4.9.3.30 Means test assessment of asset-tested income streams (long term)

Summary

This topic covers:

• income test assessment for asset-tested income streams (long term) that are not defined benefit income streams
• assets test assessment for asset-tested income streams (long term) that are not defined benefit income streams
• income test assessment for defined benefit income streams
• assets test assessment for defined benefit income streams
• income reporting requirements for account-based (allocated) income streams.

Overview

The table below gives an overview of the assets and income test treatment of different types of asset-tested income streams (long term).

Note: The assessable asset or income associated with an asset-tested income stream (long term) cannot be reduced by any charge or encumbrance on the income stream.

Income test assessment for asset-tested income streams (long term) that are not defined benefit income streams

For account-based income streams purchased after 1 January 2015, income is determined using the deeming provisions (4.4.1.30). This includes account-based pensions and annuities.

Existing account-based income streams held by income support recipients as at 31 December 2014 are 'grandfathered', unless the account holder changes products, or ceases to be in continuous receipt of an income support payment. Changing products includes fully commuting and restarting a grandfathered account-based income stream, or fully commuting a grandfathered account-based income stream and purchasing a new product with a different income stream provider.

For asset-tested income streams (long term), other than non-grandfathered account-based pensions and those assessed under the deeming provisions, the following formula is used to determine the assessable income from the income stream:

• Annual Payment − [(Purchase Price − RCV) ÷ Relevant Number]

Note: Annual payment (1.1.A.155), Purchase price (1.1.P.500), RCV (1.1.R.230) and Relevant number (1.1.R.135) are defined in 1.1.

In the case of account-based income streams, the RCV will be zero.

Note: The income test assessment for market-linked income streams is the same irrespective of whether it is ATE or asset-tested, and is outlined in 4.9.2.30.

Assets test assessment for asset-tested income streams (long term) that are not defined benefit income streams

If the income stream is account-based (e.g. account-based or allocated income streams and market-linked income streams that are not ATE), the assessable asset is the account balance.

If the income stream is not account based, the asset value is determined using the following formula:

• Purchase price − [((purchase price − RCV) ÷ relevant number) × term elapsed]

Note: Annual payment (1.1.A.155), Purchase price (1.1.P.500), RCV (1.1.R.230) and Relevant number (1.1.R.135) are defined in 1.1.

The term elapsed is the number of years that have elapsed since the income stream's commencement day. The number of years is rounded down to the nearest:

• half-year, when the asset value is determined on a 6-monthly basis, OR
• whole year when the asset value is determined annually.

The following table shows when the asset value is determined for an asset-tested income stream.

Note: Where an income stream continues to be paid to a reversionary beneficiary after the death of the primary beneficiary, it will continue to have the same commencement day, purchase price and relevant number.

Income test assessment for defined benefit income streams

The assessable income from a defined benefit income stream is:

• Assessable Income = Annual Payment - Deductible Amount

The income test assessment for defined benefit income streams is the same irrespective of whether it is ATE or asset-tested.

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).

Assets test assessment for asset-tested defined benefit income streams

The asset value used for an asset-tested defined benefit income stream is determined using the following formula:

• Annual payment × pension valuation factor (PVF)

PVFs, determined by the Minister, are contained in 4.9.5. Asset values are reassessed annually.

Income reporting requirements for account-based (allocated) income streams

Note: Account-based income streams were previously referred to as allocated income streams.

An income support recipient must receive 1 or more payments during the financial year from their account-based income stream.

The annual payment must not be less than the minimum amount calculated according to the limits specified in the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) (4.9.5.60). There are no provisions under the SIS Regulations to cease income payments from the income stream product; at least the minimum pension payment amount must be taken. The relevant minimum pension payment amount is calculated as follows:

• Account balance × percentage factor (as specified in Schedule 7 of the SIS Regulations)

Note: For the financial years commencing on 1 July 2008, 1 July 2009, 1 July 2010, 1 July 2011, 1 July 2012, 1 July 2019 and 1 July 2020, temporary relief measures reducing the minimum annual amounts apply. Refer to 'pension drawdown relief' on the Australian Taxation Office website.

Note: Account-based (allocated) income streams with commencement days before 1 July 2007 may still use the PVFs being used before that date. However, if the income support recipient wishes, they may use the new PVFs that applied from that date.

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 Services Australia reporting purposes, the 'gross annual nominated payment' is the sum of all payments the recipient has received and is expected to receive (excluding commutations) for the current whole financial year. The amount reported must always be above the relevant minimum pension payment amount.

If the date of purchase is between 1 June and 30 June and no payment is made in June but the first payment commences after 1 July, the gross annual nominated payment for the first financial year must be reported as zero. The new gross annual payment must be reported in July.

Note: If the recipient elects to take a payment in June, the gross annual nominated payment must be reported in June for the financial year (see formula below).

Where an income support recipient specifies an annual amount for the current financial year that is below the relevant minimum pension payment amount, Services Australia will still assess an amount equivalent to the relevant minimum annual amount as required for the financial year.

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 Services Australia (see formula below).

For Services Australia reporting purposes the 'gross annual nominated payment' will be equal to the sum of actual payments received, plus payments to be received, (excluding commutations) in the financial year grossed-up to reflect an annual amount. It is calculated as follows:

• [Sum of all payments already received and to be received (excluding commutations) during the financial year] × [number of days in financial year ÷ number of days from commencement until 30 June]

For subsequent financial years after an income stream's commencement date, for Services Australia reporting purposes the 'gross annual nominated payment' will be equal to the sum of actual payments received, plus payments to be received, (excluding commutations) in the relevant financial year. It is calculated as follows:

• [Sum of all payments already received and to be received (excluding commutations) during the financial year from 1 July to 30 June]