3 Discuss the impact of the deprivation rules in determination of a calculation for the Age Pension.

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1 Questions with Guided Answers by Sharon Taylor 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Reproducing or distributing any material from this website for any other purpose requires written permission from the Publisher. Chapter 18: Social Security 1 Why is social security an important pillar of Australian society? The right to social security requires a social security system be established and that a country must, within its maximum available resources, ensure access to a social security scheme that provides a minimum essential level of benefits to all individuals and families that will enable them to acquire at least essential health care, basic shelter and housing, water and sanitation, foodstuffs, and the most basic forms of education. The UN Committee on Economic Social and Cultural Rights has stated that social security, through its redistributive character, plays an important role in poverty reduction and alleviation. It has also stated that social security prevents social exclusion and promotes social inclusion. 2 Who is entitled to social security in Australia? The Australian income support system differs from those of most other developed countries, in that it is funded from general revenue, rather than from direct contributions by individuals and employers. Instead of reflecting the level and duration of contributions into a social insurance fund, Australian income support is based on residence and need. In general, a person must be an Australian resident, as defined in the Social Security Act 1991, in order to qualify for Australian social security payments. An Australian resident is a person who resides in Australia and has permission to remain permanently either because they are: an Australian citizen; the holder of a permanent visa; or a protected Special Category visa holder (as described below). In deciding whether a person is residing in Australia, factors such as the person's domestic, financial and family ties to Australia are taken into account, as well as the frequency and duration of any absences from Australia and the reasons for such absences 3 Discuss the impact of the deprivation rules in determination of a calculation for the Age Pension. Gifting is the term often used when you or your partner: gift or dispose of assets, including transferring assets for less than their market value; and do not receive adequate consideration for the gift or transfer (in the form of money, goods or services). Financial Planning in Australia 5e Questions: Ch 18 Page 1

2 Deprivation Gifting (disposal) of assets worth more than the allowable amount or free area is known as deprivation. When you or your partner sell or transfer an asset and receive an asset or money of equal value in return, adequate consideration has been received. There is no deprivation (gifting) when adequate consideration has been received. If you or your partner dispose of, sell, transfer or gift an asset and do not receive adequate consideration in the form of money, goods or services, then the amount over the allowable gifting amount is a gift. Deprived assets are: included in your assets until the fifth anniversary of the date the disposal was made; and the total value of your deprived assets are added to the value of all other financial investments. Deeming rates are then applied to the total of your financial investments to calculate your assessable income. $30,000 rule The $30,000 rule applies where gifts have been made over several years. The $10,000 rule is applied first and the total of gifts made in a financial year that exceed $10,000 would be assessed as a deprived asset. The $30,000 rule only applies to the amount of the allowable gifting (free area) amount used in each financial year. The free area used is accumulated over the maximum period of five financial years. Once the $30,000 limit is reached, any subsequent gifts are assessed as deprived assets for five years. Any amount that is assessed as a deprived asset does not count toward the $30,000 limit. Example: Stan and Shirley own a house valued at $280,000. They sell the home to their daughter for $210,000. Stan and Shirley have not received adequate consideration because there was a significant difference between the value of the house and the sale price. They have gifted $70,000, which is the difference in value of the home and the $210,000 consideration received. Stan and Shirley will have a deprived asset of $60,000 ($70,000 gift, less the gifting free area of $10,000) that will be counted as an asset for five years from the date of the gift and will be subject to deeming. Example: Julie gifts $10,000 each financial year : $10,000 within limit : $10,000 within limit : $10,000 within limit : $10,000 deprived asset : $10,000 deprived asset : $10,000 within limit. Financial Planning in Australia 5e Questions: Ch 18 Page 2

3 4 Discuss the eligibility requirements of three social security payments other than the Age Pension. Carer Payment (caring for a person 16 years or over) You may be eligible for Carer Payment (caring for a person 16 years or over) if you provide constant daily care in the home of the person you care for and he or she: is aged 16 or more with a severe disability or medical condition or is frail, aged; or is aged 16 or more with moderate care needs and has a dependent child who either is under six or is aged 6 16 and eligible for Carer Allowance. The person you care for must also either: receive an income-support payment from the Department of Human Services or from the Department of Veterans Affairs; be unable to receive an income-support payment from the Department of Human Services or the Department of Veterans Affairs because they have not lived in Australia long enough to be eligible; or meet the care-receiver income and assets tests. Newstart Allowance From 1 July 2012, you must be 22 years or older to qualify for Newstart Allowance. If you are 21 years old and are being paid Newstart Allowance on 1 July 2012, these changes will not affect you. You will continue to be paid Newstart Allowance. However, if you stop receiving Newstart Allowance for more than 13 weeks, and you are not yet 22 years old, you will have to apply for Youth Allowance. Personal Income Test There is no change to the Newstart Allowance income free area. Working credit There is no change to maximum limit of working credit for Newstart Allowance. Commonwealth Seniors Health Card eligibility To qualify for a Commonwealth Seniors Health Card, you must meet specific requirements, including age and residence conditions. To qualify, you must: Financial Planning in Australia 5e Questions: Ch 18 Page 3

4 meet the residence requirements; not be subject to a newly arrived resident s waiting period; have reached Age Pension age but not qualify for a payment from the Department of Human Services or the Department of Veterans' Affairs; provide the Department of Human Services with your and your partner's tax file numbers, or be granted an exemption from doing so; and have an annual adjusted taxable income of less than: $50,000 (singles); $80,000 (couples, combined); or $100,000 (couples, combined, for couples separated by illness or respite care or where one partner is in prison). 5 Why did the Australian Government introduce the concept of deeming in relation to the Income Test for pension payment? Background to deeming The deeming rules are a central part of the social security income test. They are used to assess income from financial investments for social security and Veterans' Affairs pension/allowance purposes. Deeming assumes that financial investments are earning a certain rate of income, regardless of the amount of income they are actually earning. If income support recipients earn more than these rates, the extra income is not assessed. The deeming rates reflect the returns available in the market to pensioners for a range of financial investments. By treating all financial investments in the same way, the deeming rules encourage people to choose investments on their merit rather than on the effect the investment income may have on the person's pension entitlement. To calculate the income assessed, deeming rates are applied to the total market value of an income support recipient's financial investments. The actual returns from the income support recipient's investments, whether in the form of capital growth, dividends or interest, are not used for income assessment, even if the investment returns are above the deeming rates. Introduction to deeming Bank deeming was introduced in 1991 to encourage income support recipients to maximise their total disposable income by investing to gain returns of at least the deeming rate. While successful, bank deeming did not address the problem of capital growth investments. Financial Planning in Australia 5e Questions: Ch 18 Page 4

5 To counter the preferential treatment of capital growth investments, the rate of return (ROR) rules were introduced in These rules assessed unrealised capital growth as income on an ongoing basis, based on the performance of the investment over the preceding 12 months. The ROR rules, however were complex, caused income support recipients' payments to fluctuate in line with their investment performance, and provided little incentive for income support recipients to earn more from investments. On 1 July 1996, the deeming legislation was extended to include the following financial investments: bank, building society and credit union accounts and term deposits; managed investments, loans and debentures; and listed shares and securities. 6 Given an ageing population and low work participation rate, over the next 50 years how will social security payments be maintained and what are the likely changes that will occur to support an already overburdened system? The proportion of the population aged 65 years and over is rising and is projected to rise further over the next 50 years. Demographers say the group aged 65-plus is likely to increase from around 12% today to around 25% by the year Can Australia provide adequate living standards for the growing number of persons in the aged and other dependent groups without seriously undermining the living standards of the general community? There are concerns that the increasing proportion of the aged in the population relative to those of employable age could place severe strains on government budgets, necessitating higher tax burdens on a diminishing number of workers. According to some commentators, our ability to support the aged will be undermined by labour shortages as more and more people enter retirement. The wealth generated by the dwindling worker class will need to be spread across more and more dependants. How will these people provide for their own retirement under an increasing burden of having to support older generations? The burden of rising taxes may undermine economic incentives, economic efficiency and therefore the performance of the Australian economy. The private cost of caring for the aged is also likely to increase, either because family members are forced to leave full- or part-time employment or families are forced to incur the expense of paid outside help to assist in the caring process. The ageing of the population will be exacerbated if there are no changes to a number of discriminatory policy measures affecting such things as retirement and savings incentives, education and training, and the demand for health and aged care services. Policy reforms could offset any rising burden. There is a range of adjustments that Australian Financial Planning in Australia 5e Questions: Ch 18 Page 5

6 governments could implement in the years ahead that could allow the economy to meet the costs of aged care more efficiently and with minimal dislocation. Areas of particular importance include labour market policies, education and vocational training, policies affecting savings and investment performance (including superannuation), financial market policies, tax burdens generally and taxation of savings in particular. Policies towards the taxation of inheritances and underlying assumptions about what should be legitimately passed on to the children need to be reassessed. The ABS population projections indicate that the highest rate of growth in the over 65 age group will occur between 2010 and 2020, when the peak of the postwar baby boom generation enters this age group. Bacon and Gallagher (1996) calculate a retired dependency ratio, defined as the ratio of persons retired to those actually working. They project this will rise from 1.4 to 1.6 in This means for every 100 workers, there will be 60 retired persons. The major specific or targeted items of Commonwealth Government funded benefits and services available to the aged include pensions, rent assistance, residential services, public housing, medical and pharmaceutical benefits, acute care hospital services and home and community care programs. State governments also provide a range of health, housing and welfare services for the aged. In , just the aged-related expenditures of the Commonwealth Government had risen to around 13.5% of total Commonwealth outlays or around 3.2% of GDP. The major areas of public funding growth with the ageing population have been age pensions, health care, housing and aged care. Currently some 84% of people of age pensionable age receive some income support either from the Commonwealth s general welfare and veterans support agencies. Rothman (1998) employed the RIMGROUP model to generate projections of the cost of age and veterans pensions as a percentage of GDP, under a range of assumptions. Under a base case scenario, pensions rise from about 3% of GDP now, to 4.5% of GDP in the year Alternative scenarios are also presented. Without the superannuation guarantee, the increase would be from 3% to 4.8% of GDP. With a universal pension, the increase would be from 3.7% to 6.4% of GDP. Increasing the pension from 25 to 30% of average weekly ordinary time earnings would see the proportion of GDP allocated to pensions rising from 3% to 5.3%. Under current policy settings, including current pension and superannuation arrangements, and given the ageing population structure, the age pension bill and other costs of supporting the aged will certainly rise over the next 50 years. Whether or not this is likely to be a problem depends partly on the extent to which those over 65 years need to rely on the public sector to provide income support. The contribution of superannuation to meeting the costs of aged income support depends on the lifetime earning of workers and the amounts they are able to afford for superannuation over and above the guarantee levy. Low-income workers and particularly those who are periodically unemployed may find it very difficult to provide for their own retirement. Financial Planning in Australia 5e Questions: Ch 18 Page 6

7 Governments in Australia and overseas have responded to the prospect of growing age dependency through policies designed to shift the responsibility for retirement incomes and aged care from the public to the private sector (that is, from taxpayers in general to individuals taking advantage of these services). In terms of retirement income, this objective could be pursued through changes to superannuation policy including increases in compulsory payments, reducing the rate of tax on superannuation contributions and earnings, increases in the preservation age or restrictions on lump sum payments. The aged pension could be made less attractive and harder to qualify for. Options for the latter include raising the pensionable age from, say, 65 to 70, lowering income and assets tests, and providing financial incentives for later retirement. Compulsory superannuation contributions are designed to reduce the level of dependency on the aged pension. Private superannuation savings will play a major role in constraining future growth in pension outlays. There is also the possibility that the young, due to reduced numbers, will fail to meet labour force requirements, and that the value of mature workers will be identified. This will lead to an increase in mature workers participation in the workforce, hence extending retirement age. This would extend their working lives and hence reduce the reliance on post retirement savings amounts and social security. 7 Discuss the terms assessable assets and financial assets in relation to the Assets Test and Income Test. Assessable assets Assessable assets are assets assessed under the Assets Test. Most assets are assessable and are taken into account when calculating your Australian Government income support payments. The value of your assets is what you would get for them if you sold them. Generally, any debt secured against an asset is deducted from the value of that asset. Assets that are assessed under the assets test Assessable assets include: any cash or money you have in bank, building society or credit union accounts (including interest-free accounts), interest-bearing deposits, fixed deposits, bonds, debentures, shares, property trusts, friendly society bonds and managed investments; any assets you hold in superannuation and rollover funds if you are of Age Pension age; the value of any real estate, including holiday homes, you own (this does not include your principal home); Financial Planning in Australia 5e Questions: Ch 18 Page 7

8 the value of any businesses and farms, including goodwill (where goodwill is shown on the balance sheet); the surrender value of life insurance policies; the value of gifts worth more than $10,000 in a single year or more than $30,000 in a five-year period; the value of any loans (including interest-free loans) you have made to family trusts, members of the family, or organisations; the value of any motor vehicles you own; the value of any boats and caravans you own which you do not use as a home; the value of your household contents and personal effects; the value of any collections you have for trading, investment or hobby purposes; the value of your entry contribution to a retirement village if it is less than the difference between the homeowners' and non-homeowners' assets limits; some income-stream products; the attributed value of a private trust or private company where you are a controller of that trust or company. Financial Assets As stated previously, the deeming provisions apply to financial assets. A financial asset is: a financial investment; or a deprived asset. Financial investments include, among other things: available money; moneys on deposit; a managed investment, such as an equity trust, property trust, mortgage trust or a cash management trust; a loan that has not been fully repaid; gold, silver or platinum bullion; and Financial Planning in Australia 5e Questions: Ch 18 Page 8

9 an asset-tested income stream (short-term). The deeming provisions do not apply to, among other things: the principal home; conventional life insurance policies (that is, policies that do not have an investment component); motor vehicles, caravans and similar lifestyle assets; collectables; investment properties, holiday homes and other real estate; and investments in superannuation and rollover funds held by persons under Age Pension age. Other examples of income Financial investments Financial investments include: bank, building society and credit union accounts; cash; term deposits; cheque accounts; friendly society bonds; managed investments; assets held in superannuation and rollover funds held if you are of Age Pension age; listed shares and securities; loans and debentures; shares in unlisted public companies; gold, silver or platinum bullion. Financial Planning in Australia 5e Questions: Ch 18 Page 9

10 Financial investments do not include your home or its contents; cars, boats and caravans; antiques, stamp or coin collections; the value of a life interest created by you or your partner, or upon the death of your partner. 8 Discuss how social security payments may be impacted by transition to aged-care facilities. In order to minimise any changes to social security payments, many retirees may need to consider what options might be available to restructure their assessable and financial assets. One possible strategy may be the use of annuities, which offer additional cash flow to help pay aged-care fees and charges, which are likely to be more than a resident receives from the Age Pension. A well-built annuity will not be subject to the deeming rules (used to assess income from investments), so the aged-care income-tested fee will be lower. Gift or loan? Some people believe gifting or loaning money to their children would protect their social security entitlements. One strategy might be to restructure a portfolio of assets early. Under the gifting rules, a person is allowed to give away $10,000 a year, or up to $30,000 over five years, and have that amount exempt from the Assets Test for the Age Pension. If the individual gives away more, it will be counted towards the Assets Test for five years, but not after that. With a bit of foresight, elderly people with a trustworthy, loyal family would be able to give away their assets on the understanding that their children would pay for their future agedcare needs. Again, it may make minimal difference to the Age Pension payments because deprivation rules and Income and Asset tests rules still apply. Hence, this gives no advantage in meeting social security eligibility requirements. However, there could be reasons as to why such a decision may be beneficial if the child needs to be repaid before any inheritance is divided up. In other words, if it is to be a loan, it would be desirable to have a document in place (a loan agreement) drafted by a solicitor that states it was a loan rather than a gift. That way the money would be repaid before the estate assets were distributed. Reverse mortgages Financial Planning in Australia 5e Questions: Ch 18 Page 10

11 Another option is a reverse mortgage, where equity in the home is used as security against a loan that is repaid when the home is sold. Some equity could be released to pay the initial bond for one person and the house could later be sold to pay the accommodation bond for a second person. Another equity release scheme is the Bendigo Bank Homesafe Debt Free Equity Release, where home owners receive a cash amount in exchange for a fixed percentage of the future sale proceeds of a home. Hold onto the home In cases where individuals can t or won t sell their home, sometimes it is possible to negotiate with the aged-care facility that they pay only a small portion of the bond and instead pay interest on the unpaid bond amount. The home may then be rented out to help fund the interest payments on the bond. When the bond is calculated in this way, the value of the home is excluded for both Assets and Income tests purposes and the accommodation bond and the income-tested fee could be lower. The maximum permissible interest rate on an unpaid bond is set by the government and is now 8.92%. Macquarie Private Wealth manager Brendan Ryan says there are good practical reasons that the sale of the home is not an automatic consideration when moving to an aged-care facility. For example, the move into aged care may be seen as temporary and a return to the family residence might be an option. Additionally, trying to sell a property during the disruption of a move into care can be challenging, so the best time to manage this might be later on. The current system allows the exemption of the family home from Centrelink assets assessment for two years from the time of entering aged care. Ryan further notes that: This exemption can also extend indefinitely if the home is rented out in the case of an individual paying an accommodation charge. If the individual is in care and is paying part or all of an accommodation bond by periodic payment, the family home also continues to be exempt. But while keeping the house may be beneficial in terms of the Centrelink and income-tested fee outcomes, the overall cash flow outcome might not be practical. Costs in maintaining the property as well as rates and other taxes as well as the management of a rental property may mean this possibility is not desirable or feasible. Financial Planning in Australia 5e Questions: Ch 18 Page 11

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