4.9.2.15 Characteristics of asset-test exempt income streams purchased from 20/09/2004 & before 20/09/2007

Summary

This topic explains the characteristics of an ATE income stream (1.1.A.306) purchased:

• from 20 September 2004 to 31 December 2005, or
• from 1 January 2006.

ATE income streams purchased prior to 20 September 2004 are covered in 4.9.2.10. Income streams 1.1.I.70 which DO NOT meet the characteristics in this topic, or 4.9.2.10, are asset-tested 4.9.3.

This topic covers the following matters:

• characteristics of an ATE income stream, which includes
  • required characteristics
  • amount of annual payments for lifetime and life expectancy income streams
  • amount of annual payments for market-linked income streams
  • payments at the end of term for market-linked income streams
  • 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
  • asset test exemption NOT affected by allowable guarantee period
  • transfer to reversionary beneficiary
  • amount of reversionary benefit payable
• assessment where an ATE income stream is transferred to a reversionary beneficiary or partner
• change in nominated reversionary beneficiary, and
• rules for determining the end of term for market-linked income streams.

Note:

• Income streams purchased from 20 September 2007 will be asset tested unless they are defined benefit income streams that qualify for a 100% exemption from the assets test (4.9.2.20), or unless they are income streams subject to special savings provisions (4.9.2.17). ATE income streams purchased from 20 September 2004 to 19 September 2007 (inclusive) must satisfy the requirements specified in SSAct section 9A, 9B or 9BA. This includes income streams purchased to satisfy divorce property settlements.
• Life expectancy and market-linked ATE income streams purchased from 1 January 2006 to 19 September 2007 have different requirements in relation to the allowable term from those purchased from 20 September 2004 to 31 December 2005.
• Market-linked income streams purchased from 1 January 2006 to 19 September 2007 have different requirements in relation to the amount of annual payments from those purchased before that date.
• ATE income streams purchased prior to 20 September 2004 that are acquired by a reversionary beneficiary after 20 September 2004, are assessed under the pre-20 September 2004 rules (4.9.2.10).
• Where they satisfy relevant conditions relief from the change in the assets test exemption will be granted for
  • ATE lifetime or life expectancy income streams purchased from 20 September 2004 from the commutation and rollover of ATE lifetime or life expectancy income streams purchased before 20 September 2004 (4.9.2.17). These new income streams will retain the 100% asset exemption granted for the initial income stream.
  • ATE lifetime or life expectancy income streams created from 20 September 2007 by the commutation and rollover of ATE lifetime or life expectancy income streams purchased from 20 September 2004 to 19 September 2007 that themselves were created from the commutation and rollover of similar ATE lifetime or life expectancy income streams purchased before 20 September 2004 (4.9.2.17). These new income streams will retain the 100% asset exemption granted for the initial income stream.
  • ATE lifetime, life expectancy, or market-linked income streams created from 20 September 2007 from the commutation and rollover of ATE lifetime, life expectancy, or market-linked income streams purchased from 20 September 2004 to 19 September 2007. These new income streams will retain the 50% exemption granted for the initial income stream.
• Relief will also be granted for ATE lifetime and life expectancy income streams that are purchased
  • on or after 20 September 2004 from the proceeds of a payment split where the original ATE income stream was purchased before 20 September 2004 and was 100% ATE (4.9.2.17).
  • on or after 20 September 2007 from the proceeds of a payment split where the original ATE income stream was purchased between 20 September 2004 and 19 September 2007 (inclusive) and was 50% ATE (4.9.2.17).
• For information on joint income streams please refer to 4.9.2.50.

For guidance on AGA valuation procedures for lifetime and life expectancy ATE income streams paid from SMSFs or SAFs refer to 4.9.4.50. Under the Superannuation Industry (Supervision) (SIS) Regulations 1994, from 1 January 2006, no lifetime or life expectancy ATE income stream can be sourced from an SMSF or an SAF unless it is fully backed by annuities purchased from the statutory fund of a life office or the benefit fund of a friendly society.

Required characteristics of an ATE income stream

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 partner's retirement, being:

A) for lifetime income streams, for the lifetime (1.1.L.45) of the recipient, OR

B) for life expectancy or market-linked income streams purchased on or after 20 September 2004 and before 1 January 2006, a term equal to

• a period of whole years at least as long as the primary beneficiary's life expectancy on the commencement day of the income stream (rounded up if not a whole number to the next whole number) and at most as long as the primary beneficiary's life expectancy on the commencement day calculated as if they were 5 years younger (rounded up if not a whole number to the next whole number), OR
• where a reversionary partner is specified, the term can be as above, OR
• for a period of whole years at least as long as the greater of the life expectancies of the primary beneficiary and the primary beneficiary's reversionary partner (rounded up, if not a whole number, to the next whole number), and at most as long as the greater of the life expectancies of the primary beneficiary and the primary beneficiary's reversionary partner if they were both 5 years younger (rounded up, if not a whole number, to the next whole number), on the commencement day of the income stream, OR

C) for life expectancy or market-linked income streams purchased from 1 January 2006 to 19 September 2007 (inclusive), a term equal to

• a period of whole years at least as long as the primary beneficiary's life expectancy on the commencement day of the income stream (rounded up if not a whole number to the next whole number), and
• at most as long as the greater of
  • the primary beneficiary's life expectancy if they were 5 years younger (rounded up if not a whole number to the next whole number), on the income stream's commencement day, and
  • the period (rounded up if not a whole number to the next whole number), starting on the income stream's commencement day and ending on the day on which the primary beneficiary would reach age 100, OR

D) where there is a reversionary partner: the term can be as above, OR

• for a period of whole years at least as long as the greater of the life expectancies of the primary beneficiary and the primary beneficiary's reversionary partner on the commencement day of the income stream (rounded up if not a whole number to the next whole number), and
• at most as long as the greater of
  • the life expectancies of the primary beneficiary and the primary beneficiary's reversionary partner if they were both 5 years younger on the income stream's commencement day (rounded up if not a whole number to the next whole number), and
  • the greater of the periods (rounded up if not a whole number to the next whole number), starting on the income stream's commencement day and ending on the day on which the primary beneficiary and the primary beneficiary's reversionary partner would reach age 100
• in the case of a lifetime or life expectancy ATE income stream from an SMSF or SAF, 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 sections 9A(1)(b), 9B(1)(b), and 9BA(1)(b)).

Where they are purchased from 20 September 2004 to 19 September 2007, lifetime and life expectancy products that have ALL of the required characteristics of SSAct section 9A or section 9B, respectively, are 50% exempt from the assets test. Life expectancy ATE income streams can be purchased at any age.

Market-linked income streams, which satisfy SSAct section 9BA, are 50% exempt from the assets test, as they can only be purchased from 20 September 2004. These income streams can be purchased at any age.

Note:

• All lifetime and life expectancy products purchased before 20 September 2004 are 100% exempt from the assets test. Refer to 4.9.2.10.
• For post-20 September 2004 lifetime or life expectancy ATE income streams to be granted 100% asset test exemption, they must satisfy the conditions specified in 4.9.2.17.

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 for lifetime & life expectancy ATE income streams

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 all subsequent years 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 an indexation rate. However, the indexation rate can never be negative, nor can it exceed 5% per annum OR CPI +1% per annum in any given year.

ATE status may be retained where:

• income payments are varied downwards after an allowable commutation (4.9.2.40)
• a recipient has wholly commuted from one ATE product, and transferred the proceeds to another ATE product, and the new income stream pays a lower rate of income.

Amount of annual payments for market-linked income streams

Note: For the financial years commencing 1 July 2008, 1 July 2009, 1 July 2010, 1 July 2011, 1 July 2012, 1 July 2019 and 1 July 2020, temporary relief measures reducing the minimum annual amounts apply. Refer to 'pension drawdown relief' on the Australian Taxation Office website.

Payments MUST be made at least annually with annual payment amounts determined under the following formula:

Account balance ÷ Payment factor

where:

• 'Account balance' means
  • if the financial year includes the income stream's commencement day - the income stream's opening account balance (i.e. purchase price less any entry fees)
  • otherwise, the account balance of the income stream on 1 July, and
• 'Payment factor' means the factors contained in 4.9.5.70.

Note:

• Where the income stream commences on or after 1 June, there is no obligation to make a payment in the first financial year.
• Annual payment amounts are to be rounded to the nearest $10. Where the amount is exactly $5, round up to the next $10.
• An allowable commutation will not affect the annual payment for that particular financial year.
• If during a financial year the income stream is fully commuted (e.g. to repurchase another ATE income stream), a pro-rata payment is required to be made which corresponds to that part of the financial year which has elapsed (i.e. based on the number of days elapsed since the most recent 1 July divided by the number of days in the current financial year).

From 1 January 2006, the annual amount received during the financial year may be varied between 90% and 110% of the amount calculated under the above formula.

A rounding rule will apply for determining the number of whole years remaining on the term of a market-linked income stream. The remaining term on each 1 July will be rounded to a whole number of years according to whether the income stream commenced before 1 January, or on or after 1 January in a financial year.

• For products commencing before 1 January, the remaining term on each 1 July will be rounded down to the nearest whole number of years. Where the remaining term rounds to zero, a payment factor of 1 will be used to calculate the final payment from the income stream.
• For products commencing on or after 1 January, the remaining term on each 1 July will be rounded up to the nearest whole number of years.

Note: Flexibility is needed in situations where, due to negative investment returns, the account balance at any time during the year is insufficient to meet the remaining required payments in that year (this typically would arise only in the final year of a market-linked income stream). In these situations, the remaining account balance may be paid out in satisfaction of the annual payment requirement.

Payments at the end of term for market-linked income streams

The payment amount specified in relation to the last financial year of the income stream's term will be determined at the beginning of that financial year. During this year, it is likely that some investment earnings will accrue after the start of this year.

Where this is the case, the remaining account balance must be paid within 28 days after the end of the term (or the end of the term as modified under the Superannuation Industry (Supervision) (SIS) Regulations 1994 that apply to income streams commencing part way through a year). For social security income test purposes, these amounts will be treated as an exempt lump sum under SSAct section 8(11).

Commencement day

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

• purchased, or
• acquired, for reversionary beneficiaries or a reversionary partner, 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

Purchase price is the amount invested to purchase the income stream less any allowable commutations (4.9.2.40) made since commencement. The purchase price includes fees but after tax has been deducted.

The purchase price of an ATE income stream is the amount invested in the product. For income streams paid from an SMSF or SAF, refer to 4.9.4.20.

Residual capital value

Irrespective of whether the income stream is a lifetime, life expectancy or market-linked 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 a 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 recipient's life expectancy for lifetime products, or the term of the product for life expectancy and market-linked 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

To meet the ATE requirements, the income stream must be non-commutable, except in limited circumstances. If the income stream is commuted, the commuted amount must not be greater than the benefit that was payable immediately before the commutation. For market-linked income streams, the commuted amount will not be greater than the account balance 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, or
• the income from it.

Asset test exemption NOT affected by allowable guarantee period

The provision of a guarantee period within allowable limits does NOT affect the ATE status of a lifetime income stream. A guarantee period is a predetermined period in which any remaining payments, up to the end of the period, are paid to a reversionary beneficiary, or the primary beneficiary's estate, if the primary beneficiary dies within the allowable guarantee period. The allowable limits for the guarantee period can be up to the shorter of:

• the primary beneficiary's life expectancy at purchase or, if life expectancy is not a whole number, life expectancy rounded up to the next whole number, and
• 20 years.

Note:

• For information on joint lifetime income streams please refer to 4.9.2.50.
• The calculation of relevant number (for assessable income purposes) is not affected by the rounding-up of the guarantee period.

Transfer to reversionary beneficiary or partner

For a lifetime income stream, it cannot be transferred except:

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

For a life expectancy or market-linked income stream, it cannot be transferred except on death of the primary beneficiary or a reversionary partner. There is also an additional requirement that must be satisfied to retain ATE status on transfer. Where a reversionary partner is specified, as per SSAct section 9B(6) or section 9BA(14), the income stream MUST be transferred to the specified reversionary partner.

Amount of reversionary benefit payable

For lifetime, life expectancy and market-linked 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.

For market-linked income streams, the reversionary benefit is the account balance at the time of the primary beneficiary's death. It may also be paid as a lump sum to a reversionary beneficiary other than a reversionary partner.

Note: A reversionary partner must be the primary beneficiary's partner. That is, a member of a couple as defined in SSAct section 4(2).

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

• 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 there is no specified reversionary beneficiary, a reversionary benefit (payable to a specified beneficiary or the primary beneficiary's estate) may only exist where the contract specifies a guarantee period and the primary beneficiary dies within that specified guarantee period. The maximum allowed guarantee period for ATE lifetime income streams purchased on or after 20 September 2004 is the lesser of:

• life expectancy, or
• if life expectancy is not a whole number, life expectancy rounded up to the next whole number, or 20 years.

For joint lifetime and life expectancy ATE income streams purchased on or after 20 September 2004, refer to 4.9.2.50.

Assessment where an ATE income stream is transferred to a reversionary beneficiary or partner

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 or trustee determines that the beneficiary is entitled to the income stream.

Note: Refer to 4.9.2 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 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 a life expectancy or market-linked income stream that is transferred to a reversionary partner, the income stream will continue to have ATE status as long as it is non-commutable for the reversionary partner (as specified in SSAct sections 9B(2)(h)(iii) and 9BA(2)(f)(iii)). This means that the requirements for the term to be within those specified in SSAct sections 9B(2A) and 9B(2C) or 9BA(3) and 9BA(4) do not need to be satisfied on reversion.

This also means that ALL life expectancy and market-linked ATE income streams will automatically lose ATE status when they are transferred to reversionary beneficiaries that are NOT specified as reversionary partners (as specified in SSAct sections 9B(6) and 9BA(14)). Refer to SSAct section 9B(1A)(aa) and section 9BA(1)(a)(ii).

For a lifetime income stream to continue to have ATE status, it will have to meet the requirements specified in SSAct section 9A. Generally, lifetime income streams will continue to have ATE status in the hands of a reversionary beneficiary because the product satisfied the requirements of section 9A when it was first assessed.

Note: When a lifetime income stream reverts, the annual payment can reduce by a percentage specified in the contract document. This will not affect whether the reversionary income stream is given ATE status.

Where a life expectancy product has not satisfied the requirements it will be asset-tested 4.9.3. If the term of the product is:

• greater than 5 years, the product will be asset-tested (long-term)
• less than 5 years, the product will be asset-tested (short-term).

Market-linked income streams that lose ATE status are treated as asset-tested (long-term) income streams 4.9.3.

Change in nominated reversionary beneficiary

This section only applies to LIFETIME products. Payments from life expectancy and market-linked 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 applied before 20 September 2007 and 1 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
• purchase price will be the present value of the future income stream payments (as advised by the product provider)
• 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
• new deduction amount will be determined by dividing new purchase price by the new relevant number.

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

Rules for determining the end of term for market-linked income streams

A market-linked income stream is required to run for a fixed number of whole years. This period is known as the term of the income stream. In the final year of the term, the income stream will end on the anniversary of its commencement.

However, some payment flexibility is being allowed towards the end of the term to reduce any lumpiness in payments that would arise from making payments over a period other than a financial year (or from the account balance being exhausted before the end of the term).

Where a payment factor of 1 is required to be used for the first time in the annual payment calculation (a payment factor of 1 means that the annual payment amount will be equal to the full account balance), the remaining account balance can be paid out over a period of either:

• (A) the remaining term for the product, or
• (B) 12 months.

Recipients who purchase a market-linked income stream on 1 July will be assessed as receiving payments until 30 June in the final year.

For recipients who purchase a market-linked income stream on a day other than 1 July, the options described above will allow payments to continue either until the end of the full term option (A), or until 30 June option (B).

A period chosen under one of the above options would not cause a breach of the requirement under the Superannuation Industry (Supervision) (SIS) Regulations 1994 and the social security rules to pay a market-linked pension over a term of a whole number of years.