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10.5.1 Overview of Income Streams

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Last amended 
8 January 2015
What is an income stream?

    VEA →

 

Section 5J

 

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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
  • an 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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Assets-test exempt income streams

Section 10.5.2

 

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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.    
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, when the term of the contract is:
  • more than five years, or
  • five years or less provided the term is equal to or greater than the pensioner's life expectancy at the commencement day, or
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.    

 

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.    

 

What an income stream is not

An income stream is not:

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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Gaining an exemption from the income stream provisions

10.5.3/Exemptions 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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Assessment of the different categories of income streams under the income and assets tests

Section 10.5.4

 

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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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Calculating the relevant number for income streams

Section 10.5.7

 

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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.

 

 

An income stream is an asset-test exempt income stream if it is purchased before 20 September 2007 and satisfies the characteristics of the following sections in the Veterans' Entitlements Act 1986:

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

  • and has either;
  •      a term greater than 5 years; or
  •      a term of 5 years or less, that is equal to or greater than the person's life expectancy.

 

 

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

  • and has either;
  •      a term greater than 5 years; or
  •      a term of 5 years or less, that is equal to or greater than the person's life expectancy.

 

 

An income stream is an asset tested short term income stream if it is;

 

 

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.

 

 

Section 5J(1) of the VEA defines a purchase price, in relation to an income stream, as the sum of the payments made to purchase the income stream (including amounts paid by way of employer and employee contributions), less any commuted amounts.

 

 

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 either;
  •      a term greater than 5 years; or
  •      a term of 5 years or less, that is equal to or greater than the person's life expectancy.

 

 

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 payment.