18.104.22.168 Determining the rate of income for pensioners of age pension age pre-20/09/2009
This topic provides information about:
- rate of ordinary income
- methods of assessing income
- annual income assessment
- variable income
- how to determine an annual rate of income - short breaks in earnings
- how to determine an annual rate of income - one-off income amounts for one to several days
- how to determine an annual rate of income - total amount MAY equal annual rate
- apportioning lump sums over 12 months
- apportioning remunerative lump sums over 12 months, and
Rate of ordinary income
The rate of ordinary income (1.1.O.30) is a required input to the rate calculation process for social security pension payments. This rate of ordinary income is the sum of the rates of the components of ordinary income. Employment income (1.1.E.102) is a component of ordinary income, as are financial investment income, deemed income and various other types of income.
Methods for assessing income
Prior to 20 September 2009 there were 2 methods of assessing income for pensions:
- annual rate of the income assessment, and
- variable income.
Each of these methods is discussed in this topic.
Annual rate of income assessment
If earnings are at a regular constant rate, the current rate whether weekly, fortnightly or monthly, is converted to an annual rate of income.
- Earnings of $150 a week equal rate of income of $7,800 ($150 × 52).
- If earnings increase to $160 a week the new rate of income is $8,320 ($160 × 52).
If income is not earned at a constant or clearly recognisable rate, average earnings over a suitable period may be used to obtain a rate.
- Casual earnings that vary from week to week.
- Fixed regular earnings with fluctuating overtime.
- Regular earnings with fluctuating hours.
- Intermittent earnings when employment stops and starts unpredictably but a consistent pattern of employment is established.
If there is difficulty in deciding what period to average earnings over, the guiding principle is that the calculation should provide a reasonable reflection of the current rate of income.
Generally an average of the previous 13 weeks earnings provides an acceptable figure if the pattern of earnings is likely to continue. However, less than 13 weeks average MAY be more appropriate if the shorter period better reflects the pattern of earnings.
Determine an annual rate of income - short breaks in earnings
If a delegate is satisfied that employment is continuing but there are short breaks in earnings, it is acceptable to average the earnings over the period, including breaks. A short break should generally be considered as 6 weeks or less.
- Where employment is likely to continue after a short break.
- A casual part-time teacher's earnings of $200 a week during school terms only (a total of 40 weeks a year) gives an annual rate of $8,000 a year, assessed over the whole year. The annual total must include any amount of leave bonus, allowances or other benefits paid over the year.
Determine an annual rate of income - one-off income amounts for one to several days
Generally, amounts of 'one-off' income received are not taken into account UNLESS they are part of a pattern of income. This income should be recorded so that any pattern of one-off payments can be established. Income such as earnings can be considered as one-off income if they are not likely to be repeated in the short to medium term and the person does not have a history of income from the source.
One-off earnings are not limited to income from employment for one day. The employment may last several days, but must have the characteristics of one-off or never likely to be repeated. Sometimes this evaluation can only be made in hindsight. If it is established that a pattern of employment exists, income from that employment should be assessed to determine an annual rate of income.
Explanation: In the High Court case of Harris v Director-General of Social Security (1985) 57 ALR 729 it was decided that if a source of income no longer exists, the income from that source will not affect the current rate of pension (the 'Harris principle').
Example: One-off earnings would include a person working for the Royal Easter Show for 3 consecutive days, once a year, every year. Even though employment occurs every 12 months, which in itself is a pattern, it is too irregular to constitute ongoing income.
Policy reference: SS Guide 22.214.171.124 Employment Income for Pensioners of Age Pension Age pre-20/09/2009
Determine an annual rate of income - total amount MAY equal annual rate
In some circumstances, an age pensioner's total earnings from employment MAY be treated as the annual rate (rather than setting an annual rate based on earnings per fortnight (pf) × 26). For example, an age pensioner with earnings of $300 a week for 4 weeks could be taken to have an annual rate of income of $1,200. Such a situation would be the exception when determining an annual rate of income. The following circumstances must exist, before this treatment can be considered:
- the employment is isolated in nature, discrete, short term for a closed period (even if repeated annually), AND
- has not occurred before, AND
- is not likely to continue or to be repeated.
The method that most accurately reflects an age pensioner's current income should be used. Where more than one method may be appropriate, the most beneficial treatment should be used. In all other circumstances, the preference is to annualise the income for the period of employment to determine an annual rate of income.
Before making a decision, Centrelink delegates should take into account:
- any recent history of past employment
- the likelihood of future paid employment
- any unusual circumstances surrounding the employment (e.g. relieving a sick relative or friend which may be evidence of the isolated nature of the employment), AND
- whether the employment is isolated, short term in nature.
Example: Usually every year an age pensioner works as an exam supervisor for 2 weeks and has no other similar or related earnings for the year.
Earnings from other completely different types of employment do not jeopardise an age pensioner's earnings from an isolated short-term employment to be considered as the annual rate.
Example: Completely different types of employment such as earnings as exam supervisor compared to irregular income as a self-employed doll maker.
Sometimes, the facts of the person's circumstances become clearer with the benefit of hindsight (e.g. when deciding if the person has been overpaid).
Explanation: In the Federal Court case of Secretary, Department of Family & Community Services v Rolley (2000) FCA 806, the Court found that it was lawful for the AAT to decide that although pension entitlement should be calculated with reference to an annual rate, the amount earned MAY be taken to be the annual rate.
Proper regard to the nature of the income must be taken into account, with the circumstances of each case being considered, sometimes in hindsight, to determine whether an annual rate is set ($X per fortnight × 26) OR whether the annual rate can be taken to be the total amount earned. The Federal Court found that either method is lawful and whichever method is more applicable to the individual circumstances of each person should be used. Generally, average earnings over a suitable period are used to obtain a rate of income unless it is clear a person's circumstances are such that the exceptional treatment of the annual rate being the total amount earned is more appropriate.
Exception: This treatment does NOT apply to PP paid to partnered persons.
Apportioning (non remunerative) lump sums over 12 months
One-off, irregular or non-periodical LUMP SUM amounts, are apportioned as income over a 12 month period in 52 weekly amounts, if they are NOT remuneration, periodic payments, or an exempt lump sum.
- family trust distributions
- certain 'loan' arrangements i.e. NOT a bona fide loan to persons
- dividend distributions from a private company
- signing on fees or endorsements for professional sports people
- an industry related payment such as a dairy cash bonus, or payments to leave the industry, and
- profit sharing.
The date earned, derived or received is the date the person becomes entitled to receive the amount.
Some lump sum payments are exempt from the income test.
Example: Lottery winnings and commutations from a superannuation fund.
Exception: Periodical lottery winnings that are a series of payments under one contract - each instalment is assessed as income over the period it represents. For example, each instalment of $50,000 paid once a year would be held as income over 12 months.
Specific exemptions under SSAct section 8(11) can be found in 126.96.36.199 Income exempt from assessment - s 8(11) exempt lump sums.
Note: The initial exemption of the lump sum amount from the income test does NOT mean that any on-going income generated by the lump sum is exempt, nor does it mean that the asset the lump sum turns into is exempt. The continuing assets and income tests treatment will be determined by how a person makes use of the funds. The funds may be used to obtain additional assets such as a car. For a purchase such as this the assets test would apply. Or, the funds may be placed in a financial investment. The funds have then become a financial asset (refer to SSAct section 9(1) for all the types of financial assets), assessable as an asset and subject to the income test deeming rules.
Act reference: SSAct section 8(8) Excluded amounts-general, section 8(11) An amount received by a person is an exempt lump sum…, section 9(1) Financial assets and income streams definitions
Policy reference: SS Guide 188.8.131.52 Scope of Deeming
Apportioning remunerative lump sums over 12 months
When a remunerative lump sum amount is apportioned under the SSAct for a 12-month period the previously apportioned amount can only be maintained where the source of income continues. If the source of income has ceased, the 12-month apportionment ceases. This policy applies in situations where payment continues AND when pension is cancelled and reclaimed.
Explanation: The pension income test is an annual test. However, in the High Court case of Harris v Director-General of Social Security (1985) 57 ALR 729 it was decided that if a source of income no longer exists, the income from that source will not affect the current rate of pension - the 'Harris principle'. This principle is overridden by specific provisions for non-remunerative lump sums.
Example: Commissions being maintained against a real estate agent cease to be maintained when the person ceases to work as a real estate agent.
Act reference: SSAct section 1064-E1 Effect of income on maximum payment rate, section 1066-E1 Effect of income on maximum payment rate, section 1066A-F1 Effect of income on maximum payment rate, section 1073(1) Certain amounts taken to be received over 12 months, section 1073AA Work bonus, section 8(1A)-'employment income'
Bona fide person borrowings (loans) are not income. A bona fide borrowing is one where money moves from the lender to the borrower, and there is an intention that the money be repaid.
- credit card borrowings
- personal loans from a bank, building society, credit union or finance company.