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Asset test exempt income streams

Section: 9.7

Certain categories of income streams that have restrictions on term, limited commutability and no residual capital value qualify for a social security asset test exemption.

Income streams that qualify for either a 100% or 50% asset test exemption

100% asset test exemption 50% asset test exemption
Complying lifetime income steams purchased before 20 Sept 2004 Complying lifetime income steams purchased on or after 20 Sept 2004 and before 20 Sept 2007
Complying life expectancy income steams purchased before 20 Sept 2004 Complying life expectancy income steams purchased on or after 20 Sept 2004 and before 20 Sept 2007
Defined benefit income streams (purchased at any time)  Term allocated pension purchased on or after 20 Sept 2004 and before 20 Sept 2007
Income streams purchased with the rollover of a pre-20 Sept 2004 complying income stream Income streams purchased with the rollover of a pre-20 Sept 2007 complying income stream

Currently, the only new complying income streams that can be commenced are defined benefit income streams and income streams commenced from the rollover of complying pre 20 September 2007 income streams.

Lifetime, life expectancy and term allocated pensions

For lifetime, life expectancy and term allocated pensions to qualify for a social security asset test exemption, they must meet the following criteria:

Lifetime income stream Life expectancy income stream Term allocated pension
Income payments must be made at least annually over the lifetime of the beneficiary (or reversionary beneficiary) Income payments must be made at least annually over the specified term. Term options depend on income stream commencement date Income payments must be made at least annually over the specified term.

Term must be at least equal to primary or reversionary beneficiary's life expectancy

Commences on the day it is purchased Commences on the day it is purchased Commences on the day it is purchased
Cannot be commuted except in limited circumstances Cannot be commuted except in limited circumstances Cannot be commuted except in limited circumstances
Cannot have a residual capital value Cannot have a residual capital value Cannot have a residual capital value
Income payments must be fixed at start and can only increase by the larger of 5% or CPI plus 1% Income payments must be fixed at start and can only increase by the larger of 5% or CPI plus 1% Annual payment = account balance divided by payment factor.

Payments can be varied plus or minus 10%

Cannot be transferred to another person except on death to a reversionary beneficiary, or in some cases to the estate Cannot be transferred to another person except on death to a reversionary beneficiary, or in some cases to the estate Cannot be transferred to another person except on death to a reversionary beneficiary, or in some cases to the estate
Cannot be used as security for borrowing Cannot be used as security for borrowing Cannot be used as security for borrowing
May have a guaranteed minimum

payment term:

  • If purchased prior to 20 September 2004, 10 years
  • If purchased from 20 September 2004 to 19 September 2007, the lesser of life expectancy of beneficiary at commencement, or 20 years

Defined benefit income streams

A defined benefit income stream is a pension paid from a public sector or corporate defined benefit superannuation fund (eg the Public Sector Superannuation Scheme). It does not include income streams purchased from retail providers or SMSFs or small APRA funds.

To be classified as a 'defined benefit income stream', it must be paid for the lifetime of the recipient and must be attributable to a 'defined benefit interest' as defined in the SIS Regulations.

For social security purposes, defined benefit interests are not determined in relation to a specific capital amount, but relate to other factors such as:

  • an individual's salary at retirement
  • the number of years of service in the organisation, or
  • specified factors for converting a capital sum to pension at rates that are favourable compared with those that would be available from a financial institution.

Assets test assessment

The assets test assessment of an asset test exempt income stream depends on the type of income stream and the date of purchase:

  • defined benefit income streams purchased at any time and complying lifetime and life expectancy income streams purchased prior to 20 September 2004: 100% assets test exemption
  • complying lifetime, complying life expectancy and term allocated pensions purchased on or after 20 September 2004 and before 20 September 2007: 50% assets test exemption.

Lifetime and life expectancy: 50% asset test exemption

For complying lifetime and life expectancy income streams purchased on or after 20 September 2004 and before 20 September 2007, the asset value is determined using

the following formula:

50% x (purchase price - (purchase price x (term elapsed/relevant number)))

where:

  • Purchase price is the amount paid to purchase the income stream.
  • RCV is the residual capital value.
  • Relevant number is:
    • the term of the income stream where it is payable for a fixed number of years
    • the income support recipient's life expectancy where it is payable during their lifetime only
    • the longer of the income support recipient and the partner's life expectancies where the income stream is jointly owned and payable for life
    • the longer of the income support recipient and a reversionary beneficiary's life expectancies where the income stream is reversionary and payable for life.
  • Term elapsed is the number of years that have elapsed since the income stream's commencement day. The number of years is rounded down to the nearest:
    • half year, when the income payments are more frequent than annual (eg fortnightly, monthly, quarterly or six monthly), or
    • whole year, when the income payments are annual.
Example: 50% asset test exempt life expectancy annuity

Jenny purchased a 20 year, complying life expectancy income stream for $100,000. As she purchased the annuity in 2006, it qualified for a 50% asset test exemption. She receives monthly income payments from the annuity.

The assessable asset value of the annuity after 13 years is:

50% x ($100,000 - ($100,000 x (13/20))) = $17,500

Example: 50% asset test exempt lifetime annuity

Jill commenced a non-reversionary lifetime pension in 2007, which qualified for a 50% asset test exemption. The purchase price was $100,000. Her life expectancy at commencement was 21.15.

She receives monthly payments from the lifetime pension. After 13 years, the assessable asset value of the lifetime pension is:

50% x [$100,000 - ($100,000/21.15) x 13)] = $19,267

Term allocated pensions: 50% asset test exemption

For term allocated pensions purchased on or after 20 September 2004 and before 20 September 2007, the asset value is:

50% x account balance

Example

John commenced a term allocated pension in 2006. 50% of the account balance is an assessable asset. On 1 July 2019, the account balance is $200,000. The assessable asset value is 50% x $200,000 = $100,000

Income test assessment

The income value for asset test exempt income streams including lifetime, life expectancy and term allocated pensions is calculated by the following formula:

Annual payment - (purchase price/relevant number)

where:

  • Annual payment is gross amount of income stream payments paid in the year.
  • Purchase price is the amount paid to purchase the income stream.
  • Relevant number is:
    • the term of the income stream where it is payable for a fixed number of years
    • the income support recipient's life expectancy where it is payable during their lifetime only
    • the longer of the income support recipient and the partner's life expectancies where the income stream is jointly owned and payable for life
    • the longer of the income support recipient and a reversionary beneficiary's life expectancies where the income stream is reversionary and payable for life.
Example: Life expectancy annuity

Jenny purchased a 20 year complying life expectancy annuity for $100,000. The annual payment is $6,000.

Under the income test, assessable income is:

$6,000 - ($100,000/20) = $1,000

Example: Lifetime pension

Joan commenced a lifetime pension in 2005 which is asset test exempt. The purchase price at commencement was $200,000 and her life expectancy was 22 years. Joan receives an annual payment of $10,000. Assessable income is:

$10,000 - ($200,000/22) = $909

Example: Term allocated pension

John commenced a term allocated pension in 2006 for $200,000. The term selected was 20 years. John receives an annual payment of $10,000.

Assessable income is:

$11,000 - ($200,000/20) = $1,000

Income assessment of defined benefit income streams

The assessable income of a defined benefit income stream is based on the annual payment and the deductible amount they receive for tax purposes.

Assessable income = annual income - deductible amount

where:

  • Annual income means the amount payable to the person for the year from the income stream.
  • Deductible amount (if any) is the tax free proportion, subject to a cap of 10% of the annual payment.

The 10% cap only applies to people in receipt of income support payments from Centrelink. People receiving payments from the Department of Veterans' Affairs, such as the service pension, are not impacted. In addition, defined benefit income streams paid by the following military superannuation funds are excluded from this cap:

  • Defence Force Retirement & Death Benefits Scheme (DFRDB)
  • Military Superannuation & Benefits Scheme (MilitarySuper), and
  • Defence Force Retirement Benefits Scheme (DFRB).
Example:

Bill and Norma receive a part Age Pension, and Bill receives a defined benefit income stream that is not paid from a military superannuation scheme. The defined benefit income stream has an annual payment of $50,000 and a tax-free percentage of 50%.

In this case, the social security deductible amount is the lower of:

  • tax-free component which is 50% x $50,000 = $25,000, or
  • 10% of the annual payment which is 10% x $50,000 = $5,000.

Therefore, social security assessable income will be $45,000 ($50,000 - $5,000).

Tip:

From 1 July 2007, there were changes to the taxation of income streams that impacted the calculation of the tax free proportion. Defined benefit income streams acquired from 1 July 2007 have their deductible amount calculated as a proportion based on the tax free component at commencement.

For defined benefit income streams acquired before 1 July 2007, different rules applied when calculating the deductible amount until:

  • the income stream is partially commuted on or after 1 July 2007 - the 'new' deductible amount will be used irrespective of whether it is lower than the deductible amount prior to the commutation
  • the primary beneficiary dies and the income stream reverts to a reversionary beneficiary on or after 1 July 2007 - the 'new' deductible amount will be used irrespective of whether it is lower than the deductible amount prior to reversion, or
  • the person is age 60 on 1 July 2007 or turns age 60 after 1 July 2007.

Last modified: Wednesday, July 24, 2019