4.8.2.10 Principles for assessing superannuation investments

Summary

This topic covers the following matters:

• assessment of superannuation investments
• valuation of assets in SMSFs and SAFs
• treatment of unallocated reserves held within SMSFs and SAFs
• contributions to a superannuation investment
• assessment of whole of life superannuation policies
• arrears of superannuation
• disability pensions paid from superannuation funds, and
• historical information.

Note: A superannuation fund for social security purposes is defined in SSAct section 9(1). Superannuation funds that do not meet this definition, such as overseas funds, are treated as managed investments provided the person can access the funds. If a person cannot access funds held in an overseas government or employer superannuation-like fund, for example because they do not meet a condition of release such as reaching a certain age, then the asset value is not assessed as a managed investment or deemed.

Note: There are limited circumstances under which it may be possible to apply for early release of superannuation. For more information on early release of superannuation, refer to the ATO website – Early access to super.

Assessment of superannuation investments

The main factors that govern the assessment of an income support recipient's superannuation investments for social security purposes are the recipient's age and whether the recipient has unrestricted access to their superannuation investment. In certain circumstances where a person of age pension age is unable to access their superannuation investment an exemption may be allowable.

The following table outlines the 3 principles that apply to assessing superannuation assets in the accumulation phase.

Note: Where superannuation assets are used to purchase an income stream, it is assessed under the income stream rules, refer to 4.9.

Valuation of assets in SMSFs & SAFs

Where the income support recipient is over age pension age, and their interest in the SMSF or SAF is assessed as a 'financial asset', it may be necessary to value the assets of the SMSF or SAF.

There are 2 main scenarios where this may occur:

• an applicant, or the applicant's partner, is of age pension age but has not yet converted all of his or her beneficial interest in their SMSF or SAF to an income stream, or
• the SMSF or SAF cannot continue to meet its obligations to make income stream payments to an applicant, or the applicant's partner, who is on income support and who is a member of the fund.

This may be done using valuations supplied by the member, or trustee, or using independent valuations requested by Centrelink.

Where the applicant is of age pension age and part of his or her beneficial interest has not been converted to an income stream, the asset review process occurs annually.

Applicants who are members of SMSFs or SAFs must provide their annual member statement along with the annual financial returns for the fund. The value of the fund assets reported in the returns should reflect current market value at the time when the returns were prepared. Where appropriate, the information in the returns should be supported by valuations of any property investments, or other investments for which an alternative market value is not readily available.

Where Centrelink is satisfied with the validity and accuracy of the asset values recorded in the annual financial returns, no further action is necessary.

Where Centrelink has concerns regarding any of the asset values specified in the annual returns for the fund, it will undertake a review of the assets by either:

• initially requesting updated valuations (current at the date of the request) from the trustee for all fund assets, or
• if the trustee cannot supply current valuations for any of the fund assets, Centrelink will arrange for those assets to be valued in accordance with relevant guidelines for the valuation of assets (for example, for investment properties, plantation investments).

This process will also be followed where:

• a trustee requests a variation to the current value of an asset held in the fund, or
• there is a need to assess the assets of a non-performing fund (4.9.8.20).

If the trustee disagrees with any of the valuations determined by Centrelink, the normal review and appeal processes apply.

Once Centrelink has undertaken the necessary valuations, the process for attributing new asset values to the fund members should take account of any guidance provided in the trust deed. In the absence of adequate guidance in the trust deed, the asset values should be attributed in proportion to the beneficial interests held by each member of the fund as indicated in the most recent annual member statement and annual financial returns.

Treatment of unallocated reserves held within SMSFs & SAFs

Some superannuation funds, including SMSFs and SAFs, will have reserves that are unallocated reserves, that is, they do not constitute part of any individual member's superannuation interest in the fund.

Assets constituting unallocated reserves may originate from several sources. Some of the ways in which unallocated reserves may be created include:

• CONTRIBUTIONS TO THE FUND - contributions that have not been allocated to the members' account.
  • Note: The May 2004 Federal Budget introduced measures requiring contributions to the fund to be allocated to a member's account, within a period of 28 days of receipt, by the trustee of the contribution.
• INVESTMENT EARNINGS OF THE FUND - investment earnings that have not been allocated to members' account.
• COMMUTATION OF ORIGINAL INCOME STREAM AND ROLL-OVER TO A NEW INCOME STREAM - an ATE income stream is rolled over to another ATE income stream. The assets backing the original ATE income stream have increased in value such that, if all the assets backing the ATE original income stream were to be commuted and rolled over to a new ATE income stream, the value of the commuted assets would violate the requirement that the commuted amount not be greater than the benefit that was payable immediately before the commutation. To get around this problem, some of the assets backing the original income stream must become unallocated reserves.
• EXCESS RESERVES - the actuary determines that some of the reserves backing the income stream are excess to those required to meet future liabilities and may advise the trustee to transfer the excess to the superannuation fund as unallocated reserves.
• FORGONE BENEFITS - those amounts that have been allocated to a member, but to which the member is not entitled because he or she has left the fund before full vesting has occurred.
• FORFEITED BENEFITS - those amounts that have been forfeited to the fund under provisions within the governing rules (see example 2).
• THE RESERVES OF ANOTHER FUND.
• A MEMBER RECEIVING AN INCOME STREAM DIES and assets backing the income stream are declared to be unallocated reserves in the fund.

Note: While the above examples represent possible sources of unallocated reserves, the reserves arising in these circumstances may also be allocated reserves.

For social security purposes, unallocated reserves within an SMSF should be attributed in proportion to the extent to which each member contributed to the unallocated reserves. Unallocated reserves are allocated in this way in recognition of the need to allocate reserves equitably in a way that reflects the contribution of each fund member.

Where it is not possible for Centrelink to attribute the reserves on the basis of how much each member has contributed towards the unallocated reserve, the unallocated reserves should be attributed based on each member's share of the fund. If even this is not possible, the unallocated reserve should be shared equally between all members of the fund.

The means test assessment of these assets will depend on whether the income support recipient is either below age pension age or of age pension age (4.8.2.10).

Contributions to a superannuation investment

ALL contributions to a superannuation fund add to the value of the financial investment for deeming purposes and the assets test. The assessment of superannuation under the means test is specified under the heading 'Assessment of superannuation investments' above.

If the contributions are made by an income support recipient's employer (as part of a salary package) and the person is of age pension age (1.1.P.129):

• ONLY the amount that is paid by the employer as part of their obligations under the SGC will be DISREGARDED as income, and
• salary sacrifice contributions are assessed as income in the hands of the income support recipient.

Assessment of whole of life superannuation policies

A whole of life superannuation policy has 2 components - an insurance component and an investment component. These policies are subject to the same rules as other superannuation funds. They ARE NOT the same as whole of life conventional life insurance products. For the income test treatment of life insurance products, see 4.3.9.20. For the assets test treatment of life insurance products, see 4.6.5.70.

The amount recorded is the ACCUMULATED SUPERANNUATION BENEFIT shown on the income support recipient's latest statement of account and NOT the amount payable from the policy in the event of the death of the insured party.

Arrears of superannuation

For information on this topic refer to 4.9.8.10 Specific provisions for assessing income streams.

Disability pensions paid from superannuation funds

For information on this topic refer to 4.9.8.10 Specific provisions for assessing income streams.

Historical policy from February 1990 to March 1993

Between 1 February 1990 and 24 March 1993 the following policy applied.

• CPSB (1.1.C.280) amounts in roll-over funds were EXEMPT from income and assets test assessment until:
  • age pension age, or
  • earlier withdrawal.
• ALL amounts held in superannuation funds, NOT roll-over funds, were classed as compulsorily preserved and EXEMPT from income and assets assessment until age pension age.
• Any part of a compulsorily preserved benefit accessed before age pension age removed the exempt status of any remaining amount UNLESS it was accessed under hardship conditions or other special circumstances approved by the then Insurance and Superannuation Commissioner.
• NON-PRESERVED amounts in roll-over funds were assessed under the general rules for managed investments (1.1.M.25), regardless of the age of the income support recipient.

In some cases, income support recipients entered into a voluntary preservation agreement with the provider of the roll-over fund. Voluntary preservation agreement amounts were treated as if they were compulsorily preserved because deferred annuity contracts allowed non-CPSB amounts to be preserved under the same access conditions as CPSB amounts.

Exception: ADFs DID NOT allow non-CPSB amounts to be preserved under CPSB access conditions.

Historical policy from March 1993 to September 1997

From 25 March 1993, all amounts in superannuation and roll-over funds became EXEMPT from income and assets test assessment until the income support recipient reached age pension age, or began receiving a pension or annuity from the fund. This removed the incentive for income support recipients to enter into voluntary preservation agreements. The change did not alter the assessment of amounts previously recorded as either compulsorily or voluntarily preserved.

Historical policy from September 1997 to June 2001

From 20 September 1997 until 1 July 2001 all amounts in superannuation and roll-over funds were exempt from the income and assets test assessment until the income support recipient reached age pension age or had been in receipt of income support for at least 39 weeks after reaching age 55.

Historical policy on withdrawal income rules

From 25 March 1993 until 1 July 2001, if a pre age pension age person made a withdrawal from a superannuation investment that was not being assessed under the assets test, the profit component of the withdrawal was assessed as income for 12 months from the date of withdrawal - unless the withdrawn amount was rolled into another superannuation roll-over or immediate annuity.

From 1 July 2001 to 27 December 2002 these rules were restricted to people under the age of 55 who made such withdrawals.

From 28 December 2002 these rules were completely removed. Any income that was being assessed under these rules ceased to be assessed from this date.

The following table shows the steps that were involved in assessing the income component of withdrawals prior to 28 December 2002. Amounts for taxation or exit costs were not deducted. Periods are determined in whole months, beginning at the start date of the assessable period.