4.9.4.30 Documentation Required for Assessment of Lifetime or Life Expectancy ATE Income Streams Paid from SMSFs or SAFs

Summary

This topic covers:

  • documentation required for assessment,
  • the trustee letter, which includes:
    • personal details,
    • income stream product details, and
    • examples of the trustee letter.

Note: These requirements are only for lifetime or life expectancy ATE income streams paid from SMSFs or SAFs and commenced before 1 January 2006. These requirements do not apply to market-linked income streams.

Documentation required for assessment

An income support recipient, or the trustee of the fund (often the same person), who receives an income stream from an SMSF or SAF and wants ATE status for the lifetime or life expectancy income stream must supply the documentation specified below to DHS to allow assessment of whether the product meets the requirements of SSAct sections 9A and 9B. Any deficiencies in the information provided may lead to delays in assessment of the income stream.

Additional reporting requirements are placed on income support recipients who receive lifetime or life expectancy ATE income stream payments from SMSFs or SAFs because of the lack of 'arms length' separation between the trustee and the member of the SMSF or SAF. With retail income streams products, the financial institution offering the product is separate from the income stream recipient. However with SMSFs or SAFs there is often no division. This lack of separation can open up opportunities for individuals to inappropriately manipulate their income stream payments to secure additional income support than could be obtained by individuals who receive payments from ATE income streams purchased from retail providers. DHS also needs to verify that SMSFs and SAFs paying lifetime or life expectancy ATE income streams have observed the prudential requirements necessary for the income stream to qualify for ATE status.

These additional reporting requirements are also applied to lifetime or life expectancy ATE income streams sourced from commercial providers where the arrangements covering these income streams are similar to those for income streams sourced from SMSFs and SAFs. They may also be applied to commercial providers where there are concerns that the income stream is being offered on other than standard commercial terms.

The documentation required includes:

  • original trust deed or governing rules for SMSF or SAF from set-up date and under which the income stream is paid including any amendments to the trust deed or governing rules, showing that the income stream meets requirements of SSAct section 9A (lifetime products) or section 9B (life expectancy products), AND
  • contract between income support recipient and superannuation fund for the income stream, or any other documents such as trustee resolutions or formal letters from trustee to the individual (as documented in the following section), setting out the conditions under which the income stream is paid, AND
  • current actuarial certificate refer to 4.9.4.40 stating that the SMSF or SAF has a 'high probability' that it can meet the income stream payments for the lifetime of the member, or the term of the product where the product is a life expectancy product, AND
  • trustee resolution that guarantees the specified indexation rate (examples are provided in the following section). Required only if specified indexation rate is not guaranteed in any other documents, AND
  • DHS schedule 'Details of income support product' (SA330), which will provide the current income stream details and a declaration from the trustee of the SMSF or SAF as to whether the income stream meets all the requirements of SSAct section 9A or 9B, AND
  • if the fund has purchased an annuity to directly fund the income stream, a copy of the contract for the fund providing the annuity.

Act reference: SSAct section 9A Meaning of asset-test exempt income stream-lifetime income streams, section 9B Meaning of asset-test exempt-income stream-life expectancy income streams

Policy reference: SS Guide 4.9.2.10 Characteristics of pre-20/09/2004 Asset-Test Exempt Income Streams, 4.9.2.15 Characteristics of Asset-Test Exempt Income Streams Purchased from 20/09/2004 & before 20/09/2007, 4.9.4.40 Actuarial Valuation Certificate for Lifetime or Life Expectancy ATE Income Streams Paid from SMSFs or SAFs, 4.9.4.50 Deprivation Assessment for Lifetime or Life Expectancy ATE Income Streams Paid from SMSFs or SAFs

Trustee letter

Unless the exact terms and conditions relating to the income stream are specified in the trust deed or governing rules, DHS requires a full and accurate description of the benefits certified by the trustees of the SMSF or SAF. The trustee letter is designed to provide DHS, and the AGA, with a clear and unambiguous document outlining the details of the benefit provided by the superannuation fund to the individual. Apart from being required for DHS purposes, the provision of proper documentation of an individual's benefits is good superannuation fund practice. This enables the correct benefit to be paid and will also assist the superannuation fund's actuary in preparing actuarial certificates.

The letter must contain the following details:

  • personal details:
    • name,
    • date of birth,
    • date of retirement, and
    • purchase price amount (i.e. fund balance allocated to pension benefits) and date of purchase, and
  • income stream product details as listed in the table below.
Details Description
Type of product/s

Details of the type of product must be stated in full. If an income support recipient has more than one type of product, details of each should be documented separately.

Example: A lifetime product and an account-based product.

Payment amounts

The documentation must specify the amount of the initial payments, when it is paid, and details of any indexation should be specified. The initial payment can be specified in several ways, which includes:

  • describing the first and any subsequent payments, or
  • describing the annual amount payable.

Note: The more complicated the arrangements, the more details will be required.

Example of describing the first and any subsequent payments:

  • A pension of $1,000 per month with the first pension payment paid on 1 August 2001 will be paid, or

Example of describing the annual amount payable:

  • A pension of $12,000 per annum payable monthly will be paid. The first pension payment will be paid on 1 August 2001.
Indexation of payments

The description of the benefits should include a full description of the indexation arrangements particularly any guaranteed indexation. This will include the date/s that indexation occurs and the rate of indexation. The amount of any guaranteed indexation should be fully described.

Please note in this context, a reference to CPI is insufficient and a description of which CPI and the appropriate reference quarter should be included in the description. References to discretionary indexation can have far less detail. Below this table there are 3 options which met the above requirements.

Note: The AGA when assessing an ATE product for deprivation (4.9.4.50), will only take account of indexation if the rate of indexation specified is GUARANTEED. Where indexation is discretionary and is subject to the satisfactory financial position of the superannuation fund, i.e. indexation is not guaranteed, it will not be taken into account in the AGA's calculations.

Death of pensioner

The benefits payable on the death of the pensioner should be described. Death benefits generally fall into 2 areas, reversionary benefits (including those to any nominated beneficiaries) and lump sum benefits.

  • Benefit options on death, for life expectancy pensions, are limited to the pension either continuing to be paid to a reversionary beneficiary or the estate for the term of the product, or to the remaining payments being commuted to a lump sum and being paid to a reversionary beneficiary or the estate.
  • Benefit options on death for lifetime pensions are more complicated if they occur within 10 years of the pension commencing.

Possible benefits include: a reversionary pension, full pension payments continuing for a guarantee period, and the payment of a lump sum equal to the value of the discounted or undiscounted remaining guaranteed payments.

Option 1

It was resolved that for the provision of paying a complying pension to

(name of person), an indexation rate of _____ per cent per annum will be guaranteed to be used in determining the pension amount payable year to year for the full duration of the pension.

Option 2

It was resolved that for the provision of paying a complying pension to

(name of person), an indexation rate, equal to the CPI will be guaranteed to be used in determining the pension amount payable year to year for the full duration of the pension.

Option 3

It was resolved that for the provision of paying a complying pension to

(name of person), an indexation rate, equal to the CPI + 1 per cent will be guaranteed to be used in determining the pension amount payable year to year for the full duration of the pension.

Policy reference: SS Guide 4.9.2.10 Characteristics of pre-20/09/2004 Asset-Test Exempt Income Streams, 4.9.2.15 Characteristics of Asset-Test Exempt Income Streams Purchased from 20/09/2004 & before 20/09/2007, 4.9.3.10 General provisions for asset-tested income streams, 4.9.4.40 Actuarial Valuation Certificate for Lifetime or Life Expectancy ATE Income Streams Paid from SMSFs or SAFs, 4.9.4.50 Deprivation Assessment for Lifetime or Life Expectancy ATE Income Streams Paid from SMSFs or SAFs

Examples of the trustee letter

The following examples of the trustee letter are not intended to be comprehensive and do not cover the total range of situations that could apply. They are intended to be illustrative only.

Example 1:

PQR Superannuation Fund

Trustee Resolution

The trustees of the PQR Superannuation Fund met on 6 July 2001 following the retirement of Mr Fred Smith on 5 July 2001. The balance of the superannuation fund held in respect of Mr Smith is to be applied towards a lifetime complying pension under Clause 12 of the Trust Deed and Rules of the PQR Superannuation Fund.

The relevant details are as follows:

Date of birth 15 May 1936
Date of retirement 5 July 2001
Purchase price $346,820
(Account balance at retirement)  
Date of purchase of income stream 6 July 2001
Date of first payment 1 August 2001

The benefit to be provided is a lifetime pension with the following terms and conditions.

Pension Payments

A pension of $1,760 per month will be paid to Mr Smith. The first monthly payment will be made on 1 August 2001 with future monthly payments being made on the first day of each month.

Indexation of Pension Payments

On each 1 August commencing 1 August 2002 the pension will be guaranteed to be increased by the lesser of:

3 per cent, and

the percentage increase in the Consumer Price Index (CPI) over the preceding year.

For the purposes of calculating the increase in the CPI over the preceding year the rate of increase is:

(CPI figure for March quarter preceding the increase date divided by CPI figure for the March quarter in the previous year) less 1

The CPI figure is the All Groups Consumer Price Index that is the weighted average of the 8 capital cities and is the figure first published by the Australian Statistician.

In the event that the CPI decreases over the preceding year the pension will remain at the same level.

Death of Mr Smith

On the death of Mr Smith a reversionary pension benefit of 100 per cent of the benefit that Mr Smith would have been paid will be payable to Mrs Jacqui Smith for the remainder of her life. Mrs Smith's date of birth is 28 August 1938.

10 year Guarantee

The pension is to have a 10 year guarantee. If both Mr Fred Smith and Mrs Jacqui Smith die before 120 monthly payments have been paid, an amount equal to

(120 − number of monthly payments made) × Amount of last monthly payment made

shall be paid to the estate of the last survivor of Mr Fred Smith and Mrs Jacqui Smith.

Signed by the trustees of the

PQR Superannuation Fund

Example 2:

Dear Mr Jones

Your Benefits from the XYZ Superannuation Fund

I am writing to formally advise you of your benefits payable following your retirement.

Details

The relevant details are as follows:

Date of birth 12 March 1938
Date of retirement 11 July 2001
Account balance at retirement $463,850

You have advised the trustee that you want $120,000 of your balance to be applied to an allocated pension under Clause 23 of the Trust Deed and the balance to be applied towards a lifetime complying pension under Clause 24 of the Trust Deed.

Allocated Pension

An allocated pension with an opening balance of $120,000 has been set up for you. In the first year the minimum draw down you must make is $7,229 and the maximum draw down you can make is $14,118. The trustee will advise you of the account balance each 1 July and the minimum and maximum draw downs for each year. Note that if you are a DHS income support recipient, you must advise DHS of the pension amount you nominate for the year.

Lifetime Complying Pension

A pension of $18,800 per annum will be paid for life. The pension will be paid quarterly. The first payment of $4,700 will be made on 1 October 2001. Subsequent payments will be made on 1 January, 1 April, 1 July and 1 October each year. The pension was purchased on 12 July 2001.

On each 1 October, starting 1 October 2002, your pension will have a guaranteed increase of 2.5 per cent.

On each 1 October, starting 1 October 2002, the trustee may provide further discretionary (non-guaranteed) increases to your pension. These discretionary increases will depend on the fund's financial position as determined by the fund's actuary. The discretionary increase will be restricted so that the pension remains a lifetime income stream under section 9A of the Social Security Act 1991.

On your death there are no further benefits payable.

Yours sincerely

F. Jones

Trustee

Example 3:

Dear Ms Williams

Your Benefits from the MNO Superannuation Fund

I am writing to formally advise you of your benefits from the MNO Superannuation Fund.

You have advised the trustee that you want your balance to be applied to a 15 year term life expectancy pension under Clause 18 of the Trust Deed.

Details

The relevant details are as follows:

Date of birth 15 April 1937
Date of retirement 30 April 2001
Purchase price $230,200
(Account balance at retirement)  
Date of purchase of income stream 1 May 2001
Date of first payment 1 May 2001

Life Expectancy Pension

A pension of $18,840 per annum will be payable for 15 years. The pension will be payable monthly with the first payment of $1,570 being made on 1 May 2001. Subsequent payments will be made on the first day of each month. The pension was purchased on 1 May 2001.

Each 1 May the pension will have a guaranteed increase of 2 per cent. The first increase will take place on 1 May 2002.

If you were to die while in receipt of the pension, the remaining pension payments will be commuted to a lump sum advised by the fund's actuary and paid to your estate.

Yours sincerely

J. Williams

Trustee

Last reviewed: 3 January 2017