4.9.4.20 General Provisions for Assessing Income Streams Paid from SMSFs or SAFs

Summary

This topic covers:

• assessment of income streams paid from SMSFs and SAFs under the income and assets test,
• purchase price of an income stream paid from SMSFs or SAFs,
• income streams commuted into new ATE income stream, including reserves,
• return of purchase price over the term for lifetime or life expectancy ATE income streams,
• guidance on return of purchase price assessment.

Note: For the assessment of unallocated reserves held within SMSFs and SAFs, see 4.8.2.10.

Assessment of income streams paid from SMSFs & SAFs under the income & assets test

The assessment of income streams paid from SMSFs and SAFs under the income and assets test are the same as for:

• ATE income streams (4.9.2),
• assets-tested income streams (long term) (4.9.3), and
• assets-tested income streams (short term) (4.9.3).

Purchase price of an income stream paid from SMSFs or SAFs

The purchase price (1.1.P.500) of an income stream paid from an SMSF or SAF is the sum of the payments made to purchase that income stream less any commutations.

Note: It is NOT the present value of the income stream as calculated by the AGA.

Income streams commuted into new ATE income stream, including reserves

An income support recipient may declare that they have commuted the income stream and rolled the funds over to a new ATE income stream.

Until 1 January 2006, SMSFs and SAFs were able to offer any type of income stream, with allocated or account-based income streams being the most common type. However, from 1 January 2006, new income streams sourced from these funds are limited to allocated or account-based income streams and market-linked income streams. The funds may continue to make payments in relation to ATE income streams that were commenced before 1 January 2006, however, if these income streams are commuted, the assets can only be used to purchase particular types of income streams depending on the commencement date of the original income stream.

If the original income stream is commuted, it must be fully commuted, including reserves, and rolled over to the new income stream.

If the original lifetime or life expectancy ATE income stream was purchased prior to 1 January 2006, the assets backing the income stream, including reserves, can only be used to purchase a lifetime or life expectancy ATE annuity (from the statutory fund or benefit fund of a life office or friendly society). The payments from the new lifetime or life expectancy income stream sourced from the retail provider can then be used to make payments from the SMSF or SAF. Alternatively, the fully commuted assets, including reserves, may be used to purchase a lifetime or life expectancy ATE income stream directly from a retail provider.

If the original lifetime or life expectancy ATE income stream was purchased from 20 September 2004 and before 1 January 2006, the fully commuted assets, including reserves, may be used to purchase a market-linked income stream from the SMSF or SAF.

The income support recipient will need to provide a completed Centrelink schedule 'Details of income support product' (SA330), unless requested by Centrelink to provide additional documentation.

Return of purchase price over the term for lifetime & life expectancy ATE income streams

Note: This applies ONLY to income streams purchased before 1 January 2006.

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.

For lifetime and life expectancy products, the AGA will include an estimation of the dollar amount of the payments from the income stream in their valuation report. The purpose of this calculation is to provide evidence as to whether or not the purchase price of the income stream will be wholly converted to income. Centrelink staff will then compare this figure with the product's purchase price. If the dollar amount is equal to or higher than the purchase price of the product, the income stream meets the return of purchase price requirement for an ATE income stream.

If the dollar amount is lower than the purchase price of the income stream, the income stream product does not meet this requirement and therefore, cannot be ATE. The product should be assessed as an asset-tested income stream (4.9.3).

Guidance on return of purchase price assessment

Note: This applies ONLY to income streams purchased before 1 January 2006.

An important requirement for lifetime and life expectancy ATE products is that they cannot have a RCV. If the product has a zero RCV, then, for the purchase price to be 'wholly converted to income', the return of capital must be such that the full dollar amount of the purchase price is returned to the income support recipient over the period of the recipient's life expectancy or the term of the product:

• For a lifetime income stream:
  • where there is no reversionary beneficiary, the full dollar amount must be returned to the individual over his or her life expectancy. The life expectancy for the purchaser of a lifetime income stream is determined by taking the life expectancy (based on ALT) of a person 9 years younger (ALT-9).
    • Example: For a 65 year old, the AGA would use the life expectancy for a 56 year old, and apply that life expectancy at the time when the income stream first commenced to be paid. For life expectancy tables refer to 4.9.5.
  • where there are reversionary beneficiaries, the full dollar amount of the purchase price should be returned over the period spanning the longer of the income support recipient's life expectancy (based on ALT-9) and the life expectancies of the reversionary beneficiaries (also based on ALT-9).
  • where income support recipients purchase a jointly-owned ATE lifetime income stream, the acceptable period for conversion of the purchase price to income is based on the longer life expectancy of the 2 recipients.
• For a life expectancy product, the full dollar amount must be returned to the income support recipient over the term of the product.