4.9.3.30 Income Test Assessment of Asset-Tested Income Streams

Summary

This topic covers:

  • income test assessment of asset-tested income streams (long term),
  • income test assessment for market-linked income streams,
  • income test assessment for defined benefit income streams,
  • income test assessment of asset-tested income streams (short term), and
  • income reporting requirements for account-based (allocated) income streams.

Note:

  • With the exception of income streams that receive relief under 4.9.2.17, all income streams purchased from 20 September 2007 will be assessed as asset-tested income streams under the provisions specified in this section of the SS Guide.
  • Where some or all of the assets backing an income stream have been frozen, the relevant income treatment as outlined below will continue to apply. For the assets test assessment refer to 4.9.3.20 Assets Test Assessment of Asset-Tested Income Streams.

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

From 1 January 2015, asset-tested income streams (long term) that are account-based are assessed under the deeming income test (see 4.4.1.30). This includes account-based pensions and account-based annuities.

Annuities which are not account-based are not included in the deeming provisions and will continue to be assessed under the return of capital rules (i.e. gross annual income less deduction amount).

Existing account-based income streams held by income support recipients as at 31 December 2014 have been 'grandfathered' and will continue to be assessed under the existing rules unless the account holder changes products (i.e. commuting and restarting a grandfathered account-based income stream, or commuting a grandfathering account-based income stream and purchasing a new product with a different income stream provider), or ceases to receive be in continuous receipt of an income support payment.

A person is considered to be in continuous receipt of an income support payment where they receive at least $0.01 of income support in each consecutive fortnight from 1 January 2015.

Income assessment for an asset-tested income stream (long term), other than account-based pensions and annuities assessed under the deeming provision, uses the following formula:

  • AP − [(PP − RCV) ÷ RN]
Abbreviation Meaning
AP Annual payment (1.1.A.155)
PP Purchase price (1.1.P.500)
RCV Residual capital value
RN

Relevant number

For account-based (allocated) income streams where there is a reversionary beneficiary go to 4.9.3.40.

Note: Purchase price (PP) is defined as the purchase price at commencement less any commutations since commencement.

This formula applies both to income streams with a specified term and to account-based income streams. In the case of account-based income streams, the RCV will be zero.

Example 1: 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 2: 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.

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

Income test assessment for market-linked income streams

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

Note: Market-linked income streams are also referred to as term allocated pensions.

Policy reference: SS Guide 4.9.2.30 Income Test Assessment of Asset-Test Exempt Income Streams, 4.9.5.70 Payment Factors for Market-Linked Income Streams

Income test assessment for defined benefit income streams

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

Income test assessment of asset-tested income streams (short term)

As asset-tested income streams (short term) are included in the definition of financial investments, they are assessed for income under the deeming rules.

Act reference: SSAct section 9(1)-'asset-tested income stream (short term)', section 9(1)-'financial investment', section 1076 Deemed income from financial assets-persons other than members of couples, section 1077 Deemed income from financial assets-members of pensioner couples, section 1078 Deemed income from financial assets-members of non-pensioner couples

Policy reference: SS Guide 4.4 Deeming Provisions

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 one or more payments during the financial year from their account-based income stream.

Exception: For an account-based income stream purchased between 1 June and 30 June, the income support recipient can defer the commencement of payment until the following financial year (i.e. after 1 July). If the income support recipient chooses this option, income will be assessed from 1 July.

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 Pension Valuation Factors (PVF) 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.

Note: For the income test assessment of account-based income streams, refer to 'Income test assessment of asset-tested income streams (long term)'.

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: 21 March 2016