Treatment of lump sums 108-05020020

Item

Description

1

Money received from a deceased estate

Sue received $3,500 from a deceased estate. This was a one-off lump sum. This is considered an exempt lump sum. Sue must also advise how the money is spent as this may affect Sue's payments. For example, if the money was invested, it must be determined if it is an assessable asset. Deeming rules would also apply to any money invested.

2

Commission from selling real estate

See Income for an independent contractor and commission income for more information.

3

Back payment of employment income

Paid to customer before transition entitlement period (pre-7 December 2020)

• Mary received $400 back payment of wages following a decision by an Industrial Tribunal on 1 February 2020 to backdate a pay increase to 1 January 2020.
  Mary did not have a 'present legal entitlement' to the $400 until the Industrial Tribunal made a decision on 1 February 2020. The $400 is remunerative, coded as EAR (Earnings from Employment) on the EAN screen and held as income for 52 weeks(364 days) from 1 February 2020, as this is the date Mary became legally entitled to receive the payment. Key a review to remove this income after 52 weeks (364 days)
• Paul received a $300 back payment of wages after an administrative error resulted in an underpayment for the period 1-28 January 2020.
  Paul had a 'present legal entitlement' at the time the $300 was earned. Paul's employment income must be corrected for the period 1-28 January 2020, and any overpayment investigated. See Recording and correcting employment income details

Paid to customer on or after Entitlement Period Start Date (EPSD) of transition entitlement period (from 7 December 2020)

Example 1

Mary was paid $400 back payment of wages following a decision by an Industrial Tribunal on 1 February 2021 to backdate a pay increase to 30 Jun 2020. Payment was made 15 February 2021.

$400 was paid to Mary on 15 February 2021 for the period 1 January 2020 to 30 June 2020.

• Code the lump sum on EAPP:
• DOV: 15 February 2021 (date paid)
• Amount: $400
• Frequency: ‘Long Period’ LOP
• Start date: 1 January 2020
• End date: 30 June 2020
• Employment Status: ‘Part-Time Casual’ (PTC)

Do not record a review as the LOP will correctly expire at the end of the term.

Example 2

Paul received was paid a $300 back payment of wages on 15 March 2021 after an administrative error resulted in an underpayment for the period 1-28 January 2021 (28 days).

• Code the lump sum on EAPP:
• DOV: 15 March 2021 (date paid)
• Amount: $400
• Frequency: LOP
• Start date: 1 January 2021
• End date: 28 January 2021
• Employment Status: ‘Part-Time Casual’ (PTC)

The amount will be assessed back to the EPSD of the period in which it was paid and assessed for the period. This is equivalent to the period for which it was paid.

Do not record a review as the LOP will correctly expire at the end of the term.

4

Remunerative Lump Sum Coding Pre 7 December 2020 Example

Customer advised they received an Aged Care Workforce Bonus Payment in July 2020.
The amount received by the customer is $800 and is for a period of 13 weeks.
This amount should be recorded on EAN as:

• Employment Type: EAR (Earnings from Employment)
• Date of Event: The date the person is entitled to receive the lump sum
• Amount: This is to be converted to 2WE. For example, $800/13 = $61.54 X 2 = $123.08
• Frequency: 2WE
• code this amount off manually as zero, 13 weeks from date of event

Note: if multiple remunerative lump sums have been received from the same employer and the assessment periods will overlap, each lump sum must be recorded under a separate employer entry on EAN to make sure the correct assessment.

5

Do leave payments count as lump sums?

When employment is ongoing

The only leave payments treated as lump sums are those in respect of accrued entitlements paid at the same time as the employee is at work also earning wages (often referred to as leave paid out). Leave payments that are paid out are assessed as income for a number of days equal to the period that the payment represents.

Normal leave payments, that is, when an ongoing employee is paid for a recognised absence, counts as ongoing employment income.

When employment is terminated

Payments in respect of leave, made on or after termination, also not treated as lump sums:

• long service leave
• redundancy payments
• maternity leave
• recreation, and
• unpaid sick leave entitlements

However, in this situation these payments may contribute to the calculation of an Income Maintenance Period preclusion if the customer or partner is claiming Austudy, Disability Support Pension, JobSeeker Payment, Parenting Payment or Youth Allowance.

See Leave and termination payments paid by an employer.

6

Can employment income be treated as a lump sum?

Only employment income earned over more than 1 entitlement period can be treated as a lump sum. Income is recorded on the Employment Income Paid Details (EAPP) screen for the period it represents.

Item

Description

1

Why are profits from conventional life insurance policies included in the social security Income Test?

While the main purpose of conventional life insurance policies is to provide death cover, some policies include an investment element, which may pay bonuses to the investor. A person who invests in such a life insurance policy is seen as deriving income from a profit-making transaction.

To ignore the income from life insurance policies for Income Test purposes would be:

• inequitable compared with the treatment of other products, and
• inconsistent with the intention of the Social Security Act to assess income from all sources, with very limited exemptions. The Income Test is used to target income support to people at times of financial need while ensuring the social security safety net remains sustainable for Australian taxpayers

2

What is the current treatment of a conventional life insurance policy under the social security Means Tests (that is, under the Income Test and Assets Test)?

During the term of the policy:

• bonuses are not assessed as income until they are paid out by the policy holder
• the surrender value of the policy is assessed as an asset unless:
• the person became the owner of the policy after 1 July 2019, AND
• the person became the owner of the policy after the person reached pension age, AND
• the sum of the amounts paid for the policy in any 12-month period exceeds 15% of the maximum death benefit that would be payable if the person died on the day of assessment

In this situation, the value of the life insurance policy is the higher of:

• the surrender value of the policy, OR
• the sum of the amounts paid to purchase the policy, less any commuted amounts

• the asset value of the policy is reduced by the amount of the encumbrance if the customer borrows against the policy

Upon withdrawal from a policy - whether by surrender or the policy reaching the maturity date first specified for the policy (if a policy has matured but none or only part of the maturity entitlement is withdrawn, at the point of maturity the treatment is the same as if a full withdrawal had been made - this is because income is assessable when a person first has legal entitlement to it):

• the difference between the surrender/maturity value and the sum of the purchase price (if any) and the premiums paid by the investor over the life of the product is held as income over 12 months (under the Income Test)
• the Assets Test treatment depends on what is done with the money. For example, if it is used to purchase a motor vehicle, the value of the motor vehicle will be assessed as an asset of the person. If is it used to pay off a mortgage on the principal home, it will not be assessed because the principal home is an exempt asset. If it is placed in a financial investment it will be assessed as a financial asset, and the interest it earns will be treated under the Income Test deeming rules
• the precise effect of the withdrawal, and the use to which the money is put, depends on the circumstances of the individual. As well, the withdrawal may result in a person's assessment changing from the Assets Test to the Income Test and vice versa
• the balance remaining with the insurance company is treated in the same way as any other financial asset and is assessable under the Income Test deeming rules

3

When did the Income Test assessment of conventional life insurance policies change?

Before 21 July 1997, bonuses on conventional life insurance policies were not assessed as income. After 21 July 1997, the income testing of policies at surrender or maturity changed, as a result of a clarification of policy to make sure there was no misinterpretation of the Social Security Act.

4

Is a conventional life insurance policy deemed?

No. During its life, a conventional life insurance policy is not assessed as a financial investment under the Income Test deeming rules (unlike pure investment policies, which are assessed this way). Amounts withdrawn from a conventional life insurance policy reinvested in a financial investment would be assessed under the Income Test deeming rules.

5

Are there any exceptions to the current treatment, that is, have any policies ever been deemed?

Yes. A small number of insurance products, which were once assessed under the Income Test deeming rules, are now regarded as conventional life insurance policies.

For each of these policies (see below), the only bonuses now subject to the Income Test treatment are those bonuses accumulated from the date the policy was no longer assessed as a financial investment.

Conventional Life Insurance Policy previously considered a financial investment:

• Australian Catholic Guild Friendly Society Blue Chip Endowment Bond (now managed by the Grand United Friendly Society)

20 March 1997

• Australian Catholic Guild Friendly Society Blue Chip Endowment Bond Number 2

20 March 1997

• Lumley Life Limited Capital Guaranteed Pure Endowment Plan

20 March 1997

• MLC Life Limited Guaranteed Portfolio Endowment Plan

20 March 1997

• MLC Life Limited Pure Endowment Plan - 20 March 1997
• Manchester Unity Blue Chip Endowment Assurance Fund

26 May 1997

• Grand United Grand Bonds Assurance Fund

9 July 1997

• Hibernian Blue Chip Assurance Certificates

2 September 1997

• Newcastle Friendly Society Our Town Bond Fund

24 September 1997

6

How is a traded policy assessed - for the seller? - for the purchaser?

For social security Means Test purposes, a life-assigned policy retains its status as a conventional life insurance policy even when sold or purchased, for example on the secondary life insurance policy exchange. This means the Income Test and Assets Test treatment of such a policy in the hands of the purchaser follows the same principles as if the policy was in the hands of the original owner.

In the hands of the person selling the policy

The proceeds from the sale will be assessed under the Income Test the same way as the amount received upon surrender or upon maturity. If the full value is not received, the Assets Test deprivation assessment outlined in the previous answer applies.

Example

The original owner buys an endowment insurance policy having a sum insured of $10,000 and pays premiums totalling $7,000. There is no initial purchase price.

After accumulating bonuses to the value of $4,000, the policy is sold for $13,000.

The income assessed for the original owner is $6,000, calculated as follows: the sale price of $13,000 minus $7,000, which is the sum of the purchase price ($0) and the value of the premiums paid ($7,000).

In the hands of the purchaser

The income assessable upon surrender or maturity is the difference between the surrender/maturity value and the sum of the purchase price paid by the purchaser and any premiums paid by the purchaser.

Example

The purchaser of the policy in the above example continues to meet the premium payments, paying a total of $3,000 in premiums. The policy accumulates further bonuses and matures, with a maturity value of $20,000.

The income assessed for the purchaser upon maturity is $4,000: the maturity value of $20,000 minus $16,000, which is the sum of the purchase price ($13,000 plus the value of premiums paid since the policy changed hands $3,000).

7

What happens when a partial withdrawal is made during the term of the policy?

The assessment of partial withdrawals can be complex. Only the profit (investment earnings component) of the withdrawal is assessed as income over 12 months.

For a partial withdrawal, the amount is reduced proportionally.

Profit multiplied by the amount of withdrawal divided by value of investment at withdrawal.

Example

A customer withdraws $20,000 from a policy with a surrender/maturity value of $60,000 and a profit component of $30,000.

To calculate the amount of income to be assessed for social security purposes:

$30,000 x $20,000/$60,000 = $10,000 to be assessed.

Note: subsequent withdrawals will be assessed similarly.

Example

After the first withdrawal, the above policy has a surrender/maturity value of $40,000 and a profit component of $20,000 (the original component minus the amount assessed as income).

The customer withdraws a further $20,000.

To calculate the amount of income to be assessed for social security purposes:

$20,000 x $20,000/$40,000 = $10,000 to be assessed.

Note: if a policy has matured but is not fully withdrawn, at the point of maturity the treatment is the same as if a full withdrawal has been made. As well, the amount remaining with the insurance company is treated as any other financial asset and deemed accordingly.

8

Can the profit from one policy be offset against the losses from another?

No. The profits arising from one conventional life insurance policy cannot be offset against the losses from another policy.

Item

Description

1

How is a policy assessed when ownership is gifted to another?

For the person making the gift, the asset value, less the allowable gifting amount, will be assessed as a deprived asset and deemed under the Means Test for 5 years from the date of disposal.

For the person receiving the gift, the income assessable upon surrender or maturity will be the difference between the surrender/ maturity value and the sum of the surrender value at time of receipt of the gift plus any premiums paid by the recipient of the gift.

Note: the precise effect of the gifting depends on the circumstances of the individual. 'Gifting' may result in a person's assessment changing from the Assets Test to the Income Test and vice versa.

2

Are borrowings against a policy assessed under the Income Test?

No. Genuine borrowings by a policy owner are not assessed as income, but neither do they reduce the surrender/maturity values for when determining the difference for Income Test purposes.

3

Are the entire conventional life insurance policy accumulated bonuses assessed as income?

Yes. The entire conventional life insurance policy accumulated bonuses are assessed as income, irrespective of the period during which the customer received social security payments. The value of the accumulated bonuses is calculated by subtracting the sum of the purchase price and the premiums paid by the investor from the surrender/maturity value.

4

Are conventional life insurance policy bonuses assessed as income when they are received before claiming social security payment?

Yes. Bonuses received (paid to the policy holder) up to 12 months before a claim is made for social security income support are assessed as income. A person is taken to receive the bonus income for 12 months starting the day on which the person becomes entitled to that bonus.

5

Are bonuses never seen by the owner of a policy (because they are used to repay a loan from the life insurance company against the policy) assessed as income?

The bonuses are considered to be income, as the owner of the policy has benefited from the use of the bonuses to reduce the loan (the borrowings) from the life insurance company.

6

What happens if only conventional life insurance policy the bonuses are cashed in?

The value of the bonuses is assessed as income over 12 months.

7

How is a payment of an insurance death benefit assessed?

Life insurance offices commit to paying a specified minimum benefit on the occurrence of particular events such as the death of the insured.

A death benefit is not assessed as income for the person nominated to receive the benefit. See Exempt lump sums.

Assets Test assessment will depend on how the money is used. For example, if it is used to pay out the mortgage on a principal home it becomes part of an exempt asset. If it is placed in a financial investment it will be assessed as a financial asset, and the interest it earns will be treated under the Income Test deeming rules.