4.9.8.20 Assessment of non-performing income streams

Introduction

This topic outlines the assessment of income streams where payments cease or are reduced. It covers:

  • treatment where an income stream ceases to be an income stream
  • reporting arrangements to DHS
  • where a trustee report is not available or is not acceptable
  • where an income stream is to be 'wound-up'
  • treatment of ATE income streams where payments cease
  • treatment of ATE income streams where payments are reduced
  • treatment of asset-tested income streams (long term) where payments cease or are reduced
  • treatment of asset-tested income streams (short term) where payments cease or are reduced
  • treatment of asset-tested income streams (lifetime) where payments cease or are reduced.

Treatment where an income stream ceases to be an income stream

Generally, an income stream ceases to be an income stream under the SSAct when the superannuation fund or income stream provider cannot pay at least 1 payment during an income year (i.e. for the current year, a period equalling 12 months that corresponds to period from commencement day to the anniversary of the commencement day). There are 2 options:

  • where NO PAYMENT has been made during the income year, the income stream is deemed to have ceased on the FIRST DAY to which the income stream payment relates, (i.e. the first day of the income year in which no payment was made), or
  • where a trustee of an SMSF or SAF decides to 'wind-up' the fund, an income stream paid from the fund would cease on the day on which there is no obligation to make any future income stream payments. That is, where a trustee makes a decision to wind-up their fund, the date of effect would be the date the fund is wound-up, and not the date the trustee made the resolution to wind-up the fund (though these could be the same date).

On the day the income stream ceases to be an income stream (as per the above guidelines), the assets backing the income stream are assessed in the same manner as superannuation. The treatment for income support recipients will depend on whether the person is BELOW or ABOVE age pension age. Refer to 4.8.2.10.

Note: Particular income streams have specific requirements regarding the amount of annual payments required (i.e. to be an ATE income stream, annual payments must equal a specific amount which is specified at the beginning of each income year). Further guidance is provided later in this topic for all social security income stream types.

Example: The Smith Family Superannuation Fund pays a quarterly income stream with a commencement date of 1 April 2002. On 1 November 2002 the trustee determines that the fund is unable to make further income stream payments and makes a resolution to discontinue payments from 1 November 2002. The income support recipient informs DHS that the income stream ceased to be paid from 1 November 2002. Therefore, it is no longer assessed as an income stream product from 1 November 2002.

If the income support recipient does not inform DHS of the trustee resolution and the product remains assessed as an income stream until the next DHS review, a debt may be raised for overpayment from 1 November 2002 if the result of reassessment is a reduction in the person's income support payments.

Example: The Jones Family Superannuation Fund pays an income stream with a date of commencement of 1 January 2002. The payment is made annually on 31 December of each year. During July 2002 the fund encounters financial difficulties. In early December, the trustee becomes aware that the fund cannot pay the annual payment. On 5 January 2003, the income support recipient informs DHS that the annual payment for 2002 was not paid. DHS will assess the income stream as ceasing on 1 January 2002 as this was the first day relating to the income stream payment on 31 December 2002. DHS may raise an overpayment from 1 January 2002 if the result of the reassessment is a reduction in the person's income support payment.

Act reference: SSAct section 23(2) For the purposes of this Act (other than section 735) …

Policy reference: SS Guide 4.8.2.10 Principles for Assessing Superannuation Investments

Reporting arrangements to DHS

The income support recipient should report to DHS if their SMSF or SAF is experiencing financial difficulty. Where DHS is aware of problems, they may request this information under SS(Admin)Act. It is the income support recipient's responsibility to ensure either they or the trustee provides this documentation to DHS.

A trustee's report should be provided to DHS within 3 months of the problem being identified by the income support recipient (or trustee). The trustee's report should outline details on:

  • the action that has, or will be, taken to either wind-up the fund or restore the fund to being a viable entity
  • the expected date for finalising the above action, and any other major milestone dates
  • the associated consequences for the income stream, and
  • if the income stream is to be terminated altogether, the trustee report should indicate the expected date of termination and what the trustee plans to do with the assets backing the income stream.

Where a trustee report is not available or is not acceptable

If a trustee's report is not available or is not considered acceptable, the existing asset value will be taken to be the current market value of the assets backing the income stream. A report may not be acceptable where the:

  • contents of the report are not consistent with other information on the fund's affairs held by DHS, or
  • report contains insufficient information to allow DHS to determine an appropriate value for the income support recipient's beneficial interest in the fund.

Where an income stream is to be 'wound-up'

If the income stream is to be wound-up, the income support recipient should provide details to DHS on the:

  • date on which the income stream is to be terminated, and
  • proposed action in relation to the assets backing the income stream.

Treatment of ATE income streams where payments cease

The income stream will be assessed as superannuation from the date the income stream ceased as per the above guidelines. Refer to 4.8.2.10.

Where an ATE product ceases to be an income stream (i.e. the fund cannot pay at least one payment during an income year), it will lose ATE status because it is no longer an income stream.

In limited circumstances, certain ATE income streams purchased prior to 20 September 2007 that are commuted and rolled over into post 20 September 2007 ATE income streams can retain their 50% or 100% ATE status provided certain conditions are satisfied. Refer to 4.9.2.17.

Where the income stream is not rolled-over to a new income stream, the assets backing the income stream will become superannuation assets of the member. The income support recipient may also be assessed as if the income stream never had ATE status. This may result in a debt being raised. Refer to 4.9.2.40 'Calculating a debt resulting from a non-allowable commutation'.

Act reference: SSAct section 9A(2) Requirements of contract/governing rules for provision of income stream (lifetime), section 9B(2) Requirements of contract/governing rules for provision of income stream (life expectancy), section 9BA(2) Requirements of contract/governing rules for provision of income stream (market-linked)

Policy reference: SS Guide 4.8.2.10 Principles for Assessing Superannuation Investments, 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 20/9/2004 & before 20/09/2007, 4.9.2.17 Retention of asset test exemption for ATE income streams purchased from 20/09/2004, or from 20/09/2007, 4.9.2.40 Commuting an Asset-Test Exempt Income Stream, 4.9.3.10 General provisions for asset-tested income streams

Treatment of ATE income streams where payments are reduced

If there is a reduction in payments, which is not associated with an allowable commutation, the income stream will lose its ATE status, because it fails to satisfy the requirements for lifetime, life expectancy, or market-linked products.

The income stream will be permanently assessed as an asset-tested income stream (long term) from when the income stream payments were reduced. Refer to 4.9.3.10.

In limited circumstances, certain ATE income streams purchased prior to 20 September 2007 that are commuted and rolled over into post 20 September 2007 ATE income streams can retain their 50% or 100% ATE status provided certain conditions are satisfied. Refer to 4.9.2.17.

Act reference: SSAct section 9A(2) Requirements of contract/governing rules for provision of income stream (lifetime), section 9B(2) Requirements of contract/governing rules for provision of income stream (life expectancy), section 9BA(2) Requirements of contract/governing rules for provision of income stream (market-linked)

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 20/9/2004 & before 20/09/2007, 4.9.2.17 Retention of asset test exemption for ATE income streams purchased from 20/09/2004, or from 20/09/2007, 4.9.2.40 Commuting an Asset-Test Exempt Income Stream, 4.9.4.20 General Provisions for Assessing Income Streams Paid from SMSFs or SAFs

Treatment of asset-tested income streams (long term) where payments cease or are reduced

Where an asset-tested income stream (long term) ceases to make payments, the income stream will be assessed as superannuation or as a managed investment from the date the income stream ceased, as per the above guidelines. Refer to 4.8.2.10.

Where the income stream payments are reduced, the income stream would continue to be assessed as an asset-tested income stream (long term). There would be no change in the assets test treatment. The income test treatment would reflect the reduced payments (4.9.3.30).

Act reference: SSAct section 9(1) Financial assets and income streams definitions

Policy reference: SS Guide 4.8.2.10 Principles for Assessing Superannuation Investments, 4.9.3.10 General provisions for asset-tested income streams, 4.9.3.20 Means test assessment of asset-tested income streams (short term), 4.9.3.30 Means test assessment of asset-tested income streams (long term)

Treatment of asset-tested income streams (short term) where payments cease or are reduced

Where an asset-tested income stream (short term) ceases to make payments, the income stream will be assessed as superannuation or a managed investment from the date the income stream ceased, as per the above guidelines. Refer to 4.8.2.10 and 4.9.3.20.

Where an asset-tested income stream (short term) reduces its income stream payments, there would be no change in its assessment under the means test (4.9.3.10). The asset value continues to be counted under the assets test, and is subject to the deeming rules for income test purposes (4.9.3.20).

Act reference: SSAct section 9(1) Financial assets and income streams definitions

Policy reference: SS Guide 4.9.3.10 General provisions for asset-tested income streams, 4.8.2.10 Principles for Assessing Superannuation Investments, 4.4.1 General Provisions for Deeming

Treatment of asset-tested income streams (lifetime) where payments cease or are reduced

Where an asset-tested income stream (lifetime) ceases to make scheduled payments, the income stream will be assessed as superannuation or as a managed investment, as per the above guidelines. An asset-tested income stream (lifetime) is not determined to have ceased its scheduled payments if it is in a deferral period outlined in the contract for the income stream.

Where an asset-tested income stream (lifetime) reduces its income stream payments, the income stream would continue to be assessed as an asset-tested income stream (lifetime). There would be no change in the assets test treatment. The income test treatment would reflect the reduced payments (4.9.3.35).

In certain circumstances, a legislative instrument may be made to reduce the asset-value of certain asset-tested income streams (lifetime) that have failed.

Act reference: SSAct section 1099DAB Income - asset-tested income stream (lifetime), section 1120AB(15) Value of asset-tested income streams (lifetime) that are not managed investments

Last reviewed: 1 July 2019