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Asset-Test Exempt Income Streams - Life Expectancy

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Last amended 
8 January 2015
Purchase date

To be an asset-test exempt income stream, the income stream must have been purchased before 20 September 2007, unless certain conditions are met. The purchase date also determines whether the income stream is 100% or 50% asset-test exempt.     

 

General characteristics of life expectancy asset-test exempt income streams

An asset-test exempt life expectancy income stream has all of the following characteristics:

Jointly owned income streams

Where an income stream is jointly owned, the characteristics of the income stream must be satisfied in relation to each owner.

Commencement day

An asset-test exempt life expectancy income stream's commencement day is the first day of the period to which the first payment relates, even if the payment is made at the end of a twelve month period. The commencement day is usually the day the income stream was purchased.

Term and relevant number of an asset-test exempt life expectancy income stream

The term of the income stream is a fixed term, as specified in the income stream contract, and is also known as its relevant number. To comply as an asset-test exempt income stream the relevant number must meet the criteria in the table below. The relevant number is always calculated using the person's age on the income stream's commencement day, which is the same as the purchase date for purchased income streams.     

 

Determination of relevent number for income streams.

Purchase date of income stream

Relevant number requirements

Rounding

Before 20/09/2004

  • If the life expectancy is less than 15 years:
  • life expectancy of the primary beneficiary regardless of whether there is a nominated reversionary beneficiary, or
  • life expectancy of each owner if the income stream is jointly owned, or
  • If the life expectancy is 15 years or more:
  • 15 years or more but not greater than the life expectancy of the primary beneficiary regardless of whether there is a nominated reversionary beneficiary, or
  • 15 years or more but not greater than the life expectancy, of each owner if the income stream is jointly owned.

If not a whole number, may be rounded up at the person's option to the next whole number.

On or after 20/09/2004 and before 01/01/2006

  • at least as long as the primary beneficiary's life expectancy and at most as long as the primary beneficiary's life expectancy as if they were five years younger, or
  • at least as long as the greater of:
  • the life expectancy of the primary beneficiary, and
  • the primary beneficiary's reversionary partner
  • and at most as long as the greater of:
  • the life expectancy of the primary beneficiary, and
  • the life expectancy of the primary beneficiary's reversionary partner as if they were five years younger.

If not a whole number, must be rounded up to the next whole number.

On or after 01/01/2006

  • at least as long as the primary beneficiary's life expectancy and at most as long as the greater of:
  • the primary beneficiary's life expectancy as if they were five years younger, and
  • the period starting on the commencement day and ending on the day on which the primary beneficiary would turn 100, or
  • at least as long as the greater of:
  • the life expectancy of the primary beneficiary, and
  • the life expectancy of the primary beneficiary's reversionary partner, and
  • at most as long as the greatest of:
  • the life expectancy of the primary beneficiary as if they were five years younger,
  • the life expectancy of the primary beneficiary's reversionary partner as if they were five years younger,
  • the period starting on the commencement day and ending on the day on which the primary beneficiary would turn 100, or
  • the period starting on the commencement day and ending on the day on which the primary beneficiary's reversionary partner would turn 100.

If not a whole number, must be rounded up to the next whole number.

Amount of annual payments

Payments must be made at least annually. The contract must specify the total amount of payments that may be made in the first year after the commencement day, excluding allowable commutations. In any other year the payments may only vary by:

  • indexed amounts, and
  • allowable commutations.

The yearly indexation cannot be a negative value and must be capped at the larger of:

  • 5% if the indexation method is fixed, or
  • the CPI plus 1% if the indexation method is not fixed.
Purchase price and residual capital value

The purchase price is the amount invested to purchase the income stream, less any allowable commutations. The amount paid as the purchase price must be wholly converted into income. The income stream must have no residual capital value.

Income stream is non-commutable

In order to be assessed as asset-test exempt, the income stream must be non-commutable except in limited circumstances. The benefit payable after the commutation cannot be greater than the benefit payable before the commutation. Commutation is allowed in the following circumstances:

  • if the income stream was purchased before 20 September 2004:
  • on death of the person to a reversionary beneficiary or the person's estate, or
  • on death of the reversionary beneficiary to another reversionary beneficiary or to the reversionary beneficiary's estate,
  • if the income stream was purchased on or after 20 September 2004:
  • on death of the primary beneficiary where there is no reversionary partner, or
  • where the income stream is paid to the reversionary partner following the death of the primary beneficiary, on death of the reversionary partner,
  • if the income stream is not a commutation funded income stream, within six months of the commencement day,
  • where the commutation is transferred directly to the purchase of a new income stream with the characteristics of an asset-test exempt income stream,
  • to the amount necessary to pay a superannuation contribution surcharge amount,
  • to the amount necessary to pay a hardship amount,
  • to the amount necessary to pay the person's spouse or former spouse in a payment split under Part VIIIAA or Part VIIIB of the Family Law Act 1975.
Commutation of non-compliant self managed superannuation or small APRA fund 100% asset-test exempt income streams

In recognition of the global financial crisis of 2008 and 2009, temporary relief has been provided for holders of 100% asset-test exempt income streams, sourced from a SMSF or SAF, who are forced to restructure after failing to meet the high probability test.    

More

 

Waiver of debt under temporary debt relief arrangements

10.5.5/Assessment where Fund Closes or is in Financial Difficulty

 

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Security for borrowing

For an income stream to be asset-test exempt, neither of the following can be used as security for borrowing:

  • the capital value of the income stream, nor
  • the income from the income stream.
Transfer to a reversionary beneficiary

In order for a life expectancy income stream to qualify for asset-test exempt status, the contract or governing rules must specify that the income stream can only be transferred to a reversionary beneficiary or to the person's estate on the death of the primary beneficiary. To ensure that no income is deferred, the payment to a reversionary beneficiary cannot be greater than the payment the primary beneficiary received immediately before death.

Re-testing of reversionary income streams purchased before 20 September 2004

If the primary beneficiary or owner of a:

  • life expectancy, or
  • 15 year minimum term asset-test exempt income stream

dies and the income stream reverts to the nominated reversionary beneficiary, the income stream must be re-tested for asset-test exempt status as at the date of reversion using the age and life expectancy of the reversionary beneficiary and remaining term of the income stream on that date.

If, on the date of reversion:

  • the reversionary beneficiary had not attained pension age, or
  • the remaining term of the income stream did not meet the term requirements for a life expectancy or 15 year minimum term income stream purchased before 20 September 2004,

the income stream would no longer meet the characteristics of an asset-test exempt income stream and would instead be assessed as an asset-tested income stream (long term). The income stream retains the same commencement day, purchase price and relevant number regardless of whether it is assessed as asset-test exempt or as asset-tested. The gross payment may reduce as specified in the income stream contract.    

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Asset-tested income streams

10.5.2/Asset tested income streams

 

Determining the relevant number for an assets test exempt life expectancy or 15 year minimum term income stream

Section 10.5.7 Life Expectancy Tables, Pension Valuation Factors and Payment Factors

 

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Re-testing of reversionary income streams purchased on or after 20 September 2004

The income stream continues to be asset-test exempt if the reversionary beneficiary was the partner of the primary beneficiary on the day of the primary beneficiary's death. In all other cases, the income stream ceases to be asset-test exempt on reversion. In any case, the income stream retains the same commencement day, purchase price and relevant number. The gross payment may reduce as specified in the income stream contract.

Period of payments to reversionary beneficiary

The reversionary benefit for life expectancy income streams is the balance of payments that would have been paid to the primary beneficiary under the contract terms.

Removal or change of reversionary beneficiary

Removing or changing the reversionary beneficiary has no impact on the asset test exempt status of the income stream.


 

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:

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.

 

 

Currently, the pension age for a veteran is 60 years of age (VEA 5QA).

The pension age for a non-veteran is determined by the table below:

Date of birth (both dates inclusive)

Age Pension age

1 July 1952 to 31 December 1953

65 years and 6 months

1 January 1954 to 30 June 1955

66 years

1 July 1955 to 31 December 1956

66 years and 6 months

On or after 1 January 1957

67 years

 

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.

The consumer price index (CPI) provides the official measure of inflation in Australia. The CPI measures quarterly changes in the price of a 'basket' of goods and services which account for a high proportion of expenditure by the CPI population group (i.e. metropolitan households).

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.

 

 

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.

 

 

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.

A commutation, in relation to an income stream, is the conversion of part or all of the future income stream payments into a lump sum. A commutation is similar to a withdrawal.

 

 

Superannuation contributions surcharge has the meaning that it has in the Superannuation Contributions Tax (Assessment and Collection) Act 1997.

A person may apply to the Commission in writing to be allowed to commute the whole or part of an income stream because of extreme financial hardship. According to s.5JA of the VEA, the Commission may determine an amount as allowable commutation if these conditions are satisfied:

  •       the person's circumstances are exceptional and could not be reasonably foreseen at the time the person purchased the income stream, and
  •       the person has insufficient liquid assets or other assets (excluding the person's principal home) that could be realised to avoid the extreme financial hardship, and
  •       that amount is required to meet unavoidable expenditure.

The governing rules of an income stream are either:

  • a trust instrument,
  • other document or legislation, or
  • combination of them,

governing the establishment and operation of the income stream.

According to section 5H of the VEA income is:

  • an amount earned, derived or received by a person for the person's own use or benefit;
  • a periodical payment by way of gift or allowance; or
  • a periodical benefit by way of gift or allowance.

 

 

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.