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Income from Private Annuities

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Assessment of private annuities

Private annuities do not satisfy the definition of an income stream, as they do not meet the requirements for prudential regulation. Private annuities are assessed under the ordinary income and assets test. To be classed as a private annuity the arrangement must be in the form of a legally binding contract between the two parties. Each private annuity must be assessed on its particular merits and an actuarial value is required in all cases.

Actuarial value required for private annuity

An actuarial valuation of a person's private annuity is required to determine:

  • the assessable asset value,
  • whether or not the person received adequate financial consideration for the purchase price, and
  • whether or not the deprivation provision apply.
Initial Actuarial value required for private annuity

An actuarial valuation is required because private annuities are usually family or private arrangements where one party provides regular income payments in exchange for a lump sum payment, or other valuable consideration. The arrangements are normally not determined by financial markets. For example, a pensioner who is a landowner in the rural industry may exchange the title to a farming property for a series of payments over a defined period of time.

An initial actuarial valuation of a person's private annuity is required when the:

  • annuity is first established, or
  • an income support pension is claimed.
Additional Actuarial value required for private annuity

Additional actuarial valuations of a person's private annuity are required when the:

  • number of annuitants (those receiving payments) changes,
  • terms and conditions of the annuity change,
  • amount paid by the annuity changes, or
  • annuity is wholly or partly commuted.
Private annuity - obtaining an actuarial value

The Australian Government Actuary can supply an actuarial value. The Actuary must be supplied with all the relevant details of the annuity including:

  • the purchase price,
  • the commencement date,
  • the term,
  • the payment rate,
  • the indexation rate (if any),
  • the date of birth of each annuitant,
  • the ability to commute the annuity (if any), and
  • a copy of the contract.

The following table shows additional information requirements.    

If one of the parties is a...

also provide...

Trust

a copy of the trust deed.

Company

  • the Articles of Association,
  • the company memorandum, and
  • the most recent company accounts.

Partnership

a copy of the partnership agreement and accounts.

Income assessment for private annuities

For private annuity payments made before 20 September 1998, the gross annuity payments is reduced by a deductible amount using the income assessment rules which applied at that time.

From 20 September 1998, private annuities do not satisfy the new definition of an income stream and are assessable under the ordinary income and assets test.  The gross annuity payments as specified in the annuity contract are fully assessable under the income test from the commencement date of the annuity contract. No deductible amount is allowed    

Assessment of One-Year, One-Payment Private Annuities

One-year, one-payment private annuities are not classified as annuities for DVA purposes. They are assessed as a financial asset assessed using the deeming provisions.    

Deprivation of income – private annuity

A pensioner is assessed for deprivation of income if they have elected to forgo a payment to which they were entitled to receive from the private annuity under the annuity contract.

This can occur where the pensioner either gifts the annuity payment to a third party, or 'forgives' the annuity payment. The term 'forgiving a payment' refers to circumstances where the annuitant does not require that the annuity provider make the annuity payment as specified in the annuity contract.    

Example of deprivation of income – private annuity payments forgone

A pensioner receives $10,000 per year from a private annuity, in the form of two payments of $5,000 each at 6 monthly intervals. The pensioner decides to forgo the first payment, but keeps the annuity contract in force. An amount of $5,000 should be assessed as deprived income under the normal rules. If the pensioner also decides to forgo the second payment, the amount of deprived income should be increased to $10,000 from the date of the second payment specified in the annuity contract.

Deprivation of assets

Generally when a person acquires or disposes of an income producing asset without [glossary:adequate:] [glossary:financial:] [glossary:consideration:], the deprived amount is maintained and deemed. It would be 'double-dipping' to also assess the forgone income as income deprivation. Therefore assets deprivation provisions only are applied if a person:

  • acquires an interest in a private annuity but does not receive adequate consideration for the amount of the purchase price,
  • surrenders their interest in a private annuity, or
  • otherwise disposes of their rights under the contract and does not receive adequate consideration.


A private annuity is a legally binding contract between two parties where one party provides an income in exchange for payment or valuable consideration. An example of this is where a person agrees to “sell” a property holding .As payment for receipt of the property the purchaser agrees to pay the person individual annuities which usually have a total stated purchase price equivalent to the value of the transferred property.

According to section 5J(1) of the VEA, an income stream includes:

  • an income stream arising under arrangements that are regulated by the Superannuation Industry (Supervision) Act 1993; or
  • an income stream arising under a public sector scheme (within the meaning of that Act); or
  • an income stream arising under a retirement savings account; or
  • an income stream provided by a life insurance business (within the meaning of the Life Insurance Act 1995); or
  • an income stream provided by a friendly society (within the meaning of the Income Tax Assessment Act 1996); or
  • an income stream designated in writing by the Commission for the purposes of this definition, having regard to the guidelines determined under subsection 5J(1F) of the VEA;
  • but does not include any of the following:
  • available money;
  • deposit money;
  • a managed investment;
  • a listed security;
  • a loan that has not been repaid in full;
  • an unlisted public security; or
  • gold, silver or platinum bullion.

 

 

A private annuity is a legally binding contract between two parties where one party provides an income in exchange for payment or valuable consideration. An example of this is where a person agrees to “sell” a property holding .As payment for receipt of the property the purchaser agrees to pay the person individual annuities which usually have a total stated purchase price equivalent to the value of the transferred property.

The ordinary income of a person for a period means, as described in section 46 of VEA, the gross ordinary income from all sources for that period without any reduction, other than a reduction of business income.

 

 

Valuable consideration is defined as receipts not in money form but capable of being valued in money terms.

According to section 5J of the VEA, a deductible amount, in relation to an income stream, means the sum of the amounts that are the tax free component, worked out under the tax law, of the payments received from the DBIS.

 

 

According to section 5J(1) of the VEA, an income stream includes:

  • an income stream arising under arrangements that are regulated by the Superannuation Industry (Supervision) Act 1993; or
  • an income stream arising under a public sector scheme (within the meaning of that Act); or
  • an income stream arising under a retirement savings account; or
  • an income stream provided by a life insurance business (within the meaning of the Life Insurance Act 1995); or
  • an income stream provided by a friendly society (within the meaning of the Income Tax Assessment Act 1996); or
  • an income stream designated in writing by the Commission for the purposes of this definition, having regard to the guidelines determined under subsection 5J(1F) of the VEA;
  • but does not include any of the following:
  • available money;
  • deposit money;
  • a managed investment;
  • a listed security;
  • a loan that has not been repaid in full;
  • an unlisted public security; or
  • gold, silver or platinum bullion.

 

 

The ordinary income of a person for a period means, as described in section 46 of VEA, the gross ordinary income from all sources for that period without any reduction, other than a reduction of business income.

 

 

According to section 5J of the VEA, a deductible amount, in relation to an income stream, means the sum of the amounts that are the tax free component, worked out under the tax law, of the payments received from the DBIS.

 

 

According to section 5J(1) of the VEA a financial asset means;

 

In 1990 the government introduced legislative changes called “deeming” to simplify the assessment of cash deposits and income from certain investments. These changes were made:

  • in response to pensioner concerns about complex income and assets test rules;
  • to encourage pensioners to maximise their private income.

Deemed income is the minimum rate that the government expects income support pensioners to earn from investments.

Banks created “pensioner accounts” which paid interest at the deeming rate set by the government.

On 1 July 1996 further changes meant the deeming rate was applied to all financial assets as defined in section 5J(1) of the VEA.