Reed 2009 International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman
2008 Reed International Books Australia Pty Limited trading as LexisNexis
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Financial Planning in Australia
Chapter 17 SOCIAL SECURITY
Solutions to Questions
Question 1
A funded social security program is one in which a sponsor, usually the government, sets
aside a pool of savings from which social security benefits are paid. An unfunded scheme is
one in which benefits are paid from current taxation receipts. The issue with unfunded
schemes is whether the government will have sufficient financial resources to satisfy its
social security obligations in the future. Researchers argue that future commitments can only
be satisfied if the Australian Government increases taxation receipts, which will unfairly
burden working people. This explains why the Australian Government is fostering a savings
mentality and financial self-reliance amongst Australians so that they can provide their own
retirement incomes supplemented with government benefits.
Question 2
The concern is that most countries are experiencing an ageing population. This means that
the proportion of retired people to working age people is increasing. The implication of an
ageing population is that governments will have difficulty raising sufficient financial resources
to pay retirement incomes. The unpalatable choice for governments will be to increase the
burden of taxation on working people, with potentially serious political overtones.
Question 3
A non-exhaustive list includes:
annual payments must be fixed when entering into the contract;
payments must be paid for the lifetime of the annuitant;
except in very limited circumstances, the income stream must be non-commutable;
the income stream must have a nil residual capital value; and
the guarantee period cannot be more than 10 years.
Question 4
Using the 20042006 tables, the life expectancy of a 67-year-old female is 19.49 years.
Hence, the term of the income stream product can be anywhere between 19.49 years
(rounded up to the next whole number) and 23.71 years (rounded up to the next whole
number).
Question 5
The principle of deeming is that a predetermined rate of return is applied to all investments
that are classed as financial investments. This means that many different types of
investments are considered to earn the same rate of return regardless of their actual rates of
return. Deeming considerably simplifies the determination and administration of social
security benefit entitlements under the Income Test.
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2009 Reed International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman
Question 6
The asset value for the Assets Test is the market value of the real estate less any
encumbrances. The income, for Income Test purposes, is the actual income derived less
outgoings such as interest, rates and repairs. When insufficient expense data exists, the
outgoings are taken to be one-third of the gross income plus interest charges.
For social security purposes, a loss on one property cannot be carried across to a profitmaking property.
Question 7
The deprivation rules penalise pension recipients by reducing entitlements when assets
above a designated threshold are gifted or sold below their market value. There are two
tests. First, assets gifted above $10,000 per income year will be treated as assets of the
donor for a period of five years. Second, assets gifted above $30,000 in any five-year rolling
period will be treated as assets of the donor for a period of five years. The thresholds of
$10,000 and $30,000 apply to single pensioners and pensioner couples alike.
The deprivation provisions were introduced to discourage social security recipients from
gifting assets in order to increase their benefits.
Question 8
One change you may wish to consider is the inclusion of the principal residence as an
assessable asset under the Assets Test. Alternatively, you could assess the market value of
principal residences above a designated threshold. As the law currently stands, principal
residences of any market value are excluded under the Assets Test. This may encourage
beneficiaries to place considerable proportions of their total assets into principal residences
in order to increase entitlements.
This policy would have significant negative political ramifications. In Australia, a high
proportion of the population aspires to home ownership; any proposal to include the home
under the Assets Test would be seen as an attack on the institution of home ownership.
Question 9
The Social Security system is often broadly referred to a safety net as it provides support to
those members of society who cannot help themselves for whatever reason.
There are two specific safety nets.
Safety net (HCC, PCC, CSHC)
Definition For the purposes of HCC, PCC and CSHC, there are two safety nets which
protect individuals and families from large overall expenses for medicines and out-of-pocket
medical costs. These are:
the Pharmaceutical Benefits Scheme (PBS) (1.1.P.260) safety net, and
the Medicare safety net.
PBS safety net
The government subsidises a wide range of prescription medicines through the PBS with the
highest subsidies being made available to those with chronic illness, or greatest financial
need. Safety net arrangements apply to further assist in limiting the cost of medicines for
those patients and families who require a large number of PBS items.
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2009 Reed International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman
Concessional patients (cardholders)
In 2006, once total eligible expenditure of a person and/or their immediate family exceeds
$253.80 within the 2006 calendar year, PBS items are free for the remainder of the year (the
$4.70 co-payment (patient contribution) is removed).
General patients (non-cardholders)
In 2006, once the eligible expenditure of a person and/or their immediate family exceeds
$960.10 within a calendar year, the patient co-payment per item decreases from $29.50 to
the concessional co-payment rate of $4.70.
Patients may pay more than the co-payment where a PBS item is priced above the
benchmark price for different brands of the same drug, OR the benchmark price for particular
therapeutic groups of drugs. The government subsidy is limited and any difference in price
must be met by the patient. Brand or therapeutic group premiums do not count towards
safety nets.
Further information on the PBS safety net is available from the PBS Information Line on
freecall 1800 020 613.
Act reference: National Health Act 1953, refer to Part 7.
Policy reference: SS Guide 1.1.P.270 Pharmaceutical concessions (HCC, PCC, CSHC).
Medicare safety net
The Medicare safety net protects all Australians from high out-of-pocket medical costs
incurred for Medicare services outside hospital. These may arise, for example, as a result of
chronic conditions such as asthma or diabetes, or from a sudden illness. The safety net
covers services like x-rays, magnetic resonance imaging scans, blood tests or other
pathology tests.
Concession cardholders (and FTB recipients)
From March 2004 the government has covered 80 per cent of the out-of-pocket costs of
medical services provided out of hospital above a certain threshold amount. The threshold is
currently $500 per individual or family per year.
Non-cardholders
From March 2004 the Government has covered 80 per cent of the out-of-pocket costs of
medical services provided out of hospital above a certain threshold amount. The threshold is
currently $1000 per individual or family per year.
Individuals are automatically registered with Medicare for the safety net. However, if families
want all their out-of-pocket medical costs to count towards reaching the family safety net
threshold, they will need to confirm family details with Medicare. For a Family Registration
Form, or for further information on the Medicare safety net, visit Medicare Australia's website
or contact the Department of Health and Ageing on freecall 1800 011 163.
Most recent information can be found at
http://www.facsia.gov.au/guides_acts/ssg/ssguide-1/ssguide-1.1/ssguide-1.1.s/ssguide1.1.s.10.html
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Question 10
2009 Reed International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman
See:
Disability changes must go further
Wednesday, 23 July 2008
Changes to the Disability Support Pension (DSP) announced by the Federal Government on
Monday are a good first step in encouraging recipients back into the workforce ... but there's
still a long way to go.
Of the 700,000 DSP recipients in Australia, an estimated 20 per cent 140,000 people
are thought to be capable of work.
One of the main hurdles for DSP recipients contemplating returning to work has been that, in
doing so, they would be placed on the Newstart Allowance ... main the level of income
support for jobseekers.
The problem is that Newstart pays significantly less than the DSP and provides fewer
associated benefits.
What would you do if you were on DSP? It's not hard to see the disincentive is it?
The Government's changes announced on Monday remove this barrier. From September, if
you're on DSP and you're looking for work, you'll stay on DSP.
Great news ... but why stop there?
Another simple reform would be making sure that if a DSP recipient loses their new job in the
first year that they return to receiving the benefit.
At the moment, if this happens, the person is pushed onto Newstart pays less, fewer
benefits.
Many DSP recipients don't look for work because they fear this very thing happening.
The cost to Government of introducing this reform would be negligible in fact, it may
actually make them a saving.
If the Government is serious about disability rights and wants to give disabled people greater
access to the workforce, this is just one of a whole raft of disincentives and barriers waiting to
be removed.
See http://www.missionaustralia.com.au/news/media-releases/42-media-releases/615disability-changes-must-go-further
http://www.acoss.org.au/upload/publications/papers/264_info%20371%20DSP.pdf
Solutions to Problems
The following solutions are prepared using the July quarter 2008 Age Pension rates.
Problem 1
Pension Assets Test:
$525.10 + 5.80 ($1.50 / $1000) $(219,500 171,750)
= 530.90 71.63
= $459.28 pf.
Deemed income = 4.0% $41,000 + 6.0% $135,500
= 1640 + 8130
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2009 Reed International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman
= $9770 pa = $375.77 pf
Pension Income Test = 530.90 0.4(375.77 138)
= 530.57 95.11
= $435.46
Rogers Age Pension is $435.46 pf and the Income Test applies.
Problem 2
Age Pension (26 $435.46)
CMT (3.8% $15,000)
$
11,322
570
Debentures (5.8% $105,000)
6,090
Shares (3.2% $54,000)
1,728
Savings account (1.0% $2500)
25
Total
19,735
His gross income is $19,735 pa.
Problem 3
Pension Assets Test:
$530.90 ($1.50 / $1000) $(210,000 171,750)
= 530.90 57.38
= $473.52
Deemed income = 4.0% $41,000 + 6.0% $137,000
= 1640 + 8220
= $9860 pa = $379.23 pf.
Pension Income Test = $530.90 0.4 $(379.23 138)
= 530.90 96.49
= $434.41 pf.
Age Pension = $11,399
Diannes gross income from all sources = $11,399+ $8892 = $20,291
Problem 4
Based on 20042006 rates
The life expectancy product is 50% Assets Test exempt. The assessable assets are
therefore $210,000 $50,000 = $185,000
Pension (Assets Test) = $530.90 ($1.5 / $1000) $(185,000 171,750)
= $511.04 pf.
Deemed income = 4.0% $41,000 + 6.0% $(178,000 50,000 37,200)
= $7088 pa.
Total assessable income = $7088 + $(3200 $2500)
= $6388 pa = $245.69 pf.
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Pension (Income Test) = $530.90 0.4 $(245.69 138) = $487.82 pf.
2009 Reed International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman
The total income is:
$
Age Pension (26 $487.82)
12,683
Annuity
3,200
Financial investments ($128,000 / $178,000) $8,892
6,394
Total
22,277
Problem 5
Assessable value of the annuity = $60,000 (($60,000 0) / 6) 1 = $50,000
Assessable income of the annuity = 2 $6000 $10,000 = $2000
Financial investments = $185,000
Assessable assets = $245,000 + $50,000 = $295,000
Assessable income (financial investments) = 4.0% $68,200 + 6.0% $116,800
= $9736 pa.
The total assessable income = $9736 + $2000
= $11,736 pa = $451.38 pf.
Pension (Income Test) = $438.50 0.2 $(451.38 240)
= $396.22 pf each.
Pension (Assets Test) = $438.50 ($1.50 / $1000) $(295,000 243,500)
= $361.25 pf each.
Age Pension = 26 $361.25 = $9392.50 pa each.
Problem 6
The assessable assets, for social security purposes, reduce by:
$45,000 + $5000 + $(16,000 6000) = $60,000
The increase in the Age Pension (assuming the Assets Test still applies)
= ($1.50 / $1000) $60,000 pf each
= $90 pf each.
Problem 7
Assessable value of the annuity = $60,000 $10,000 3 = $30,000
Assessable assets = $316,000 $40,000 $5000 = $271,000
Financial investments = $183,000
Deemed income = 4.0% $68,200 + 6.0% $114,800= $9616
Total assessable income = $9616 + $1600
= $11216 pa or $431.38 pf
Note (1): the value of the annuity has reduced by a further $5000.
Problem 8
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2009 Reed International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman
Assessable assets = $260,000
Financial assets = $180,000
Pension Assets Test:
$530.90 ($1.50 / $1000) $(260,000 171,750)
= 530.90 132.37
= $398.53 pf.
Deemed income = 4.0% $41,000 + 6.0% $139,000
= 1640 + 8340
= $9980 pa = $383.85 pf
Pension Income Test = 530.90 0.4(383.85 138)
= 530.90 98.34
= $432.56
Louises Age Pension will be $383.85 pf and the Assets Test applies.
Solution to Case Study 17.1
1. Wendys maximum tax liability = 0.165 $(140,000 129,751) = $1691 where $129,751
is the 2005/06 lump sum tax threshold.
Her after-tax benefit is therefore $140,000 $1691 = $138,309.
John has no liability on his superannuation benefit as the amount is below the threshold.
Their combined superannuation benefits = $257,328. Add to this amount their other
financial assets to provide a grand total of $287,328.
2. The following asset allocation is adopted based on an assumed risk profile for Wendy
and John. Growth oriented due to small super balances:
Asset class
Proportion (%) Amount ($)
Cash
10
28,733
Fixed interest
30
86,199
Property securities
5
14,367
Australian shares
30
86,199
International shares
25
71,830
Assume the following long-term rates of return on the various asset classes:
Asset class
Income % pa Capital growth % pa
Cash
4.0
Fixed interest
5.0
Property securities
5.0
2.0
Australian shares
3.0
5.0
International shares
1.0
8.0
3. Under the Assets Test, their combined assessable assets are:
$287,328 + $30,000 = $317,328.
Under the Income Test, their assessable income is:
3.0% $62,000 + 5.0% $(287,328 62,000) = $13,126 pa = $504.85 pf.
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2009 Reed International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman
Assets Test:
P(A) = $417.20 + $2.90 ($1.50 / $1000) $(317,328 229,000)
= $287.61 pf each
Income Test:
P(Y) = $417.20 + $2.90 0.2 $(504.85 228) = $364.73.
The Age Pension is therefore $287.61 pf each.
4. Income from all sources is set out in the following table:
Source
Amount ($) Return (%) Income ($)
Cash
28,733
4.0
1,149
Fixed interest
86,199
5.0
4,310
Property securities
14,367
5.0
718
Australian shares
86,199
3.0
2,586
International shares
71,830
1.0
718
Age Pension (combined)
14,956
Combined income
24,437
5. Wendy and John have an estimated income of approximately $12,218 each. Because the
amount is below the shade-out threshold for the SATO, Wendy and John will not have an
income tax liability in the relevant year.
6. The portfolio does not satisfy their income objective unless they draw down some of their
capital to make up the deficiency between the income they derive and their estimated
annual expenditure.
7. The estimated capital growth on their portfolio is:
2.0% $14,367 + 5.0% $86,199 + 8.0% $71,830 = $10,344
$10,344 / $287,328 = 3.6% pa.
Assuming an inflation rate of 3.5% pa over the next 10 years, the portfolios purchasing
value should be maintained.
The overriding result from this initial analysis is that Wendy and John do not have
sufficient capital to meet their income objective unless they draw down on some of their
capital. They will need to consider alternative investment strategies, possibly using
income stream products.
Solution to Case Study 17.2
This case requires the student to access the Centrelink and Australian Tax Office websites to
consider the issues relating to Family Tax Benefit.
Issues
Relate to protection of assets. Students should discuss issues re structure of assets.
Possible use of trusts to protect children as well as Michelle. Also possible consideration of
insurance products in the event of premature death of either party. If new property to be
purchased consider Joint Tenants versus Tenants in Common as a way of eliminating
possible challenges to the estate.
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2009 Reed International Books Australia Pty Limited trading as LexisNexis: Ancillary for Financial Planning in Australia, 3rd ed., by Taylor, Juchau, Houterman
Major concern is the reduction of Michelles Family Tax Benefit once she marries Michael as
their combined assets and income will exclude her current receipt of Family Tax Benefit A
due to means testing.
Refer to the following website:
www.ato.gov.au/content/downloads/NAT4108short-06.pdf
Solution to Case Study 17.3
Total assessable assets:
Term deposit
Shares
Half-share investment unit
Contents
$
10,000
20,000
200,000
20,000
$250,000
Financial assets = $230,000
Pension Assets Test:
$530.90 ($1.50 / $1000) $(250,000 171,750)
= 530.90 117.38
= $413.52 pf.
Deemed income = 4.0% $41,000 + 6.0% $189,000
= 1640 + 11,340
= $12,980 pa = $499.23 pf
Pension Income Test = 530.90 0.4(499.23 138)
= 530.90 144.49
= $386.41
Lucinda will receive $413.52 pf and the Assets Test applies.
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