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10.5.1 Overview of Income Streams

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Last amended 
1 July 2019
What is an income stream?

    VEA →

Section 5J

An income stream is a series of regular payments, made for life or for a fixed term, which are purchased with a capital sum or made directly from accumulated superannuation contributions. An income stream can only be paid by one of the following entities:

  • an entity regulated under the Superannuation Industry (Supervision) Act 1993
  • a public sector superannuation scheme
  • a retirement savings account under the Retirement Savings Account Act 1997
  • a life company registered under the Life Insurance Act 1995
  • a structure designated in writing by the Commission, or
  • a Family Law Affected (FLA) income stream.

Investments referred to as income streams may be known by the following names:

  • superannuation pensions, including defined benefit income streams;
  • account-based pensions or transition to retirement pensions;
  • market-linked pensions or annuities;
  • allocated pensions;
  • immediate annuities.
Types of income streams

Income streams are classified into the following assessment categories, each of which are assessed under different rules:

Asset-test exempt income stream characteristics

An income stream can only be asset-test exempt if it is a defined benefit income stream, or meets all of the following criteria:    

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  • is purchased before 20 September 2007,
  • is payable for a specified term dependent on the type of income stream,
  • meets criteria dependent on the type of income stream regarding how payments under the income stream are calculated,
  • commences on the day it is purchased or acquired,
  • converts the purchase price wholly into income,
  • has no residual capital value,
  • is non-commutable except in limited circumstances,
  • has limited reversionary benefits,
  • cannot be used as security for borrowing, and
  • if the income stream is a lifetime or life expectancy income stream paid from a self managed superannuation fund or a small APRA fund, has a current actuarial certificate in force.    More →
Asset-tested income stream characteristics

Asset-tested income streams are income streams:

  • purchased before 20 September 2007 which do not meet all the characteristics of an asset-test exempt income stream, or
  • purchased on or after 20 September 2007

and are either:

  • long term, where:
    • the specified term of the contract is:
      • more than five years, or
      • five years or less, provided the term is equal to or greater than the owner's life expectancy, or
    • the income stream pays for the life of the owner, and
    • it was purchased before 1 July 2019, or
  • short term, where:
  • lifetime, where:
    • ​it was purchased on or after 1 July 2019,
    • once regular payments commence, the payments continue for the rest of the owner's life,
    • the amount paid are based on the age, life expectancy or other factors relevant to the mortality of the owner, and
    • it does not have the characteristics of an asset-test exempt income stream or a defined benefits scheme.
Defined benefit income streams

A defined benefit income stream is an income stream paid from a defined benefit superannuation fund (eg PSS). Defined benefit income streams cannot be purchased from retail providers. The income stream must meet the definition of a 'pension' and the person's interest in the income stream must be a 'defined benefit interest' under the Superannuation Industry (Supervision) Regulations 1994.    

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Hybrid income streams

Some products combine account-based income streams with lifetime income streams.  In these cases, the product will be assessed as two separate income streams.  The account-based income stream will be assessed as an asset-tested income stream (long term) and the lifetime component will be assessed as an asset-tested income stream (lifetime).

Impact of splits under the Family Law Act 1975

Income streams may be split as a part of a divorce settlement under the Family Law Act 1975. This can affect how the income stream is assessed.    

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What an income stream is not

An income stream is not:

  • a private arrangement with a person or entity that cannot provide an income stream,     More →
  • a loan repayment arrangement,
  • a foreign pension provided through the national social security system of an overseas country,    More →
  • an overseas annuity, or    More →
  • a financial asset as defined in the VEA for the purposes of the deeming provisions except for certain asset-tested income streams.    More →
Exemptions from income stream provisions

Certain people who would be financially significantly disadvantaged by the income stream provisions introduced from 20 September 1998 may qualify for an exemption from the income stream provisions.    

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Assessment of income streams

Income streams are assessed according to the term and characteristics of the income stream contract or governing rules.  The commencement date of the income stream and whether the owner has been in continuous receipt of an income support payment may also be relevant.   

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Life expectancy tables

Life expectancy tables are used to determine the relevant number for income streams. The commencement day of the income stream determines which life expectancy table to use.    

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Section 5J

An income stream is a series of regular payments, made for life or for a fixed term, which are purchased with a capital sum or made directly from accumulated superannuation contributions. An income stream can only be paid by one of the following entities:

 

Types of Income Stream

Section 10.5.2

 

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Assets-test exempt income streams

Section 10.5.2

 

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Defined benefit income streams

 

Income from Overseas Pensions

10.1.5/Income from Foreign Pensions

 

Assessment of Comparable Foreign Pension Payments

Section 3.7.5

 

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Income from Overseas Annuities

10.1.7/Income from Overseas Annuities

 

Assessment of Overseas Annuities

10.2.4/Assessing Overseas Annuities

 

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Deeming Provisions

Chapter 9.5

 

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Gaining an exemption from the income stream provisions

10.5.3/Exemptions from the Income Stream Provisions

 

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Assessment of the different categories of income streams under the income and assets tests

Section 10.5.4

 

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Calculating the relevant number for income streams

Section 10.5.7

 

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According to subsection 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 as life insurance business by a life company registered under section 21 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;
    • an investment in a public unit trust;
    • an investment in an insurance bond;
    • an investment with a friendly society;
    • an investment in a superannuation fund;
    • an investment in an approved deposit fund;
    • an investment in an ATO small superannuation account;
  • a listed security;
  • a loan that has not been repaid in full;
  • an unlisted public security; 
  • gold, silver or platinum bullion; or
  • a payment of compensation in relation to a person's:
    • inability to earn, derive or receive income from remunerative work; or
    • total and permanent disability or incapacity.

 

 

An income stream is an asset-test exempt income stream if it is purchased before 20 September 2007 and must be:

  • paid for the income support recipient's lifetime for lifetime products; or
  • paid for a fixed period based on the income support recipient's life expectancy or that of their reversionary partner's;

and:

  • make payments at least annually;
  • specify the payment to be made in the first year;
  • not pay less than the previous year's payments in any year;
  • limit indexation to no more than 5% or CPI plus 1% in any year;
  • convert the purchase price wholly into income;
  • have no residual capital value;
  • have limited commutation;
  • have limited reversionary benefits;
  • have limited transferability;
  • not be able to be borrowed against; and
  • in respect of market-linked income streams, must make payments according to the formula in the Superannuation Industry (Supervision) Regulations 1994.

Legislative reference:

Veterans' Entitlements Act 1986:

An income stream is an asset-tested long term income stream if it is:

  • and has:
    • a specified term greater than 5 years (i.e. not for the life of an individual or individuals);
    • a specified term of 5 years or less, that is equal to or greater than the purchaser's life expectancy; or
    • the income stream pays for the life of the individual or individuals and was purchased or acquired before 1 July 2019.

Note: income streams that pay for the life of an individual or individuals, purchased or acquired on or after 1 July 2019, are assessed as asset-tested lifetime income streams.

Legislative reference: subsection 5J(1) Veterans' Entitlements Act 1986

An income stream is an asset-tested long term income stream if it is:

  • and has:
    • a specified term greater than 5 years (i.e. not for the life of an individual or individuals);
    • a specified term of 5 years or less, that is equal to or greater than the purchaser's life expectancy; or
    • the income stream pays for the life of the individual or individuals and was purchased or acquired before 1 July 2019.

Note: income streams that pay for the life of an individual or individuals, purchased or acquired on or after 1 July 2019, are assessed as asset-tested lifetime income streams.

Legislative reference: subsection 5J(1) Veterans' Entitlements Act 1986

An income stream is an asset-tested short term income stream if the term of the income stream is five years or less and it is not any of the following:

Legislation: subsection 5J(1) Veterans' Entitlements Act 1986

 

 

A defined benefit income stream is an income stream  where the payments are not fully determined by a purchase price. Instead, payments are made with reference to a set formula based on:

  • the person's salary before retirement,
  • years of service, and/or
  • the governing rules of the income stream.

 

 

The purchase price of an income stream is the nominal sum of the paymetns made to purchase the income stream (including amounts paid by way of employer and employee contributions) less any commuted amounts.

Note: In determining the means test assessment of asset-tested income streams (lifetime), the purchase price is not used.  Rather, the grossed up purchase amount.

Legislation: Section 5J(1) of the VEA

 

The residual capital value is the amount (if any) remaining at the end of an income stream's term, consisting of a portion of the initial capital invested in the income stream.

 

 

An income stream is an asset-tested long term income stream if it is:

  • and has:
    • a specified term greater than 5 years (i.e. not for the life of an individual or individuals);
    • a specified term of 5 years or less, that is equal to or greater than the purchaser's life expectancy; or
    • the income stream pays for the life of the individual or individuals and was purchased or acquired before 1 July 2019.

Note: income streams that pay for the life of an individual or individuals, purchased or acquired on or after 1 July 2019, are assessed as asset-tested lifetime income streams.

Legislative reference: subsection 5J(1) Veterans' Entitlements Act 1986

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.

 

 

Life expectancy is the length of time a person is expected to live and is has the same meaning as 'life expectancy factor' under section 27H of the Income Tax Assessment Act 1936.

An income stream's relevant number is the length of time an income stream is paid for. It can be a fixed term or the life expectancy factor of the payee or reversionary beneficiary.

The commencement day in relation to an income stream is the first day of the period to which the first income stream payment relates. This is usually one instalment period before the date of the first income payment.

The commencement day cannot occur prior to:

  • when all of the capital which is to support the income stream is available to the income stream provider;
  • the day established as the commencement day in relation to the terms and conditions agreed between the income stream provider and the individual; and
  • in circumstances where the individual or their beneficiary becomes entitled to the income stream as per the terms and conditions, the time at which the entitlement to start the income stream arises.

Legislative reference:  subsection 5J(1) of the Veterans' Entitlements Act 1986.

 

 

According to subsection 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 as life insurance business by a life company registered under section 21 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;
    • an investment in a public unit trust;
    • an investment in an insurance bond;
    • an investment with a friendly society;
    • an investment in a superannuation fund;
    • an investment in an approved deposit fund;
    • an investment in an ATO small superannuation account;
  • a listed security;
  • a loan that has not been repaid in full;
  • an unlisted public security; 
  • gold, silver or platinum bullion; or
  • a payment of compensation in relation to a person's:
    • inability to earn, derive or receive income from remunerative work; or
    • total and permanent disability or incapacity.