C08/2001 ENHANCE DEBT RECOVERY

Purpose

The purpose of this Departmental Instruction is to provide legislation, policy and procedural information with regards to the 1999/2000 Budget Initiative, Enhance Debt Recovery.

Start date

The changes commence on 1 July 2001.

JEANETTE RICKETTS

BRANCH HEAD

INCOME SUPPORT

Introduction

From 1 July 2001, changes to some of the debt recovery provisions in the Veterans' Entitlements Act 1986 (VEA) were introduced via the 1999/2000 Budget measure known as 'Enhance Debt Recovery'.

Note: similar changes to the social security law will affect age pensioners paid by DVA.

Background

Feedback and past experience has highlighted inequities with parts of the old debt recovery policy, including:

• Imposition of an administrative charge even where a debtor is making repayments; and

• Not having the legislative authority to recall funds that have been released after a person's death, or released to an incorrect bank account.

Aim of change

The aim of the changes is to overcome these difficulties by:

• Not imposing an administrative charge on a debtor who is making an effort to repay; and
• Ensuring that public monies are directed to those most in need, by being able to recover misdirected funds.

Who is affected?

Service pensioners and Income Support Supplement recipients and Age Pensioners paid by DVA are affected by the changes.

Application of admin charge

Prior to 1 July 2001, an administrative charge was applied under the VEA, when the debt:

• arose due to a breach of the VEA, such as failure to notify within the notification period; and
• was greater than $200; and
• was not repaid within 3 months after the person was advised in writing of the amount of the debt.

Note: there was no penalty interest provision under the VEA.

Amount of admin charge

• The administrative charge was a one off charge, calculated by adding $15 + 10% of the balance outstanding after 3 months.

• The admin charge could not exceed $515.

Example: if $250 was outstanding after 3 months, the admin charge calculated would be $40 (i.e. $15 + $25).

Age pensioners

Prior to 1 July 2001, penalty interest was imposed on age pensioners under the Social Security Act 1991 (SSA) when:

• The person was not in payment; and
• The person had not repaid the debt or entered into an agreement to repay the debt within a specified time frame.

Note: there was no administrative charge provision under the SSA.

Commencement date

The new rules commence on 1 July 2001.

New penalty interest

Penalty interest can be applied to debts if the debtor is no longer in payment and fails to enter into, or breaks an existing, repayment arrangement.

New admin charge

A one off administrative charge of $50 will be applied to debts that are liable to have penalty interest applied.

FI recall

DVA will have the authority to recall misdirected funds from financial institutions.

Who is affected?

The new rules apply to:

• service pensioners;
• income support supplement recipients; and
• age pensioners paid by DVA.

First notice

If a recoverable debt:

• has not been repaid; and
• hasn't been waived under paragraph 206(1)(b),

in order to recover the debt, Commission must write to the person.  The letter that has to be sent is called a 'notice' (e.g. this will be a daily advice sent to the person following, for example, a PIR that has resulted in an overpayment).

Legislative Ref: ss 205AAA(1).

Due and payable

The debt is due and payable on the 28 — th day after the date of the notice.

Example: A notice is issued on 2 March.  The debt is due on 30 March.

Legislative Ref: ss205AAA(2)

Further notice

A further notice may be issued if the:

• debt has not been wholly repaid; and
• person has not entered into an arrangement to repay the debt; or
• person has entered into an arrangement but has failed to make a payment.

This applies to a person who is not currently in payment.  In most cases, where a person is in payment, recovery would be effected via instalments of pension or by another method as agreed with the person and a further notice would not be required.

Legislative Ref: ss205AAA(3)

What's in a further notice?

A further notice must specify the following details:

• date the notice was issued (the date of the further notice);
• reason the debt was incurred;
• period to which the debt relates;
• amount of the debt;
• due date for payment;
• repayment options;

• contact details for inquiries;
• effects of penalty interest and administrative charge; and
• how penalty interest is calculated.

Legislative Ref: paragraphs 205AAA(3)(c) – (f)

When is a first notice a further notice?

If a first notice includes details about:

• effects of penalty interest and administrative charge; and

• how penalty interest is calculated,

it can be counted as a further notice.

Legislative Ref: ss205AAA(4)

Application

A person may be liable to pay penalty interest on a debt if the:

• person has received a 'further notice'; and
• person is not in receipt of pension, allowance or other pecuniary benefit under the VEA or social security law.

Legislative Ref: ss205AAB(1)

Liability – no arrangement to pay

A person is liable to pay penalty interest from and including the day after the 'final payment day':

• if the person has not entered into an arrangement, to pay the debt, on or before the final payment day; and
• they have been notified in writing about the effects of penalty interest.

Legislative Ref: ss205AAB(2)

Liability – arrangement to pay broken on or before final payment day

A person is liable to pay penalty interest from and including the day after the final payment day:

• if the person has entered into an arrangement to pay the debt; and
• they have been notified in writing about the effects of penalty interest; and
• if the person fails to make a payment, as arranged, on or before the final payment day.

Legislative Ref: paragraph 205AAB(3)(d)

Liability – arrangement to pay broken after final payment day

A person is liable to pay penalty interest from and including the day after the last payment was made :

• if the person has entered into an arrangement to pay the debt; and
• they have been notified in writing about the effects of penalty interest; and
• if the person fails to make a payment, as arranged, after the final payment day.

Legislative Ref: paragraph 205AAB(3)(e)

Note: penalty interest cannot be applied before the day after the final payment day.

Final payment day

The final payment day is the later of the following days:

• 90 — th day after the day on which the debt was due and payable (the debt is due and payable on the 28 — th day after the date of the notice); or
• 28 — th day after the date of the further notice.

Legislative Ref: ss205AAB(4).

In other words the final payment day cannot be earlier than the 118 — th day after the date of the notice.

Example: A notice is issued on 2 March.  The debt is due on 30 March.  The final payment day is 90 days after 30 March, which is 28 June.  Therefore the person is liable to pay penalty interest from 29 June.

Final payment day – SSA

There is another dot point applicable to age pensioners paid by DVA, in addition to the final payment day rules above.

• 90 — th day after the day an Authorised Review Officer makes a decision, if a request for review has been made within 90 days after receipt of a first notice.

Legislative Ref: ss1229A(4) SSA.

Example: First notice issued 1 August.  Request for review made within 90 days of receipt of notice, on 10 August.  ARO makes decision 1 September.  Final payment day is 90 days after 1 September decision, being 30 November.

Admin error

A person is not liable to pay penalty interest on a debt, or on any portion of a debt, that arose due to administrative error.

Legislative Ref: ss205AAB(2A)

Recovery

Penalty interest is recoverable as if it were a recoverable debt under section 205 VEA.

Legislative Ref: ss205AAB(5)

Order of recovery

Any repayments made reduce the original debt first.  Once the original amount is wholly repaid, then repayments go towards reducing the penalty interest component, then the administrative charge, as shown in the following table.

Legislative Ref: ss205AAB(6)

IF a repayment is made, and original debt is...

THEN reduce...

not wholly repaid

original debt by the repayment amount until wholly repaid

wholly repaid

penalty interest debt by the repayment amount until wholly repaid

wholly repaid and penalty interest is wholly repaid

admin charge debt by the repayment amount until wholly repaid

Discretion to not apply

If Commission is satisfied that a person has a reasonable excuse for not entering into a repayment arrangement or for breaking one, it has the discretion not to apply penalty interest at all, or for a particular period.

Legislative Ref: s205AAC

Calculation

Penalty interest is calculated daily.

Interest rate

Penalty interest is set at the lower deeming rate.

Legislative Ref: s205AAE

Type of interest

Penalty interest is simple, not compound.

Method

1. [Annual interest rate expressed as a decimal] ÷ [365 days] = daily percentage rate
2. [daily percentage rate] × [amount of debt] = Penalty Interest daily amount
3. [Penalty Interest daily amount] × [number of days being applied for] = amount of Penalty Interest to be added to debt

Example

• Debt = $2000
• Penalty Interest rate = 3% (deeming rate as @ 1 July 2001)
• Penalty Interest applied to debt balance at end of each month
• Months are June and July, therefore 30 and 31 days respectively.

Step

Action

1

[0.03] ÷ [365] = 0.0000821

2

[0.0000958] × $2000.00 = $0.1642¢

3

[$0.1642¢] × [30 days] = $4.93

Debt now

$2004.93

Step

Action

1

[0.03] ÷ [365] = 0.0000821

2

[0.0000821] × $2000.00 = $0.1642¢

3

[$0.1642¢] × [31 days] = $5.09

Debt now

$2010.02

Amount

The new rules remove the old administrative charge and replace it with a flat one-off charge of $50.

Legislative Ref: ss205AAD(1)

Application

The administrative charge is added to the debt when the person first becomes liable to pay penalty interest in respect of the debt.

Legislative Ref: ss205AAD(1)

Recovery

The administrative charge is a debt due to the Commonwealth, and is recoverable under section 205 VEA.

Legislative Ref: ss205AAD(2)

Contrast to old admin charge

Unlike the old administrative charge, there does not have to be a breach of the VEA, nor does the debt have to be over $200, before the administrative charge can be applied.

Introduction

New provisions under section 205AB VEA provide the authority to recover misdirected funds from financial institutions.

Payment made to incorrect a/c

If a pension is paid to an incorrect account, Commission has the authority to recover it from the financial institution.  The request to recover by Commission must be in writing.

Legislative Ref: ss205AB(1)

Payment made after death

If a pension is paid to a pensioner's account, after the pensioner's death, Commission may recover it from the financial institution.  This applies to any single accounts kept by the pensioner, or any joint accounts kept by the pensioner and any other persons.  The request to recover by Commission must be in writing.

Legislative Ref: ss205AB(2)

Pmt made after death – letter to estate

As soon as possible after requesting repayment, Commission must write to the deceased estate explaining why recovery action is being taken and how much is being recovered.

Legislative Ref: ss205AB(2A)

Change to rules

Changes to section 206 VEA mean that recovery action can be commenced up to 6 years after an officer becomes aware (or could reasonably be expected to have become aware) of the circumstances that gave rise to the debt.

Legislative Ref: ss206(2)

Old rules

Under the old section 206 provisions, recovery action could not commence after more than 6 years from the date a debt arose, unless it arose due to a false statement/representation or failure or omission to comply with the Act.  In those cases, recovery action could commence up to 6 years from the day an office became aware of the false statement/representation or failure or omission to comply.

Contrast

The new rules mean that regardless of whether there is a false statement/representation or failure or omission to comply, recovery action can commence up to 6 years from the date the officer became aware of the debt.

Application of new rules

The new rules apply to any debts that:

• are owed at 1 July 2001; and
• arise after 1 July 2001.

Application & transitional

'Application and transitional' provisions are inserted at Item 9 of the new Act.  The following is an explanation of these provisions.

Hyperlink: click on this link and scroll down to Item 9.

http://scaleplus.law.gov.au/html/comact/11/6326/0/CM000090.htm

Item 9, Clause (1)

The provisions that repeal the old administrative charge & apply the new administrative charge and penalty interest, apply to debts that become recoverable from 1 July 2001.

Item 9, Clause (2)

If a debt was recoverable prior to 1 July 2001, the transitional provisions apply.

Item 9, Clause (3)

If receiving payment under VEA or social security law as at 1 July 2001:

1. if they were not liable before 1 July 2001 to pay the old administrative charge they won't ever have to pay it, and they won't have to pay the new administrative charge or penalty interest either; or
2. if they had become liable before 1 July 2001 to pay the old administrative charge, they will still be liable for it, but they won't become liable for the new administrative charge and penalty interest.

Item 9, Clause (4)

If not receiving payment under VEA or social security law as at 1 July 2001 and they had repaid part of their debt before 1 July 2001:

1. if they had become liable before 1 July 2001 to pay the old administrative charge they will still be liable for it, but if they fail to make a payment in accordance with their repayment arrangement, Commission can also apply the new penalty interest (but not the new administrative charge) – providing a further notice under 205AAA(3) is issued; or
2. if they were not liable before 1 July 2001 to pay the old administrative charge and they fail to make a payment in accordance with their repayment arrangement on or after 1 July 2001, Commission can apply the new penalty interest and administrative charge - providing a further notice under 205AAA(3) is issued.

Clause 9, Item (5)

If not receiving payment under VEA or social security law as at 1 July 2001 and they had not repaid any part of their debt before 1 July 2001:

1. if they had become liable before 1 July 2001 to pay the old administrative charge they will still be liable for it; or
2. if they had not become liable before 1 July 2001 to pay the old administrative charge, Commission can apply the new penalty interest and administrative charge - providing a further notice under 205AAA(3) is issued.

Clause 9, Item (6)

This provision ensures that the provision dealing with recovery action not being taken after the expiration of the 6 year period starting on the first day on which we become aware of the debt, or could reasonably have been expected to have done so, applies to debts owing as at 1 July 2001 and debts that arise after 1 July 2001.

Table

The following table illustrates the application of the transitional provisions.

IF @ 1/7/01 receiving payment

& debt {PART PAID/ UNPAID} pre 1 July 2001...

Liable old Admin Charge pre 1/7/01

THEN pay old Admin Charge

IF fail to make repmt

Pay new Admin Charge

Pay new Penalty Interest

Y

N/A

N

N

N/A

N

N

Y

N/A

Y

Y

N/A

N

N

N

PART PAID

Y

Y

Y

N

Y

N

PART PAID

N

N

Y

Y

Y

N

UNPAID

Y

Y

N/A

N

N

N

UNPAID

N

N

N/A

Y

Y

Changes to VEA

Changes to the Veterans' Entitlements Act 1986 (VEA), were effected in the Family and Community Services and Veterans' Affairs Legislation Amendment (Debt Recovery) Act 2001, No. 47, 2001.  The Act received Royal Assent on 12 June 2001. Changes not discussed elsewhere are listed here.

Hyperlink to full text of Act: http://scaleplus.law.gov.au/html/comact/11/6335/top.htm

Methods of recovery

Section 205 VEA has been amended to allow overpayments to be recovered by any one of the following methods or combination of methods:

• Deductions
• Proceedings in a court
• Instalments
• Payment notice