4.9.4.50 Deprivation Assessment for Lifetime or Life Expectancy ATE Income Streams Paid from SMSFs or SAFs

Summary

This topic deals with assessment, under the deprivation provisions, of lifetime or life expectancy ATE income streams paid from SMSFs or SAFs and commenced before 1 January 2006. This topic covers:

  • deprivation provisions,
  • assessing deprivation,
  • AGA valuation, and
  • AGA valuation procedures, which includes:
    • lifetime income streams,
    • life expectancy income streams, and
  • treatment of indexation for ATE income streams for deprivation purposes.

Deprivation provisions

All ATE income streams are subject to the normal deprivation provisions (4.1.1) in the SSAct. These provisions are designed to limit the extent to which income support recipients can avoid the assets test. Deprivation occurs where the purchase price (1.1.P.500) of an ATE income stream is greater than the present value of the future payments from the income stream.

As the present value is not readily identifiable for lifetime or life expectancy products paid from SMSFs or SAFs, a valuation by the AGA may be necessary. For income streams paid from SMSFs and SAFs, the purchase price is the amount the trustee declares to be the purchase price.

The deprivation provisions 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.

Policy reference: SS Guide 1.1.P.500 Purchase price, 4.1.1 General Provisions of Deprivation

Assessing deprivation

To determine whether deprivation has occurred, DHS compares the present value of the ATE income stream over its term or life (as calculated by the AGA) with the purchase price. If deprivation has occurred, the normal deprivation procedures are applied, including the allowable disposal rules (4.1.1).

A deprivation assessment can only be conducted after an income support recipient PURCHASES an ATE income stream. It cannot be reviewed or reassessed, as the assessment relates to the purchase of the ATE income stream, which cannot be reversed.

However, if the return of purchase price requirement (4.9.4.20) is not met and the income stream product is assessed as an asset-tested income stream, then any deprivation determined, as mentioned above, will not apply.

Example: An income support recipient receives an income stream of $5,000 per year from an SMSF. The relevant documentation states that she or he bought this income stream for $200,000. The AGA values this income stream at $150,000. The income support recipient's deprived asset (1.1.D.110) is the difference between the purchase price and the AGA's valuation ($200,000 - $150,000 = $50,000), MINUS the allowable gifting amount, currently $10,000 ($50,000 - $10,000 = $40,000).

Policy reference: SS Guide 1.1.D.110 Deprived asset, 4.1.1 General Provisions of Deprivation, 4.9.4.20 General Provisions for Assessing Income Streams Paid from SMSFs or SAFs

AGA valuation

AGA valuations may be requested for lifetime or life expectancy ATE income streams paid from SMSFs or SAFs where the ATE income stream is 'purchased' via a non-commercial 'non-arms length' arrangement. AGA valuations may also be requested for 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.

Where an ATE income stream is purchased on a commercial basis from a commercial provider, or is acquired from large company superannuation funds or public sector superannuation funds, it GENERALLY will not be assessed by the AGA for deprivation. This means that, unless DHS considers there are unusual circumstances surrounding such products, it will not require valuation by the AGA. This approach recognises that the transactions are at 'arms length' with both parties having received an asset of equal value. However, a valuation may be required where DHS considers that the terms and conditions surrounding the income stream do not reflect normal commercial arrangements.

To determine the present value of an ATE income stream, the AGA requires the documentation specified in 4.9.4.30.

Policy reference: SS Guide 4.9.4.30 Documentation Required for Assessment of Lifetime or Life Expectancy ATE Income Streams Paid from SMSFs or SAFs

Treatment of indexation for ATE income streams for deprivation purposes

For lifetime or life expectancy ATE income streams purchased from SMSFs or SAFs, the documents listed in 4.9.4.30 should include a full description of the indexation arrangements. This should cover:

  • whether indexation will apply,
  • the date/s that indexation will occur,
  • the relevant indexation rate, and
  • whether indexation is guaranteed.

Note: Where the indexation rate is CPI, a full description of which CPI is to be used, and the appropriate reference quarter should be included in the description. A mere reference to CPI is insufficient.

When assessing an ATE product for deprivation, the AGA will take account of indexation only WHERE the indexation rate specified is 'GUARANTEED'. To be considered 'guaranteed', the details listed above must be specified in either the trust deed, the contract, or in a trustee resolution. Where indexation is not 'guaranteed', the AGA will assume the indexation rate is 0 per cent.

Policy reference: SS Guide 4.9.4.30 Documentation Required for Assessment of Lifetime or Life Expectancy ATE Income Streams Paid from SMSFs or SAFs

AGA valuation procedures

The following paragraphs outline the AGA's procedures for estimating the present value of payments from lifetime or life expectancy ATE income streams. The AGA uses these procedures to estimate 'purchase prices' that are broadly in line with those that would be paid to commercial providers.

Note: It should be noted that although the AGA assumptions are relatively stable, they can be changed without notice. DHS staff should NOT undertake these calculations.

The following provides guidance on calculating a present value of a product when:

  • a lifetime or life expectancy ATE income stream product is purchased, or
  • a previously asset-tested product (either account based or non-account based) becomes ATE, or
  • a previously ATE non-account based product becomes an assets-tested non-account based product, or
  • the ownership structure changes and, as a consequence, the income support recipient is assessed as receiving a new income stream.

Lifetime income streams

The present value of an income stream in these circumstances is calculated by multiplying the annuity value by the initial annual payment, where the annuity value is calculated as the sum of the discounted value of each prospective payment multiplied by the probability that the prospective payment will be made.

Where:

  • The interest rate used to calculate the discounted value of each prospective payment is equal to the 10 year Commonwealth bond rate as published in the Reserve Bank of Australia (RBA) Bulletin relating to the day the income stream commences to be paid, or the nearest working day to that date. If the relevant RBA Bulletin is not available at the time of valuation, the 10 year Commonwealth bond rate as published in the daily press is used. The relevant 10 year Commonwealth bond rate is rounded down to one decimal place.
  • The probability of payments being made is ascertained using the latest ALT (4.9.5) available at the date the income stream commences, where the mortality is based on the actual age of the recipient on the day the income stream commences to be paid, less 9 years.

Example: The future survival probability of a recipient aged 65 at the commencement of the income stream would be calculated using the ALT as if the income stream commenced at age 56.

  • Where there is a reversionary beneficiary, the probability of reversionary pension payments being made is ascertained by incorporating the probability that the pensioner will have died but the reversionary beneficiary is still alive.
  • The annuity value includes allowance for any guaranteed indexation of payments for income streams where:
    • indexation is related to CPI, the assumed CPI used is the interest rate used to calculate the discounted value less the equivalent yield on Commonwealth capital indexed bonds on the day the income stream commences to be paid, or the nearest working day to that date, rounded down to one decimal place, or
    • the indexation rate is fixed, that rate is used.

It should be noted that for income streams where the indexation rate can be varied at the discretion of the trustee, a zero indexation rate is used for the purposes of these calculations.

  • The present value also includes an allowance for expenses associated with the income stream and this allowance is a reduction in the interest rate used to calculate the discounted value of each prospective payment of 1 per cent per annum.

Life expectancy income streams

The present value of an income stream in these circumstances is calculated by multiplying the annuity value by the initial annual payment, where the annuity value is calculated as the sum of the discounted value of each prospective payment over the term of the income stream, assuming that all payments will be made.

Where:

  • The interest rate used to calculate the discounted value of each prospective payment is equal to the 10 year Commonwealth bond rate as published in the Reserve Bank of Australia (RBA) Bulletin relating to the day the income stream commences to be paid, or the nearest working day to that date. If the relevant RBA Bulletin is not available at the time of valuation, the 10 year Commonwealth bond rate as published in the daily press is used. The relevant 10 year Commonwealth bond rate is rounded down to one decimal place.
  • The annuity value includes allowance for any guaranteed indexation of payments for income streams where:
    • indexation is related to CPI, the assumed CPI used is the interest rate used to calculate the discounted value less the equivalent yield on Commonwealth capital indexed bonds on the day the income stream commences to be paid, or the nearest working day to that date, rounded down to one decimal place, or
    • the indexation rate is fixed, that rate is used.
  • It should be noted that for income streams where the indexation rate can be varied at the discretion of the trustee, a zero indexation rate is used for the purposes of these calculations.
  • The present value also includes an allowance for the expenses associated with the income stream and this allowance is a reduction in the interest rate used to calculate the discounted value of each prospective payment of one per cent per annum.

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

Last reviewed: 15 August 2016