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Asset tested (long term)

Section: 9.5

An asset tested (long term) income stream does not have the product features to qualify as a lifetime income stream, an asset tested (short term) income stream or an asset test exempt income stream.

The most common type of asset tested (long term) income stream is an account based pension.

What are asset tested (long term) income streams?

The following income streams qualify as asset tested (long term):

  • account based income streams, eg account based pensions, allocated pensions and equivalent annuities
  • immediate lifetime annuities purchased before 1 July 2019
  • fixed term annuities with a term of six years or greater.

The only exception where an income stream with a term of less than six years will qualify as asset tested (long term) is where the member has a life expectancy of five years or less at commencement of the income stream and the term is greater than or equal to their life expectancy.

Example: Five-year fixed term annuity qualifying as asset tested (long term)

Doris is 90 years old with a life expectancy of 4.82 years.

She purchased a five year term annuity.

Ordinarily an income stream with a term of five years or less would be considered an asset tested (short term) income stream. However as Doris has a life expectancy of less than five years and the term of the income stream is greater than her life expectancy, the income stream is asset tested (long term).

Assets test assessment

The asset test assessment of asset tested (long term) income streams depends on whether they have an account balance.

Account based income streams such as account based pensions, have 100% of their account balance assessed under the assets test.

Non account based income streams, such as annuities, are assessed using the following formula:

Purchase price - [(purchase price - RCV) ÷ relevant number) x term elapsed]

where:

  • Purchase price is the amount paid to purchase the annuity less commutations.
  • 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 annuity'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:

Gina purchased a 10 year annuity for $100,000. It has a residual capital value of $50,000. She receives monthly income payments from the annuity.

The assessable asset value of the annuity after 10 months from commencement is:

$100,000 - [($100,000 - $50,000) ÷ 10) x 0.5] = $97,500

Income test assessment

Prior to 1 January 2015, all asset tested (long term) income streams were assessed by reducing the annual payment by a deductible amount. However, from 1 January 2015, new rules were introduced for account based income streams. From this date, account based pensions have been deemed under the income test unless they qualify for grandfathering.

Non-account based income streams

Asset tested (long term) income streams that are not account based, such as immediate lifetime annuities purchased before 1 July 2019 and fixed term annuities with a term of six years or greater, are assessed by reducing the annual payment by a deductible amount.

The assessable income value is calculated by the following formula:

Annual payment - ((purchase price - RCV)/relevant number)

where:

  • Annual payment is gross amount of annuity payments paid in the year.
  • Purchase price is the amount made to purchase the annuity less commutations.
  • 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.
Example

Gina purchased a 10 year annuity for $100,000. It has a residual capital value of $50,000. The annual payment is $6,000.

Under the income test, assessable income is:

$6,000 - (($100,000 - $50,000)/10) = $1,000

Account based income streams

Account based income streams include account based pensions, allocated pensions and equivalent annuities. Term allocated pensions are not considered account based income streams for the purposes of these rules.

Deeming

Since 1 January 2015, account based income stream balances (along with a member's other financial assets) have been deemed for income test purposes. Where deeming applies to an account based income stream, actual income stream payments are ignored for income test purposes.

Grandfathering

Grandfathering applies to allow existing income support recipients to have their pre-January 2015 account based income streams continue to be assessed under the pre-January 2015 income test rules. Under the pre-January 2015 rules, assessable income is determined by:

Annual payment - ((purchase price - commutations - RCV)/relevant number)

A member's account based income stream will qualify for grandfathering provided:

  • the income stream commenced prior to 1 January 2015, and
  • the member has been in receipt of an eligible income support payment since immediately prior to 1 January 2015 and continuously receives an eligible income support payment from that time.

Where a member is receiving an account based income stream that has an automatically reversionary beneficiary and qualifies for grandfathering based on the above rules, its grandfathered status can continue when it reverts to the reversionary beneficiary upon the death of the member, provided the reversionary beneficiary is receiving an eligible income support payment at the time of reversion and continuously receives an eligible income support payment from that time.

What changes will cause grandfathering to cease?

Where a member has a grandfathered account based income stream, the following changes after 1 January 2015 will remove its grandfathered status:

  • switching income stream providers
  • aggregating multiple account based income streams
  • refreshing a transition to retirement account based pension strategy
  • adding or removing a reversionary beneficiary (if the provider requires a new income stream to be commenced)
  • ceasing to receive an eligible income support payment (switching immediately from one eligible income support payment to another will not cause grandfathering to cease)
  • where the member dies and a new pension (not reversionary pension) is paid to a beneficiary.

Once an income stream's grandfathered status is removed, it is then subject to deeming.

Grandfathered account based income streams - Centrelink reporting

For Centrelink reporting purposes, the 'gross annual nominated payment' of a grandfathered account based income stream is equal to the sum of actual payments received plus payments to be received for the whole financial year.

Where the person nominates to increase or reduce the amount of annual payments part way through the financial year, the new annual payment amount is assessable for the remainder of the financial year.

Example

Bob has a grandfathered account based pension. On 1 July 2019, he nominates to receive payments of $1,000 per month from his account based pension.

For Centrelink purposes, the annual payment amount is:

  • actual payments received: Nil
  • payments to be received: 12 x $1,000 = $12,000
  • total payments: $12,000.

On 1 January 2020, Bob decides to increase his monthly payments to $2,000. For Centrelink purposes, the annual payment amount is:

  • actual payments received: 6 x $1,000 = $6,000
  • payments to be received: 6 x $2,000 = $12,000
  • total payments: $18,000

Centrelink will assess an annual payment of $18,000 from 1 January 2020 for the remainder of the financial year.

How do commutations affect the social security deductible amount?

For account based pensions that are 'grandfathered', commutations may have a significant impact on the income test assessment.

In this case, individuals will need to decide whether they wish one-off withdrawals to be treated as irregular pension income or a commutation.

  • If the withdrawal is taken as a pension payment, it will be treated as income in the financial year the payment is made.
  • If the withdrawal is taken as a partial commutation, it is not treated as income under the income test. However, it will permanently reduce the income stream's Centrelink deductible amount.

The deductible amount will be recalculated as:

(Original purchase price - lump sum commutations)/original relevant number

There is no fixed rule as to when a withdrawal should be treated as either a pension payment or commutation; it must be determined in light of the member's circumstances.

Example

Russell was age 65, fully retired and receiving the Age Pension.

He commenced an account based pension with a purchase price of $300,000 in November 2014. His life expectancy at commencement was 18.54.

Deductible amount: $300,000/18.54 = $16,181

Russell requires $18,000 a year to meet his retirement income needs.

On 1 July 2019, he nominates to receive payments of $1,500 per month from his account based pension. For Centrelink purposes, the annual payment amount is:

  • actual payments received: Nil
  • payments to be received: 12 x $1,500 = $18,000
  • total payments: $18,000.

Centrelink will assess an annual payment of $18,000 from 1 July 2019.

Assessable income $18,000 - $16,181 = $1,819

Russell receives the maximum Age Pension under the income test.

In addition to his annual payment of $18,000, Russell also requires $20,000 in January 2020 to purchase a new car. He has the choice of taking the additional $20,000 as either:

  • increased pension payment, or
  • lump sum commutation.

Increased pension payment

On 1 January 2020, Russell decides to increase his pension payments to receive an additional $20,000 in the month of January, in addition to his regular $1,500 per month. For Centrelink purposes, the annual payment amount is:

  • actual payments received: 6 x $1,500 = $9,000
  • payments to be received: 1 x $21,500 = $21,500, plus 5 x $1,500 = $7,500
  • total payments: $38,000

Centrelink will assess an annual payment of $38,000 from 1 January 2020 for the remainder of the financial year.

Assessable income $38,000 - $16,181 = $21,819

Unfortunately Russell's Age Pension reduces substantially for the remainder of the financial year due to the additional assessable income.

Lump sum commutation

Alternatively, Russell could choose to take the additional $20,000 as a lump sum commutation. In this case, on 1 January 2020, Russell commutes $20,000 in addition to his regular $1,500 per month. The lump sum commutation is not assessed as income, however it does cause a recalculation of the deductible amount as follows:

(Original purchase price - lump sum commutations)/original relevant number

($300,000 - $20,000)/18.54 = $15,102

From 1 July 2019 to 31 December 2019:

assessable income is $18,000 - $16,181 = $1,819

From 1 January 2020 to 30 June 2020:

assessable income is $18,000 - $15,102 = $2,898

The reduction in the deductible amount is permanent and will result in higher assessable income for the remainder of the income stream. In this case, Russell continues to receive the maximum Age Pension under the income test as his assessable income is still below the lower income threshold

Timing is important

When electing to increase the amount of annual pension payments from an account based income stream, the timing is important as the increased assessable income will apply for the remainder of the financial year.

By timing the increased pension payment towards the end of the financial year, it can minimise the impact on Centrelink entitlements.

Members have an obligation to notify Centrelink within 14 days of any changes in circumstances. If they time the increased pension payment towards the end of June and then notify within the 14 day period, they could potentially reduce the amount of income assessable.

Last modified: Wednesday, July 24, 2019