4.9.2.30 Income test assessment of asset-test exempt income streams
Summary
This topic covers:
- income test assessment for lifetime and life expectancy ATE income streams
- income test assessment for market-linked ATE income streams
- income reporting requirements for market-linked income streams
- income test assessment for defined benefit income streams before 1 July 2007
- income test assessment for defined benefit income streams from 1 July 2007, and
- income test assessment for military invalidity pension income streams.
Income test assessment for lifetime & life expectancy ATE income streams
The assessable income from a lifetime or life expectancy ATE income stream is the annual payment (1.1.A.155) LESS the deduction amount. The deduction amount is the purchase price less commutations (1.1.P.500) divided by the relevant number (1.1.R.135).
Example: Fran is 64 years old and single. She purchases an ATE lifetime pension for $150,000. The relevant number is equal to her life expectancy of 22 years. Her annual payment from the pension totals $11,400. Her assessable income from this income stream equals:
- $11,400 − ($150, 000 ÷ 22 years) = $4,582 p.a.
Example: Mark is 65 years old and single. He purchases an ATE life expectancy annuity for $100,000 with a term based on life expectancy (that is, 17.7 years rounded up to 18 years). The relevant number is equal to the term of the contract (that is, 18 years). His annual payment from the annuity totals $9,895. His assessable income from this income stream equals:
- $9,895 − ($100,000 ÷ 18 years) = $4,339 p.a.
Act reference: SSAct section 8(1)-'income', section 9(1)-'asset-test exempt income stream', section 9(1)-'relevant number', section 1099 Income—income stream not a defined benefit income stream, section 9(1) Financial assets and income streams definitions
Policy reference: SS Guide 1.1.R.135 Relevant number, 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, 4.9.5 Life expectancy, pension valuation factor & payment factor tables
Income test assessment for market-linked ATE income streams
The assessable income from a market-linked income stream is the annual payment LESS the deduction amount. The deduction amount is the purchase price less commutations divided by the relevant number.
Note: The annual payment can vary between plus or minus 10% of the default annual payment for the year (that is, account balance ÷ payment factor).
Note: For the financial years commencing 1 July 2008 and ending 30 June 2012, temporary relief measures reducing the minimum annual amounts apply. Refer to 'pension drawdown relief' on the Australian Taxation Office website. The annual income amount for a market-linked income stream is calculated as detailed in 4.9.2.15.
The amount that should be reported for Centrelink purposes is specified later in 'Income reporting requirements for market-linked income streams'.
Example: Bill Symthe, who turns 60 on 1 July 2006, commences a market-linked income stream from that date based on an initial account balance of $500,000 and a term of 30 years.
In the first year, the default annual payment amount is worked out using the formula in SSAct subsection 9BA(5). In this case the amount is:
= $500,000 ÷ 18.39 (rounded to the nearest $10)
= $27,190
= $2,265.83 per month
Bill elects to draw down monthly payments of $2,100 for the financial year, that is, a total of $25,200. Assessable annual income on these payments is determined according to the formula in SSAct subsection 1099AA(2):
= (($25,200 ÷ 365) − $500,000 ÷ (30 × 365)) × 365
= $8,533.34
On 1 January 2007, Bill elects to draw down monthly payments of $2,400 for the remainder of the financial year.
Bill has received $12,600 (from July to December) and will receive $14,400 (from January to June). Total payments for the year will be $27,000.
Assessable annual income on these payments is determined according to the formula in SSAct subsection 1099AA(2):
= (($27,000 ÷ 365) − $500,000 ÷ (30 × 365)) × 365
= $10,333.33
Example: John Smith, who turns 65 on 1 July 2006, commences a market-linked income stream from that date based on an initial account balance of $400,000 and a term of 25 years.
In the first year, the default annual payment amount is worked out using the formula in SSAct subsection 9BA(5). In this case the amount is:
= $400,000 ÷ 16.48 (rounded to the nearest $10)
= $24,270
Mr Smith fails to notify the specific amount that he is planning to withdraw during the first financial year when the income stream is paid.
In this case, the default amount of $24,270, calculated under SSAct subsection 1099AA(3), is the amount of income that will be assessed against Mr Smith.
Under the formula in SSAct subsection 1099AA(3), the annual rate of income assessed is:
= (($24,270 ÷ 365) − $400,000 ÷ (25 × 365)) × 365
= $8,270
Act reference: SSAct section 8(1)-'income'
Policy reference: SS Guide 1.1.R.135 Relevant number, 4.9.2.15 Characteristics of asset-test exempt income streams purchased from 20/9/2004 & before 20/09/2007, 4.9.5 Life expectancy, pension valuation factor & payment factor tables
Income reporting requirements for market-linked income streams
Note: For the financial years commencing 1 July 2008 and ending 30 June 2012, temporary relief measures reducing the minimum annual amounts apply. Refer to 'pension drawdown relief' on the Australian Taxation Office website.
An income support recipient must receive one or more payments during the financial year from their market-linked income stream. Where the income stream commences on or after 1 June, there is no obligation to make a payment in the first financial year (that is, in June).
Payments must be made at least annually and must be between plus or minus 10% of the amount determined under the following formula:
- Default annual amount = Account balance ÷ Payment factor (4.9.5.70).
- Account balance
- If the financial year includes the income stream's commencement day - the income stream's opening account balance (that is, purchase price less any entry fees).
- If the financial year does not include the income stream's commencement day - the account balance of the income stream on 1 July.
- The default annual amount (that is, account balance ÷ payment factor) is to be rounded to the nearest $10. Where the amount is exactly $5, round up to the next $10. This must happen before the plus or minus 10% range is calculated.
- An allowable commutation will not affect the annual payment for that particular financial year.
The payment period is the whole financial year, except where the income stream is purchased during that financial year, in which case it is the period from the income stream's commencement date to the end of the first financial year.
For Centrelink reporting purposes, the 'gross annual nominated payment' is the sum of all payments the recipient has received and is expected to receive for the current whole financial year. In effect, this amount will reflect the amount that the recipient expects to report for tax purposes after the end of a financial year, except in the first year, where the income stream does not commence on 1 July, the amount will be an annual amount (see formula below). For the income stream to meet the requirements for a 50% exemption from the assets test, the annual payment reported must always be between plus or minus 10% of the amount specified according to the above formula.
Where an income support recipient specifies an annual payment that is outside the 10% minimum or maximum range, the income stream will become non-complying and penalties may apply.
Where the income stream commences during a financial year, the income support recipient will receive a pro-rated payment amount to reflect the number of days remaining in the financial year. The pro-rated payment amount MUST NOT be reported to Centrelink.
For Centrelink reporting purposes the 'gross annual nominated payment' will be equal to the sum of actual payments received, plus payments to be received, in the financial year grossed-up to reflect an annual amount (that is, an amount which reflects what the client would have received for a full financial year had their payments not been pro-rated). It is calculated as follows:
- = (Sum of all payments already received and to be received during the financial year) × (number of days in financial year ÷ number of days from commencement until 30 June).
Example: George, who turns 65 on 1 January 2007, commences a 20-year market-linked income stream from that date based on an initial account balance of $300,000.
The default annual payment is:
= $300,000 ÷ 14.21
= $21,111.89
= $21,110 (rounded to nearest $10)
George elects to receive 6 monthly payments of $1,800 commencing on 1 January 2007 for the remainder of 2006-07. George will receive $10,800 for the 6-month period. This amount is between the minimum payment limit of $9,421 ($21,110 × 90% × (181 ÷ 365)) and maximum payment limit of $11,515 ($21,110 × 110% × (181 ÷ 365)).
For Centrelink reporting purposes, the gross annual nominated payment is calculated as follows:
= (Sum of all payments already received and to be received during the financial year) × (number of days in financial year ÷ number of days from commencement until 30 June)
= $10,800 ÷ 181 × 365
= $21,779.00
Example: On 1 April 2007, George elects to vary his monthly payment to $1,900. He has already received $5,400 (between January and March) and wants to receive $5,700 from April to June.
George will receive $11,100 in 2006-07 (1 January 2007 to 30 June 2007), which is between the minimum and maximum limits of $9,421 and $11,515, respectively.
For Centrelink reporting purposes, the gross annual nominated payment is calculated as follows:
= (Sum of all payments already received and to be received during the financial year) × (number of days in financial year ÷ number of days from commencement until 30 June)
= $11,100 ÷ 181 × 365
= $22,383.98
For subsequent financial years after an income stream's commencement date, for Centrelink reporting purposes the 'gross annual nominated payment' will be equal to the sum of actual payments received, plus payments to be received in the financial year. It is calculated as follows:
- = (Sum of all payments already received and to be received during the financial year from 1 July to 30 June).
Example: Bill, who turns 65 on 1 July 2006, commences a market-linked income stream with a 20-year term, and based on an initial account balance of $300,000.
The default annual payment is:
= $300,000 ÷ 14.21
= $21,111.89
= $21,110 (rounded to nearest $10)
Bill elects to receive $1,700 per month for the financial year, which is an annual amount of $20,400 (12 payments of $1,700). This amount is between the minimum and maximum payment limits of $18,999 (90% of $21,110) and $23,221 (110% of $21,110), respectively.
For Centrelink reporting purposes, the gross annual nominated payment to be reported on the Centrelink schedule is $20,400.
Example: On 1 January 2007, Bill elects to vary his monthly payments to $1,800. He has already received $10,200 (between July and December) and wants to receive $10,800 from January to June.
Bill will receive $21,000 for the financial year comprising of the payments received and expected to be received for the full financial year, which is between the minimum and maximum limits of $18,999 and $23,221, respectively.
For Centrelink reporting purposes, the gross annual nominated payment to be reported on the Centrelink schedule from 1 January 2007 is $21,000.
Act reference: SSAct section 1098 Income from asset-test exempt income stream, section 1099AA Income from market-linked asset-test exempt income stream
Policy reference: SS Guide 4.9.2.15 Characteristics of asset-test exempt income streams purchased from 20/9/2004 & before 20/09/2007, 4.9.5.70 Payment Factors for Market-Linked Income Streams
Income test assessment for defined benefit income streams before 1 July 2007
Prior to 1 July 2007, the deductible amount for social security purposes was based on the UPP in accordance with Income Tax Assessment Act 1936 section 27H(2) (as in force just before 1 July 2007).
The income test assessment for income support recipients who were receiving payments from a defined benefit income stream, was calculated as follows:
- Annual payment - deductible amount (1.1.D.44). The deductible amount was UPP ÷ relevant number.
For defined benefit income streams commenced from 20 September 1998 and before 1 July 2007, the deductible amount was based on the tax definition that applied during this period.
Where an income support recipient was simultaneously receiving a social security benefit AND payments from a defined benefit income stream on or before 19 September 1998, the deductible amount was based on the pre-1 July 1994 definition of UPP in the Income Tax Assessment Act.
Income test assessment for defined benefit income streams - from 1 July 2007
From 1 July 2007, the deductible amount is based on the 'tax-free component' as worked out under Income Tax Assessment Act 1997 subdivision 307-C or if applicable, Income Tax (Transitional Provisions) Act 1997 subsection 307-125.
The income test assessment for income support recipients who were receiving payments from a defined benefit income stream, is calculated as follows:
- Annual payment - deductible amount.
Defined benefit income streams commenced from 1 July 2007 have their deductible amounts expressed as a proportion of the superannuation interest that gives rise to the income stream payments. This proportion will be the proportion that the 'sum of the amounts of the tax-free component' of the superannuation interest comprises of the total superannuation interest.
As the sum of the amounts of the tax-free component constitutes a fixed proportion of the superannuation interest that gives rise to the income stream, in most cases, the deductible amount will increase in the same proportion as any increase (for example, CPI indexation) in the payments.
From 1 January 2016, the level of income from a defined benefit income stream that can be excluded from the income test by the deductible amount is capped at 10% of the gross income. This means if the income stream has a tax-free component greater than 10% of the gross income, the tax-free component or deductible amount is capped at 10%.
Note: Defined benefit income streams paid by the following military superannuation funds are excluded from the change:
- Defence Force Retirement & Death Benefits Scheme (DFRDB)
- Military Superannuation & Benefits Scheme (MilitarySuper), and
- Defence Force Retirement Benefits Scheme (DFRB).
Act reference: Social Services Legislation Amendment (Defined Benefit Income Streams) Act 2015
Policy reference: SS Guide 1.1.D.44 Deductible amount
Income test assessment for military invalidity pension income streams
From 31 May 2024, a new income stream classification and income test assessment is applied to invalidity superannuation benefits paid under the Military Superannuation & Benefits Scheme (MilitarySuper) and the Defence Force Retirement and Death Benefits Scheme (DFRDB). This is the result of the Social Services and Other Legislation Amendment (Military Invalidity Payments Means Testing) Act 2024, which amended the SSAct in response to the decision in Commissioner of Taxation v Douglas (2020) FCAFC 220.
These invalidity benefits are military invalidity pension income streams under the SSAct. They are NOT defined benefit income streams. However, any assessments of these invalidity benefits that were made in the period prior to 31 May 2024 on the basis that the invalidity benefits could be treated as defined benefit income streams are validated by the amendments to the SSAct.
The income stream is assessed from the date the person is notified of the approval of their claim. It is not the date the person applied for the invalidity benefit.
Note: For lump sum arrears for the period prior to notification refer to 4.9.8.10.
The income test assessment for income support recipients receiving a military invalidity pension income stream is calculated as follows:
- Annual payment – special reduction amount.
Annual payment is the amount payable to the income support recipient for the year under the income stream. This is the gross amount payable, before any deductions.
The special reduction amount is the sum of the amounts that would be the tax-free components, worked out under Subdivision 307-C of the Income Tax Assessment Act 1997, of the payments received from the military invalidity pension income stream during the year, if it were assumed that the income stream is a superannuation income stream within the meaning of that Act.
If a military invalidity pension income stream paid from the DFRDB or the MilitarySuper scheme has a special reduction amount greater than 10% of the gross income, the special reduction amount is NOT capped at 10%. This is similar to the way defined benefit income streams that are retirement benefits paid from the DFRDB and MilitarySuper schemes are assessed.
If the Secretary makes a determination that an income stream is a military invalidity pension income stream, and that income stream is not related to military service, the special reduction amount is capped at 10%.