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Additional Rules Regarding Commutation
Last amended: 13 May 2008
Partial commutation of a purchased income stream
When a partial commutation is made from a purchased income stream the:
- relevant number does not change for income support purposes,
- purchase price is reduced by the actual amount/s commuted,
Asset assessment of an income stream after a partial commutation
- residual capital value may need to be reduced, information must be sought to determine whether an adjustment to this value is also necessary,
- asset value is adjusted, as the new asset value is calculated using the adjusted purchase price and adjusted residual capital value,
- gross income may need to be reduced, information must be sought to determine whether an adjustment to the income stream payments is also necessary, and
- deduction is reduced, as the deduction is calculated using the adjusted purchase price and adjusted residual capital value.
Partial commutation of a defined benefit income stream
The assessable income must be reviewed when a partial commutation is made from a defined benefit income stream as the:
- gross income,
- deductible amount and
- method under which the deductible amount is calculated
may all change as a result of a partial commutation.
If the deductible amount was calculated under the saving provision immediately before the commutation, the saving provision will continue to apply, however the deductible amount may be recalculated.
Three strike policy on commutation of an asset test exempt income stream
Section 5JA(4) VEA - three strike policy on assets test exempt income stream commutations – income streams payable for life
Section 5JB(3) VEA - three strike policy on assets test exempt income stream commutations – income streams payable for life expectancy or 15 year minimum
Pensioners may commute a non-commutation funded asset test exempt income stream within six months of the commencement day of the income stream. They can use this provision at least twice within the first 6 months for one or more income streams after they first receive an income support pension without the income stream losing asset test exempt status. On the third commutation, the Commission may determine that any further income streams owned by the person do not qualify for asset test exemption.
Transfer of funds from one asset test exempt income stream to another
A transfer of all the funds in one asset test exempt income stream directly to the purchase of another asset test exempt income stream is not a commutation for the purposes of the three strikes policy. A commutation does occur, when part, or all, of the funds in an asset test exempt product are accessed or not directly transferred to the purchase of another asset test exempt product.
Retrospective reclassification of an asset test exempt income stream following commutation
If a person commutes (in whole or in part) an asset test exempt income stream contrary to the contract or governing rules as specified under subsection 5JA(2), 5JB(2) or 5JBA(2), section 52ZMA will be applied to retrospectively reclassify the commuted income stream as an asset tested income stream (long term) from later of the:
- day five years before the day the income stream was commuted, or
- commencement day of the income stream (or if the income stream is part of a succession of asset test exempt income streams, the commencement day of the first asset test exempt income stream in the succession of asset test exempt income streams), or
- date income support pension was granted (ie. SP/ISS/Centrelink pension), or
- 20 September 2001 (the date section 52ZMA took effect).
Retrospectively reclassifying the income stream as an asset tested income stream (long term) has the effect of including the assessable asset value of the income stream in the pension assessment for the relevant period, with provision for asset depletion under subsection 52A(4).
Debt arising from retrospective reclassification
Retrospective reclassification of an asset test exempt income stream to an asset tested income stream may result in an overpayment. The overpaid amount must be recovered under existing policy.
Debts not raised for commutation of asset test exempt defined benefit income stream
Section 52ZMA of the VEA provides for the calculation of a debt if an overpayment arises following the commutation of an asset test exempt income stream in contravention to the contract or governing rules under which the income stream was provided. However, subsection 52ZMA(11) provides that section 52ZMA is not applicable to income streams where a determination under subsection 5JA(5), 5JB(4), or 5JBA(11) is in force. As there is a Commission determination under subsection 5JA(5) for all existing defined benefit income streams, section 52ZMA cannot be applied when a defined benefit income stream is commuted.
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.
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.
Income support pension is:
- a social security pension
- a service pension;
- an income support supplement.
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.