Family and
Community Services and
Veterans' Affairs Legislation Amendment (Income Streams) Bill 2004
June
2004
Parliament of the
Commonwealth of Australia 2004
ISBN 0 642 71417 7
Table of Contents
Membership of the Committee
Report
- The Inquiry
- The Bill
- Issues
- Recommendation
Additional Comments from Labour Senators
Appendix 1 Submissions received by the Committee
Appendix 2 Public Hearing
Senate Community Affairs Legislation Committee Secretariat
Mr Elton
Humphery Secretary
Ms Christine
McDonald Principal Research Officer
Ms Leonie
Peake Research Officer
Ms Ingrid
Zappe Executive Assistant
The Senate
Parliament House
Canberra ACT
2600
Phone: 02 6277 3515
Fax: 02 6277 5829
E-mail: community.affairs.sen@aph.gov.au
Internet: https://www.aph.gov.au/senate_ca
Membership of the Committee
Members
|
Senator Sue
Knowles, Chairman
|
LP, Western Australia
|
|
Senator Brian
Greig, Deputy Chairman
|
AD, Western Australia
|
|
Senator Guy
Barnett
|
LP, Tasmania
|
|
Senator Kay
Denman
|
ALP, Tasmania
|
|
Senator Gary
Humphries
|
LP, Australian Capital Territory
|
|
Senator Jan
McLucas
|
ALP, Queensland
|
Substitute member
|
Senator Nick
Sherry to replace Senator Denman
for the committee's inquiry into the Family and Community Services and
Veterans' Affairs Legislation Amendment (Income Streams) Bill 2004
|
ALP, Tasmania
|
Family and communtiy services and veterans' affairs legislation amendment (Income Strams) Bill 2004
The Inquiry
99.1
The Family
and Community Services and Veterans' Affairs Legislation Amendment (Income
Streams) Bill 2004 (the Bill) was introduced into the House of
Representatives on 26 May 2004 and in the Senate on 15 June 2004. On 16 June 2004, the Senate, on the
recommendation of the Selection of Bills Committee (Report No. 8 of 2004),
referred the Bill to the Committee for report.
99.2
The Committee considered the Bill
at a public hearing on 18 June 2004.
Details of the public hearing are referred to in Appendix 2. The Committee
received six submissions relating to the Bill and these are listed at Appendix
1. The submissions and Hansard transcript of evidence may be accessed through
the Committees website at https://www.aph.gov.au/senate_ca
The Bill
99.3
The purpose of the Bill is to change the social security and
veterans' affairs means test assessment for certain income streams.
99.4
Currently, income streams that meet certain criteria
are 'asset-test exempt' for the purposes of the means test for social security
and veterans' affairs payments. This means that the asset value of the income
stream is not taken into account when determining a person's eligibility for a
social security payment. The proposed legislation seeks to change entitlements
means test assessments of income streams to:
-
extend asset-test exempt status for a new
product, 'market-linked income streams' from 20 September 2004. This product
will offer market returns but the purchaser will not be able to withdraw his or
her capital before the term of the product has been ended (ie it is
non-commutable); and
-
change the social security assets test exemption
from 100 per cent to 50 per cent for non-commutable income streams that are
purchased from 20 September 2004 and meet the requirements for exemption
from the assets test.[1]
99.5
The Bill also contains provisions to align the
characteristics of life expectancy income stream products with those of the new
market-linked income stream products. This will ensure that the products are
treated in a consistent manner under the means test.
99.6
Under present arrangements, life expectancy income
streams only retain assets test exempt status on reversion to a reversionary
beneficiary where the remaining term of the income stream matches the
beneficiary's life expectancy at the time of death. As a consequence, for most
life expectancy income streams, assets test exempt status is lost when the
income stream reverts. Under the proposed legislation individuals, who purchase
life expectancy and market-linked income streams on or after 20
September 2004, will have 'greater confidence that the
income stream will retain its asset test exempt status on reversion to a
partner'.[2]
99.7
The Bill also proposes to extend the guarantee period
for asset-test exempt lifetime income streams. The current means test rules
stipulate that an asset test exempt lifetime income stream may only be commuted
if the primary beneficiary dies within a 10-year period of purchasing the
income stream. The Bill will extend this period to allow a lifetime
income stream to be commuted provided that the primary beneficiary dies within
a period equal to his or her expectancy or within 20 years of purchasing the
income stream, whichever is the lesser.
99.8
Table 1.1 provided by the Department of Family and
Community Services gives a pictorial representation of the different categories
of income streams products.
Issues
Market-linked income streams
99.9
Market-linked income streams will offer market returns
but the purchaser will not be able to withdraw his or her capital before the
term of the product has ended (that is, it is non-commutable). Presently,
consumers can only select insurance-based income streams which offer a
guaranteed income but at generally low return.[3] According to evidence provided, the
availability of many other products will be a consequence of this legislation.
99.10
The Investment and Financial Services Association
(IFSA) stated that the new product would enable retirees to 'invest in a
balanced portfolio of investments and that will improve both the amount and the
quality of their returns over their retirement'. In addition, because market-linked
income streams do not involve any income guarantees, a broader range of funds,
both in the for-profit sector and elsewhere, will be able to offer products.[4]
Table 1.1
Source: Submission No.1 (Department of
Family and Community Services).
99.11
IFSA also noted that the changes to life expectancy provisions
will result in 'a significant lengthening, we believe, in the terms that people
can choose and, importantly, a choice in the length of term between life
expectancy and the life expectancy of somebody five years younger than you'.
There are also changes to the provisions concerning who can purchase a market-linked
income stream with either a couple or an individual now being able to purchase
the product.[5]
99.12
IFSA concluded that the changes will result in 'quite
significant competition amongst product providers'. In addition a strong demand
from consumers was expected as there is a need for retirees to invest in growth
assets to fund their retirement.[6] The market-linked
income streams 'will be a better product by the measures that consumers bring
to the marketplace than the preceding offers'.[7]
99.13
The Securities Institute also noted that market-linked
income streams provide better returns, higher levels of income over time for
retirees and allow retirees to control their capital.[8]
99.14
The Department of Family and Community Services (FaCS)
noted that the proposed changes to extend assets test exempt status to the new
'market-linked income streams' will increase competition in the income streams
market and provide retirees with more choice and flexibility by making
available a wider range of products that best meets their retirement needs.[9]
99.15
The Department stated that features which will allow more
flexibility include:
-
life expectancy provisions which allow for a
choice of the individual's life expectancy or life expectancy at an age five
years younger than that persons current age. Individuals who are members of a
couple will also have the choice of selecting the term based on their spouses
life expectancy and life expectancy of that partner at an age five years
younger;
-
allowing retention of the assets test exemption
on reversion to a spouse, if the primary beneficiary dies, provides couples with
greater choice in purchasing income streams that provide income for the greater
part of both partners' lives.
-
payments being made to the recipient annually
and are based on payment factors contained in the Superannuation Industry
(Supervision) Regulations;
-
the product will be non-commutable except in
limited circumstances, such as hardship or divorce; and
-
purchase of market-linked income stream products
by an individual from any age and obtain the 50 per cent asset test concession
from purchase.[10]
Changing the asset test exemption to 50 per cent
99.16
The Association of Superannuation Funds of Australia (ASFA)
stated that it supported the measures 'particularly the reduction from 100 per
cent to 50 per cent, if they better target the public pension'.[11]
99.17
FaCS also stated that the change in the assets test
exemption from 100 per cent to 50 per cent for asset test exempt income streams
purchases after 20 September 2004
is aimed at ensuring that social security payments are paid to those who need
it most. FaCS noted that even after the change, it will be possible for home
owner couples to invest $900,000 in a complying income stream and still receive
some age pension if they have no other assessable assets. FaCS concluded that,
while providing some concessions:
These changes will make the retirement income system fairer by
better targeting the age pension to those in need.[12]
Recommendation
99.18
The Committee reports to the Senate that it has
considered the Family and Community Services and Veterans' Affairs Legislation
Amendment (Income Streams) Bill 2004 and recommends
that the Bill proceed.
Senator Sue Knowles
Chairman
June 2004
Family and
Community Services and Veterans' Affairs Legislation Amendment (Income Streams)
Bill 2004
Additional
Comments from Labor Senators
The tightening of the assets test, which
reduces the level of tax exemption for certain complying pensions from 100%
down to 50%, will have a significant impact over time on those entitled to
claim the age pension.
It will lead over time to either the loss,
or a reduction, in the level of the age pension that many low and middle income
Australians would otherwise have been entitled to on retirement and not just
millionaires as was inferred by the Department, IFSA and ASFA.
The number of persons estimated to be
affected in the first year is 19,000 to 20,000.
This number will continue to grow at a similar rate in the following
years as reflected in the projected savings.
|
Year
|
2005/06
|
2006/07
|
2007/08
|
|
Amount
|
$28 million
|
$60million
|
$97 million
|
In addition, the effect of superannuation
balances, which will increase significantly as a result of compulsory
superannuation which was introduced in 1987, and are included in the means
test, means that there will be a significant average increase in assets for many
individuals in futures years.
Taking into account the fact that the asset
test for single persons cuts in at approximately $150,000, increasing numbers
of low and middle income Australians will be caught by this measure.
Senator
Jan McLucas
(ALP, Queensland)
Senator
Nick Sherry
(ALP, Tasmania)
Appendix 1 - Submissions received by the Committee
|
1
|
Department of Family and Community
Services
|
|
2
|
Industry Fund Services Pty Ltd (IFS)
|
|
3
|
Investment & Financial Services
Association Ltd (IFSA)
|
|
4
|
Small Independent Superannuation Funds
Association Ltd (SISFA)
|
|
5
|
Securities Institute
|
|
6
|
The Association of Superannuation Funds of
Australia Limited (ASFA)
|
Appendix 2 - Public Hearing
A public hearing was held on the Bill
on 18 June 2004 in House of
Representatives Committee Room 2R1, Parliament House, Canberra.
Committee Members in attendance
Senator Knowles
Senator Humphries
Senator McLucas
Senator Sherry
Witnesses
Investment &
Financial Services Association Limited (IFSA)
Mr Bill
Stanhope, Senior
Policy Manager
Ms Nicolette Rubinsztein, General Manager, Colonial First
State Investments Ltd
Association of
Superannuation Funds Australia (ASFA)
Dr Michaela
Anderson, Director, Policy
Mr Robert
Hodge, Senior
Policy Adviser
Department of Family
and Community Services
Mr Alex
Dolan, Assistant Secretary, Seniors and
Means Test Branch
Mr Sam
Cavalli, Director, Seniors and Means Test
Branch
Department of the
Treasury
Mr Patrick
Boneham, Senior
Adviser, Superannuation, Retirement and Savings Division