DATE OF ISSUE: 5 September 1991
VETERANS' AFFAIRS LEGISLATION AMENDMENT ACT 1991
The Veterans' Affairs Legislation Amendment Act 1991 contains the Autumn 1991 legislative amendments including:
.extension of eligibility for war widowers pension;
.extension of service pension eligibility to male dependants
of female veterans; and
.Income Support non-Budget legislation.
2.The Act gained Royal Assent on 25 June 1991.
3.Departmental instructions on war widowers pension and male dependant service pension have been issued already (B10, B15 & B33 of 1991 refer).
4.The Income Support non-Budget legislative amendments detailed in this instruction all commenced from 1 July 1991.
TABLE OF CONTENTS
Paragraphs
"Australian Resident" Definition5 - 10
Exempting as "income" payments for non-Specialist
Jury Service11 - 13
Funeral Bonds14 - 28
Ordinary Income Concept29 - 36
Indexing the Maintenance Income Free Area37 - 40
Indexing pharmaceutical allowance41 - 45
"Australian Resident" definition
Background
5.For service pension purposes, a decision has to be made as to whether or not a person is an "Australian resident". This is important in 3 major areas:
1)in "ordinary" residency status;
2)in determining residency in applying the 10-year rule for Commonwealth and allied veterans and allied mariners; and
3)in applying the 12-month rule to a former resident who has returned to Australia and subsequently applied for service pension on the grounds of Australian residency.
6.Determining whether a person is an "Australian resident" is a 2-part test: the person must be:
1)residing in Australia; AND
2)is a person who:
(i)is an Australian citizen; or
(ii)holds a valid permanent entry permit, in accordance with the Migration Act; or
(iii)has been granted, or who is included in, a return endorsement, or a resident return
(iv)is an exempt non-citizen under the Migration Act and who is likely to remain permanently in Australia.
7.The difficulty has always been in determining what constitutes "residing in Australia". In the past, the legislation has been silent on this point and administrative guidelines have been used to assist in decision making.
The amendment
8.New ss5G(1A) has been inserted in the VEA to provide a legislative basis for those guidelines used in determining whether a person is "residing in Australia". This subsection states that the following factors must be considered in determining whether a person is residing in Australia:
(i)the nature of the accommodation used by the person in Australia;
(ii)the nature and extent of the person's family relationships in Australia;
(iii)the nature and extent of the person's employment, business or financial ties with Australia; and
(iv)any other matter relevant to determining whether the person intends to remain permanently in Australia. (For example: the nature and extent of the person's property located in Australia; the frequency and duration of the person's travel outside Australia; etc.)
9.The absence of one or more of these factors does not mean that the person does not have Australian residency status.
10.The Social Security Act has been similarly amended.
Exempting as "income" payments for non-Specialist Jury Service
Background
11.It has been long-standing Commission policy to exempt as "income" a payment received by a service pensioner for jury service.
The amendment
12.This amendment will provide legislative authority for the current practice of excluding as "income" payments for jury service or payment of expenses for a person to attend as a witness before a court, tribunal or commission (new paragraphs 5H(8)(zh) & (zi) refer).
13.This exemption does not apply to fees received by a service pensioner for appearing as an expert or specialist witness.
Funeral Bonds
Background
14.Subsection 52(1) of the VEA exempts the value of cemetery plots and prepaid funeral expenses from the assets test. This provision was inserted in the VEA primarily to cover the situation where a pensioner paid funeral expenses directly to a funeral home or funeral director.
15.Changes to the investment market have resulted in many finance companies offering market-linked and accruing return investments in the guise of "funeral bonds". It has been Commission's policy to exempt these bonds under the assets test although there was no legislative basis for this policy.
The amendments
16.Subsection 52(1) has been amended to exempt the value of an "exempt funeral investment" from the assets test provisions.
17.Subsection 5Q(1) defines an "exempt funeral investment" as either:
(i)a type A funeral investment of no more than $5,000
where, in relation to the same funeral:
.no other type A funeral investment has been made; and
.no type B funeral investment has been made; and
.there are no pre-paid funeral expenses; or
(ii)a type B funeral investment of no more than $5,000
where, in relation to the same funeral:
.no other type B funeral investment has been made; and
.no type A funeral investment has been made; and
.there are no pre-paid funeral expenses.
For the purposes of this definition, any return on the investment is disregarded in applying the $5000 limit.
18.Subsection 5Q(1) defines a "type A funeral investment" and a "type B funeral investment".
19.A "type A funeral investment" is an investment bought for an individual that meets the following guidelines:
(i) it matures on the death of the person;
(ii)it cannot be realised before maturity; and
(iii)it does not allow for a return to be paid before maturity.
20.A "type B funeral investment" is a joint bond bought for a pensioner couple which:
(i)matures on either the death of the first person OR the death of the second person; and
(ii)cannot be realised before maturity; and
(iii)does not allow payment of a return before maturity.
21.A pensioner couple may purchase a type A funeral investment for each member of the couple. Both bonds would be considered "exempt funeral investments".
22.The important criterion for an "exempt funeral investment" is that the value of the investment is no more than $5,000 whether it is a joint bond or an individual bond. As stated above, the $5,000 valuation does not include any return on the investment.
23.Subsection 5H(8) has been amended by inserting new paragraph 5H(8)(zj) which exempts as "income" the value of a return from an "exempt funeral investment".
Examples
Example 1:
A pensioner, who is not a member of a couple, purchases a funeral bond valued at $4,500. This is a type A funeral investment and is exempt under the income and assets tests.
Example 2:
A pensioner, who is not a member of a couple, purchases a funeral bond valued at $6,000. The entire value of the bond is assessable under the income and assets tests. The asset value is maintained and the return on the investment is assessed under the investment income provisions.
Example 3:
A pensioner, who is not a member of a couple, purchases a bond valued at $4,000. This is a type A funeral investment and is income and assets test exempt.
The pensioner subsequently purchases an additional $2,000 worth of shares in the same bond. The total purchase value of the investment is $6,000.
It no longer meets the definition of a type A funeral investment and the total value of the investment is subject to assessment as an asset and the return on the investment is assessed under the investment income provisions.
Example 4:
A pensioner couple purchases a joint bond valued at $3,000. This is a type B funeral investment and is exempt from the income and assets tests.
Six months later, the couple purchases an additional $2,000 worth of shares in the same bond. The total purchase value of the investment is $5,000.
The bond still meets the definition of a type B funeral investment and continues to be both income and assets test exempt.
Example 5:
A pensioner couple purchases a joint funeral bond valued at $2,000. This is a type B funeral investment and is income and assets test exempt.
The couple subsequently purchases another joint bond valued at $3,000. Although the total value of both bonds is no more than $5,000, the $3,000 bond does not satisfy the definition of a type B funeral investment: the $2,000 investment is already classified as a type B funeral investment and the legislation does not allow the couple to have two exempt investments of the same type; nor a type A AND a type B investment; nor a type A OR B AND pre-paid funeral expenses.
Therefore, the $2,000 bond continues to be exempt from the income and assets tests. However, the $3,000 bond is subject to assessment as an asset and the return on the investment is assessed under the investment income provisions.
Friendly Society of the Independent Order of Rechabites
24.A recent Queensland enquiry concerned a theoretical situation that would not be covered by the new legislation on funeral bonds. The situation is one where an investment is returned to the investor prior to maturity because of a breach of contract.
25.An example of such a case would be a pensioner purchasing a funeral bond with the Friendly Society of the Independent Order of Rechabites. Members of this friendly society must be non-drinkers. If a pensioner is caught drinking, he would be expelled from the friendly society and the funeral investment returned.
26.In this instance, the investment would not have matured: a breach of contract would have terminated the investment. Therefore, the following rules would apply:
.there is no retrospective assessment of any return on the bond; and
.the total amount the pensioner received from the friendly society will be assessed as cash-in-hand (ie, the deeming rules apply).
27.If the pensioner were to invest in another funeral bond in the future and that bond satisfied the definition of an "exempt funeral investment", the new bond would be exempt from the income and assets test provisions.
28.It is not envisaged that a significant number of pensioners would deliberately breach their funeral investment contract as a method of avoiding the income and assets tests because of the absolute limit of $5,000 on the value of the exempt bonds.
Summary
An exempt funeral investment must satisfy all the following rules:
.it must be valued at no more than $5,000 at purchase whether it is an individual's bond or a joint bond for a pensioner couple;
.the pensioner must have no other form of funeral bond or prepaid funeral expenses taken out in his or her name;
.the bond must not mature until either the death of the person (if it is an individual's bond) or the death of one member of a couple (where it is a joint bond); and
.a return must not be payable prior to maturity.
A pensioner couple may purchase a type A funeral investment for each member of the couple each valued at no more than $5,000.
If a breach of contract results in the premature cancellation of the investment:
.no retrospective assessment on the return on the investment occurs; and
.the money is treated as cash-in-hand until otherwise disposed.
Ordinary Income Concept
Background
29.Long-standing Commission policy has allowed certain business expenses as deductions when calculating income for service pension assessment purposes for a person who is self employed. This policy did not have any legislative base and therefore it was difficult to apply a level of consistency in decision making.
The amendments
30.New Division 8AA (sections 45A - 45D) has been inserted in the VEA to provide a definition of what constitutes "ordinary income", thus making it clear that ordinary income is generally gross income except for certain allowable deductions.
31.New s45A states that ordinary income equals total gross income from all sources of income (eg, investment income) unless further provisions within new Division 8AA allow for a deduction.
32.Section 45B assesses income for a self-employed person using the value of business trading stock.
33.If the value of trading stock at the end of the financial year is greater than at the beginning of the financial year, the difference forms a profit to be included in the overall profit of the business.
34.If the value of trading stock at the end of the financial year is less than at the beginning of the financial year, the difference reduces the overall profit of the business.
35.Section 45C provides for allowable deductions from business income for the self-employed. An "allowable deduction" is defined in terms of what are allowable deductions under specified provisions of the Income Tax Assessment Act (ITAA):
.section 51 ITAA: deductions for losses and outgoings:
All losses and outgoings incurred in gaining or producing a business income are allowable except:
-losses or outgoings of capital;
-losses or outgoings of a capital, private or domestic nature;
-a penalty imposed by the Commonwealth, a State, a Territory or a foreign country;
-an amount ordered by a court of the Commonwealth, a State, a Territory or a foreign country following a conviction of the person;
-fringe benefits tax;
-an amount of interest imposed by the Commissioner of Taxation following an amended tax assessment; or
-a charge or contribution imposed under Chapter 4 of the Higher Education Funding Act 1988 (HECS); that is, administrative charges, or the repayment of a loan to the Higher Education Trust Fund.
.subsection 54(1): depreciation:
Depreciation of plant or articles owned and used by the person for the purposes of producing a business income are allowable.
.subsection 82AA(1): deductions:
A one-time deduction on the value of a property (including a ship) that produces business income where the person owns the property is allowable:
-in the first year of income production;
-whether the person owns the property outright or by mortgage; and
-where no portion of the property is leased.
36.Section 45D allows a person to deduct any amounts allowable under section 46G or 46R VEA from any income calculated under Division 8 - Investment Income. (Sections 46G and 46R detail the reasonable costs that can be deducted from an accruing return investment and a market-linked investment; that is, costs incurred as a condition of making the investment.)
Indexing the Maintenance Income Free Area
Background
37.The maintenance income free area allows a service pensioner to receive maintenance up to a specified limit without affecting the rate of his/her service pension. Every dollar of maintenance in excess of the free area causes a 50c reduction in the rate of service pension.
38.Currently, the maintenance income free area is a fixed amount. Obviously, this will fail to keep pace with inflation over time and will disadvantage service pensioners receiving maintenance income in the future.
The amendment
39.The legislation has been amended to ensure that the maintenance income free area is subject to annual indexation commencing from 1 July 1991 (item 4A in the Table at ss59B(1) refers).
40.This will align the indexation of all the following amounts from 1 July each year:
.the income free area (called the basic income limit prior to 1/7/91);
.the asset value limit (called the basic asset limit prior to 1/7/91); and
.the maintenance income free area.
(With effect from 1 July 1991, indexation of the asset value limit was deferred from 12 June to 1 July each year to align it with the indexation of the income free area.)
Indexing pharmaceutical allowance.
Background
41.Payment of pharmaceutical allowance to eligible pensioners was introduced in the 1990 Budget Sittings. The allowance is currently payable at two rates: $2.50 and $5.00.
The amendment
42.Section 198E was inserted into the VEA to provide for the annual indexation of the lower rate of pharmaceutical allowance. The higher rate will not be indexed.
43.Section 118JB - containing the rates of pharmaceutical allowance - was amended to state that the rate of pharmaceutical allowance in ss118JB(1) is twice the rate specified in subsection 118JB(2) - currently the $2.50 amount.
44.The reason for taking this approach is that, if the two rates of pharmaceutical allowance were both indexed, the higher rate of the allowance would not always be twice the value of the lower rate.
45.The indexation provisions commence with effect from 20 September 1991.
FELICITY BARR
A/G NATIONAL PROGRAM DIRECTOR
BENEFITS