1.1.P.495 Purchase amount
Usage
This definition applies to all payments.
Definition
For asset-tested income streams (lifetime) (1.1.A.304), the purchase amount is used to determine the income stream's assessable asset value. The purchase amount is a sum of all payments made for the lifetime income stream, with certain payments grossed up if they were made prior to a person's assessment day (1.1.A.280).
Note: The purchase amount is only used for the means test assessment for asset-tested income streams (lifetime). For other types of income stream, a nominal purchase price is used (1.1.P.500).
Calculation of the purchase amount
For most products, the purchase amount is:
- the sum of
- each amount paid for the income stream before the assessment day, grossed up each year by the above threshold deeming rate (compounded amounts), AND
- each amount paid for the income stream on or after the assessment day
- less any commuted amounts.
For specific products outlined below, the Secretary has determined via legislative instrument a different method for working out the purchase amount.
Act reference: SSAct section 1120AB(12) Purchase amount
Policy reference: SS Guide 4.9.3.35 Means test assessment of asset-tested income streams (lifetime)
Compounded amounts
Each amount paid to purchase the income stream prior to the assessment day is increased over time to account for investment returns. The increased value of the amount paid to purchase the income stream is referred to as a compounded amount.
Compounded amounts are re-calculated on adjustment days. Adjustment days occur:
- on each 12-month anniversary of the day the amount was paid to purchase the income stream, and
- on the assessment day for the income stream.
Note: If the income stream is purchased in instalments, there may be multiple compounded amounts. Each compounded amount may have a different adjustment day.
On each adjustment day, the following formula is used to increase the compounded amount:
Previous compounded amount MULTIPLIED BY (1 + relevant above threshold rate)
The 'previous compounded amount' is:
- for the first adjustment day - the nominal amount paid to purchase the income stream
- for each subsequent adjustment day - the compounded amount that was calculated at the previous adjustment day.
The 'relevant above threshold rate' is based on the above threshold deeming rate (4.4) in force on the adjustment day. It is:
- if the adjustment day is a 12-month anniversary of the day the amount was paid to purchase the income stream - the full above threshold deeming rate in force on the adjustment day, expressed as a decimal fraction (e.g. if the above threshold deeming rate is 3.25%, the rate is expressed as 0.0325).
- if the adjustment day is the assessment day - a pro-rata above threshold deeming rate, based on the number of days between the previous adjustment day and the assessment day, expressed as a decimal fraction.
Explanation: If the adjustment day is the assessment day, the 'relevant above threshold rate' is the above threshold deeming rate in force on the adjustment day, multiplied by the number of days beginning after the previous adjustment day, ending at the end of the assessment day, divided by 365.
Example: Amy purchases a deferred income stream with superannuation monies in 4 instalments of $50,000. Each instalment is made one year apart. The first instalment is made on 1 July 2020, the second instalment is made on 1 July 2021, the third instalment is made on 1 July 2022 and the fourth instalment is made on 1 July 2023.
Amy's assessment day is 1 November 2022, the day she meets a relevant condition of release.
Each year, each instalment increases in value depending on the above threshold rate at each 12-month anniversary of the instalment being made, or at the assessment day.
For this example, assume the above threshold rate is 3.25% on 1 July 2021, 3.25% on 1 July 2022, and 3.5% on 1 November 2022.
When an instalment is increased across a full year, the full deeming rate applies. For the final part year before the adjustment day (e.g. in this example, between 1 July 2022 and 1 November 2022), the rate is a pro-rata rate, meaning it only accounts for the number of days in the year for which the instalment is being increased.
The compounded amount is therefore the following amounts on the following days:
- 1 July 2020: $50,000
- 1 July 2021: $50,000, increased by deeming rate at 1 July 2021
= $50,000 x (1 + 3.25%)
= $51,625 - 1 July 2022: $51,625, increased by deeming rate at 1 July 2022
= $51,625 x (1 + 3.25%)
= $53,302.81 - 1 November 2022: $53,302.81, increased by a pro-rata deeming rate at 1 November 2022
Note that there are 123 days between 1 July 2022 and 1 November 2022.
= $53,302.81 x (1 + 3.50% x (123 ÷ 365))
= $53,931.49
This process is done for the 3 instalments made before the assessment day for the income stream on 1 November 2022:
| Instalment 1 | Instalment 2 | Instalment 3 | Total purchase amount | |
|---|---|---|---|---|
| 1 July 2020 | $50,000.00 | - | - | $50,000.00 |
| 1 July 2021 | $51,625.00 | $50,000.00 | - | $101,625.00 |
| 1 July 2022 | $53,302.81 | $51,625.00 | $50,000.00 | $154,927.81 |
| 1 November 2022 | $53,931.49 | $52,233.89 | $50,589.73 | $156,755.11 |
On the assessment day, the purchase amount for Amy's income stream is $156,755.11.
Amy makes one more instalment after her assessment day, of $50,000 on 1 July 2023. This is added to her total purchase amount at the assessment day, $156,755.11, for a total of $206,755.11.
As Amy makes no more instalments to the products after 1 July 2023, her purchase amount does not change after 1 July 2023 and remains at $206,755.11.
The full process for calculating Amy's purchase amount is stepped out in the table below.
| Instalment 1 | Instalment 2 | Instalment 3 | Instalment 4 | Total purchase amount | |
|---|---|---|---|---|---|
| 1 July 2020 | $50,000.00 | - | - | - | $50,000.00 |
| 1 July 2021 | $51,625.00 | $50,000.00 | - | - | $101,625.00 |
| 1 July 2022 | $53,302.81 | $51,625.00 | $50,000.00 | - | $154,927.81 |
| 1 November 2022 | $53,931.49 | $52,233.89 | $50,589.73 | - | $156,755.11 |
| 1 July 2023 | $53,931.49 | $52,233.89 | $50,589.73 | $50,000.00 | $206,755.11 |
Act reference: SSAct section 1120AB(13) Value of asset tested income streams (lifetime) that are not managed investments
Policy reference: SS Guide 4.9.3.35 Means test assessment of asset-tested income streams (lifetime)
Purchase amounts of joint income streams
If the income stream is a joint income stream, then the 'amount paid' for the income stream used for the purchase amount calculation is the amount paid, multiplied by the proportion of the income stream attributable to the person on the date of assessment.
Act reference: SSAct section 1120AB(14) Value of asset tested income streams (lifetime) that are not managed investments
Policy reference: SS Guide 4.9.3.35 Means test assessment of asset-tested income streams (lifetime)
Purchase amount for the lifetime component of guaranteed minimum income for life products
Guaranteed minimum income for life products are account-based income streams, with a lifetime component that makes regular payments to an individual once the account balance of the account-based income stream is reduced below a threshold specified in the product's contract.
The purchase amount for these products is the sum of:
- if the lifetime component is financed (wholly or partly) by fees or charges - the amount of any such fees or charges paid by the person, AND
- if the lifetime component is financed (wholly or partly) by a specified fund in which the individual was required to invest in, and an amount was invested prior to the assessment day - the compounded amount of the individual's investment in the specified fund, AND
- if the lifetime component is financed (wholly or partly) by a specified fund in which the individual was required to invest in, and an amount was invested on or after the assessment day - the amount of the individual's investment in the specified fund.
However, if the Secretary is satisfied that the lifetime component is not wholly financed by the means specified above, the purchase amount can be determined by an actuarial certificate.
Note: The account-based income stream component of the product is assessed as an asset-tested income stream (long term). The account balance of the account-based income stream is assessed as an asset.
Act reference: SSAct section 1120AB(12) Purchase amount
Policy reference: SS Guide 4.9.3.35 Means test assessment of asset-tested income streams (lifetime)
Purchase amount for lifetime income streams packaged with or within account-based income streams
Lifetime income stream products can be sold alongside, or in combination with, account-based income stream products. Lifetime income stream products can also be acquired as an investment option within an account-based income stream.
The purchase amount for the lifetime income stream component of these products is the sum of:
- if the lifetime component is financed (wholly or partly) by fees or charges - the amount of any such fees or charges paid by the person, AND
- if the lifetime component is financed (wholly or partly) by a specified fund or investment option in which the individual was required to invest in, and an amount was invested prior to the assessment day - the compounded amount of the individual's investment in the specified fund or investment option, AND
- if the lifetime component is financed (wholly or partly) by a specified fund or investment option in which the individual was required to invest in, and an amount was invested on or after the assessment day - the amount invested by the individual in the specified fund or investment option.
However, if the Secretary is satisfied that the lifetime component is not wholly financed by the means specified above, the purchase amount can be determined by an actuarial certificate.
Note: The account-based income stream component of the product is assessed as an asset-tested income stream (long term). The value of the account balance that is separate from the amount attributable to the lifetime income stream is assessed as an asset.