4.3.9.70 Income from Private Annuities & Overseas Income Streams

Summary

This topic provides information on the following matters:

  • private annuities (1.1.P.425) and overseas income streams,
  • assessment commencement date,
  • income assessment for private annuities operating - pre-20 September 1998,
  • assessment of one year, one payment, private annuities,
  • income deprivation,
  • assessment of overseas income streams, and
  • assessment of overseas annuities - blocked income.

Private annuities & overseas income streams

Private annuities and overseas income streams are assessed under the ordinary income (1.1.O.30) and assets test. They are NOT subject to the Income Streams Initiative, which took effect on 20 September 1998.

Explanations:

  • A private annuity is an arrangement between 2 parties, where one party provides an income in exchange for payment, or other valuable consideration. They are not subject to prudential regulation. To be classed as a private annuity this arrangement must be in the form of a legally binding contract between the 2 parties.
  • Each private annuity is a separate contract that must be assessed on its particular merits.
  • Overseas income streams are not subject to Australian prudential regulation.

Example: Recent examples have included arrangements where a landowner, usually operating in the rural industry, exchanges title to a farming property for a series of payments over a defined period of time.

Assessment commencement date

Income from a private annuity should be assessed from the first day covered by the first payment period.

Example: Fred is in receipt of Age. In April 2001 he purchases a private annuity that will not commence until 1 July 2001. Payments are made every 3 months in arrears (i.e. the first payment for the period 1 July 2001 to 30 September 2001 is not made until 30 September 2001). Income from the annuity should be assessed from 1 July 2001.

For the asset test assessment of private annuities, refer to (4.6.5.100).

Income assessment for private annuities operating - pre-20 September 1998

Private annuities operating prior to 20 September 1998 are NOT assessed as producing any income between 20 September 1998, and the next date an income support recipient received a payment.

The assessment of income recommences on the date an income support recipient receives the first payment after 20 September 1998. The full amount of income paid is assessed under the income test after that date.

Assessment of one year, one payment, private annuities

One year, one-payment annuities are NOT classed as income streams for social security purposes.

They ARE assessed as a financial asset. Their value is maintained and subject to deeming.

Deprivation of income

If an income support recipient has deprived themselves of an asset, the asset deprivation rules apply. Where an income support recipient has:

  • NOT deprived him/herself of an asset (1.1.D.210), BUT
  • has deprived themselves of income by his or her own action the income deprivation rules apply.

Explanation: This can occur where the income support recipient either gifts the annuity payment to a third party, or 'forgives' the annuity payment. The term 'forgiving a payment' refers to circumstances where the annuitant does not require that the annuity provider make the annuity payment as specified in the annuity contract.

Example: An income support recipient receives $10,000 per year from a private annuity, in the form of 2 payments of $5,000 each at 6 monthly intervals. The income support recipient decides to forgive the first payment, but keeps the annuity contract in force. An amount of $5,000 should be assessed as deprived income under the normal rules. If the income support recipient also decides to forgive the second payment, the amount of deprived income should be increased to $10,000 from the date of the second payment specified in the annuity contract.

Assessment of overseas income streams

Because they are not subject to Australian prudential regulation, overseas income streams are not subject to the income streams rules. They are assessed in the same way as private annuities. That is, the gross amount of income is taken into account under the ordinary income test.

For asset test purposes, overseas annuities or income stream type products should be assessed in a similar way as Australia products that do not comply with the income stream rules.

Example: A private annuity.

Overseas 'superannuation-like' funds that are in the accumulation phase are treated as managed investments. They are not a superannuation fund for social security purposes as defined in SSAct section 9(1).

Lump sum amounts commuted from an income stream that does not meet the requirements at section 9(1), such as an overseas income stream, are assessable as income for 12 months under SSAct section 1073 unless the person can show that the amount withdrawn consists ENTIRELY of the person's own contributions and returns on those contributions.

Policy reference: SS Guide 4.8.2.10 Principles for Assessing Superannuation Investments, 4.8.2.30 Assessing Withdrawals from Superannuation, 4.9.1.10 Background to Income Streams, 4.6.5.100 Assessing Private Annuities & Overseas Income Products

Assessment of overseas annuities - blocked income

Some overseas countries have regulations that prevent the transfer of money outside that country. Income support recipients with overseas annuities that CANNOT make payments into Australia does NOT mean the annuity is considered 'blocked'.

The treatment of blocked foreign income is dealt with by the Federal Court in Rose v Secretary, Department of Social Security (1990) 21 FCR 241. The Rose decision held that no territorial limitation could be implied into the definition of income. When access to a foreign pension is severely limited, for example, the paying country restricts payment of pensions overseas, or access is restricted to residents of or to people physically present in the paying country, does NOT mean the pension is considered blocked.

Depending on the circumstances of the individual case, however, it MAY be accepted that an overseas annuity is NOT income for social security purposes, where the prospect of receiving the money is so remote that the monies are not 'earned, derived or received' for the person's own use or benefit.

Policy reference: SS Guide 4.3.2.30 Income exempt from assessment - legislated, 4.3.6.10 Income from Overseas Payments - General Rules

Last reviewed: 6 November 2017