calculate your rate of pension in the meantime.
Your pension rate will be updated when your income stream provider notifies us of your new deductible amount. Whether this affects your rate of pension will depend on how much the new deductible amount is. If your rate of pension changes as a result of the new deductible amount, we will send you a letter to notify you of the new rate.
Scenario 2 – saving provision applies, old rules method used to calculate deductible amount.
The changed rules mean that the deductible amount calculated under the new rules is sometimes lower than it was under the old rules. Your deductible amount under the new rules would have been lower than under the old rules. Therefore, we have used the amount calculated under the old rules to ensure that your rate of pension is not reduced.
We will continue to recalculate your deductible amount under the new rules also, and if it becomes higher than under the old rules, we will switch your assessment over to use the new rules.
Scenario 3 – maximum rate pensioner.
You are already receiving the maximum rate of pension. The changes do not increase the maximum rate of pension.
We will continue to update your income from the defined benefit income stream, and the deductible amount, to ensure that your income support pension continues to be paid the correct rate of service pension.
Scenario 4 – increase in gross pension payment matches increase in deductible amount.
Your pension has been reassessed taking into account the updated income paid by your income stream and the updated deductible amount. The increase in your deductible amount and the increase in your income from the defined benefit pension matched exactly this time, so your rate of pension remains unchanged.