4.9.2.30 Income Test Assessment of Asset-Test Exempt Income Streams

Summary

This topic covers income test assessment for:

• income test assessment for lifetime and life expectancy ATE income streams,
• income test assessment for market-linked ATE income streams,
• income reporting requirements for market-linked income streams,
• income test assessment for defined benefit income streams before 1 July 2007, and
• income test assessment for defined benefit income streams from 1 July 2007.

Income test assessment for lifetime & life expectancy ATE income streams

The assessable income from a lifetime or life expectancy ATE income stream is the annual payment (1.1.A.155) LESS the deduction amount. The deduction amount is the purchase price less commutations (1.1.P.500) divided by the relevant number (1.1.R.135).

Income test assessment for market-linked ATE income streams

The assessable income from a market-linked income stream is the annual payment LESS the deduction amount. The deduction amount is the purchase price less commutations divided by the relevant number.

Note: The annual payment can vary between plus or minus 10% of the default annual payment for the year (i.e. account balance ÷ payment factor).

Note: For the financial years commencing 1 July 2008 and ending 30 June 2012, temporary relief measures reducing the minimum annual amounts apply. Refer to 'pension drawdown relief' on the Australian Taxation Office website. The annual income amount for a market-linked income stream is calculated as detailed in 4.9.2.15.

The amount that should be reported for Centrelink purposes is specified later in 'Income reporting requirements for market linked income streams'.

Income reporting requirements for market-linked income streams

Note: For the financial years commencing 1 July 2008 and ending 30 June 2012, temporary relief measures reducing the minimum annual amounts apply. Refer to 'pension drawdown relief' on the Australian Taxation Office website.

An income support recipient must receive one or more payments during the financial year from their market-linked income stream. Where the income stream commences on or after 1 June, there is no obligation to make a payment in the first financial year (i.e. in June).

Payments must be made at least annually and must be between plus or minus 10% of the amount determined under the following formula:

• Default annual amount = Account balance ÷ Payment factor (4.9.5.70).
• Account balance:
  • 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).
  • If the financial year does not include the income stream's commencement day - the account balance of the income stream on 1 July.
• The default annual amount (i.e. account balance ÷ payment factor) is to be rounded to the nearest $10. Where the amount is exactly $5, round up to the next $10. This must happen before the plus or minus 10% range is calculated.
• An allowable commutation will not affect the annual payment for that particular financial year.

The payment period is the whole financial year, except where the income stream is purchased during that financial year, in which case it is the period from the income stream's commencement date to the end of the first financial year.

For Centrelink reporting purposes, the 'gross annual nominated payment' is the sum of all payments the recipient has received and is expected to receive for the current whole financial year. In effect, this amount will reflect the amount that the recipient expects to report for tax purposes after the end of a financial year, except in the first year, where the income stream does not commence on 1 July, the amount will be an annual amount (see formula below). For the income stream to meet the requirements for a 50% exemption from the assets test, the annual payment reported must always be between plus or minus 10% of the amount specified according to the above formula.

Where an income support recipient specifies an annual payment that is outside the 10% minimum or maximum range, the income stream will become non-complying and penalties may apply.

Where the income stream commences during a financial year, the income support recipient will receive a pro-rated payment amount to reflect the number of days remaining in the financial year. The pro-rated payment amount MUST NOT be reported to Centrelink.

For Centrelink reporting purposes the 'gross annual nominated payment' will be equal to the sum of actual payments received, plus payments to be received, in the financial year grossed-up to reflect an annual amount (i.e. an amount which reflects what the client would have received for a full financial year had their payments not been pro-rated). It is calculated as follows:

= [Sum of all payments already received and to be received during the financial year] × [number of days in financial year ÷ number of days from commencement until 30 June]

For subsequent financial years after an income stream's commencement date, for Centrelink reporting purposes the 'gross annual nominated payment' will be equal to the sum of actual payments received, plus payments to be received in the financial year. It is calculated as follows:

= [Sum of all payments already received and to be received during the financial year from 1 July to 30 June]

Income test assessment for defined benefit income streams before 1 July 2007

Prior to 1 July 2007, the deductible amount for social security purposes was based on the UPP in accordance with Income Tax Assessment Act 1936 section 27H(2) (as in force just before 1 July 2007).

The income test assessment for income support recipients who were receiving payments from a defined benefit income stream, was calculated as follows:

• Annual payment - deductible amount (1.1.D.44). The deductible amount was UPP ÷ relevant number.

For defined benefit income streams commenced from 20 September 1998 and before 1 July 2007, the deductible amount was based on the tax definition that applied during this period.

Where an income support recipient was simultaneously receiving a social security benefit AND payments from a defined benefit income stream on or before 19 September 1998, the deductible amount was based on the pre-1 July 1994 definition of UPP in the Income Tax Assessment Act.

Income test assessment for defined benefit income streams - from 1 July 2007

From 1 July 2007, the deductible amount is based on the 'tax free component' as worked out under Income Tax Assessment Act 1997 subdivision 307-C or if applicable, Income Tax (Transitional Provisions) Act 1997 subsection 307-125.

The income test assessment for income support recipients who were receiving payments from a defined benefit income stream, is calculated as follows:

• Annual payment - deductible amount.

Defined benefit income streams commenced from 1 July 2007 have their deductible amounts expressed as a proportion of the superannuation interest that gives rise to the income stream payments. This proportion will be the proportion that the 'sum of the amounts of the tax free component' of the superannuation interest comprises of the total superannuation interest.

As the sum of the amounts of the tax free component constitutes a fixed proportion of the superannuation interest that gives rise to the income stream, in most cases, the deductible amount will increase in the same proportion as any increase (e.g. CPI indexation) in the payments.

From 1 January 2016, the level of income from a defined benefit income stream that can be excluded from the income test by the deductible amount is capped at 10% of the gross income. This means if the income stream has a tax free component greater than 10% of the gross income, the tax free component or deductible amount is capped at 10%.

Note: Defined benefit income streams paid by the following military superannuation funds are excluded from the change:

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