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Asset-Test Exempt Income Streams - Market Linked

Document
Last amended 
8 January 2015

VEA

Purchase date

To be an asset-test exempt income stream, a market linked income stream must have been purchased before 20 September 2007, unless certain conditions are met.     

 

General characteristics of asset-test exempt market linked income streams

An asset-test exempt market linked income stream has all of the following characteristics:

  • the commencement day is on or after 20 September 2004
  • the income stream is provided to the primary beneficiary, or the primary beneficiary's reversionary partner on the date of the primary beneficiary's death
  • on reversion, the reversionary component cannot be greater than the account balance immediately prior to reversion
  • the income stream is payable for a fixed term in whole years based on life expectancy
  • the payments under the income stream are made at least annually and are calculated under the legislated formula
  • the first payment under the income stream relates to the period commencing on the date of purchase of the income stream
  • the income stream has no residual capital value
  • the income stream has limited commutability
  • on commutation, the amount commuted cannot be greater than the account balance immediately prior to the commutation
  • the income stream cannot be used as security for borrowing.
Commencement day

An asset-test exempt market linked 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 market linked income stream

The term of the income stream is a fixed term 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 date as the purchase day.     

 

 

Purchase date of income stream

Relevant number requirements

Rounding

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 as if they were five years younger, and
  • 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 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.

Range of payments for a market linked income stream

The annual payment is calculated on the commencement day of the income stream and on 1 July each year. The annual payment made under the income stream for a financial year must be at least 90% and not more than 110% of the default annual payment worked out by the formula:

 

                  Default annual payment = Account balance / payment factor

 

For the purposes of the formula:

Rules determining the choice of payment factor

The payment factor used in calculating the annual payment depends on the remaining term of the income stream. The remaining term of the income stream is rounded using the following rules:

  • for income streams commencing between 1 July and 31 December, the remaining term of the income stream is rounded down to the next whole number
  • for income streams commencing between 1 January and 30 June, the remaining term of the income stream is rounded up to the next whole number
  • if the remaining term rounds to zero, a payment factor of one is used.
Other rules for payments from a market linked income stream
 

If

then

the income stream commences or is fully commuted midway through the financial year

the annual payment under the income stream must be reduced on a pro-rata basis, however, the assessable income is the annualised amount

the income stream is partly commuted midway through the financial year

the annual payment, and therefore the assessable income, does not change for that financial year

the income stream commences in June

payments under the income stream need not commence until the following 1 July

the amount worked out under the formula exceeds the income stream balance on that day

the amount payable for the period is the balance of the income stream

the balance of the income stream at the end of the term is greater than $0

the balance must be paid out within 28 days of the end of the term

Temporary reduction in minimum payments

For the financial years commencing on 1 July 2008 and ending 30 June 2013, temporary relief measures were applied by the Government in response to the Global Financial Crisis to allow all account-based income stream recipients to elect to reduce their minimum annual payment to :

  • 50% of the required minimum payment for the financial years commencing 1 July 2008 and ending 30 June 2011; and
  • 75% of the required minimum payment for the financial years commencing 1 July 2011 and ending 30 June 2013.

These temporary relief measures ceased to apply from 1 July 2013.

Purchase price and residual capital value

The purchase price is the amount invested to purchase the income stream, less any allowable commutations. 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:

  • on death of the primary beneficiary where there is no reversionary partner,
  • 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 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 VIIIB of the Family Law Act 1975.
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.
Re-testing of reversionary income streams

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, gross payment, purchase price and relevant number as the original income stream.

Period of payments to reversionary beneficiary

Payments will be made to the reversionary beneficiary for the remainder of the contract term. To ensure that no income is deferred, the reversionary benefit cannot be greater than the payment the account balance immediately before reversion.


 

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:

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.

 

 

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.

 

 

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 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.

 

 

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.

 

 

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.

Financial year, in relation to a company, means:

  • a period of 12 months beginning on 1 July, or
  • if some other period is the company's tax year that other period.

 

 

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.