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Asset-Test Exempt Income Streams - Lifetime
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 a lifetime asset-test exempt income stream
An asset-test exempt income stream, paid for life has all of the following characteristics:
- is payable for the pensioner's lifetime,
- has a fixed annual payment, or an indexed annual payment with indexation capped at no greater than 5% or CPI+1%,
- 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, and
- cannot be used as security for borrowing, and
- if the income stream is a lifetime income stream paid from a self managed superannuation fund (SMSF) or a small APRA fund (SAF), has a current actuarial certificate in force.
The commencement day is the first day of the period to which the first payment under the income stream 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, or
- acquired (for defined benefit income streams that are not purchased).
Term and relevant number of a lifetime asset-test exempt income stream
Although the term of a lifetime income stream is for the life of the beneficiary, the relevant number is either the:
- life expectancy of the primary beneficiary (ie where there is no nominated reversionary beneficiary), or
- longest life expectancy of either the primary beneficiary or reversionary beneficiary (ie where there is a nominated reversionary beneficiary or where the income stream is purchased in joint names).
When determining the relevant number the actual life expectancy factors are used (ie there is no rounding). If there is a guaranteed period, the relevant number will be based on the life expectancy, not the guaranteed period. 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.
Determining the relevant number for an asset-test exempt lifetime income stream
Exemption not affected by guarantee period
The asset-test exemption for a lifetime income stream is not affected if the income stream provides the following guarantee conditions:
- if a primary beneficiary dies within the guarantee period, any further payments they would have received in the guarantee period, had they lived, can be paid as an income stream or a lump sum to:
- a reversionary beneficiary, or
- the primary beneficiary's estate, if there is no reversionary beneficiary.
- if a reversionary beneficiary also dies within the guarantee period, any further payments due in the guarantee period can be paid to their estate.
The maximum guarantee period for an income stream purchased:
- before 20 September 2004 is 10 years
- on or after 20 September 2004 is the lesser of the person's life expectancy or 20 years.
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 no greater than:
- 5% where the indexation method is fixed, or
- the CPI plus 1% where 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 an asset-test exempt income stream, 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:
- to a reversionary beneficiary or the person's estate on death of the person
- if the income stream was purchased before 20 September 2004, within ten years of the commencement day, or
- if the income stream was purchased on or after 20 September 2004, within the shorter of the period of the person's life expectancy on the commencement day or 20 years
- 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 contributions 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.
Waiver of debt under temporary debt relief arrangements
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, or
- the income from the income stream.
Reductions in payments
Payments may only decrease as a result of:
- death of one of the owners of a jointly owned income stream, or
- on reversion to a reversionary beneficiary.
Transfer to a reversionary beneficiary
In order for a lifetime income stream to qualify for asset-test exempt status, the contract or governing rules must specify that the income stream cannot be transferred to another person, apart from:
- a reversionary beneficiary on the death of the primary beneficiary, or
- another reversionary beneficiary on the death of the first reversionary beneficiary.
To ensure that no income is deferred, the payment to a reversionary beneficiary cannot be greater than the primary beneficiary received immediately before death.
Reversion to reversionary beneficiary or death of a joint owner
On reversion to a reversionary beneficiary upon the death of the primary beneficiary or the death of one of the owners of a jointly owned income stream, the income stream is treated as a continuation of the original income stream. The asset-test exempt status, purchase price, commencement day and relevant number remain unchanged. The gross payment may be reduced in accordance with the contract.
Period of payments to reversionary beneficiary
Payments to a reversionary beneficiary must be paid at least annually, either:
- throughout the reversionary beneficiary's life,
- if the reversionary beneficiary is a child of the primary beneficiary, or former reversionary beneficiary, at least until the child turns sixteen, or
- if the child is a full-time student who has turned sixteen, until the earlier of when the student:
- finishes full-time study, or
- turns 25.
Removal or change of reversionary beneficiary
Where the reversionary beneficiary is removed or is changed, the income stream is treated as a new income stream from that date. The commencement day is the date that the reversionary beneficiary changed and the purchase price is the net present value of the future income stream payments as calculated by the income stream provider. The relevant number is calculated on the person's circumstances on the new commencement day.
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).
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.
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.
A guaranteed period ensures that the pension payments will continue to the estate should the owner and the reversionary beneficiary die during the guaranteed period.
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.
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.
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.