Defined benefit income streams for social security
An income stream is a defined benefit income stream for social security purposes if:
- it is a pension under the Superannuation Industry (Supervision) Regulations 1994 (SIS regs), and
- in the case of an income stream arising under a super fund established on or after 20 September 1998 - the income stream is a lifetime pension, and
- in the case of an income stream arising under a super fund established before 20 September 1998 - the income stream is provided under rules that meet the standards determined, by legislative instrument, by the Minister, and
- in any case - the income stream is attributable to a defined benefit interest.
Defined benefit interest
A super interest is a defined benefit interest if it is:
- an interest in an unfunded public sector super scheme that has at least one defined benefit member, or
- an interest that entitles the member who holds the interest, when benefits in respect of the interest become payable, to be paid a benefit defined, wholly or in part, by reference to one or more of the following:
- the amount of the member's salary at the date of the termination of the member's employment,
- the date of the member's retirement, or another date
- the amount of the member's salary averaged over a period
- the amount of the salary, or allowance in the nature of salary, payable to another person (for example, a judicial officer, a member of the Commonwealth or a State parliament, a member of the Legislative Assembly of a Territory), or
- specified conversion factors.
Asset testing of defined benefit income streams
Defined benefit income streams are assets test exempt if they meet the conditions above.
Income testing of defined benefit income streams
The assessable income of a defined benefit income stream is:
|Assessable income = annual income - deductible amount, where:
Note from 1 January 2016, the deductible amount of a defined benefit income stream is limited to 10% of the gross annual payment. See 'New legislation: Deductible amount of defined benefit income stream capped at 10% from 1 January 2016' below for more information.
Deductible amount for defined benefit income streams
The deductible amount of a defined benefit income stream has three possible definitions:
1. Prior to 1 July 2007
The deductible amount in relation to an income stream acquired prior to 1 July 2007 is the tax deductible amount of the income stream under subsection 27H(2) of ITAA 1936.
|Deductible amount = Undeducted purchase price/Relevant term or life expectancy|
In many cases, defined benefit income streams did not have a deductible amount, as the pension was not a purchased pension.
Defined benefit income streams acquired prior to 1 July 2007 will retain the original deductible amount for social security purposes unless:
- 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 - called the 'trigger day' for social security purposes. Transitional rules will apply from the trigger day.
2. On or after 1 July 2007
The social security deductible amount for defined benefit income streams acquired from 1 July 2007 is the sum of the amounts that are the tax-free components of the payments received from the defined benefit income stream during the year.
The tax-free proportion of a pension is fixed at commencement. This means that, in most cases, if pension payments are indexed, the deductible amount will increase in the same proportion as any increase in the pension payments.
Transitional deductible amount
The transitional rules apply where:
- a person has received at least one payment from a defined benefit income stream before 1 July 2007, and is still receiving payments from the income stream on or after 1 July 2007
- the person receives an income support payment for a continuous period starting before, and ending on or after, the later of the person's 60th birthday or 1 July 2007 (the trigger day)
- the amount of the income support payment received before the person's trigger day was affected by the social security deductible amount of the income stream, and
- if the person's trigger day is after 1 July 2007, the income stream has not been partially commuted on or after 1 July 2007 and before the person's trigger day.
From the trigger day onward, the deductible amount of a defined benefit income stream is the greater of the following amounts:
- the original deductible amount
- the sum of the amounts that are the tax-free components worked out under the transitional proportioning rules.
Where the payments from a defined benefit income stream are indexed periodically, and the original deductible amount is greater than the sum of the tax-free components on the trigger day, the current deductible amount will be retained until the sum of the tax-free components exceeds the original deductible amount. However, at the point in time that the tax-free components exceed the original deductible amount, the deductible amount will remain as the sum of the tax-free amounts.
|Deductible amount of defined benefit income stream capped from 1 January 2016
From 1 January 2016, a 10% cap on the 'deductible amount' of defined benefit income streams commenced. The 10% cap limits the 'deductible amount' to 10% of the gross annual payment from the defined benefit income stream. These changes apply to all Centrelink recipients who hold a defined benefit pension however they do not apply to recipients of DVA pensions such as the service pension. In addition, it does not apply to Military Super Funds.
The simpler super changes in 2007 significantly increased the deductible amount of defined benefit income streams for a number of social security recipients. The rules are complex, but put simply the deductible amount calculation was changed in 2007 from a fixed amount, which represented a person's after tax contributions, to a tax free percentage which also included the pre-July 1983 component. For those with significant pre-July 1983 service, this resulted in a large deductible amount.
Bill and Norma receive a part age pension and a defined benefit income stream. The defined benefit income stream has an annual payment of $50,000 and a tax free percentage of 50%.
Under the current Centrelink income test, $25,000 is included in assessable income.
From 1 January 2016, the deductible amount will be limited to 10%, therefore assessable income will increase to $45,000. Assuming the couple are income tested, the result is a reduction in age pension of approximately $10,000pa (combined).
Last modified: Friday, January 12, 2018