1.1
On 28 September 2022, the Senate referred the provisions of the Social Services and Other Legislation Amendment (Incentivising Pensioners to Downsize) Bill 2022 (the bill) to the Senate Community Affairs Legislation Committee (the committee) for inquiry and report by 20 October 2022.
Conduct of the inquiry
1.2
Details of the inquiry were made available on the committee’s website. The committee also contacted a number of organisations and individuals inviting written submissions by 7 October 2022.
1.3
The committee received three submissions, as listed at Appendix 1.
Compatibility with human rights
1.4
The statement of compatibility with human rights states that the bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
1.5
The statement notes that Schedule 1 of the bill engages the right of everyone to social security in Article 9 of the International Covenant on Economic, Social and Cultural Rights, and that the amendments ‘support the right to social security by increasing the flexibility of an existing social security benefit’.
Consideration by other committees
1.6
The Parliamentary Joint Committee on Human Rights made no comment on the bill in its Report 4 of 2022.
1.7
The Senate Standing Committee for the Scrutiny of Bills made no comment on the bill in its Scrutiny Digest 5 of 2022.
Financial impact
1.8
The explanatory memorandum to the bill states that Schedule 1 of the bill will have $61.4 million in financial impact over the forward estimates. The ongoing cost per year is not provided.
Acknowledgement
1.9
The committee thanks the organisations that made submissions for their interest and contributions to the inquiry.
Structure of the report
1.10
This report contains two chapters. This chapter sets out:
background information relating to the bill and relevant policy area;
an overview of the provisions in the bill; and
a practical example of how the amendments would benefit pensioners and other income support recipients seeking to downsize their principal home.
1.11
Chapter 2 sets out the submitters’ views on the bill and concludes with the committee’s view and recommendation.
Purpose of the bill
1.12
In her second reading speech, the Minister for Social Services, the Hon Amanda Rishworth MP (the Minister) stated that the bill will deliver amendments that will ‘remove a potential barrier to pensioners downsizing their principal homes by reducing the impact that this has on their social security means testing’.
1.13
According to the explanatory memorandum, the bill amends the Social Security Act 1991 (Social Security Act) and the Veterans’ Entitlements Act 1986 (Veterans’ Entitlements Act) to better support pensioners (or other eligible income support recipients) during the sale and purchase of a new principal home, by:
extending the existing assets test exemption for principal home sale proceeds which a person intends to use to purchase a new principal home from 12 months to 24 months; and
applying only the ‘below threshold’ deeming rate to the principal home sale proceeds when calculating deemed income for the period during which the proceeds are exempt from the assets test.
1.14
These changes reduce the impact of selling and buying a new principal home on an income support recipient’s rate of payment.
1.15
The Minister stated that, along with other measures, this bill will work to:
… encourage more older Australians to downsize their homes, reducing the impact of downsizing on older Australians’ access to the pension at the same time as improving housing access and affordability and enabling growing families more opportunities to find suitable housing options.
Background
1.16
This section provides an overview of how the current age and veterans’ income support payments operate.
1.17
Under Australia’s income support system, the rate of income support payable depends on a person’s income and assets, and is calculated using different formulas. The test that results in the lower (or nil) rate is the one that applies.
Assets testing
1.18
The assets test includes the value of real estate (not including a person’s principal home or place of residence) and financial investments.
1.19
Currently, when a pensioner (or other eligible income support recipient) intends to use the proceeds from selling their principal home to purchase or build another home, those proceeds are exempt from the assets test for up to 12 months. An additional 12-month extension can be granted in specific circumstances. This prevents the sale proceeds affecting an income support recipient’s payment rate through the assets test. However, income is still deemed from the value of the sale proceeds and can affect payment rates through the income test.
Income testing
1.20
The income test is based on a person’s (and their partner’s) annual rate of ordinary income, and includes income deemed to be generated by financial assets such as financial investments. A financial investment includes bank accounts, cash, deeming or term deposit accounts, managed investments or shares and securities.
1.21
To determine how much income a financial asset produces, deeming provisions are applied. Deeming assumes that a financial asset earns a set rate of income, regardless of the actual rate of income generated.
1.22
The deeming rates are different depending upon the total value of the person’s and their partner’s financial assets. An individual’s financial assets are added together to generate a total value. The proportion of that value below a threshold is deemed at the ‘below threshold rate’, set by legislative instrument made under the Social Security Act, and under section 46J of the Veterans’ Entitlements Act, and is subject to change.
1.23
The value of the person’s financial assets at or above the threshold is deemed at the ‘above threshold rate’. The above threshold rate is a higher rate, and generates more deemed income than the below threshold rate.
1.24
Couples where one or both members are receiving a social security pension, a services pension, an income support pension or a veterans payment are known as a pensioner couple. The financial assets of both members of a pensioner couple are pooled and treated as joint. The financial assets of a person who is a member of a couple that is not a pensioner couple (for example, where a member of the couple is receiving the Jobseeker allowance) are treated individually.
1.25
The threshold is currently $56 400 for a single pensioner, and $93 600 for a pensioner couple. The threshold is $46 800 for a person who is a member of a non-pensioner couple.
1.26
The sale value of a home will generally exceed these thresholds, and under the current arrangements, income would be deemed at the above threshold rate. The above threshold rate is currently 2.25 per cent, and the below threshold rate is 0.25 per cent.
Provisions
1.27
The bill is comprised of one schedule (Schedule 1 – Amendments) that would amend the Social Security Act and the Veterans’ Entitlements Act.
1.28
If passed by the Parliament, the provisions will commence on the later of 1 January 2023 or the day after the end of the period of one month beginning on the day the bill receives Royal Assent.
Schedule 1 – Amendments
Amendments to apply the lower deeming rate to assess income on principal home sale proceeds
1.29
Items 1–6 and 9–14 of the bill amends the calculation method for deeming income from financial assets (including principal home sale proceeds) for pensioners, pensioner couples, members of non-pensioner couples and persons other than members of a couple.
1.30
The amendments treat assets test exempt principal home sale proceeds as a separate pool to the individual’s or couple’s other financial assets for the purpose of calculating deemed income. Only the below threshold rate will be applied to these proceeds for the duration of the assets test exemption.
1.31
Under current deeming rules, the lower deeming rate of 0.25 per cent is applied to the value of financial assets up to a deeming threshold of $56 400 for singles and $93 600 for couples combined. The upper deeming rate, presently 2.25 per cent, applies to the value of financial assets above these thresholds.
1.32
Given the high value of most Australian homes, this means the bulk of home sale proceeds are often subject to the upper deeming rate.
1.33
The amendments in the bill would amend the Social Security Act and the Veterans’ Entitlements Act to ensure that only the lower deeming rate is used to assess income of principal home sale proceeds.
Amendments to extend the assets test exemption period for principal home sale proceeds
1.34
Items 7, 8, 15 and 16 of the bill amends the Social Security Act and the Veterans’ Entitlement Act to double the period of the automatic asset test exemption for the principal home sale proceeds which a person intends to use for the purchase of a new home.
1.35
The amendments extend the assets test exemption period for principal home sale proceeds from the current maximum of 12 months, to a new maximum of 24 months.
1.36
The current additional 12-month exemption for extenuating circumstances will continue under the amendments, meaning that in exceptional cases, home sale proceeds could be exempt from the social security test for up to 36 months from the date of the house sale.
1.37
Item 17 provides that the amendments in Schedule 1 apply in relation to working out a person’s income on or after the commencement of the Schedule.
Practical example
1.38
In her second reading speech, the Hon Amanda Rishworth MP, provided a practical example to illustrate how the bill would reduce the impact of selling and buying a new principal home on pensioners’ payment rates.
1.39
The Minister outlined the hypothetical circumstances of a maximum rate pensioner couple who have chosen to downsize by building a new, smaller home that better suits their needs.
1.40
Under the current rules, if the couple sold their existing family home for $1 million and intended to use $800 000 of that amount to purchase, build, repair or renovate a house of equal value, then the $800 000 would be exempt from the assets test for up to 12 months.
1.41
Without the changes proposed by this bill, and assuming the couple put the full sale proceeds of $1 million into a savings account and had no other financial assets, the deemed income assessed on this amount would be at the upper deeming date of 2.25 per cent of the $1 million, less the couple’s deemed threshold amount of $93 600, which would be deemed at the lower rate.
1.42
The Minister explained that this would have an effect of reducing the couple’s payments rate by about $229 a fortnight.
1.43
However, with the proposed changes in the bill, the $1 million less the deeming threshold area of $93 600, would be deemed at only 0.25 per cent. This would have the effect of reducing the deemed income on the couple’s home sale proceeds to well below the income-free area of $336 per fortnight, meaning that they would remain on the maximum pension rate.
1.44
In regards to the assets test, the Minister noted that under the current arrangements, if the couple experienced a building delay which prevented their home from being completed within 12 months, they could apply for an additional 12-month asset test exemption due to extenuating circumstances.
1.45
However, the Minister noted that if further complications arose (such as floods or other natural disasters), which prevented the new home from being completed by the end of the second year, the assets test exemption would expire and their home sale proceeds of $800 000 would be subject to the assets test. Under current settings, after 12 months they would no longer be treated as ‘homeowners’ for means-testing purposes.
1.46
Assuming they had no other assets, under the assets test for a non‑homeowner couple, their pension would be reduced significantly, by $1069.50 a fortnight, to a part rate pension of $419.30 per fortnight.
1.47
In contrast, the amendments in the bill would allow the asset test exemption to be extended to a total of 36 months in extenuating circumstances, in recognition that many people face repeated setbacks to the completion of a new home.
1.48
In setting out the example, the Minister acknowledged recent events which had contributed to many Australians experiencing setbacks in the completion of new homes. She referenced challenges experienced throughout the Australian building sector, such as economic pressures and labour market and supply chain issues due to COVID-19. The Minister also noted the significant impacts of repeated bouts of severe flooding over the past two years that had affected many Australians living in Queensland and New South Wales.
1.49
The Minister emphasised that the extended assets test exemption measure would give pensioners, and other income support recipients, more time, certainty, and peace of mind when building or purchasing a new home.