5.1.8.40 Pension reform - transitional arrangements

Summary

This topic contains information on the transitional arrangements that apply to those receiving a pension as at 19 September 2009.

This topic contains information on the following:

• overview of the transitional arrangements
• rationale for the transitional arrangements
• application of the transitional arrangements
• working out whether a person is paid under the transitional arrangements
• calculating the rate of pension under the transitional arrangements
• maximum transitional rate of pension
• calculating the rate of pension under the transitional arrangements - members of a couple
• periods when a person is paid the transitional arrangements pension rate
• access to transitional arrangements - working credit
• taxation of transitional arrangements rate pension payments, and
• transitional arrangements for people receiving DSP under 21 with no children at 20 September 2009.

Overview of transitional arrangements

The transitional arrangements refer to provisions in the social security legislation that allow a person whose pension is affected by changes made to pensions from 20 September 2009 to have their pension assessed under the pension rules that applied before 20 September 2009 plus an increase ($20.20 a fortnight for singles, $20.30 per fortnight for couples combined), or the rules that applied from that date, whichever provides a higher rate of payment.

The relevant pension changes that applied from 20 September 2009 were:

• the MBR of pensions for all pensioners was increased, apart from those on DSP for those under 21 with no dependent children
• the income test withdrawal rate was increased from 40c to 50c for each extra dollar of private income above the income test 'free area'
• the additional income test free area for dependent children was removed, and
• a work bonus was introduced providing that half of the first $500 of employment income earned a fortnight is disregarded under the income test for pensioners over age pension age (in addition to the usual operation of the income test free area).

Note: From 1 July 2011, the work bonus was improved to allow pensioners to earn up to $250 a fortnight in employment income without it being assessed under the income test. Pensioners are also able to build up any unused amount of the $250 fortnightly exemption to a total of $6,500.

Note: From 1 July 2019, the work bonus was expanded to include self-employment income from gainful work, as well as employment income. The work bonus amount was also increased from $250 to $300 for each 14 day instalment period and the maximum work bonus income concession bank balance was increased from $6,500 to $7,800.

Note: From 7 December 2020, changes were made to the assessment of employment income for social security purposes. As part of these changes, the work bonus is now determined based on when a recipient is taken to have been paid employment income as opposed to when it is earned. This change only applies to income from employment. Income from gainful work from self-employment continues to be assessed when first earned, derived or received.

Rationale for the transitional arrangements

Most pensioners including all full maximum rate pensioners immediately benefited from 20 September 2009 from the increase to the MBRs of pension.

However, the change to the income test withdrawal rate and the free area for dependent children could mean that a person's pension would be reduced or cancelled.

The transitional arrangements were introduced to ensure that no pensioner who was receiving a pension at the commencement of the changes to the income test from 20 September 2009 is worse off as a result of the changes.

Application of the transitional arrangements

The transitional arrangements may be used from 20 September 2009 to work out a person's provisional annual rate of:

• Age, including to a person who is permanently blind
• DSP or disability wage supplement of a person who
  • has turned 21, or
  • of a person who has not turned 21 and has one or more dependent children*
  • including to a person who is permanently blind
• wife pension
• carer payment
• mature age allowance under Part 2.12A
• mature age partner allowance
• bereavement allowance, and
• widow B pension.

The transitional arrangements may apply to a person if the person was receiving on 19 September 2009 one of the following social security pensions:

• age pension
• disability support pension*
• wife pension
• carer payment
• bereavement allowance
• widow B pension
• special needs pension
• service pension
• income support supplement

and the person continues without a break to receive one of the above payments.

* Special rules apply to people receiving DSP who are under 21 with no children.

Note: WP and WidB ceased on 20 March 2020. BVA ceased on 20 September 2020. Mature age allowance closed to new recipients from 20 September 2003 and completely phased out from 19 September 2008. Mature age partner allowance closed to new recipients in 1995, and no recipients on this payment since July 2001.

Transfer between payments

The transitional arrangements can apply if a person transfers between one of the above payments or otherwise stops receiving one of these payments and starts receiving another of the above payments without a gap of a day or more between the payments.

Pension payments cease to be payable on or after 20 September 2009

If the person ceases to receive a social security pension on or after 20 September 2009, the transitional arrangements cease to apply to the person. The person can no longer have their pension calculated under the transitional arrangements. They have their payment assessed under the relevant pension rate calculator e.g. at point 1064-A1, 1065-A1 or 1066-A1, or under section 796.

Pension commences to be payable on or after 20 September 2009

The transitional arrangements do not apply to a person who commences to receive a pension on or after 20 September 2009.

People who commence to receive a social security pension on or after 20 September 2009, (and were not receiving a pension on 19 September 2009) have their payment assessed under the relevant pension rate calculator.

Working out whether or not a person is paid under the transitional arrangements

The transitional arrangements may apply where the person's provisional pension rate in the relevant pension rate calculator is worked out under the income test.

To work out whether the person's income tested rate is to be calculated under the transitional arrangements, it is necessary to make a comparison between:

• the provisional annual rate payable to a person under the relevant pension rate calculator (as amended from 20 September 2009).
  • From 20 September 2009, the MBRs of pensions were increased over and above the usual indexation arrangements, the income test withdrawal rate was increased to 50c, the 'free area' for dependent children was removed and a work bonus (3.1.15) was introduced, under which half of the first $500 of employment income earned in a fortnight is disregarded under the income test for pensioners over age pension age, and
• the rate of pension payable to the person that would have been paid under similar pension rules that applied prior to 20 September 2009 including the 'old' income test rules and CPI indexation (including the increase payable from 20 September 2009), plus the increase of $20.20 a fortnight for singles, or $20.30 per fortnight for couples combined (referred to here as 'the transitional arrangements rate').
  • Prior to 20 September 2009, the income test withdrawal rate was 40c for each extra dollar of private income above the income test 'free area'.

The following table shows the steps involved in working out whether the person is paid a transitional rate of pension.

Calculating the rate of pension under the transitional arrangements

A person's transitional pension rate under the relevant pension rate calculator is worked out as follows:

Maximum transitional rate of pension

The maximum pension rates payable to a person assessed under the transitional arrangements are set out at 5.1.8.10 Common pension rates.

A person's maximum transitional pension rate depends on the person's partnered status and whether or not they are in residing in Australia or have been temporarily absent from Australia for up to 6 weeks.

The maximum transitional rates of pension incorporate some additional payments that before 20 September 2009 were identified separately, such as PhA, TAL and UA.

Where a person receives the transitional rate of pension, these former payments are no longer separately identified. However, equivalent amounts have been incorporated into the rate of pension.

The maximum transitional rates of pension are based on the former payments set out in the following table.

Indexation of the transitional pension rates

The transitional pension rates are subject to indexation on indexation days. The amounts will be indexed to the CPI on 20 March and 20 September of each year under SSAct Part 3.16.

Calculating the rate of pension under the transitional arrangements - members of a couple

Where a person is a member of a couple, and at least one member is a pensioner (i.e. paid under the pension means test), the person and their partner's assessable ordinary income is added together, and half of the total income is used to work out each member of the couple's social security payment under the relevant rate calculator. The work bonus provisions may apply to either member of the couple (where the person is of age pension age) and affect the amount of the couple's combined income. The work bonus is applied first to each member of a couple's income (if applicable) before their income is added to their partner's income and the combined total is halved.

Once a person's rate has been calculated under the relevant rate calculator, it will then be necessary to determine if the transitional rate provisions apply to one or both members of the couple. If they do, it will be necessary to then calculate the person's pension rate under the transitional provisions to determine whether or not the person's payment would be higher under those provisions.

If the transitional provisions apply to a member of the couple, half of the couple's combined income (excluding any application of the work bonus provisions) is used to work out that member of the couple's (Partner A) transitional rate of pension.

In working out their partner's social security payment (Partner B) under the relevant rate calculator, it is assumed that the transitional provisions do not apply to Partner A. This means that the Partner B's rate of social security payment under the relevant rate calculator continues to take account of the work bonus rules (if applicable).

If Partner B has their rate determined under the transitional rate provisions, half of the couple's combined income is used to work out that member of the couple's pension, and the work bonus provisions do not apply to that person.

In other words, members of a couple always have their pension calculated under the 'new rules' (including the work bonus if applicable), and then a comparison is done with the person's transitional rate to determine which rate of pension will be payable. If the transitional rate of pension applies to one member of a couple, there is no recalculation of the couple's income when calculating the partner's payment to disregard any effect of the work bonus.

These arrangements were introduced so that the benefit of the work bonus is able to flow from one member of a couple to the other irrespective of whether or not a person's rate is determined by the transitional arrangements.

Periods when a person is paid the transitional arrangements pension rate

A pensioner can continue to be paid the transitional arrangements (Total B in Table A) until a determination is made that this amount is equal to or less than Total A in Table A, i.e. where the transitional rate provides the higher rate of payment.

Where the transitional arrangements cease to apply, the person's payment is calculated under the relevant payment rate calculator.

Limit on access to transitional arrangements

Where a person has been paid under the transitional arrangements, and those arrangements have ceased to apply to the person (because they do not a provide a higher rate of payment than if their pension were assessed under the relevant pension rate calculator), the person's pension cannot ever again be paid under the transitional arrangements, except where they have been a 'respite care couple'.

Access to transitional arrangements - respite care couples

A person who is a member of a couple (except an illness-separated or respite care couple, or their partner is in goal) does not lose access to the transitional arrangements where:

• they had been receiving payment under the transitional arrangements, and
• they or their partner become a member of a respite care couple (as defined in SSAct subsection 4(8)).

When the person ceases to be a member of a respite care couple, they can resume being paid in accordance with the transitional arrangements.

Access to transitional arrangements - working credit

A person may continue to have access to the transitional arrangements where:

• at 19 September they were using their working credits to reduce their assessable employment income, and
• on 20 September 2009 they commenced to be paid under the new rules rather than the transitional rules because of these working credits.

The person is allowed to continue to have access to the transitional rules, where those rules provide a higher rate of pension, when their working credits have been exhausted.

When their working credits have been exhausted, if their pension rate would be higher under the new system, they would lose access to the transitional rules.

Taxation of transitional payments

Where a person receives a pension under the transitional arrangements, the amount payable is taxable in the same way as if it were the person's pension supplement.

A person's pension supplement is exempt from tax in accordance with Income Tax Assessment Act 1997 sections 52-10 and 52-15 except for the 'person's basic pension supplement' amount.

The maximum basic supplement amount of a person's transitional payment depends on a person's family situation. At 20 March 2010, these amounts were:

These amounts are indexed on 20 September and 20 March in line with the CPI.

Taxable portion where pension paid at less than the maximum rate

Where a person's payment is reduced by the operation of the income test, the assets test or the compensation provisions, the order of reduction, in descending order is:

• the taxable basic pension supplement amount
• the remaining pension supplement amount (apart from the person's minimum pension supplement amount)
• RA (if applicable)
• the pension's minimum pension supplement amount.

The minimum supplement amount is paid in full where a part-rate entitlement exists, and is the amount that would otherwise be the person's 'minimum pension supplement amount'. See 3.12 for further information.

Transitional arrangements for people receiving DSP under 21 with no children at 20 September 2009

People receiving DSP under 21 with no children at 20 September 2009 were not eligible to the increased rates of pension payable as a result of the pension 20 September 2009 changes. However, DSP paid to these people became subject to an increase in the income test withdrawal rate from 40c to 50c for each dollar of income over the allowable income test threshold.

To ensure that those under 21 and without a dependent child or children receiving DSP at 19 September 2009 with affecting income did not have a reduction in their payment as a result of the increase in the income test withdrawal rate, these pensioners continued to have their payments assessed under the rules that applied to them before 20 September 2009.

Eligibility to the under 21 DSP transitional arrangements

To be eligible for these transitional arrangements, a person had to be:

• under 21 and without a dependent child or children receiving DSP at 19 September 2009, and
• at 19 September 2009, had their payment reduced because their assessable income exceeds the allowable income threshold.

If a person's rate was not reduced because of their income (e.g. they had income below the allowable threshold) these transitional arrangements did not apply to them.

By 20 September 2014, there were no pensioners left who were still entitled to receive DSP at the transitional rate previously payable to those under 21 without children.

Operation of the under 21 DSP transitional arrangements

Where the transitional arrangements applied, a disability support pensioner's payment was assessed under Rate Calculator D.

When the under 21 DSP transitional arrangements applied

The transitional arrangement applied while a person:

• was in receipt of DSP
• was under 21
• did not have a dependent child or children, and
• their pension was reduced because of their ordinary income.

Once one of these conditions was no longer fulfilled, the transitional arrangement ceased to apply to the person and could not apply ever again. In these circumstances, their pension was assessed under the relevant pension rate calculator.

For disability support pensioners under 21 whose pension would otherwise have commenced to be assessed using an income test taper rate of 50 cent for each dollar of ordinary income over the allowable income test threshold, a 40 cent taper rate was to be applied.