House of Representatives

Explanatory Memorandum

(Circulated with the authority of the Minister for Finance and Deregulation, Senator the Hon Penny Wong)

V. NOTES ON SCHEDULE 2 - Validation of certain benefits under the Defence Force Retirement and Death Benefits Act 1973

359. Schedule 2 will validate certain benefits (pensions and lump sum payments) made in breach of the DFRDB Act and other legislation.

360. The DFRDB scheme, established by the DFRDB Act, was closed to new members from 1 October 1991 (see subsection 6(1) of the Military Superannuation and Benefits Act 1991 (MSB Act)). The MSB Act also established a new scheme, the Military and Superannuation Benefits Scheme (MSB scheme). However, subsection 6(2) of the MSB Act, in conjunction with the definition of eligible member of the Defence Force in subsection 3(1) of the DFRDB Act, section 5A of the DFRDB Act ( Persons excluded from the definition of eligible member of the Defence Force ) and section 61B of the DFRDB Act ( Election by recipient member intending to resume full-time service ) provides DFRDB recipient members with the ability to avoid becoming MSB scheme members for the period of re-entered service.

361. The DFRDB Act requires recipient members who re-enter for a period of continuous full time service either to elect to become a contributing member (for service of 12 months or more) (s 61B(1)) or to elect not to become a MSB scheme member (for service of less than 12 months) (s 61B(3)) prior to commencing re-entered service. In either case, if an election is invalid (for example, the election is not in writing, the election is incomplete, the election is not made before re-entered service commences, etc), the member becomes a MSB scheme member by operation of the law. Once MSB scheme membership is established, whether by election or by operation of the law, there is no provision that allows a DFRDB recipient member again to become a DFRDB contributing member.

362. The law was applied inconsistently during the period 1 October 1991 (the date of commencement of the MSB scheme) to 30 June 2008. In particular, ComSuper, the administrator of the DFRDB scheme, accepted a large number of invalid elections. Consequently, there are an unidentified number of re-entered DFRDB recipient members who, because of an invalid election, should have become MSB scheme members, but did not become so. This has led to breaches of section 83 of the Constitution because pensions paid to some DFRDB recipient members who re-entered for less than 12 months and new pensions calculated as a result of re-entered service in excess of 12 months were not, and are not, supported by a valid appropriation.

363. There have been a number of re-entered DFRDB recipient members who have been correctly placed into the MSB scheme because of an invalid election and some of these people have been called on to repay amounts of pension paid during a period of re-entered service of less than 12 months. There are also some who have been placed into the MSB scheme and who have been called on to repay amounts that have been overpaid as a result of the recalculation of the DFRDB pension following re-entered service of 12 months or more.

364. There is no intention to change outcomes for those re-entered DFRDB recipient members in relation to whom the law has been correctly applied. The intent is to validate elections made during the period 1 October 1991 to 30 June 2008 for the unidentified cohort of re-entered DFRDB recipient members who should have been placed into the MSB scheme because of invalid elections. This is to overcome the constitutional problems created as a result of the inconsistent application of the law. It is also to avoid problems under the Financial Management and Accountability Act 1997 (FMA Act). In the absence of Schedule 2, it would be necessary to identify individual cases of unauthorised payment, and consider recovery or waiver of any debts due to the Commonwealth under section 47 of the FMA Act.

365. In relation to people paid without authorisation (who include not only re-entered DFRDB recipient members, but also those whose entitlement flows from such a member, such as reversionary pensioner beneficiaries, children or orphan pensioner beneficiaries, etc), Schedule 2 works as follows:

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First, it provides that unauthorised amounts are debts due to the Commonwealth which may be recovered by the Commonwealth Superannuation Corporation (see sub-items (2)-(3) of items 2-5).

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Second, it provides that people who have been paid without authorisation are entitled to a substitute payment equal to the unauthorised payment (see sub-item (4) of items 2-5).

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Third, and critically, it provides that the unauthorised payment (which is payable to the Commonwealth) may be set-off against the substitute payment (which is payable by the Commonwealth) (see sub-item (5) of items 2-5). This process of set-off is not intended to involve any actual payment.

Essentially, therefore, Schedule 2 "substitutes" an authorised payment for an unauthorised payment, and, in this way, validates past unauthorised payments.

366. In addition, Schedule 2 contains provisions to validate past invalid elections (see sub-items (6)-(8) of items 2-5). These provisions ensure that future payments are authorised, but that no "double dipping" may occur. That is, an election validated by Schedule 2 will not create an entitlement to a payment which a person has essentially already received (although it was unauthorised when they received it).

367. Neither ComSuper nor Defence has quantified or specifically identified the cohort of recipient members who have been and continue to be paid pensions that are not supported by an appropriation. This is because of the many records and system changes since 1991 and the number of records that would need to be examined (it is estimated that some 12,000 recipient members have re-entered for further service on one or more occasions between 1991 and 2008. ComSuper has suggested that a manual interrogation of records (there is no simple system solution) would take in the vicinity of 18 months and cost in the order of $3 million to review all elections made by re-entered recipient members since October 1991.

368. ComSuper has assured Defence that the requirements of the DFRDB Act in relation to elections from re-entered recipient members have been strictly applied since late in the 2007-2008 financial year following on from the receipt of legal advice and an examination of administrative practices.

369. Both ComSuper and Defence have taken administrative steps to ensure that DFRDB recipient members are aware of the requirement to make elections before commencing re-entered service (for example, information is included in pensioner newsletters from ComSuper, there is specific information on the ComSuper website, re-entering members can complete electronic election forms online, the requirements of the legislation in relation to elections have been reinforced with Defence career and recruiting managers and relevant Defence forms advise of the requirements).

370. Item 1 defines specific terms used in the Schedule. The definitions of contributing member, CSC and MSB scheme are the same as those in the DFRDB Act.

371. Item 2 deals with the validation of certain pensions paid to re-entered recipient members of the DFRDB scheme.

372. Sub-item 2(1) sets out the circumstances in which item 2 will apply. Broadly speaking, item 2 will apply if:

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during the period beginning with the closure of the DFRDB scheme and ending immediately before the commencement of this item, a pension commenced to be paid to a person;

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the pension purported to be a DFRDB scheme benefit;

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the pension was not payable (in whole or in part);

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at a particular time before ComSuper began to apply section 61B of the DFRDB Act consistently, the person purported to make an election under that section either to become a contributing member of the DFRDB scheme or not to become a member of the MSB scheme;

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the person's election was invalid;

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the pension would have been payable if the person's election had been valid; and

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the pension has not been recovered.

373. Sub-item 2(2) provides for the creation of a debt due and payable to the Commonwealth in respect of the pension payments in sub-item 2(1) and also allows for recovery of the debt by CSC on behalf of the Commonwealth.

374. Sub-item 2(3) makes it clear that the amount recoverable under sub-item 2(2) is not recoverable under the specific recovery provisions of the DFRDB Act (subsections 126(4) or 126(5)). These provisions provide generally, in respect of an amount of benefit that has been paid to a person but is not payable or has become not payable, for recovery by CSC in a court of competent jurisdiction and for that amount to be recovered by deduction from a benefit which the person is receiving or is entitled to receive.

375. Sub-item 2(4) provides for a benefit to be paid to the person referred to in sub-item 2(1), equal to the total amount of pension that would have been payable to the person during the interim period had there been a valid election. In effect, this substitutes an authorised benefit for an unauthorised payment (the pension referred to in sub-item 2(1)).

376. Sub-item 2(5) allows for the debt due and payable to the Commonwealth under sub-item 2(2) to be recovered by deduction from the amount payable to the person under sub-item 2(4). It is intended that this is the method of recovery of the debt rather than recovery in a court of competent jurisdiction (as allowed by sub-item 2(2)). In other words, it is intended that recovery by deduction will not involve any actual payment; there will simply be a set-off of amounts payable.

377. Sub-item 2(6) has the effect of deeming purported elections under section 61B of the DFRDB Act made on or before 30 June 2008 as having been validly made.

378. Sub-item 2(7) has the effect of ensuring that, notwithstanding sub-item 2(6) , a re-entered member with an invalid election is not entitled to the relevant portion identified in sub-item 2(1) during the interim period or during a period of re-entered service that ceased during the interim period as a pension payable under the DFRDB Act. This sub-item is designed to prevent "double dipping".

379. Sub-item 2(8) provides that a substitute payment under sub-item 2(4) is taken to be a payment of pension payable under the DFRDB Act, so that such a payment may be treated appropriately under the DFRDB Act and other laws.

380. Item 3 deals with the validation of certain lump sums paid to re-entered recipient members of the DFRDB scheme.

381. Sub-item 3(1) sets out the circumstances in which item 3 will apply. Broadly speaking, item 3 will apply if:

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during the period beginning with the closure of the DFRDB scheme and ending immediately before the commencement of this item, a lump sum was paid to a person;

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the lump sum purported to be DFRDB scheme benefit;

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the lump sum was not payable (in whole or in part);

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at a particular time before ComSuper began to apply section 61B of the DFRDB Act consistently, the person purported to make an election under that section either to become a contributing member of the DFRDB scheme or not to become a member of the MSB scheme;

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the person's election was invalid;

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the lump sum would have been payable if the person's election had been valid; and

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the lump sum has not been recovered.

382. Sub-item 3(2) provides for the creation of a debt due and payable to the Commonwealth in respect of the lump sum payments in sub-item 3(1) and also allows for recovery of the debt by CSC on behalf of the Commonwealth.

383. Sub-item 3(3) makes it clear that the amount recoverable under sub-item 3(2) is not recoverable under the specific recovery provisions of the DFRDB Act (subsections 126(4) or 126(5)). These provisions provide generally, in respect of an amount of benefit that has been paid to a person but is not payable or has become not payable, for recovery by CSC in a court of competent jurisdiction and for that amount to be recovered by deduction from a benefit which the person is receiving or is entitled to receive.

384. Sub-item 3(4) provides for a benefit to be paid to the person referred to in sub-item 3(1) , equal to the total amount of the lump sum that would have been payable to the person during the interim period had there been a valid election. In effect, this substitutes an authorised benefit for an unauthorised payment (the lump sum referred to in sub - item 3(1) ).

385. Sub-item 3(5) allows for the debt due and payable to the Commonwealth under sub-item 3(2) to be recovered by deduction from the amount payable to the person under sub-item 3(4) . It is intended that this is the method of recovery of the debt rather than recovery in a court of competent jurisdiction (as allowed by sub-item 3(2) ). In other words, it is intended that recovery by deduction will not involve any actual payment; there will simply be a set-off of amounts payable.

386. Sub-item 3(6) has the effect of deeming purported elections under section 61B of the DFRDB Act made on or before 30 June 2008 as having been validly made.

387. Sub-item 3(7) has the effect of ensuring that, notwithstanding sub-item 3(6) , a re-entered member with an invalid election is not entitled to the relevant portion identified in sub-item 3(1) during the interim period or during a period of re-entered service that ceased during the interim period as a lump sum payable under the DFRDB Act. This sub-item is designed to prevent "double dipping".

388. Sub-item 3(8) provides that a substitute payment under sub-item 3(4) is taken to be a benefit payable under the DFRDB Act, so that such a payment may be treated appropriately under the DFRDB Act and other laws.

389. Item 4 deals with the validation of certain pensions paid to associates of re-entered recipient members of the DFRDB scheme (who might be reversionary pensioner beneficiaries, children or orphan pensioner beneficiaries, or beneficiaries under Part VIA of the DFRDB Act, which relates to family law superannuation splitting arrangements).

390. Sub-item 4(1) sets out the circumstances in which item 4 will apply.

391. Broadly speaking, item 4 will apply if:

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during the period beginning with the closure of the DFRDB scheme and ending immediately before the commencement of this item, a pension commenced to be paid to an associate of a re-entered recipient member of the DFRDB scheme (described in the item as the first person);

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the pension purported to be a DFRDB scheme benefit;

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the pension was not payable (in whole or in part);

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at a particular time before ComSuper began to apply section 61B of the DFRDB Act consistently, the re-entered recipient member (described in the item as the second person) purported to make an election under that section either to become a contributing member of the DFRDB scheme or not to become a member of the MSB scheme;

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the second person's election was invalid;

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the pension would have been payable if the second person's election had been valid; and

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the pension has not been recovered.

392. Sub-item 4(2) provides for the creation of a debt due and payable to the Commonwealth in respect of the pension payments in sub-item 4(1) and also allows for recovery of the debt by CSC on behalf of the Commonwealth.

393. Sub-item 4(3) makes it clear that the amount recoverable under sub-item 4(2) is not recoverable under the specific recovery provisions of the DFRDB Act (subsections 126(4) or 126(5)). These provisions provide generally, in respect of an amount of benefit that has been paid to associates but are not payable or have become not payable, for recovery by CSC in a court of competent jurisdiction and for those amounts to be recovered by deduction from benefits which associates are receiving or are entitled to receive.

394. Sub-item 4(4) provides for benefits to be paid to associates referred to in sub-item 4(1) , equal to the total amount of pension that would have been payable to associates during the interim period had there been a valid election. In effect, this substitutes authorised benefits for unauthorised payments (the pensions referred to in sub-item 4(1) ).

395. Sub-item 4(5) allows for debts due and payable to the Commonwealth under sub-item 4(2) to be recovered by deduction from the amounts payable to associates under sub-item 4(4) . It is intended that this is the method of recovery of the debt rather than recovery in a court of competent jurisdiction (as allowed by sub-item 4(2) ). In other words, it is intended that recovery by deduction will not involve any actual payment; there will simply be a set-off of amounts payable.

396. Sub-item 4(6) has the effect of deeming purported elections under section 61B of the DFRDB Act made by the second person on or before 30 June 2008 as having been validly made.

397. Sub-item 4(7) has the effect of ensuring that, notwithstanding sub-item 4(6) , associates are not entitled to the relevant portion identified in sub-item 4(1) during the interim period or during a period of re-entered service that ceased during the interim period as a pension payable under the DFRDB Act. This sub-item is designed to prevent "double dipping".

398. Sub-item 4(8) provides that a substitute payment under sub-item 4(4) is taken to be a payment of pension payable under the DFRDB Act, so that such a payment may be treated appropriately under the DFRDB Act and other laws.

399. Item 5 deals with the validation of certain lump sums paid to associates of re-entered recipient members of the DFRDB scheme (who might be reversionary beneficiaries or beneficiaries under Part VIA of the DFRDB Act, which relates to family law superannuation splitting arrangements).

400. Sub-item 5(1) sets out the circumstances in which item 5 will apply. Broadly speaking, item 5 will apply if:

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during the period beginning with the closure of the DFRDB scheme and ending immediately before the commencement of this item, a lump sum was paid to an associate of a re-entered recipient member of the DFRDB scheme (described in the item as the first person);

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the lump sum purported to be DFRDB scheme benefit;

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the lump sum was not payable (in whole or in part);

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at a particular time before ComSuper began to apply s 61B of the DFRDB Act consistently, the re-entered recipient member (described in the item as the second person) purported to make an election under that section either to become a contributing member of the DFRDB scheme or not to become a member of the MSB scheme;

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the second person's election was invalid;

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the lump sum would have been payable if the second person's election had been valid; and

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the lump sum has not been recovered.

401. Sub-item 5(2) provides for the creation of debts due and payable to the Commonwealth in respect of the lump sum payments in sub-item 5(1) and also allows for recovery of the debts by CSC on behalf of the Commonwealth.

402. Sub-item 5(3) makes it clear that the amounts recoverable under sub-item 5(2) are not recoverable under the specific recovery provisions of the DFRDB Act (subsections 126(4) or 126(5)). These provisions provide generally, in respect of amounts of benefit that have been paid to associates but are not payable or have become not payable, for recovery by CSC in a court of competent jurisdiction and for the amounts to be recovered by deduction from benefits which associates are receiving or are entitled to receive.

403. Sub-item 5(4) provides for benefits to be paid to the associates referred to in sub-item 5(1) , equal to the total amount of the lump sums that would have been payable to the associates during the interim period had there been a valid election. In effect, this substitutes authorised benefits for unauthorised payments (the lump sums referred to in sub - item 3(1) ).

404. Sub-item 5(5) allows for the debts due and payable to the Commonwealth under sub-item 5(2) to be recovered by deduction from the amounts payable to associates under sub-item 5(4) . It is intended that this is the method of recovery of the debts rather than recovery in a court of competent jurisdiction (as allowed by sub-item 5(2) ). In other words, it is intended that recovery by deduction will not involve any actual payments; there will simply be a set-off of amounts payable.

405. Sub-item 5(6) has the effect of deeming purported elections under section 61B of the DFRDB Act made by the second person on or before 30 June 2008 as having been validly made.

406. Sub-item 5(7) has the effect of ensuring that, notwithstanding sub-item 5(6) , associates are not entitled to the relevant portion identified in sub-item 5(1) during the interim period or during a period of re-entered service of the second person that ceased during the interim period as lump sums payable under the DFRDB Act. This sub-item is designed to prevent "double dipping".

407. Sub-item 5(8) provides that a substitute payment under sub-item 5(4) is taken to be a benefit payable under the DFRDB Act, so that such a payment may be treated appropriately under the DFRDB Act and other laws.

408. The purpose of item 6 is to ensure that there is no acquisition of property by the Commonwealth other than on just terms, as required by paragraph 51(xxxi) of the Constitution.

409. Sub-item 6(1) provides for reasonable compensation to be paid to a person if the operation of Schedule 2 would result in an acquisition of property from a person other than on just terms.

410. Sub-item 6(2) enables a person to institute proceedings in a court of competent jurisdiction where that person and the Commonwealth disagree on the amount of compensation for the purposes of sub-item 6(1) .

411. Sub-item 6(3) aligns the terms acquisition of property and just terms with those terms as used in paragraph 51(xxxi) of the Constitution.