4.9.2.40 Commuting an asset-test exempt income stream

Summary

This topic covers:

circumstances when commutation of an ATE income stream is allowed
commutation to a reversionary beneficiary
calculating a debt resulting from a non-allowable commutation, and
commutations allowed under the hardship provisions.

Note:

Income streams purchased or acquired from 20 September 2007 will be assessed as asset-tested income streams unless they are defined benefit income streams (1.1.D.47) or military invalidity pension income streams (1.1.M.138) or are granted relief under provisions specified in 4.9.2.17.
Commutation includes lump sum withdrawals in cash, as well as rollovers to another income stream product within the same superannuation fund or to another superannuation fund.

Act reference: SSAct section 9(1)-'asset-test exempt income stream'

Circumstances when commutation of an ATE income stream is allowed

There are 3 options where commutation is allowed.

Option 1: ATE income streams may be commuted in full (including reserves) to a lump sum without incurring a debt where the commutation has occurred within the first 6 months of the commencement day of a non-commutation funded income stream (1.1.I.70).

Note:

A commutation funded income stream is an income stream that has been purchased with funds acquired from the commutation of another income stream.
From 20 September 2007, commutation within the first 6 months is no longer available for income streams as any new ATE income stream will be treated as a commutation funded income stream.

Option 2: ATE income streams may be commuted in full (including reserves) to purchase another income stream and keep asset test exempt status where one of the following conditions is satisfied:

where the new income stream is purchased on or after 20 September 2004 and before 20 September 2007, the new income stream may retain its 100% exemption if certain conditions apply (refer to 4.9.2.17 for more details), OR
where the new income stream is purchased on or after 20 September 2007, the income stream may also retain its 100% or 50% exemption if certain conditions apply (refer to 4.9.2.17 for more details).

Note: Where the original income stream is a 100% ATE income stream, then the commuted amount can only be used to purchase a lifetime or life expectancy ATE income stream for retention of asset-test exemption.

Option 3: ATE income streams may be partially commuted to a lump sum and keep asset test exempt status where one of the following conditions is satisfied:

the commutation has occurred to pay an amount for the superannuation contributions surcharge, up to the maximum surcharge payable, OR
the commutation has occurred to pay a hardship amount, OR
the commutation has occurred to the extent necessary to give effect to the split of an income stream pursuant to a divorce property settlement (4.9.6), OR
the commutation has occurred to pay the excess contributions tax amount.

Note:

Under the Superannuation Industry (Supervision) Regulations 1994, a complying income stream (that is, lifetime, life expectancy or market-linked ATE income stream) purchased with superannuation money CANNOT be commuted to pay a hardship amount. A hardship amount can only be paid for income streams purchased with non-superannuation monies.

Where the income stream is commuted in full to make any of the above payments, any amount remaining after making the payment must be rolled over to a complying income stream (that is, lifetime, life expectancy or market-linked ATE income stream).

Act reference: SSAct section 9(1)-'commencement day', section 9(1)-'superannuation contributions surcharge', section 9A(7)-'hardship amount'

Commutation to a reversionary beneficiary

For lifetime income streams, if the recipient dies within the guarantee period (see below for guidance concerning the 'guarantee period'), the legal or equitable interest in an ATE lifetime income stream can be commuted to a lump sum and paid to a reversionary beneficiary. If there is no reversionary beneficiary, the income stream can be commuted and paid as a lump sum to the recipient's estate. If there is a reversionary beneficiary and the interest is taken as an income stream and the reversionary beneficiary dies within the guarantee period, the income stream can be commuted to a lump sum and paid to the reversionary beneficiary's estate.

Note: The maximum guarantee period for:

lifetime income streams purchased pre-20 September 2004 is 10 years after the commencement day of the income stream (4.9.2.60)
lifetime income streams purchased post-20 September 2004 is the lesser of the primary beneficiary's life expectancy at purchase (rounded up to the next whole number), or 20 years
for joint lifetime income streams, it is allowable to use the longer of the 2 joint beneficiaries' life expectancies when determining the maximum allowable guarantee period or 20 years, whichever is the lesser.

An ATE life expectancy or market-linked income stream may be commuted to a lump sum on a:

primary beneficiary's death where no reversionary partner is specified, OR
reversionary partner's death if there is a reversionary partner who outlives the primary beneficiary.

Act reference: SSAct section 9A(2)(h) Requirements of contract/governing rules for provision of income stream (lifetime), section 9B(2)(h) Requirements of contract/governing rules for provision of income stream (life expectancy), section 9BA(2)(f) 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 20/09/2004 & before 20/09/2007, 4.9.6 Assessment of divorce property settlements

Calculating a debt resulting from a non-allowable commutation

If a recipient commutes a lump sum from an ATE income stream and it is not an allowable commutation (as specified above) the income stream will lose its ATE status. The income stream will be assessed as if it never had ATE status (that is, it will be treated as an asset-tested income stream (4.9.3.10) from its commencement day). This may result in a debt being raised. This debt will be calculated on the basis that the product was never ATE. It will be the difference between the amount of income support paid to the individual and the amount that would have been paid if the income stream had been asset tested over the shortest of the following periods, that is, the period extending:

back 5 years from the day the lump sum was commuted from the income stream
from the commencement day of the income stream (see following note), or
from 20 September 2001, to the day the income stream was commuted.

Note: Where the current ATE income stream is the result of commuting one or more previous ATE income streams, then the commencement day of the current ATE income stream will be considered to be the same as the commencement day of the FIRST ATE income stream in the succession of ATE income streams, and NOT the commencement day of the most recent ATE income.

Example: A recipient purchases an ATE income stream on 1 April 2002. On 1 May 2003, the recipient commutes the income stream and purchases a new ATE income stream with the entire proceeds. If the recipient subsequently commutes a non-allowable lump sum from the new income stream, the commencement day for debt recovery purposes will be 1 April 2002, and not 1 May 2003.

SSAct Section 1223A took effect from 20 September 2001 and was subsequently amended on 15 April 2003 to limit the practice of commuting an existing ATE income stream to a new ATE income stream and then commuting a lump sum.

Act reference: SSAct section 1223A Debt resulting from commutation of asset-test exempt income …

Commutations allowed under the hardship provisions

The following table deals with hardship provisions.

Issues	Explanation/description
Determination of extreme financial hardship	Centrelink will assess whether a person meets the extreme financial hardship rules. The Centrelink delegate must determine that a HARDSHIP AMOUNT may be commuted from the income stream if they are satisfied that: the recipient's circumstances are exceptional and could not reasonably be foreseen at the time the person purchased the income stream the amount commuted is needed to meet UNAVOIDABLE EXPENDITURE, and the recipient has insufficient LIQUID ASSETS or other assets (excluding the recipient's principal home) that could be realised to avoid the extreme financial hardship. (This term is not the same as 1.1.L.50 Liquid assets.) If the recipient satisfies the above conditions, Centrelink will not raise a debt in relation to the commutation.
Hardship amount	The HARDSHIP AMOUNT covers: unavoidable expenditure expected during the period when issues related to the recipient's financial situation are being resolved, and unavoidable expenditure which is not likely to be covered by the recipient's investments even when issues related to the financial situation have been resolved.
Unavoidable expenditure	Unavoidable expenditure means one or more of the following: essential medical expenses of the recipient (including transport costs for medical treatment, modifications to home/vehicle, palliative care or death, funeral, or burial expenses), or the recipient's partner, where these expenses are not covered by health insurance or other contracts or arrangements the cost of replacing the recipient's principal home (for example, destroyed by fire), or essential repairs to the recipient's principal home to the extent that the cost of the replacement or repairs is not covered by an insurance policy, and/or expenditure to purchase/replace essential household goods because of the loss of those goods where the cost of replacement is not covered by an insurance policy. These will include food, utilities, bills and rent.
Expenditure that is NOT unavoidable	Expenditure that is not unavoidable includes where a recipient feels they have been inappropriately sold an income stream product, and subsequently commutes the product, they will not qualify for an exemption from the debt calculations. These recipients should seek redress from the planner/adviser using the current consumer protection provisions of either the Corporations Law or the Competition & Consumer Act 2010.
Liquid assets	A recipient's liquid assets relate to his/her cash and readily realisable assets and include: the recipient's shares and debentures in a public company within the meaning of the Corporations Law managed investments insurance policies that can be surrendered for money amounts deposited with, or lent to, a bank or other financial institution by the person (whether or not the amount can be withdrawn or repaid immediately) amounts due, and able to be paid, to the person by, or on behalf of, a former employer of the person loans to other people, and cash on hand. Example: Sally has unavoidable expenditure of $20,000. She has $10,000 in liquid assets. She could commute $10,000 from her ATE income stream and have that classed as a 'hardship amount' for social security purposes.
Difference between extreme financial hardship and severe financial hardship	Extreme financial hardship (1.1.E.260) is not defined in the Act but is NOT the same concept as 'severe financial hardship' (1.1.S.120) and (1.1.S.125). Rather, as indicated above, extreme financial hardship means that: the person's circumstances are exceptional and could not have been reasonably foreseen at the time the recipient purchased the income stream the recipient has no other resources, or insufficient resources, that can be used to meet the unavoidable expenditure, and the amount commuted is required to meet the unavoidable expenditure. The test for 'extreme financial hardship' is different to definitions of 'severe financial hardship'. This is because recipients can have liquid assets in excess of the amounts specified for 'severe financial hardship' but still be in 'extreme financial hardship' if their liquid assets are insufficient to meet the unavoidable expenditure.
Allowable difference between amount commuted and actual unavoidable expenditure incurred	Often recipients will have to commute a certain amount from their ATE income stream product and later find that the unavoidable expenditure was not as much as was first anticipated. To discourage abuse of the commutation provisions, Centrelink will assess a debt on the full amount of the commutation if: for commuted amounts up to $40,000, there is a difference of more than $2,000, and for commuted amounts over $40,000, there is a difference of more than 5% of the commuted amount. Example: Sally needs to make an urgent repair on her primary residence. A builder's quote for this repair is $20,000. Sally then commutes $20,000 from her ATE income stream to meet this expense. However, the builder's actual final bill was only $19,000. In these circumstances, Sally's whole commutation will be classed as a hardship amount for social security purposes. If Sally commuted $20,000 from her ATE product but her unavoidable expenditure only amounted to $10,000 then, because she commuted in excess of the allowable 'hardship amount', Sally's income stream is assessed as being an asset-tested income stream (long term) and a debt is recoverable for the period back to the income stream's commencement day.
Underestimates of unavoidable expenditure	There will be occasions where a recipient underestimates the amount of the unavoidable expenditure. As there are no limits to the number of commutations that may be made they can always approach the product provider and arrange for a subsequent commutation to meet the unavoidable expenditure. Example: Sally needs an urgent medical operation costing her personally $5,000. She commutes this amount from her ATE income stream product. Later, she is informed that her operation and hospital bill actually will cost $7,000. Sally then commutes a further $2,000 from the ATE income stream product. In these circumstances both commutations are classed as hardship amounts and no debts are raised.

Act reference: SSAct section 9A(7)-'hardship amount', section 9A(7)-'unavoidable expenditure', section 9A(7)-'liquid assets', section 9(1)-'managed investment', section 1223A Debt resulting from commutation of asset-test exempt income …