C08/1997 GUIDELINES FOR EXEMPTION OF FINANCIAL ASSETS FROM DEEMED INCOME RULES

Purpose

The purpose of this instruction is to outline the guidelines for exemption of financial assets from the deemed income rules.

Page

Subject

3

Background

3

Main Purpose of Instruction

4

Guidelines for General Exemptions

5

Treatment of Companies and Financial Institutions in Financial Difficulty

5

Church and Charitable Institutions Exemption Guidelines

6

Unlisted Property Trusts Exemption Guidelines

7

Saved Loans Exemption Guidelines

8

Hardship Guidelines

9

Income and Assets Test Assessment

9

Delegations

10

Determinations

11

CMS Registration Procedures

11

PIPS Recording Procedures

12

Monitoring Exemptions

13

Further Information

14

Attachment A

15

Attachment B

16

Attachment C

18

Attachment D

20

Attachment E

21

Attachment F

Background

From 1 July 1996 the deemed income rules were extended to all financial assets as detailed in Departmental Instruction C 44-96.  Under previous (pre 1 July 1996) deemed income rules, the Minister could determine that specified money of a person or class of persons, could be disregarded in calculating a person's income from:

• available cash or deposit money held in a financial institution; and

• specified loans or a specified class or loans.

With the extension of deemed income rules to all financial assets the existing legislation and the delegations have been repealed.  The existing exemption guidelines will however, continue and be extended to all financial investments under new section 46L.  Note:  The deemed income exemption guidelines do not apply to deprived (or gifted) assets.

Main purpose of Instruction

The main purpose of the DI is to describe the guidelines approved by the Minister for exemptions from the deemed income rules.

The guidelines approved by the Minister are for:

• general exemptions (ie for specified financial investments or a specified class of financial investment); and
• special exceptions to the above.

Decisions relating to the general exemption guidelines will be administered by National Office.

Under the Special Exceptions are guidelines for:

• Church and Charitable Institutions;
• Unlisted Property Trusts for which there was a restriction on access in place at 30 June 1996; and
• Personal Loans made before 22 August 1990.

Decisions relating to the guidelines for Church and Charitable Institutions  will be administered by National Office.

State Offices will administer decisions in relation to individual requests for exemptions under the guidelines for Unlisted Property Trusts for which there was a restriction on access in place at 30 June 1996 and for Personal Loans made before 22 August 1990.  Any other requests for exemption will be administered by National Office.

Exemption Principles

The underlying principle for determining an exemption from the deemed income rules, is that the decision must not undermine the policy intent of the deemed income rules.

Guidelines for General Exemptions

In keeping with the underlying principle of deeming, the general exemption guidelines approved by the Minister are as follows:

An exemption from the deemed income rules will be granted where

• the investment(s) is not earning income; and

• there is no access to capital; and

• the reason for the inaccessibility must be due to a legal impediment by a third party (e.g. an Australian Securities Commission freeze.  A freeze instigated by the fund manager or investor would generally not be acceptable); and

• the failure was unforeseeable when the investor obtained the investment.

Explanatory Notes

•                                          Generally under the guidelines, the poor performance of an accessible investment is insufficient grounds for exemption from the deemed income rules.  Basically, if there are alternative options such as redemption and reinvestment of funds exemptions are unlikely to be granted.

•                                          Requests for general exemptions should be forwarded to Eddie Bolanac, Manager, Investment Database Unit (IDU) in NSW on (02) 9213 7875.

•                                          The general exemption guidelines are to be used when determining exemptions for specified financial investments or a specified class of financial investments. The general exemption guidelines are not to be used to determine individual exemptions.  However, when an individual exemption request is received, other than for Unlisted Property Trusts and Saved Loans, the request must be considered in terms of the investment product or institution and should be forwarded to Eddie Bolanac at the IDU.

Treatment of Companies and Financial Institutions in Financial Difficulty

The following policy clarifies the treatment of Companies and Financial Institutions in Financial Difficulty under the Income and Assets Test:

•                                          assessment of actual income (if exemption granted) is suspended only when the company is placed in liquidation as it must be evident that no further interest will be paid on investments;
•                                          assess investments at a reduced asset value in accordance with information received from the Liquidator on likely return to investors (if any); and
•                                          if it is possible that investors could receive a full return, maintain full asset value.

Special Exceptions

The table below describes the special exceptions to the above guidelines:

Investment

Exemption Treatment

Church and Charitable Institutions  Exemption Guidelines

• Current exemptions to remain in place.

• New post 1 July 1996 requests to be treated under the pre-existing guidelines.  The guidelines are as follows:

Generally, the fund had to satisfy certain conditions before an exemption would be granted:

• It must be held by a church or charitable organisation;

• Used for capital expenditure within Australia and limited to eligible capital works, ie used for:

-  the purchase of land and the construction, extension or refurbishment of buildings including

-  those funds that use a combination of investment strategies provided that at least 50% of the deposits and loans and the income is used for capital expenditure on capital works.

• In the case of loans that are not paid into a pooled development fund, only that part of the loan that is used for capital expenditure on eligible     capital works be exempt.

Explanatory notes

• Any requests for exemption after 1/7/96 may be assessed under Section 46L of the VEA using the existing Church and Charitable Institutions guidelines for exemption.

Unlisted Property Trusts Exemption Guidelines

Individual exemptions will be granted for unlisted property trusts for which there was a restriction on access in place at 30 June 1996 if:

•                           the investor can demonstrate hardship; and
•                          reasonable action to maximise income has been taken

Explanatory Notes

• Exemptions under this guideline may only be considered for Unlisted Property Trusts that had a restriction on access in place at 30 June 1996.  These requests must be considered on a case by case basis. Exemptions may only be granted for individual pensioners.
• Any other Unlisted Property Trusts can  be considered under the  general exemption guidelines.
• Eddie Bolanac, Manager, Investment Database Unit (IDU) in NSW on (02) 9213 7875 should be contacted if the nature of the investment is difficult to determine (ie. where you are not sure if the investment is an Unlisted Property Trust for which there was a restriction on access in place at 30 June 1996).

Saved Loans Exemption Guidelines

• No general exemptions will be granted for saved loans (made before 22 August 1990); however

• Individual exemptions will be granted on personal loans made before 22 August 1990 to:

(i)   a family member;

(ii)  a private company of which the pensioner or family member have a controlling or substantial interest; or

(iii) a family trust which the customer or family member have a controlling or substantial interest;

• only if:

•                                the investor can demonstrate hardship; and
•                                reasonable action to maximise income has been taken.

Explanatory Notes

• Exemptions for saved loans must be considered on a case by case basis and may only be granted for individual pensioners based on their personal circumstances. 
• As indicated in the guidelines only certain personal loans can be considered. 
• Loans other than the personal loans detailed in the guidelines cannot be considered for exemptions.
• A saved loan cannot be given a general exemption.
• Prior to considering an exemption for a saved loan it may be appropriate to consider whether the loan is “irrecoverable”.  Guidelines for determining whether a loan is irrecoverable are contained in the GOSP.

•                                          If a loan is irrecoverable no exemption is required because the loan no longer has a value

Definition of Hardship

The definition of hardship is where a pensioner has a lower "total income" than the maximum rate of income support pension that could be paid to a pensioner who holds either of the following financial assets:

• a personal loan made before 22 August 1990; or

• an investment in an unlisted property trust for which there was a restriction on access in place at 30 June 1996

Total Income

The table below describes the calculation of total income:

Step

Action

1

Work out the income (if any) actually received from the investment in respect of which the exemption is being claimed;

2

Add deemed income from the pensioner's remaining financial assets, other than the investment in respect of which an exemption is being claimed.

3

Add any income assessed from sources other than financial assets.

4

Add the pensioner's current rate of pension payment.

Explanatory Notes

•                                          Compare the total of steps 1 to 4 (total income) to the maximum rate of pension that could be paid to the pensioner (including rent assistance if applicable) to determine if the pensioner is in hardship.

•                                          Disability pension is to be included in the calculation of total income (this is consistent with assessment under the financial hardship provisions contained in the VEA).

•                                          When determining hardship for a veteran and spouse combine their total income and divide by 2 when comparing total income to the maximum rate of income support that could be paid to the pensioner.

•                                          If an exemption has been granted where a pensioner satisfies financial hardship it may be appropriate to review the pensioner's financial circumstances at a later date to determine if the pensioner is still in financial hardship.

Income Assessment

If a product is determined to be exempt from the deemed income rules, actual income is held in the assessment.

Asset Assessment

Exemption from the deemed income rules does not mean there is an exemption from the assets test.  The asset value of a financial asset exempted from the deemed income rules, will continue to be assessed under the assets test.

Previous Delegations

From 1 July 1996, the previous delegated authority to exempt certain products from the deemed income rules was repealed.

New Delegations

The Minister has approved delegations for the following decisions:

1. If the Minister for Social Security has made a section 1084 SSA determination to exempt a product or institution from the deemed income rules; and

2. Where an individual pensioner requests an exemption due to his or her individual circumstances where a pensioner is invested in an Unlisted Property Trust for which there a restriction on access was in place at 30 June 1996 and for certain personal loans made before 22 August 1990.

Under category 1, it should be noted that if the Minister for Social Security has rejected an application for exemption, the power to determine section 46L VEA is not delegated.

General exemptions which have not been determined by the Minister for Social Security are not delegated.  The Minister will consider such requests.

Decisions that fall under category 1 are delegated to National Office due to the National implications of the decision.  These requests should be forwarded to Eddie Bolanac, Manager, Investment Database Unit (IDU) in NSW on (02) 9213 7875.

Decisions under category 2 are delegated to the State Offices.

Notification of delegates

All State offices should have received the relevant delegations for determining exemptions.

Extent of delegations

The delegations specify that the delegated officers in each state can only make decisions where an individual pensioner requests an exemption due to his or her individual circumstances.  Individual exemptions may only be considered where a pensioner has an investment in an unlisted property trust for which there was a restriction on access in place at 30 June 1996 or a personal loan made before 22 August 1990.

Any other requests for exemptions should be referred to Eddie Bolanac, Manager, Investment Database Unit (IDU) in NSW on (02) 9213 7875.

Wording for determinations

Attachments A and B contain the wording for a determination for an exemption due to individual circumstances.

Determinations only need to be completed where an exemption is being granted.  Where a determination is being granted a letter containing the details of the investment exempted will need to be sent to the pensioner.  Sample letters are at Attachment E and F.

If an exemption is not being granted, no determination is required and a letter detailing the reasons and calculation of hardship is sufficient.  Sample letters are at Attachments C and D.

A copy of a decision should be retained on record.

Right of Review

There is no right of review for a determination made under section 46 L of the VEA.  Staff must ensure that pensioners are not inadvertently advised that they have a right of review to the AAT.

Therefore, the sample letters at Attachments C and D do not contain a right of review paragraph.

CMS Registration

As an interim measure, individual exemption applications should be registered using the 'PENSIONER INITIATED REVIEW' Classification, Item 10, with the attribute set to 'COMPLEX'.

A Section 46L Classification will be added to CMS at a later date.  State Offices will be advised when the new classification becomes available.

General Exemptions Determined by National Office

If the investment is a managed investment, share or account which appears on the DVA Investment Database, the IDU will set the national exemption indicator to 'Yes' and select all clients holding the investment for reassessment using the Fortnightly Processing Run.

As these investments can be monitored via the DVA Investment Databases, the IDU will update the actual dividend, rate and/or price details on the investment to ensure that all clients are reassessed using the same details.

If the investment is a loan, bond, debenture, bullion or other financial asset, the 'Failed Financial Institutions Register' (located on the General) will be updated with the appropriate exemption, income, asset and effective date details.

As these investments do not appear on the DVA Investment Databases, processing staff must manually edit the investment on PIPS PC and re-set the 'Exemption' indicator from 'No' to 'Yes', updating actual interest rate details and the current asset value.

Individual Exemptions Determined by a State Office

If the investment is an unlisted property trust for which there was a restriction on access in place at 30 June 1996, processing staff must manually edit the investment on PIPS PC and re-set the 'Exemption' indicator from 'No' to 'State'.

As the investments can be monitored via the DVA Managed Investment Database, processing staff must contact the IDU to advise that they intend to grant an individual exemption and provide the product details.  The IDU will then ensure that the Managed Investment Database is updated with the latest actual dividend and price details.

If the investment is a personal loan made before 22 August 1990, processing staff must manually edit the investment on PIPS PC and re-set the 'Exemption' indicator from 'No' to 'State', updating actual interest rate details and the current asset value of the loan.

Church and Charitable Exemptions Determined by National Office

For loans or deposits made to church and charitable ogranisations, the 'Church and Charitable Institutions Register' (located on the General) will be updated with the appropriate exemption, income, asset and effective date details.

As these investments do not appear on the DVA Investment Databases, processing staff must manually edit the investment on PIPS PC and re-set the 'Exemption' indicator from 'No' to 'Yes', updating actual interest rate details and the current asset value.

State Office Register

State Offices must maintain an Deeming Exemption Applications Register to ensure that applications can be readily monitored.  As the Minister has delegated certain decisions in relation to this issue it would be appropriate to be able to report to the Minister on the exemptions granted in order to ensure that the delegation is being correctly exercised and to justify the continuation of the delegated authority.

Attachment A

Sample Determination:  Exemption of unlisted property trust due to individual circumstances.

Attachment B

Sample Determination:  Exemption of saved loan due to individual circumstances.

Attachment C

Sample Letter:  No exemption for an unlisted property trust.

Attachment D

Sample Letter:  No exemption for a saved loan.

Attachment E

Sample Letter:  Exemption Granted for an unlisted property trust.

Attachment F

Sample Letter:  Exemption Granted for a saved loan.

Contact Officer

Any further queries relating to the policy aspects of this DI should be directed to John Bruce, Business Administration Section, National Office

(06) 289 6441, LAN C-C-BA-09.

Eddie Bolanac, Manager, Investment Database Unit (02) 9213 7875, should contacted in relation to issues as indicated in the DI.

Income actually received from investment in respect of which the exemption is being claimed

nil

Deemed income from your remaining financial assets

Income assessed from sources other than financial assets (e.g. superannuation,  earnings, disability pension)

Your current rate of pension payment (combined)

Total Income (combined)

Total Income (per person)

Income actually received from loan in respect of which the exemption is being claimed

nil

Deemed income from your remaining financial assets

Income assessed from sources other than financial assets  (e.g. superannuation, earnings, disability pension)

Your current rate of pension payment (combined)

Total Income (combined)

Total Income (per person)