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Income Assessment of Purchased Income Streams
Income assessment of purchased income streams
For a purchased income stream that is either asset-test exempt or asset-tested (long term), the assessable income equals the annual income stream payment less a deduction that is based on the return of the purchase price over the term of the income stream.
The annual amount of ordinary income produced by these income streams is determined by the following formula:
Purchase price to be reduced by commutations and residual capital value
Where partial commutations have been made from the income stream, the purchase price should be reduced by the amount of the commutations. For income streams that are not asset-test exempt income stream, the purchase price must be further reduced by the income stream's residual capital value (if any).
Example of income assessment
Mark is sixty five years old and single. He purchases an asset-test exempt income stream for $100,000 with a term of 16 years. His life expectancy at the commencement day is 15.41 years, (which for a life expectancy income stream must be rounded up to the next whole number being 16 years). His annual payment from the annuity totals $9,895. His assessable income from this income stream equals:
$9,895 - ($100,000 ÷ 16 years) = $3,645 per annum.
It should be noted, that if this product were paid for life, then the relevant number could not be rounded up in the assessment.
Minimum payment for certain income streams
An account based income stream must make one or more payments during the financial year and the annual payment must not be less than the minimum payment.
Account based income streams must meet certain requirements regarding minimum payments. If the annual payment under the income stream is less than the minimum payment, the assessable income is taken to be the minimum payment.
For allocated income streams, the minimum payment is calculated:
- before 1 July 2007 using a pension valuation factor, using the following formula:
minimum payment = account balance ÷ payment valuation factor; and
- from 1 July 2007 using a percentage factor, using the following formula:
minimum payment = account balance x percentage factorMore
For market linked income streams, the minimum payment is calculated using a payment factor using the following formula:
minimum payment = account balance ÷ payment factor
For the purposes of each formula:
- the account balance is the balance as at 1 July or, if the payment is for the first year, the balance at the commencement day,
- the result is rounded to the nearest $10.00.
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.
Calculating the annual payment
The annual payment under the income stream is calculated by the income stream provider and must always satisfy the rules for the minimum and maximum payments relevant to that particular type of income stream. The annual payment for an income stream is calculated using the formula:
annual payment = A + B
If the year is a part year, the annual payment reported by the income stream provider will be annualised using the formula:
annual payment = (A + B) x C ÷ D
- A is the amount received so far during the financial year
- B is the amount expected to be received for the rest of the financial year
- C is the number of days in the financial year, and
- D is the number of days between the commencement of the income stream and 30 June.
Income assessment of asset-tested income streams (short term and long term deemed)
An income stream that is an asset-tested income stream (short term) or an asset-tested income stream (long term) deemed is treated as a financial investment. Its assessable income is determined under the deeming provisions.
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.
The ordinary income of a person for a period means, as described in section 46 of VEA, the gross ordinary income from all sources for that period without any reduction, other than a reduction of business income.
Annual payment means the amount payable to the person for the year under the income stream.
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.
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 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 is an asset tested short term income stream if it is;
- not an asset test exempt income stream; and
- not an [glossary:asset-tested income stream (long term):212].
According to section 5J of the VEA, a financial investment means:
- available money,
- deposit money,
- a managed investment,
- a listed security,
- a loan that has not been repaid in full,
- an unlisted public security,
- gold, silver or platinum bullion,
- an asset tested income stream (short term) ; or
- an asset tested income stream (long term) that is an account‑based pension within the meaning of the Superannuation Industry (Supervision) Regulations 1994; or
- an asset‑tested income stream (long term) that is an annuity (within the meaning of the Superannuation Industry (Supervision) Act 1993) provided under a contract that meets the requirements determined in an instrument under subsection (1G);
but does not include an investment in an FHSA (within the meaning of the First Home Saver Accounts Act 2008) or a designated NDIS amount.
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.