4.9.3.30 Means test assessment of asset-tested income streams (long term)

Summary

This topic covers:

  • income test assessment for asset-tested income streams (long term) that are not defined benefit income streams
  • assets test assessment for asset-tested income streams (long term) that are not defined benefit income streams
  • income test assessment for defined benefit income streams
  • assets test assessment for defined benefit income streams
  • income reporting requirements for account-based (allocated) income streams.

Overview

The table below gives an overview of the assets and income test treatment of different types of asset-tested income streams (long term).

Type Assets test Income test
Non-account based income streams. This group includes term income streams. The purchase price is depreciated over a period equal to the relevant number. Receives an income deduction based on the purchase price.
Account based income streams. This group includes market-linked income streams that are NOT ATE (1.1.A.306). The assessable asset is the account balance.

Account-based income streams: The account balance is deemed (4.4) UNLESS the product is grandfathered, then the recipient receives an income deduction based on the purchase price.

Market-linked income streams: Receives an income deduction based on the purchase price.

Defined benefit income streams that are NOT ATE. The assessable asset value is derived from the gross annual income in the first year. Receives an income deduction based on income support recipient's deductible amount.

Note: The assessable asset or income associated with an asset-tested income stream (long term) cannot be reduced by any charge or encumbrance on the income stream.

Income test assessment for asset-tested income streams (long term) that are not defined benefit income streams

For account-based income streams purchased after 1 January 2015, income is determined using the deeming provisions (4.4.1.30). This includes account-based pensions and annuities.

Existing account-based income streams held by income support recipients as at 31 December 2014 are 'grandfathered', unless the account holder changes products, or ceases to be in continuous receipt of an income support payment. Changing products includes fully commuting and restarting a grandfathered account-based income stream, or fully commuting a grandfathered account-based income stream and purchasing a new product with a different income stream provider.

For asset-tested income streams (long term), other than non-grandfathered account-based pensions and those assessed under the deeming provisions, the following formula is used to determine the assessable income from the income stream:

  • Annual Payment − [(Purchase Price − RCV) ÷ Relevant Number]

Note: Annual payment (1.1.A.155), Purchase price (1.1.P.500), RCV (1.1.R.230) and Relevant number (1.1.R.135) are defined in 1.1.

In the case of account-based income streams, the RCV will be zero.

Example: Sally is 65 years old and single. She purchases a 10-year annuity with a RCV of $20,000 for $150,000. Her total annuity payment for the first year is $18,337. Her assessable income from this income stream = $18,337 − [($150,000 − $20,000) ÷ 10 years] = $5,337 per annum.

Example: Adam is 65 years old and single. He purchases a 20-year annuity with no RCV for $400,000. His total annuity payment for the first year is $34,400. His assessable income from this income stream = $34,400 − ($400,000 ÷ 20 years) = $14,400 per annum.

Note: The income test assessment for market-linked income streams is the same irrespective of whether it is ATE or asset-tested, and is outlined in 4.9.2.30.

Act reference: SSAct section 9(1)-'residual capital value', section 9(1)-'relevant number', section 1099C Income-income stream not a defined benefit income stream

Policy reference: SS Guide 4.4.1.30 Scope of Deeming, 4.9.3.40 Account-based Income Streams - Relevant Number where Reversionary Beneficiary Exists, 1.1.A.155 Annual payment, 1.1.P.500 Purchase price, 1.1.R.230 Residual capital value (RCV), 1.1.R.135 Relevant number

Assets test assessment for asset-tested income streams (long term) that are not defined benefit income streams

If the income stream is account-based (e.g. account-based or allocated income streams and market-linked income streams that are not ATE), the assessable asset is the account balance.

If the income stream is not account based, the asset value is determined using the following formula:

  • Purchase price − [((purchase price − RCV) ÷ relevant number) × term elapsed]

Note: Annual payment (1.1.A.155), Purchase price (1.1.P.500), RCV (1.1.R.230) and Relevant number (1.1.R.135) are defined in 1.1.

The term elapsed is the number of years that have elapsed since the income stream's commencement day. The number of years is rounded down to the nearest:

  • half-year, when the asset value is determined on a 6-monthly basis, OR
  • whole year when the asset value is determined annually.

Example: Sally is 65 years old and single. She purchases a 10-year annuity with a RCV of $20,000 for $150,000. She receives a total payment of $18,337 per year. Monthly payments commence on 1 January. Her assessable asset from 1 January for the first 6 months will be $150,000 − [(($150,000 − $20,000) ÷ 10 years) × 0 years] = $150,000.

Her assessable asset from 30 June in that year will be $150,000 − [(($150,000 − $20,000) ÷ 10 years) × 0.5 years] = $143,500

The following table shows when the asset value is determined for an asset-tested income stream.

If an income stream pays an income support recipient … then the asset value is determined …
once per income year once a year at the start of the contract year.
MORE than once per income year twice a year at the start of each 6 month period.

Note: Where an income stream continues to be paid to a reversionary beneficiary after the death of the primary beneficiary, it will continue to have the same commencement day, purchase price and relevant number.

Act reference: SSAct section 9(1)-'commencement day'

Policy reference: SS Guide 1.1.P.500 Purchase price

Income test assessment for defined benefit income streams

The assessable income from a defined benefit income stream is:

  • Assessable Income = Annual Payment - Deductible Amount

The income test assessment for defined benefit income streams is the same irrespective of whether it is ATE or asset-tested.

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).

Policy reference: SS Guide 4.9.2.30 Income Test Assessment of Asset-Test Exempt Income Streams, 1.1.D.44 Deductible amount

Assets test assessment for asset-tested defined benefit income streams

The asset value used for an asset-tested defined benefit income stream is determined using the following formula:

  • Annual payment × pension valuation factor (PVF)

PVFs, determined by the Minister, are contained in 4.9.5. Asset values are reassessed annually.

Act reference: SSAct section 1120 Value of asset-tested income streams that are defined benefit income streams, section 1120(3)-'pension valuation factor'

Policy reference: SS Guide 4.9.5 Life Expectancy, Pension Valuation Factor & Payment Factor Tables

Income reporting requirements for account-based (allocated) income streams

Note: Account-based income streams were previously referred to as allocated income streams.

An income support recipient must receive 1 or more payments during the financial year from their account-based income stream.

The annual payment must not be less than the minimum amount calculated according to the limits specified in the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) (4.9.5.60). There are no provisions under the SIS Regulations to cease income payments from the income stream product; at least the minimum pension payment amount must be taken. The relevant minimum pension payment amount is calculated as follows:

  • Account balance × percentage factor (as specified in Schedule 7 of the SIS Regulations)

Note: For the financial years commencing on 1 July 2008 and ending 30 June 2013, temporary relief measures reducing the minimum annual amounts apply. Refer to 'pension drawdown relief' on the Australian Taxation Office website.

Note: Account-based (allocated) income streams with commencement days before 1 July 2007 may still use the PVFs being used before that date. However, if the income support recipient wishes, they may use the new PVFs that applied from that date.

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 DHS reporting purposes, the 'gross annual nominated payment' is the sum of all payments the recipient has received and is expected to receive (excluding commutations) for the current whole financial year. The amount reported must always be above the relevant minimum pension payment amount.

If the date of purchase is between 1 June and 30 June and no payment is made in June but the first payment commences after 1 July, the gross annual nominated payment for the first financial year must be reported as zero. The new gross annual payment must be reported in July.

Note: If the recipient elects to take a payment in June, the gross annual nominated payment must be reported in June for the financial year (see formula below).

Where an income support recipient specifies an annual amount for the current financial year that is below the relevant minimum pension payment amount, DHS will still assess an amount equivalent to the relevant minimum annual amount as required for the financial year.

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 DHS (see formula below).

For DHS reporting purposes the 'gross annual nominated payment' will be equal to the sum of actual payments received, plus payments to be received, (excluding commutations) in the financial year grossed-up to reflect an annual amount. It is calculated as follows:

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

Example 1: George, who turns 65 on 1 January 2009, commences an account-based income stream from that date based on an initial account balance of $300,000.

George elects to receive 6 monthly payments of $2,000 commencing on 1 January 2009 for the remainder of 2008-09. George will receive $12,000 for the 6-month period. This amount is above the relevant minimum pension payment amount.

For DHS reporting purposes, the gross annual nominated payment is calculated as follows:
[Sum of all payments already received and to be received (excluding commutations) during the financial year] × [number of days in financial year ÷ number of days from commencement until 30 June]
= $12,000 × (365 ÷ 181)
= $24,198.89

Example 2: Fred turns 65 on 1 January 2008 and commences an account-based income stream from that date based on an initial account balance of $300,000. Fred elects to receive 6 monthly payments of $2,000 commencing on 1 January 2008 for the remainder of 2007-08. Fred will receive $12,000 for the 6 month period. This amount is above the relevant minimum pension payment amount.

For DHS reporting purposes, the gross annual nominated payment is calculated as follows:
[Sum of all payments already received and to be received (excluding commutations) during the financial year] × [number of days in financial year ÷ number of days from commencement until 30 June]
= $12,000 × (366 ÷ 182)
= $24,131.87

On 1 April 2008, Fred elects to vary his monthly payment to $3,000. He has already received $6,000 (between January and March) and wants to receive an additional $9,000 from April to June.

Fred will receive $15,000 in 2007-08 (1 January 2008 to 30 June 2008).

For DHS reporting purposes, the gross annual nominated payment is calculated as follows:
(Sum of all payments already received and to be received (excluding commutations) during the financial year) × (number of days in financial year ÷ number of days from commencement until 30 June)
= $15,000 × (366 ÷ 182)
= $30,164.84

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

  • [Sum of all payments already received and to be received (excluding commutations) during the financial year from 1 July to 30 June]

Example 3: Bill, who turns 65 on 1 July 2008, commences an account-based income stream from that date based on an initial account balance of $300,000.

Bill elects to receive $2,000 per month for the financial year, which is an annual amount of $24,000 (12 payments of $2,000). This amount is above the relevant minimum pension payment amount.

For DHS reporting purposes, the gross annual nominated payment to be reported on DHS schedule is $24,000.

Example 4: On 1 January 2009, Bill elects to vary his monthly payments to $1,000. He has already received $12,000 (between July to December) and wants to receive an additional $6,000 from January to June.

Bill will receive $18,000 for the financial year comprising of the payments received and expected to be received for the full financial year, which is above the relevant minimum pension payment amount.

For DHS reporting purposes, the gross annual nominated payment to be reported on DHS schedule from 1 January 2009 is $18,000.

Act reference: SSAct section 1099C Income-income stream not a defined benefit income stream, section 1099DAA Income from certain low-payment asset-tested income streams

Policy reference: SS Guide 4.9.5.60 Pension Valuation Factors & Percentage Factors for Allocated & Account Based Income Streams

Last reviewed: 1 July 2019