Senate

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)

Chapter 2 - Social Security changes

Overview

2.1 This chapter covers the tax treatment of the disability wage supplement (DWS) paid under the Social Security Act 1991 (SSA91). It also includes certain technical amendments relevant to some related social security payments. The amendments are contained in Part 2 of Schedule 1 of the Bill.

Summary of the amendments

Purpose of the amendments

2.2 The amendments will provide for tax treatment of payments of DWS similar to that for other comparable social security payments. The amendments will also make certain technical amendments to the Income Tax Assessment Act 1936 (the Act) relating to other social security payments. [Item 7]

Date of effect

2.3 The amendments relevant to the DWS will apply to payments received on or after 1 July 1994. The other amendments will apply from 12 November 1991. [Item 20]

Background to the legislation

Disability wage supplement

2.4 The disability wage supplement (DWS) which commenced on 1 July 1994 is available to people who enter the supported wage system administered by the Department of Human Services and Health. This system aims to assist persons with a disability to enter the work force. Under the system, a person with a disability may receive less than the award wage based on his or her productivity compared to a person in the same occupation who does not have a disability. DWS will be available at the same rate as the disability support pension (DSP). Income earned under the system by a DWS recipient will count as income for the purpose of determining a rate of DWS. The DWS has a much more liberal income test free area than other pensions paid by the Department of Social Security (DSS).

Tax treatment of basic social security pensions, allowances and benefits

2.5 Division 1AA of the Act provides for the tax treatment of social security pensions, allowances and benefits. In particular circumstances, the Division exempts some basic pensions and allowances from income tax.

2.6 In other circumstances the Division provides for certain of these basic payments to be taxable, in particular the basic payments of pensions where the recipient is of age pension age. Where pensions are taxable, section 160AAA of the Act provides for a pensioner rebate. This rebate extinguishes the tax on pensions plus non-pension income up to the income test free area. The rebate available is reduced where there is further taxable income.

2.7 Like the DSP the DWS will be exempt from income tax when paid to a person below age pension age. The DWS paid to someone of age pension age will be taxable but subject to a pensioner rebate.

Tax treatment of supplementary amounts

2.8 Under Division 1AA, supplementary amounts, such as rent assistance, are exempt from income tax. Subsection 24ABA(1) of the Act contains a table of supplementary amounts.

Tax treatment of bereavement payments

2.9 Bereavement payments may be payable following the death of a social security pensioner, allowee or beneficiary or a person associated with such a person, for example, a partner. The purpose of the payments is to provide financial assistance over a period of fourteen weeks following the date of death. This period is referred to as the 'bereavement period' .

2.10 The following diagram shows the bereavement period and points relating to bereavement payments and their tax treatment.

2.11 The significant points on the diagram are:

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bereavement notification day - the day on which the DSS becomes aware of the death; and

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first available bereavement adjustment payday (FABAP) - the first payday after the bereavement notification day for which it is practicable to terminate or adjust payments under the SSA91.

2.12 The first available bereavement adjustment payday effectively divides the bereavement period in two:

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The bereavement rate continuation period (BRCP) to which the continued payments relate. This period ends before the FABAP unless the FABAP occurs on or after the last day of the bereavement period; where the latter occurs, BRCP coincides with the bereavement period.

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The bereavement lump sum period in relation to which a bereavement lump sum may be payable. This period begins on the FABAP and ends on the last day of the bereavement period.

2.13 In regard to the DWS, the modes of payment that the tax treatment of bereavement payments should encompass are set out below.

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Continued payment - Following the death of a recipient of DWS, the surviving partner is entitled to a payment on each of the paydays in the BRCP at the pre-death rate for the deceased (section 470 of SSA91). This payment is exempt from income tax.

•

Bereavement lump sum payment to DWS recipient whose partner dies (section 471 of SSA91) - This payment takes into account the continued payments (if any) to which the DWS recipient is entitled during the BRCP (i.e., before the FABAP). All or a proportion of such a bereavement lump sum may be exempt from tax. The exempt bereavement calculator A in section 24ABZB of the Act provides the steps to determine the 'tax-free amount'. Where the tax-free amount is less than the lump sum payment the difference is taxable. Where the tax-free amount exceeds the lump sum payment the excess may be set off against other social security payments received during the bereavement period and which are assessable.

•

Bereavement lump sum paid to person other than the partner.

Where:

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a person is qualified for payments in relation to his or her partner; and

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that person dies within the bereavement period; and

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DSS is not notified of the death of the partner until after the person dies; then

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the whole of a lump sum worked out by using the lump sum calculator in section 473 of the SSA91 will be exempt from tax.

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Bereavement payment on death of recipient of DWS - The recipient is not a member of a couple or the recipient's partner is not receiving a social security or service pension (section 475 of SSA91) at the time the recipient dies. This payment is exempt from tax.

•

Accrued leave at date of death of recipient of DWS - Where the recipient has accrued recreation or long service leave at date of death, SSA91 treats such amounts as bereavement payments payable under section 476. Under the DWS arrangements accrued holiday and long service leave related to DWS will be exempt from tax.

Application of an exclusion provision

2.14 Where the new single rate of pension received by the surviving partner who is of age pension age exceeds or is equal to the combined rate of pension if the person had not died there is no bereavement payment. In regard to the bereavement period, the excess of the new single rate of pension over the rate that would have been received by the surviving partner if the person had not died is exempt from income tax. The rest of the payment is assessable but would normally be subject to beneficiary rebate.

Explanation of the amendments

2.15 The amendments provide for the taxation treatment of the DWS and make technical amendments to certain provisions of the Act that deal with other payments under SSA91. [Item 7]

2.16 Item 13 inserts a reference to the DWS in the index of payments table in section 24AB of the Act. The index lists payments under the SSA91 covered by Subdivision B of Division 1AA of Part III of the Act.

2.17 Item 15 inserts in the table of supplementary amounts in subsection 24ABA(1) a reference to the DWS. Supplementary amounts, such as rent assistance, are included in the payment of pensions, allowances and benefits. New subsection 24ABJA(1) will provide that supplementary amounts related to DWS will be exempt from tax [item 17]. It is necessary to refer to the table in subsection 24ABA (1) to ascertain the supplementary amounts exempted by new subsection 24ABJ(1).

Basic payment

2.18 The DWS basic payment is the balance after deducting supplementary amounts from the total payment of DWS. Where the recipient is under age pension age, new subsection 24ABJA(1) will exempt the DWS from income tax. [Item 17]

2.19 Where the recipient is of age pension age, the basic payment will be taxable. However, under section 160AAA of the Act the pensioner rebate will automatically extend to recipients of age pension age.

Supplementary amounts

2.20 Supplementary amounts, such as rent assistance, paid to recipients of the DWS, will be exempt from income tax under new subsection 24ABJA(1). [Item 17]

Bereavement payments

2.21 The Bill proposes to provide for the tax treatment of bereavement payments to recipients of the DWS along the lines of the existing tax treatment for the DSP.

Continued payment

2.22 During the BRCP (see diagram in paragraph 2.10), the surviving partner of a DWS recipient is entitled to a continued payment equal to that which the deceased recipient would have received on each payday before the FABAP (section 470 of SSA91). The amendments will make these payments exempt from income tax under new subsection 24ABJ A(3) of the Act. [Item 17]

Example

2.23 Arthur, a DWS recipient, earns a fortnightly payment of $150 in his job. In addition he receives a DWS of $268 from DSS (under SSA91 he has an income test free area of $152 per fortnight). Beth, his wife, receives fortnightly partner allowance payments of $248 (her income test free area was lower). Arthur dies and. Beth notifies the Department of the death two weeks after the date of death. There is one payday in the BRCP and the second payday in the bereavement period will be the FABAP. Beth will be entitled to $268 continued payment in relation to the BRCP (all paid by DSS). This amount is exempt from income tax. Beth will continue to be entitled to payment of partner allowance at her pre-bereavement rate, which is not a bereavement payment. The partner allowance payments will continue to be assessable and subject to beneficiary rebate under section 160AAA of the Act.

Bereavement lump sum payment to DWS recipient whose partner dies

2.24 The amendments provide that the part of a bereavement lump sum payment under section 471 of SSA91 that does not exceed the 'tax-free amount' is to be exempt from income tax under new paragraph 24ABJA(4)(a) of the Act. The Exempt Bereavement Payment Calculator A (Calculator A) in section 24ABZB of the Act will determine the tax-free amount relating to any bereavement lump sum payment. [Item 17]

Example

2.25 John is 45 years of age. He receives fortnightly DWS of $268. His partner, Martha, receives partner allowance payments of $248 per fortnight The income test free area for partner allowance is lower than for the DWS. Martha dies and there are six paydays in the bereavement lump sum period. Following Martha's death John becomes entitled to the higher single rate of DWS ($321 per fortnight).

2.26 For the bereavement lump sum period, Calculator A applies as follows:

Step 1:

There are six relevant pension paydays .

Step 2:

The amount of payments received by John on each relevant pensioner payday that would have been exempt is $268.

Step 3:

The amount derived in this step is $1,608 ($268 x 6).

Step 4:

The amount of payments received by Martha on each relevant pensioner payday is $248.

Step 5:

The amount derived in this step is $1,488 ($248 x 6).

Step 6:

The tax-free amount is $3,096 (step 3 + step 5).

2.27 The tax-free amount is exempt from income tax [item 17, new paragraph 24ABJA(4)(a)]. John would receive, as a lump sum, the amount determined in the lump sum calculator in section 471 of the SSA91 by deducting the after-death single rate from the combined pre-death partnered rate and multiplying the result by the number of pension paydays in the bereavement lump sum period: [($516 - $321) x 6 = $1,170]. The difference between the tax-free amount and the lump sum received amounts to $1,926 ($3,096 - $1,170). This amount is available to set off against any taxable social security income John receives during the bereavement lump sum period.

Bereavement lump sum paid to person other than the partner

2.28 Where a DWS recipient is qualified for bereavement payments in relation to the death of his or her partner and the DWS recipient dies within the bereavement period, a lump sum payment may be made to an appropriate person. This may occur where the DSS is not notified of the death of the partner until after the death of the DWS recipient. The lump sum is determined by use of a lump sum calculator in section 473 of SSA91. The whole of this amount is exempt from income tax. [Item 17, new subsection 24ABJA(3)]

Example

2.29 Harry, a DWS recipient, and his partner, Ilsa, a recipient of partner allowance, are involved in a motor accident in which Ilsa is killed. Harry dies from injuries ten days later and, a week after his death, DSS is notified of both deaths. A lump sum determined by use of the lump sum calculator in section 473 of SSA91 is paid to a person the Secretary of DSS considers to be the appropriate person. This amount is exempt from income tax.

Bereavement payment on death of recipient

2.30 Where a DWS recipient dies and is not a member of a couple or the person's partner is not receiving a social security or service pension the DSS may make a bereavement payment to the person considered to be appropriate (section 475 of SSA91). This payment is exempt from income tax. [Item 17, new subsection 24ABJA(3)]

Accrued leave at date of death of DWS recipient

2.31 Section 476 of SSA91 treats accrued recreation and long service leave at date of death as bereavement payments. New subsection 24ABJA(3) makes such payments exempt from income tax. [Item 17]

Application of an exclusion provision

2.32 Item 8 removes an obsolete reference from subparagraph 24A (a)(v) of the Act and substitutes 'Subdivision A of Division 10 of Part 2.9' in the definition of 'bereavement Subdivision'. Subdivision A effectively provides for an 'exclusion provision' that results in the DWS recipient not being entitled to bereavement payments. It is the bereavement Subdivision relevant to DWS referred to in new paragraph 24ABJA(5)(b) . An exclusion provision applies where the new single pension received by the surviving partner who is of age pension age exceeds or is equal to the combined pension that would have been received if the death had not occurred. In these circumstances there is no bereavement payment. [Item 17]

2.33 Item 11 inserts in the definition of 'exclusion provision' a reference to paragraph 469(1)(e) of SSA91. This reference identifies the provision in SSA91 that determines the exclusion of a DWS recipient from the receipt of bereavement payments. Where this exclusion provision applies, new subsection 24ABJA(5) determines that the excess of the new payment over the surviving partner's pre-death payment, where the surviving partner is of age pension age, is exempt from income tax for the duration of the bereavement period.

Technical amendments

2.34 Item 16 repeals existing sections 24ABD and 24ABDAA that deal with the tax treatment of DSP to persons under age pension age and above age pension age respectively. The item substitutes new section 24ABD in which the provisions of former sections 24ABD and 24ABDAA are consolidated. The consolidation omits the reference in old subsection 24ABDAA(4) to section 146P of SSA91 which has now been repealed.

2.35 The consolidation does not extend the exclusion provision to recipients of DSP under pension age [new subsection 24ABD(5)]. This is consistent with existing section 24ABD.

2.36 Because of the consolidation of old sections 24ABD and 24ABDAA as new section 24ABD it is necessary to remove the reference to section 24ABDAA in section 24AB, the index of payments under SSA91 covered under Subdivision B. Item 12 deletes the reference to section 24ABDAA in the table in section 24AB.

2.37 Items 18 and 19 repeal existing sections 24ABR and 24ABRA which deal with the tax treatment of special needs DSP to persons under age pension age and above age pension age respectively. The item substitutes new section 24ABR in which the provisions of existing sections 24ABR and 24ABRA are consolidated.

2.38 The new section 24ABR, like the two sections it replaces, does not contain any provisions for the tax treatment of bereavement payments. The tax treatment of bereavement payments for all special needs pensions is included in existing section 24ABV.

2.39 The consolidation of former sections 24ABR and 24ABRA provides that the exclusion provision only applies to recipients of special needs DSP of age pension age [new subsection 24ABR(3)] . This is consistent with existing section 24ABR.

2.40 Because of the consolidation of former sections 24ABR and 24ABRA as new section 24ABR, it is necessary to remove the reference to section 24ABRA in section 24AB, the index of payments under SSA91 covered under Subdivision B. Item 14 deletes the reference to section 24ABRA.

2.41 Items 9 and 10 remove obsolete references to sections in the SSA91 from the definition of 'exclusion provision' in section 24A.

Dates of effect

2.42 Item 20 inserts a table of application dates:

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the effective date of consolidation of former sections 24ABR and 24ABRA [items 14, 18 and 19] in relation to the special needs DSP is to be retrospective to 12 November 1991;

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the effective date of consolidation of former sections 24ABDA and 24ABDAA [items 12 and 16] in relation to the DSP is to be retrospective to 12 November 1991;

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the effective date of the provisions for DWS [items 13, 15 and 17] to apply is to be 1 July 1994;

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the effective date of removal of obsolete references [items 9 and 10] in the definition of exclusion provision is to be 12 November 1991;

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the effective date for extending the definition of 'bereavement Subdivision' to include the Subdivision relevant to DWS [item 8] is to be 1 July 1994; and

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the effective date for extending the definition of 'exclusion provision' to include DWS [item 11] is to be 1 July 1994.

2.43 The retrospectivity of the application dates in paragraph 2.42 to 12 November 1991 will not disadvantage anyone. This is because the amendments made are beneficial to taxpayers and reflect the administrative arrangements of the DSS.