4.9.2.10 Characteristics of pre-20/09/2004 asset-test exempt income streams

Summary

This topic explains the characteristics of an ATE income stream (1.1.A.306) purchased before 20 September 2004, which includes ATE income streams purchased prior to 20 September 2004 that are transferred or revert to a reversionary beneficiary on the death of the primary beneficiary on or after 20 September 2004. ATE income steams purchased on or after 20 September 2004 are covered in 4.9.2.15. Income streams (1.1.I.70) which DO NOT meet the characteristics in this topic or 4.9.2.15 are asset-tested (4.9.3). This topic covers the following matters:

• characteristics of ATE income streams purchased prior to 20 September 2004, which includes:
  • required characteristics
  • amount of annual payments
  • commencement day
  • purchase price (including where the new income stream was commuted from an asset-tested income stream)
  • residual capital value
  • relevant number
  • return of purchase price over the term of the product
  • ATE income stream is non-commutable
  • security for borrowing
  • exemption NOT affected by 10 year maximum guarantee
  • transfer to reversionary beneficiary
  • amount of reversionary benefit payable
• assessment where an ATE income stream purchased prior to 20 September 2004 is transferred to a reversionary beneficiary, and
• change in nominated reversionary beneficiary.

Note:

• For ATE income streams purchased on or after 20 September 2004 refer to 4.9.2.15.
• For information on joint income streams please refer to 4.9.2.50.
• For guidance on AGA valuation procedures for lifetime or life expectancy ATE income streams paid from SMSFs or SAFs refer to 4.9.4.50.

Required characteristics of ATE income streams purchased prior to 20 September 2004

The specific characteristics required for an asset test exemption have been designed to ensure that an income stream will last for most, if not all, of the purchaser and/or their reversionary beneficiary's retirement, being:

• for the lifetime (1.1.L.45) of the income support recipient, OR
• if purchased or acquired at or over age pension age
  • for a period of life expectancy where life expectancy is less than 15 years (if life expectancy does not consist of a whole number of years rounded up to the next whole number), OR
  • for a period between 15 years and life expectancy, where life expectancy exceeds 15 years (if life expectancy does not consist of a whole number of years, at the person's option, rounded up to the next whole number), AND
  • in the case of lifetime or life expectancy ATE income streams from SMSFs or SAFs, that the Secretary is satisfied that there is in force an actuarial certificate that states there is a high probability that the provider of the income stream will be able to pay the income stream as required under the contract (4.9.4.40), AND
  • that the Secretary is satisfied that the income stream complies with the provisions of the social security law (particularly SSAct section 9A(1)(b) and section 9B(1)(b)).

Lifetime products (purchased at any age) and life expectancy products (purchased on or after age pension age) that have ALL of the required characteristics and are purchased prior to 20 September 2004 are 100% EXEMPT from the assets test.

Those products that DO NOT meet ALL of the required characteristics are asset-tested (4.9.3.10).

Note: For ALL defined benefit income streams refer to 4.9.2.20.

Amount of annual payments

Payments MUST be made at least annually (1.1.A.155). The income stream contract MUST specify the total amount of payments that may be made in the first year after the commencement day, EXCLUDING allowable commutations. In any other year the payments may ONLY vary:

• by indexed amounts, AND
• allowable commutations, AND
• upwards.

The yearly indexation CANNOT be a negative value and MUST be capped at the larger of:

• 5%, OR
• the CPI change plus 1%.

For an income stream to be assessed as ATE, the contract does not have to explicitly state indexation rate. However, the indexation rate can never be negative, nor can it exceed 5% per annum OR CPI plus 1% per annum in any given year.

The income payment may only vary downwards after an allowable commutation (4.9.2.40) without losing its ATE status. When an income support recipient has wholly commuted from one ATE product, and transferred the proceeds to another ATE product, and the second product pays a lower rate of income, the second product will also retain its ATE status. Where this occurs after 20 September 2004, the new income stream will be assessed under the rules specified in 4.9.2.15.

Commencement day

An income stream's commencement day is the day it was:

• purchased, or
• acquired, for reversionary beneficiaries and defined benefit income streams that are not purchased.

The commencement day for income testing is the first day of the period to which the first payment relates, even if the payment is made at the end of a 12 month period.

Purchase price of an ATE income stream

The purchase price of an ATE income stream purchased prior to 20 September 2004 is the amount invested in the product. For a lifetime or life expectancy product provided by an SMSF or SAF refer to 4.9.4.20.

Note: Purchase price is the amount invested to purchase the income stream less any allowable commutations (4.9.2.40) made since commencement.

Residual capital value

Irrespective of whether the income stream is a lifetime or a life expectancy product, there must be no RCV. That is, the amount invested must be returned over the life of the product.

Relevant number

To determine the relevant number for an income stream refer to 1.1.R.135. For further guidance on joint income streams refer to 4.9.2.50. To determine the life expectancy of an income support recipient refer to 4.9.5.

Return of purchase price over the term of the product

The purchase price must be returned as income over the income support recipient's life expectancy for lifetime products, or the term of the product for life expectancy products. This is consistent with the requirement that ATE products cannot have a RCV.

Income stream products, purchased at arms length from a commercial provider, are generally accepted as meeting the 'return of purchase price' requirement. Guidance is provided in 4.9.4.20 for lifetime or life expectancy ATE income streams purchased from SMSFs or SAFs.

ATE income stream is non-commutable

The income stream must be non-commutable, except in limited circumstances, to meet the ATE requirements. If the income stream is commuted, the commuted amount must not be greater than the benefit that was payable immediately before the commutation.

Security for borrowing

Neither of the following can be used as security for borrowing:

• the capital value of the income stream
• the income from it.

Exemption NOT affected by 10 year maximum guarantee

The asset test exemption for a lifetime income stream is NOT affected if the income stream provides the following 10-year maximum guarantee conditions:

• If a primary beneficiary dies within 10 years after the commencement day of an income stream, any remaining payments they would have received in the 10-year period, had they lived, can be paid as an income stream (refer to 'Assessment where an ATE income stream is transferred to a reversionary beneficiary' in this topic) or a lump sum to
  • a reversionary beneficiary, or to another reversionary beneficiary in the event of the death of the first reversionary beneficiary, OR
  • the primary beneficiary's estate, if there is no reversionary beneficiary.
• If a reversionary beneficiary ALSO dies within the 10-year period, any further payments due in the 10-year period can be paid to their estate.

Note:

• The guarantee period can exceed an income support recipient's life expectancy, where the recipient's life expectancy is less than 10 years.
• The guarantee period has changed for lifetime income streams purchased on or after 20 September 2004. Refer to 4.9.2.15.

Transfer to reversionary beneficiary

The income stream can ONLY be transferred to:

• a reversionary beneficiary on the death of the primary beneficiary, (or if there is no reversionary beneficiary, to the estate of the primary beneficiary), or
• another reversionary beneficiary on the death of the first reversionary beneficiary (or if there is no other reversionary beneficiary, to the estate of the first reversionary beneficiary).

Amount of reversionary benefit payable

For lifetime and life expectancy income streams, the reversionary component cannot be greater than the benefit that was payable immediately before the event that caused the reversion (e.g. death of primary beneficiary). This means that the payment to a reversionary beneficiary CANNOT be greater than the payment the primary beneficiary would have received immediately before death.

For lifetime and life expectancy income streams, the reversionary benefit is generally the actuarial valuation of income stream payments to a reversionary beneficiary under the contract terms. Also the reversionary component may be paid to a reversionary beneficiary as an income stream or a lump sum depending on the contract terms.

Additionally on reversion of a lifetime income stream, the annual payment can reduce by a percentage specified in the contract document.

For lifetime ATE income streams, the payments to a reversionary beneficiary MUST be paid at least annually:

• throughout the reversionary beneficiary's lifetime, OR
• if the reversionary beneficiary is a child of the primary beneficiary, or former reversionary beneficiary, at least until the child turns 16, OR
• if the child is a full-time student who has turned 16, at least until the EARLIER of when the student
  • finishes full-time study (1.1.F.230), or
  • turns 25.

Note: For a lifetime income stream where a guarantee period has been specified and the primary and any reversionary beneficiaries have died, a reversionary benefit (payable to a specified beneficiary or the primary beneficiary's estate) may be payable. The maximum allowed guarantee period is 10 years.

Assessment where an ATE income stream purchased prior to 20/09/2004 is transferred to a reversionary beneficiary

Where an income stream reverts to a reversionary beneficiary after the death of the primary beneficiary, it should be treated as a continuation of the original income stream and be assessed from the date the reversionary beneficiary becomes entitled to receive the income stream. Reversion and entitlement to receive the income stream is from when the product provider/trustee determines that the beneficiary is entitled to the income stream.

Note: Refer to 4.9.8.10 for further detail on how to assess a lump sum payment of arrears that was accrued between death of the primary beneficiary and when the reversionary beneficiary became entitled to receive payments.

The income stream will then be assessed in the hands of the reversionary beneficiary based on their characteristics and the characteristics of the income stream. The income stream will have the same commencement day, original purchase price (less any commutations) and relevant number/term as the original income stream. The income support recipient of an income stream that reverts (or the product provider) will need to provide Centrelink with this information.

An income stream that reverts will only be assessed as a new income stream where the reversionary beneficiary subsequently commutes and repurchases another income stream.

For an ATE income stream to continue to have ATE status, it will have to meet the requirements specified in either SSAct section 9A or section 9B. This means that:

• lifetime income streams will continue to have 100% ATE status in the hands of the reversionary beneficiary because the product satisfies the requirements of SSAct when it was first assessed
• life expectancy income streams will continue to have 100% ATE status where
  • the remaining term of the income stream (rounded up to the next whole number of years) is equal to the new owner's life expectancy rounded up to the next whole number of years, and
  • the new 'owner' has reached age pension age.

Note:

• Where a lifetime income stream reverts, the annual payment can reduce by a percentage specified in the contract document. This will not affect the ATE status of the income stream on reversion.
• Where a life expectancy income stream has not satisfied the above requirements it will be asset-tested (4.9.3) as either a long-term or short-term asset tested product.

Change in nominated reversionary beneficiary

This section only applies to LIFETIME products. Life expectancy products are not affected by a change of the nominated reversionary beneficiary as these products have a set term.

Where a reversionary beneficiary of a lifetime ATE income stream is changed (e.g. due to divorce or death), the income stream should be assessed as a NEW ATE income stream. The new income stream must satisfy the provisions of SSAct section 9A as it is applied before 20 September 2007 and one of the first 2 additional sets of conditions for retention of asset test exemption in 4.9.2.17.

For the new income stream:

• the commencement date will be the day the existing beneficiary is removed and either a new beneficiary is added or no beneficiary is added
• the purchase price will be the present value of the future income stream payments (as advised by the product provider)
• the new relevant number will be the life expectancy of the primary beneficiary where no beneficiary is added, or the longer of the life expectancies of the primary and reversionary beneficiaries if a new beneficiary is added at the new commencement day, and
• the new deduction amount will be determined by dividing new purchase price by the new relevant number.

For guidance on AGA valuation procedures for lifetime or life expectancy ATE income streams paid from SMSFs or SAFs refer to 4.9.4.50.