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C44/1998 CHANGES TO MEANS TEST OF INCOME STREAMS

Document

DATE OF ISSUE:  15 October 1998

CHANGES TO MEANS TEST OF INCOME STREAMS

Purpose of Instruction

The purpose of this instruction is to provide details of the 1996/97 Budget initiative to reform the income and assets treatment of income streams for income support purposes.

Authorised by

R J HAY

Branch Head

Income Support


Table of contents

CHANGES TO MEANS TEST OF INCOME STREAMS..................................

Background...................................................................

Income streams................................................................

Legislation....................................................................

Classification of income streams from 20 September 1998.........................

New Income Stream Classifications..................................................

Summary of characteristics........................................................

Guidelines, determinations and exemptions relating to income streams........................

Determination - By Commission: that an income stream is not an asset exempt income stream.......

Determination - By Commission: that an income stream is an asset exempt income stream..........

Exemptions - Ministerial: for significant financial disadvantage...............................

Exemptions - Deeming...........................................................

Assessment of Income Streams under the Income and Assets Tests.......................

Income test overview.............................................................

Income test assessment..........................................................

Assets test overview.............................................................

Assets test treatment.............................................................

Bereavement..................................................................

Commutations..................................................................

Data entry requirements for foreign income streams......................................

General policy issues............................................................

Forms and schedules of information..................................................

Attachment A:  Income stream definitions..............................................

Attachment B: Details of requirements of income streams under new classification system..........

Attachment C: Classification terminology used by Centrelink and the financial industry..............

Attachment D: Pension Valuation Factors..............................................


Background

Budget announcement

One of the measures announced in the Government's 1997-98 Budget provided for the reform of the means test treatment of income streams under the Social Security Act 1991, and the Veterans' Entitlements Act 1986 (VEA).

What is an Income Stream

Income stream is a term, which has been introduced into the VEA, to cover all types of superannuation, pensions, immediate annuities and allocated pensions and annuities.  The term does not include Social Security or Veterans' Affairs income support pensions.  Use of the generic term ‘income stream' indicates that the classification is based on the characteristics, not the origin, of the product.

In general terms, an income stream can be described as a product that provides regular payments for life or for a fixed term and is purchased with a capital sum or through accumulated superannuation contributions.  These products are most commonly sold or provided as:

  • superannuation pensions;

  • immediate annuities; and

  • allocated annuities and pensions.

For the legislative definition of income stream under the VEA, see page 5.

Why the new rules were introduced

The previous legislation relating to retirement income under the VEA was formulated for traditional products (eg superannuation pensions and immediate annuities).  Over recent years there has been a proliferation of income stream products, which do not have the characteristics of the traditional products.

The means test treatment of income streams has largely been dependent on the origin of the payments (ie. superannuation fund or life insurance).  As a result, products that have similar characteristics have been subject to different income test treatments.  For example, allocated pensions purchased prior to 20 August 1996 remained asset-test exempt, whilst those purchased from that date onwards were asset-tested.  Allocated pensions and allocated annuities, which are essentially similar products, were treated differently for historic reasons not related to their characteristics.

In addition, there were loopholes and inequities in the assessment of income streams by product type.  This particularly was the case with fixed term superannuation pensions and one-year immediate annuities.

Continued on next page


Background, Continued

Who is affected

All service pensioners, income support supplement recipients and Department of Social Security (DSS) age and wife pensioners are subject to the new rules.

Rationale for changes

The changes are designed to make the means test treatment of income streams simple, consistent and fair.  The aim is to align taxation and social security treatment so that those income streams which qualify for a higher Reasonable Benefit Limit for taxation purposes will be exempt from the Social Security and Veteran's Affairs assets tests.  Assessing income streams according to their characteristics will allow for quick and easy classification of any new income stream product that appears in the market.

The reforms will:

  • give greater incentives and provide greater choices for retired people investing in longer term income streams;

  • complement other government policy initiatives aimed at encouraging the use of superannuation and other investments to provide income in retirement;

  • provide a more generous means test of long-term pensions and annuities meeting specified criteria; and

  • ensure that people able to finance their own retirement will no longer be able to use loopholes to access social security payments through the use of short fixed term financial investments.

Consultation

There was extensive consultation with other Government agencies (DSS, the Australian Taxation Office, Treasury and the Insurance and Superannuation Commission), the financial industry and community groups in developing the new criteria for classifying income stream products.  This was followed by an exposure draft of the legislation that was circulated to the industry and other interested parties in December 1997.  Their responses have been generally very favourable.


Income streams

Definition of an Income Stream in the VEA

For the purposes of the VEA, certain products provided by superannuation providers and the life insurance industry are income streams. These are income streams which:

  • arise under arrangements that are regulated by the Superannuation Industry (Supervision) Act 1993; or

  • arise under a retirement savings account (within the meaning of the Retirement Savings Account Act 1997); or

  • are provided by a life insurance business (within the meaning of the Life Insurance Act 1995); or

  • are provided by a friendly society within the meaning of the Income Tax Assessment Act; or

In addition, in the Department of Veterans' Affairs (DVA), the Repatriation Commission can determine that a financial investment is an income stream for the purposes of the VEA.

The VEA definition of an income stream also specifies things which are not an income stream for purposes of the VEA.  These are:

  • 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.

Commission determination of an income stream

VEA paragraph 5J(1)(f) states that the Commission may designate in writing that a product is an income stream for the purposes of the VEA even though it does not meet the criteria set out in the definition of an income stream.

Guidelines

VEA subsection 5J(1F) gives the Commission power to lay down guidelines to be used when making a decision under VEA paragraph 5J(1F), to designate a financial product as an income stream.  The determination specifying the guidelines is a disallowable instrument for the purposes of the Acts Interpretation Act 1901.

NOTE: There is no intention at this stage to issue any guidelines under this provision.  In the absence of guidelines, if a financial product is not already covered by the definition of ‘income stream' in the legislation, the Commission cannot determine that it is an income stream.

Financial products not income streams

If staff have doubts about applications for financial products to be treated as income streams, they should forward these to National Office for consideration.  Certain products which are not income streams for the purposes of the VEA are:

  • financial assets which come under the deemed income provisions;

  • foreign pensions provided through the national social security system of an overseas country;

  • foreign income streams which fail to satisfy the Commission;

  • private arrangements which fail to satisfy the Commission.

Foreign superannuation

Foreign superannuation pensions do not satisfy the requirements in the legislation to be an income stream as they are not provided by an Act listed in the VEA, and they do not arise from an Act specified in the VEA.

Foreign annuities

Foreign annuities do not satisfy the requirements in the legislation to be an income stream as they are not provided by an Act listed in the VEA, and they do not arise from an Act specified in the VEA.

However, foreign annuities have not been excluded from the assets-test provisions.  Therefore, an asset value for any foreign annuity must be included in the assessment.  We expect that foreign annuities will be rare.

Legislation

The amendments to the VEA were included in the Social Security and Veterans' Affairs Legislation Amendment (Budget and Other Measures) Act 1997 (Act No. 93, 1997) which was passed by the Parliament on 25 June and received the Royal Assent on 15 July 1998.

Timetable for changes

The changes are effective from 20 September 1998.

What has changed in the legislation

The majority of the legislation applying to income streams prior to 20 September 1998 has been repealed or amended and new terms and definitions have been introduced to reflect the change to the way income streams will be classified for assessment under the income and assets tests.

See Attachment A for a summary of the changes to the definitions.

See Attachment B for a summary of the characteristics for classification, and the income and assets tests under the new arrangements.


Classification of income streams from 20 September 1998

New Income Stream Classifications

New Income stream classifications

From 20 September 1998, income streams are classified by the characteristics of the product.

All income streams will now be classified as:

  • asset-test exempt income streams:

- lifetime income streams; or

- life expectancy or 15 year minimum term income streams;

or

  • long term asset-tested income streams;

or

  • short term asset-tested income streams.

The new classifications do not align with any of the previous classifications.

The legislation describing each of these types is at Attachment B.

A summary of the classification terminology used by Centrelink and the financial industry is at Attachment C.

Continued on next page


New Income Stream Classifications, Continued

How to classify an income stream

Examiners are not required to analyse the characteristics of the income stream to classify it.  Income streams recorded on the system before the 20 September 1998 changes were automatically classified under the new arrangements if there was sufficient data on the system.  All new products will be classified as they are added to the system.

The order of checking an income stream is as follows:

Question

Procedure

If No

If Yes

VEA ref

1.  Is it an income Stream?

Manually check to determine:

  • If it was paid for by superannuation contributions or ordinary money lump sum; and

  • If it provides regular payments; and

  • If it is provided under Acts as specified in VEA.

Treat as not an income stream.

Go to Q 2

Ss5J(1)

2.  Is it asset-test  exempt (ATX)?

Enter data from Schedule of Information into system for an automatic assessment.

A manual assessment can be made by checking assessment characteristics which are detailed at Attachment B.

Go to
Q 3

Product is asset-test  exempt

Ss5JA(1), (2)
or
Ss5JB(1), (2)

3.  Is it asset-tested (long term) AT(LT)?

Enter data from Schedule of Information into system for an automatic assessment.

To assess manually, check if the income stream meets the characteristics for an AT(LT) income stream which are detailed at Attachment B.

Go to
Q 4

Product is asset-tested (long term)

Ss5JA(1), (2)
or
Ss5JB(1), (2)

4.  Is it asset-tested (short term) AT(ST)?

Enter data from Schedule of Information into system for an automatic assessment.

To assess manually, check if the income stream meets the characteristics for an AT(ST) income stream which are detailed at Attachment B.

Product is asset-tested (short term)

Ss5JA(1), (2)
and
Ss5JB(1), (2)

Continued on next page


New Income Stream Classifications, Continued

Rationale for the new classification system

The changes are designed to divide income streams into three basic categories based on their major characteristics:

Asset-test exempt: ensure a steady drawdown over the whole retirement period and allow no further access to the capital underlying the income stream.

Asset tested (long term): allow access to capital, but are still for a reasonably long term.

Asset tested (short term): allow access to capital and are for a short term (under 5 years, unless life expectancy is less than 5 years).

What was what

Asset-test exempt: includes defined benefit superannuation pensions, lifetime annuities and other term annuities or pensions meeting the required characteristics.  Allocated products are never asset-test  exempt.

Asset tested (long term): can include term pensions and annuities, allocated pensions and annuities.

Asset tested (short term):  can include term pensions and annuities.


Summary of characteristics

Asset-test exempt income stream

An income stream is asset-test  exempt if it meets certain requirements.

If the Income Stream is

it must also

paid for life

1.meet all the characteristic listed in subsection 5JA(2) of the VEA

paid to life expectancy

Note:  the term must be equal to the person's life expectancy or life expectancy rounded up to the next whole number.  See block below on life expectancy tables.

1.meet all the characteristics listed in subsection 5JB(2) of the VEA; and

1.be purchased or acquired on or after pension age

paid for a fixed term of 15 years or more

Note:  The term must be 15 years or more and not be greater than the person's life expectancy or life expectancy rounded up to the next whole number.

1.meet all the characteristics listed in subsection 5JB(2) of the VEA; and

1.be purchased or acquired on or after pension age; and

1.the term must not be greater than the person's life expectancy; and

4.  the person's life expectancy must be 15 years or more.

Continued on next page


Summary of characteristics, Continued

Requirements for asset-test of 5JA and 5JB

One of the requirements of an assets-tested income stream is that it must satisfy the requirements prescribed in VEA subsections 5JA(2) or 5JB(2)

[11]

Examiners are not normally required to assess the income stream against the individual criteria in sections 5JA and 5JB of the VEA.  The income stream provider is required to supply this information as a Yes/No option on the Schedule of Information they fill out for each new income stream notified by Veterans' Affairs clients.

[11] (go back)
whichever is relevant.  These requirements are listed in more detail in Attachment B.  The main requirements of those subsections are:
  • limited commutation (only within 6 months of starting)

  • no residual capital value

  • fixed pension payments (with allowance for indexation)

  • limited reversionary benefits (not more that 100% of payments to revert)

  • not transferable

  • cannot be borrowed against

  • income paid at least annually (at not less than the previous year's rate).

Asset-tested income stream (long term)
  • does not have all of the characteristics for an asset-test  exemption; and

  • term is over 5 years except where the term is 5 years or less, but equal to or greater than life expectancy.

    [12]

    The actuarial life expectancies calculated in the life tables are given to two decimal points.  Where the term provided for an income stream (short term) is given as a rounded number, it is assumed that the income stream has been purchased for a fixed term of less than ‘life', and hence the income stream is not an asset-test exempt income stream.  If a person is wrongly classified because of this assumption, they may appeal to have the income stream reclassified because it has been incorrectly classified.  Few cases are expected.

    [12] (go back)

Asset-tested income stream (short term)
  • does not have all the characteristics for an assets test exemption; and

  • does not satisfy asset-tested (long term) income stream criteria.

Determinations affecting assessment

The VEA includes several provisions to cater for situations where people may be disadvantaged by the general provisions in the legislation.  The provisions which can be used to vary the way in which an income stream is treated are:

  • Deeming exemptions (Ministerial); and

  • Commission determination on asset-tested exempt status; and

  • Ministerial exemptions from the new income stream legislation.

Continued on next page


Summary of characteristics, Continued

Relevant number

The relevant number (RN) is the term used to indicate the number of years that an income stream will be payable under the existing criteria.

The relevant number depends on the type of term and whether the product is jointly owner or whether there is a reversionary beneficiary if the primary beneficiary dies during the term of the income stream.

Type of Term

Payment reverts to reversionary beneficiary

Relevant number (RN)

FIXED TERM

Yes

the number of years as specified

(ie, fixed number of years)

No

the number of years as specified

LIFE EXPECTANCY
(ie, for a person's life

Yes

the person's life expectancy factor

expectancy factor and no longer

[13]

  For life expectancy income streams, which have a reversionary beneficiary, the term must be equal to the primary beneficiary's life expectancy for the income stream to be asset-test exempt.  If the income stream passes to the reversionary beneficiary, the relevant term is the remainder of the term of the product.  This new  number is tested for asset-test exemption in the hands of the reversionary beneficiary.

[13] (go back)
*)

No

the person's life expectancy factor

LIFETIME

Yes

the longest of each person's life expectancy factors

(ie, for life (until death))

No

the person' s life expectancy factor

Life Tables and life expectancy

Life Tables provide an actuarial life expectancy for a person at any given age.  There are separate tables for males and females.  New tables are produced from time to time to reflect the most recent predictions of life expectancy.

The system compares a person's life expectancy using these tables against the term of a product to calculate if the product is a life expectancy product.

Continued on next page


Summary of characteristics, Continued

Where are the life tables

The life tables can be listed at the following sites:

Where

How to access

GOSP

  • Click on GOSP Index button

  • type in ‘life expectancy'

  • click on the ‘view' button to see the life tables

PIPS/PC

  • Click on ‘View' drop box

  • hover over ‘Income Streams Ref Tables'

  • click on ‘Life Expectancy' tables.

PIPS/PC

  • Access the Income Streams Add or Edit screen,

  • Key in the ‘Commencement date' and any ‘Relevant number'

  • set ‘Owner' to Vet, Spouse or Joint

  • click on the ‘Next' button to display a message box showing ‘Relevant number'.

NO

  • Hardcopy photocopy is available from National Office if required.  Ref File no. 98/2409


Guidelines, determinations and exemptions relating to income streams

Overview of determinations and exemptions

Determinations and exemptions may change the way in which a product is classified or assessed.  Provisions included in the revised legislation are:

  • the Commission has the power to lay down guidelines that are to be used when making a decision to designate a financial product as an income stream (see VEA subsection 5J(1F)).  (See “Guidelines' on page 6.)

  • the Commission can determine that an income stream is not an asset-test exempt income stream, having regard to guidelines determined by the Commission.  (see VEA subsections 5JA (5) and 5JB (4); and

  • the Commission can determinate that an income stream is an asset-test exempt income stream, having regard to guidelines determined by the Commission.  (see VEA subsections 5JA (6) and 5JB  (5)); and

  • the Minister can grant exemption from the new rules for cases of significant financial disadvantage.

  • the Minister can grant a deeming exemption for certain short-term products under existing section 46L.

The last four points are discussed below.


Determination - By Commission: that an income stream is not an asset exempt income stream

Determination that the income stream is not asset-test exempt

The Commission may make a determination under VEA subsections 5JA(4) and 5JB(3) that an income stream, that otherwise meets the requirements for an asset-test  exempt income stream is not an asset-test exempt income stream.

This may occur if the person has commuted an asset-test exempt income stream within the first 6 months after the commencement day on at least 3 occasions since the person first received a service pension, income support supplement or social security payment.

What is a commutation?

A commutation occurs when an amount in excess of the agreed periodic income stream amount specified in the contract is withdrawn from the income stream account.

For the purposes of the three times by six months rule, the commutation may be a full or partial.

Rationale

Subparagraph 5JA(2)(h)(i) of the VEA allows a person to commute an asset-test exempt income stream if they discover within 6 months that it is inappropriate or inadequate.

There was concern that the provision to allow commutations of the income stream could be misused.  Without some control, it would be possible for a person to regularly commute to fresh income streams each six months, effectively maintaining access to the capital; and

Procedures

When a person has commuted an income stream three times within six months of purchase, all future income streams owned by that person do not comply with the 5JA/5JB requirement, so a ‘NO' should be entered in the 5JA/5JB compliance field on the system.


Determination - By Commission: that an income stream is an asset exempt income stream

Determination that the income stream is asset-test exempt

The Commission may make a determination under subsections 5JA(5) and 5JB(4) that an income stream that does not meet the requirements of sections 5JA(2) or 5JB(2) is an asset-test exempt income stream.

Rationale

The provision to make this determination was introduced because there are situations where the Commission considers it is reasonable to treat an income stream as asset-test exempt even though it does not quite meet the asset-test exempt criteria.

When to determine that an income stream is asset-test  exempt

The circumstances under which the Commission may determine that an income stream that is not asset-test exempt is to be treated as asset-test exempt are very specific:

  • if a person has commuted an income stream three times, no subsequent income stream would qualify for asset-test exemption unless the Commission is satisfied that, having regard to all the circumstances of the case, the commutation is not for the purpose of retaining control of capital.  This is a delegated power that should be exercised whenever this situation is detected; and

  • the Commission may determine that an income stream is an asset-test exempt income stream under guidelines determined by the Commission.  The guidelines only cover cases where the income stream:

-  deviates slightly from the asset-test exempt criteria, through no fault of the recipient (eg, commutation is allowed in the first 12 months rather than only the first 6 months under the governing rules of a public sector scheme); and.

-  is a lifetime income stream.

Determinations cannot be made about life expectancy income streams.

Continued on next page


Determination - By Commission: that an income stream is an asset exempt income stream, Continued

Guidelines for determination

The Commission has determined guidelines for lifetime defined benefit income streams that are currently asset-test exempt.  The Commission must have regard to these guidelines when determining that an income stream is to be treated as an asset-test exempt income stream.

The guidelines state tht lifetime, private and public sector defined benefit superannuation schemes (including the Defence Force Retirement and Death Benefits Schemes, and the Military Superannuation and Benefits Scheme) should retain asset-test exempt status even though currently they may not quite meet all the criteria for asset-test exemption.

Public sector lifetime income streams which may be exempt

The guidelines outline the conditions where an asset-test exemption should be provided even though the income stream does not meet all the characteristics of an asset-test exempt income stream.  This may occur where:

  • the lifetime income stream is a defined benefit income stream consisting of payments from a defined benefit superannuation pension product provided by a public sector superannuation scheme or fund that was established before 20 September 1998;  and

  • the scheme or fund provided the defined benefit superannuation pension product before 20 September 1998; and

  • the defined benefit superannuation pension product was, or would have been exempt under the assets test under the VEA as in force immediately before 20 September 1998 (that is, the defined benefit superannuation pension product was treated as a superannuation pension and exempt from the assets test before 20 September 1998).

Therefore a lifetime defined superannuation pension from a defined benefit superannuation product described above may be exempt from the asset-test regardless of whether it commenced before or after 20 September 1998.

Continued on next page


Determination - By Commission: that an income stream is an asset exempt income stream, Continued

Private sector lifetime income streams which may be exempt

The guidelines outline the conditions where an asset-test exemption could be provided even though the income stream does not meet all the characteristics of an asset-test exempt income stream.  These are:

  • the lifetime income stream is a defined benefit income stream consisting of payments from a defined benefit superannuation pension product provided by a private sector superannuation scheme or fund that was established before 20 September 1998;  and

  • the scheme or fund provided the defined benefit superannuation pension product before 20 September 1998; and

  • the scheme or fund is directly connected to the person's previous employment and the payments from the defined benefit superannuation pension product become payable to, or in respect of, the person because of that employment (exempt if the person is a reversionary beneficiary of such a defined benefit superannuation product); and

  • the defined benefit superannuation pension product was, or would have been exempt under the assets test under the VEA as in force immediately before 20 September 1998 (that is, the defined benefit superannuation pension product was treated as a superannuation pension and exempt from the assets test before 20 September 1998).

Therefore a lifetime defined superannuation pension from a defined benefit superannuation product described above may be exempt from the asset-test regardless of whether it commenced before or after 20 September 1998.

Public and  private sector  superannuation to comply

The legislation under which the various public sector superannuation schemes operate will be changed as soon as possible to ensure they comply completely with the asset-test exempt criteria.

The private superannuation schemes will have 12 months to change the trust deeds of their existing policies to comply with the asset-test exempt criteria.

National Office will notify the State Offices of any income streams that should lose their asset-test exempt status at the end of the 12 month period.

Superannuation pensions commencing in either the public or private sector schemes will be asset-test exempt during the relevant ‘saved' periods.


Exemptions - Ministerial: for significant financial disadvantage

Legislation

The Ministerial exemption can be granted under clause 12 of Schedule 5 - Savings and Transitional Provisions of the VEA.

To receive an exemption:

  • the person must be able to demonstrate that he or she:

-  entered into a binding arrangement for the provision of the income stream before the announcement of the new income stream rules in the 1997-98 Budget  (13 May 1997); and

-  was, on 19 September 1998 receiving a social security or Veterans' Affairs income support payment; and

  • the Minister must declare, in writing, that the Minister is satisfied that the application of the amended VEA would cause the person significant disadvantage in relation to the treatment of the person's income stream.

Rationale for Ministerial exemption

One of the aims of the new income stream reforms is to provide consistent treatment of income streams with the same characteristics.  This has not been the case in the past.  As a result, some income streams that were not previously subject to the asset-test will now be asset-tested.

Where a person does suffer severe disadvantage as a result of the new income stream legislation, and they meet the specified criteria, the Minister may make a declaration that would exempt them from the income stream amendments so that the income stream continues to be treated under the previous legislation.

Use of  exemption

The exemption will only be granted in exceptional cases.

Guidelines for Ministerial exemption

Guidelines will be produced to describe the criteria and situations in which the Ministerial exemption should be exercised.  These guidelines will be a disallowable instrument.

Continued on next page


Exemptions - Ministerial: for significant financial disadvantage, Continued

Summary of Guidelines

To have an income stream exempted from the new classification rules, the person must be able to demonstrate that he or she:

  • has entered into a binding arrangement for the provision of an income stream before 13 May 1997 when the new arrangements were announced.  Binding arrangements include those where it is considered that the existing arrangement could only be terminated on terms that would cause severe detriment to the person;

  • was receiving a DVA income support payment as at 19 September 1998 (ie, prior to the implementation of the new rules); and

  • would, in the Minister's opinion, be significantly disadvantaged by the application of the new rules.

Details of the Guidelines

Details of the guidelines will be provided in a later Departmental Instruction.

Processing an application for exemption

When an application for exemption is received, it should be processed as follows:

Step

Question

Answer

Action

1

Are the assets underlying the

Y

Go to Step 2

income stream assessable?

N

Go to Step 3

2

Will termination of the income stream cause the person severe

Y

Go to Step 3

detriment?

N

Reject application

3

Will assessment of the income stream under the new legislation

Y

Minister grants exemption.

cause the person significant disadvantage?

N

Reject application

Continued on next page


Exemptions - Ministerial: for significant financial disadvantage, Continued

Conditions for exemption

The exemption will only apply:

  • on an individual basis, not to a class of products;

  • whilst the person who received the exemption remains in continuous receipt of an income support payment. That is, the exemption continues if the person transfers from invalidity service pension to age service pension

The exemption ceases if the person's rate of service pension becomes nil, and is not reinstated if the person begins to receive service pension again.  If at any time the income support ceases so too does the ministerial exemption.

Most of the products affected by the changes can be commuted, so it is not expected that many exemptions will be approved.

Delegations

You will be advised later on about delegations for Ministerial exemptions.

Effect of Ministerial exemption

When a Ministerial exemption is granted, the pre 20 September 1998 income and assets assessment rules apply to that income stream as long as it remains eligible.

Duration of Ministerial exemption

The Ministerial exemption may be reviewed at any time to ensure that the person's circumstances have not changed.

Procedures

PIPS/PC has a facility, which will allow examiners to set the Ministerial exemption flag to disable the automatic income and assets amounts.  New income and assets amounts must be manually inserted.  These must be calculated using the pre 20 September 1998 rules.


Exemptions - Deeming

Legislation

Section 46L of the VEA covers deeming exemptions.  This is an existing provision.  Guidelines created under section 46L allow for the Commission to exempt a financial product from deeming under certain circumstances.

Deeming Exemption Guidelines

The deeming exemption guidelines will remain in the current form.  See Departmental Instruction (DI) C08/97: ‘Guidelines for exemption of financial assets from deemed income rules' for details.

Exempting a deemed income stream

Only short-term income streams are subject to deeming.

On the system, you can select the deeming exemption indicator to remove the exempted amount from the financial assets to be deemed.  It will then be treated under ‘Other financial assets' and the actual income will be included in the income test.


Assessment of Income Streams under the Income and Assets Tests

Income test overview

Rationale for Income Test treatment

The income test treatment of income streams will continue the principle of allowing a deductible amount for longer-term policies for income test purposes.  It recognises the return of capital to the owner by allowing a deduction.

Where the income stream is for a term of five years of less, it will be subject to deeming, recognising that it is similar to a financial investment.

Payments in respect of children

Where the contract specifies that part of the income stream is made in respect of dependant children, then the amount paid for children is not included for income purposes.

Definitions

In this section, the following definitions apply:

TERM

DEFINITION IS

Annual payment

the amount payable to the person for the year under the income stream

Purchase price (PP)*

as defined in subsection 5J(1)

Relevant number (RN)*

as defined in subsection 5J(1)

Deductible amount (DA)*

as defined in subsection 5J(1) but also see below for additional DVA usage.

Residual capital amount (RCV)*

as defined in subsection 5J(1)

Pension valuation factor (PVF)

as determined in the Disallowable Instrument.  See Attachment D.

Term elapsed

the length of time in years or part years which have elapsed since the commencement of the income stream. The value used is rounded down to the nearest year if the asset value is worked out annually, and to the nearest half-year of the asset value is worked out on a six monthly basis.

Undeducted purchase price

An amount used by the ATO to work out the amount by which the gross income stream should be reduced for taxation purposes.   Used by DSS & DVA in means testing income streams.

* These terms are defined more fully in Attachment A

Continued on next page


Income test overview, Continued

Legal use of ‘deductible amount' for defined benefit income streams

The VEA refers to a deductible amount for defined benefit income streams only, where it refers to the amount by which the gross income paid by an asset-test exempt or asset-test long term defined benefit income stream should be reduced for pension purposes..

The method for recognising the return of capital in products that are not purchased is to use the tax deductible amount as defined in the Income Tax Assessment Act 1936.

Note: two deductible amounts will be used for defined benefit income streams:

  • the pre 30 July 1994 tax definition of deductible amount; and

  • post 30 June 1994 tax definition of deductible amount.

General use definition of ‘deductible amount' for purchased income streams

However, ‘deductible amount' is also used by DVA as a general term to describe the amount by which a purchased asset-test exempt or an asset-test  (long-term) income stream will be reduced for income test purposes.  This is calculated as the purchase price minus any residual capital value, divided by the relevant number.

DA ‘saved' for some defined benefit income streams

The pre-1 July 1994 definition of DA (ie, where the UPP consists of
pre-1 July 1983 excess contributions plus post 30 June 1983 undeducted contributions) will continue to be used for people who are receiving:

  • payments under a defined benefit income stream that is:

- an asset-test exempt income stream, or

- an asset-tested income stream (long term),

whose commencement date is earlier than 20 September 1998; and

  • a service pension, an income support supplement or a social security payment on 19 September 1998.

That is, the same DA that was held prior to 20 September 1998 will continue to be held for these defined benefit income streams.

NOTE: For these products, the DA was automatically transferred (ie, the DA was assumed to be correct).

Continued on next page


Income test overview, Continued

Defined Benefit income streams without ‘saved' DA

The post 30 June 1994 definition of UPP tax deductible amount will be used:

  • for asset-test  exempt, and asset-tested (long term) defined benefit income streams which commenced on or after 20 September 1998;

          or

  • if the person's income support payment commenced or recommenced on or after 20 September 1998.

Long term purchased income streams

For long term income streams that are purchased, the income test treatment will now give a deduction based on the purchase price of the income stream.  In most circumstances, pensioners with purchased long term income streams such as immediate annuities with a term greater than 5 years, will receive a larger deductible amount than under the previous rules.  These clients will be winners as less income from their income stream will be held in their assessment and an increased rate or pension should result, all other things remaining equal.

Short term income streams

Short term income streams, (ie those with a term of five years or less unless the person's life expectancy is less than five years), will be subject to the deemed rate of income.  The rationale for this treatment is that short-term income streams are similar to other financial investments and should therefore be treated similarly.

The only exception to this treatment is where the income stream is purchased by a person with a life expectancy of less than five years.  In that case, the income stream is treated as a long-term income stream.


Income test assessment

Assessment of income streams

Income tests are summarised below.

Asset-test exempt

Assessable income

Defined benefit

Annual payment - Deductible Amount

Not defined benefit
(ie., purchased)

Annual payment - Deductible Amount  (Purchase price/ Relevant number)

Income stream (long term)

Assessable income

Defined benefit

Annual payment - Deductible Amount

Not defined benefit
(ie., purchased)

Annual payment - (Purchase price - Residual capital value / Relevant number)

Income stream (short term)

Assessable income

Defined benefit

N/A

Non-defined benefit
(ie., purchased)

Included in deemed financial assets.

Continued on next page


Income test assessment, Continued

Income
- Asset test
   exempt -
- Purchased

For purchased income streams which are asset-test exempt, the income to be taken into account is the gross annual income minus the deductible amount where the deductible amount equals the purchase price divided by the relevant number (life expectancy or the term), ie,

Annual payment   -    Deductible amount

where:

Deductible amount =    Purchase price

Relevant number

where:

The

for

is the

Purchase price

all purchased asset-tested income streams

original purchase price less any commutations, divided by the relevant number.

Relevant number

fixed term income streams

term in years.

Relevant number

lifetime income streams

person's life expectancy factor prescribed in life tables under the Income Tax Assessment Act.  (See page 14 for more details.)

Relevant number

Allocated annuities and allocated pensions

person's life expectancy factor prescribed in life tables under the Income Tax Assessment Act.  (See page 14 for more details.)

Relevant number

life expectancy income streams

person's life expectancy factor prescribed in life tables under the Income Tax Assessment Act.  (See page 14 for more details.)

Note:  purchased income streams cannot have an RCV if they are asset-test exempt.

Example

John is a 65-year-old veteran.  He purchases an annuity for $100,000 with a term based on life expectancy (ie, 15.41 years rounded up to 16 years).  His annual payment from the annuity totals $9,895.  His assessable income from this income stream is:

$9895 - ($100,000 / 16 years)

= $3,645

Continued on next page


Income test assessment, Continued

Income streams purchased between 1 April and 30 June

If an allocated product is purchased between 1 April and 30 June and the owner elects to receive the first payment in the next financial year, ie after 30 June:

  • for income test purposes the date of commencement is taken to be 1 July in the new financial year;

  • for asset test purposes the date of purchase remains the date of commencement.

Assessment of lifetime products where the ‘guarantee period' has been adjusted

As an interim measure, until 20 December 1998, DVA and DSS have agreed that, for purchased income streams the ‘guarantee period' (or minimum payment period) may be reduced to meet the characteristics for a lifetime asset test exemption. (Refer to VEA para 5JA(2)(h) which outlines the conditions under which a lifetime asset-test exempt income stream may be commuted.)

Where the guarantee period is reduced to allow the income stream to meet asset-test exemption requirements:

  • the original purchase price;

  • the original purchase date;

  • the original term (that is, the life expectancy of the client at the date of purchase); and

  • the new annual payment amount

are to be used for assessment purposes.

Example of reduced guarantee period

A lifetime annuity meets the requirements for assets-test exemption, except that the term is greater than the person's life expectancy.  The person may agree with their provider to reduce the guarantee period from fifteen to ten years to meet the characteristics for assets test exemption.

The provider calculates the new annual payments as if the product had always allowed only a ten-year guarantee period.

The full original purchase price must still be returned over the term of the income stream (based on the owner's original life expectancy at the commencement of the product) but the annual payments are likely to increase to compensate for the reduced guarantee period.

Continued on next page


Income test assessment, Continued

Income
- Asset test
   exempt
- Defined
   benefit

If the income stream is a defined benefit income stream, and the person becomes a Veterans Affairs' income support recipient on or after 20 September 1998, the income to be taken into account is the gross annual income minus the tax deductible amount, ie

Annual payment  -  deductible amount

This deductible amount is based on the undeducted purchase price of the income stream.  See Attachment A for the definition.

If the defined benefit income stream was in payment before 20 September 1998, and the person was a Veterans' Affairs income support recipient on 19 September, the income stream may come under the ‘saved' provisions that use the old deductible amount.  (See Income test overview on page 24 for details of this savings provisions.)

Income test for
- Assets tested
  (long term)
  income stream
- Not defined
  benefit, ie, not
  purchased

For a purchased long term income stream the amount of income assessed is the annual payment, with a deduction for the purchase price, spread over the expected lifetime of the income stream.  This deduction is reduced for any residual capital value to be repaid to the person at the end of the term of the income stream.  The income to be held is:

Annual payment – deductible amount

where

Deductible amount = (purchase price - residual capital value)

  relevant number

Example

Sally is 65 years old and single.  She purchases a 10 year annuity for $150,000 with a residual capital value of $20,000.  Her total annuity payment is $18,337.  Sally's assessable income from her 10 year annuity is:

$18,337 - [($150,000 - $20,000)/10 years] = $5,337.

Continued on next page


Income test assessment, Continued

Income
- Assets tested (long term) income stream
- Defined benefit

For defined benefit income streams, where the person becomes a Veterans' Affairs income support recipient on or after 20 September 1998, the income to be taken into account is the gross annual income minus the tax deductible amount.

Annual payment  -  deductible amount

where

Deductible amount = undeducted purchase price ? relevant number

If the defined benefit income stream was:

  • in payment before 20 September 1998; and

  • the person was a Veterans' Affairs income support recipient on 19 September

the income stream may come under the ‘saved' provisions which use the
pre-30 July 1994 deductible amount.  (See Income test overview above for details of this savings provisions.)

Asset-tested income stream (short term)

These are deemed on asset value as for other financial investments.


Assets test overview

Rationale for Assets Test Treatment

Income streams which are asset-test exempt are generally long term (but may be short term) and must satisfy certain criteria.  The main rationale behind granting an asset-test exemption is that the person must not have access to the capital of the income stream.

Asset test calculation

The asset value of an asset-tested income stream is calculated as follows:

If the income stream is...

and there is...

then the asset value will be...

purchased

an account balance

the account balance.

purchased

no account balance, but there is a purchase price

the purchase price minus any residual capital value, depleted every 6 or 1 months by the return of capital.

defined benefit

no account balance, and no purchase price

a calculated value using a pension valuation factor.

Asset tested income streams - purchased

For purchased income streams which are asset-tested the asset value will be:

Note:  Previously, no asset value was held for superannuation pensions purchased with ETP of Rollover money, or for allocated pensions purchased prior to 21 August 1996.

Asset tested income streams - defined benefit

For these defined benefit income streams the return of capital is difficult to identify. Therefore the asset value will be calculated, using pension valuation factors.

Note:  This is a change from the current practice, where no asset value is held for any superannuation pensions.


Assets test treatment

Asset-test exempt

No asset value is held for these income streams.

Asset-tested income stream
(long term) and (short term)

Asset value is calculated as:

  • the account balance; or

  • the purchase price, depleted; or

  • the value determined according to pension valuation factors,

depending on the type of product.

Asset-tested income stream

Asset value is:

  • if an account balance exists:

-  if one payment is made per year - the value of the account balance at the beginning of each 12 months.

-  if more than one payment is made per year – the value of the account balance at the beginning of each 6 month period;

  • for other purchased income streams:

-  if one payment made per year - the original purchase price is deplete every 12 months with the term elapsed (TE) incrementing in whole years.

-  if more than one payment is made per year - the original purchase price is deplete every 6 months with the TE incrementing in half years.

PP - [ (PP-RCV) x TE ]

               RN

Example:  Sally is 65 years old and is single.  She purchases a 10 year annuity for $150,000 with a residual capital value of $20,000.  Her total annual annuity payment is $18,337.  Monthly payments commence on 1 January.

Her assessable income for the first six months will be:

$150,000 - [($150,000 - $20,000)/10 yrs x 0 yrs]

= $150,000

Her assessable income after 30 June in that year will be:

$150,000 - [($150,000 - $20,000)/10 yrs x 0.5 yrs]

= $143,500

  • for defined benefit income stream; the value is determined according to pension valuation factors, (See Attachment D) ie,

Annual payment  x  PVF


Bereavement

Bereavement period

During the 14 week bereavement period, the income and asset treatment of the income stream remain unchanged in the hands of the joint owner or the reversionary beneficiary.

After the bereavement period - life expectancy products

After the bereavement period, a life expectancy income stream which has passed to the reversionary beneficiary must be reassessed in the hands of the reversionary beneficiary.

Only the remaining term is used as ‘term' for testing against life expectancy to determine if the product is asset-test exempt. (ie, use original term less that term expired to give the new term).

Following reassessment, the details of the income and asset-test components will be as follows:

The

is

Purchase price

unchanged.

RCV

unchanged.

RN*

the balance of the relevant number minus the term expired.  (eg, if the primary beneficiary dies after 5 years of a 12 year term have elapsed, the RN for the reversionary beneficiary is 12 - 5 = 7 years.)

Gross payment amount

as specified on the revised schedule of information.

Current account balance

as specified on the revised schedule of information.

Deductible amount

recalculated to take account of the revised RN.

*  Note that the RN for life expectancy products with a reversionary beneficiary is based on the primary beneficiary's life expectancy.

After the bereavement period - joint products

Joint products pass to the surviving spouse.  Since both life expectancies were tested in arriving at asset-test exempt status, this is not tested again.  The surviving partner has already passed the asset-test exempt test so the product remains asset-test exempt.


Commutations

What is a commutation

A commutation occurs when future income stream payments are converted to a lump sum.  Commutation rules apply whether the policy is fully or partially commuted.

Purchased income streams - partial commutations

When a partial commutation is made to a purchased income stream:

  • the relevant number is unchanged;

  • the purchase price and the residual capital value are reduced by the actual amount of the commutation; and

  • the deductible amount is adjusted due to the change in purchase price.

Purchased income streams - income test

The annual income for income test purposes for a partially commuted purchased income stream is:

New gross annual payment  -  deductible amount

where

Deductible amount = Adjusted purchase price - Adjusted residual value
                                                          Relevant number

Purchased income streams - assets test

For income streams which are asset-tested the asset value will be:

  • the adjusted account balance; or, where there is no account balance

  • the adjusted purchase price, less the adjusted residual capital value, less the revised depleted amounts as the capital is returned.

Defined benefit income streams – partial commutations

When a partial commutation is made to a defined benefit income stream:

  • the relevant number is unchanged for DVA purposes;

  • the undeducted purchase price is reduced.

Defined benefit income streams – income test

Annual income = New gross annual payment – deductible amount

where

Deductible amount = Adjusted undeducted purchase price

Relevant number

Continued on next page


Commutations, Continued

Defined benefit income streams – asset test

If the defined benefit income stream is asset tested, the asset value is the new gross payment amount multiplied by the Pension Valuation Factor.

When are commutations allowed

Commutations may be allowed for any asset-tested income stream.  They are also allowed in restricted circumstances for asset-test exempt income streams:

Income stream is:

Commutation allowed:

Lifetime,
-asset-test exempt,

  • Within 6 months after the commencement day of the income stream (allowed up to 3 times, after which the person is not eligible to have an income stream treated as asset-test exempt.

  • Within 10 years after the commencement day, if the owner dies, to the reversionary beneficiary or the person's estate.

  • At any time, if payment is transferred directly to the purchase of another income stream that meets the requirements for asset-test exemption.

  • At any time, but only enough, to cover any superannuation contributions surcharge that the person is liable to pay.

Life expectancy
-asset-test exempt

  • Within 6 months after the commencement day of the income stream (allowed up to 3 times, after which the person is not eligible to have an income stream treated as asset-test exempt).

  • At any time, if payment is transferred directly to the purchase of another income stream that meets the
    asset-test exempt requirements.

  • At any time, but only enough, to cover any superannuation contributions surcharge that the person is liable to pay

  • On the death of the owner, if it is to a reversionary beneficiary or otherwise to the person's estate.

Long term or short term

Not restricted by the legislation.  Restrictions may be imposed by the rules for that class of product; eg, lifetime immediate annuities do not allow commutations and superannuation pensions to vary.

Future policy

Commutations within the ‘three strikes' policy will be closely monitored by DSS to decide if further tightening is necessary.


Data entry requirements for foreign income streams

Entry of foreign superannuation

As a result of screen changes for the new classification to income streams, data entry for foreign superannuation has changed.   The entry point for foreign superannuation is through the new income streams entry, as for other income streams (superannuation, annuities etc).  The next screen is a summary screen from which a product can be added or the required product selected for editing.

It the product you wish to edit is a foreign product, select the ‘Foreign products' button.

For an existing product, details can then be edited.  Otherwise a new product can be entered.

Asset value of foreign annuities

Foreign annuities require an asset value.  Foreign products are not covered by the income streams legislation, but their treatment will change as a result of the new legislation.  This is because annuities which were asset test exempt under the previous legislation will no longer be asset-test exempt.  However, very few foreign annuities are expected to be detected.

Use foreign currency

In a change from previous practice, for all foreign products, including British Retirement Income (BRI) and other foreign superannuation or annuities, the payment amount must be entered in the original currency, eg, German marks, English pounds etc.  The Australian dollar equivalent will be calculated, based on the most recent exchange rate on the system.

Where are the foreign exchange rates

The foreign exchange rates are available from the ‘View' option on PIPS/PC under ‘Income Stream Reference Tables'.


General policy issues

Pension age for partner service pensioners

For an asset-test exempt life expectancy or 15 year minimum term income streams, subsection 5JB(1) (a) of the Veterans' Entitlements Act 1986 requires that the person must have reached pension age on or before the day on which the person purchases or acquires the income stream.

Section 5QB states that the pension age for women who are not veterans, is 60 (subject to the age equalisation).

Therefore, a life expectancy or 15 year minimum term income stream can only be asset-test exempt if the person was at least:

  • 60 if a male veteran;

  • 56 if a female veteran (this age is subject to age equalisation); or

  • 61 if a female partner of a veteran (this age is subject to age equalisation).

The provision to pay partner service pension to the partner of a veteran receiving the special rate (totally and permanently incapacitated) disability pension (P&TI) regardless of age or dependent children, or to partners over age 50 does not extend to the definition of pension age.  That is, partner service pension may be paid to people who have not reached the ‘pension age' as defined in the VEA.

Abatements

Certain superannuation schemes, such as the New South Wales Railway Superannuation Scheme, may contain an abatement.  An abatement arises when an employee takes additional units of superannuation, but is not in a position to pay the full amount due at the time of his/her retirement.  The amount due is repaid over a number of years following retirement, and is deducted annually in a lump sum before the superannuation is made available.

During the time an abatement is in effect, the amount of the abatement is not income and is, therefore, not included in the gross payment for income test purposes.

Ex gratia payments

An ex-gratia payment, which may or may not be in addition to superannuation, is one made at the discretion of the employer, without the superannuant having any legal right to it.

Any payment made on a regular basis is regarded as income.

Continued on next page


General policy issues, Continued

Excluded funds (do it yourself funds)

An excluded fund under the Superannuation Industry (Supervision) Act 1993 is defined as an excluded superannuation fund or an excluded approved deposit fund.

  • An excluded approved deposit fund means an approved deposit fund in which there is only one beneficiary and which satisfies such other conditions (if any) as are specified in the regulations.

  • An excluded superannuation fund means a superannuation fund of which there are fewer than 5 members.

Excluded funds may offer asset-test exempt income streams in retirement. These income streams must meet all of the characteristics of an asset-test exempt income stream and the excluded fund must satisfy the relevant prudential requirements of the Superannuation Industry (Supervision Act 1993.

The following documentation must be provided for an excluded fund to be regarded as an asset-test exempt income stream:

  • a copy of the trust deed, ensuring that the fund meets the requirements of Section 5JA or 5JB of the VEA, whichever is applicable; and

  • evidence or actuarial certification that the excluded fund can meet the income stream payments for the lifetime of the member, or the term of the product where the product is a e expectancy product; or

  • where the fund has purchased an annuity to fund the income stream, a copy of the contract for fund providing the annuity, verifying compliance with Section 5JA or 5JB of the VEA, whichever is applicable.

Jointly owned income streams

If an income stream is jointly owned, it must satisfy the life expectancy requirements for both people as well as all of the other characteristics for such products to be asset-test exempt.

Reversionary pensions – deductible amount

A reversionary beneficiary is entitled to the same deducible amount in respect of a reversionary pension that was allowed to the primary beneficiary.

Continued on next page


General policy issues, Continued

Asset value after a partial commutation

When a partial commutation is made:

  • the relevant number is unchanged;

  • the purchase price is reduced by the actual amount of the commutation;

  • the deduction amount is reduced due to the reduction in purchase price.

For example, John purchases a 5-year term annuity for $50,000. At the end of two years, the assessable asset value is:

$50,000 - ($50,000/5x2)=$30,000

He commutes $6,000 at this point. The new assessable asset value after commutation is:

($50,000 - $6,000)-[( $50,000 - $6,000) x 2 years]=5

$44,000-($8,800 x 2)=$26,400

His new deductible amount after commutation now is:

($50,000 - $6,000) / 5=$8,800


Forms and schedules of information

Amended forms for income stream information

All forms used for collecting information of income streams have been amended.  These include:

  • The Schedule of Information (including a glossary of terms used and a summary of requirements for assets test exemption) for clients to arrange for their income stream provider to complete.

  • Retirement Income Streams - Centrelink/Veterans' Affairs Assessment, similar to the Schedule of Information above, which will be used by many of the income stream providers, especially the Australian Retirement Industry and Superannuation Association (ARISA) members.

  • The income and assets test reviews.

New Schedule of information

A new schedule of information has been developed.  This will replace the existing schedules for Superannuation and Annuities.

Term types

On the Schedule of Information  from ARISA, the term type provided should be read as follows:

If ‘Type of Income Stream' on ARISA form is

Enter ‘term type' on screen as

Defined Benefit

Lifetime

Lifetime

Lifetime

Term

Fixed

Life Expectancy

Life Expectancy

Allocated

Life Expectancy (really a modified life expectancy as it may not last life expectancy)


Attachment A

Attachment A:  Income stream definitions

Definition of terms used in new classification of income streams

A number of new terms have been defined in the VEA as a result of the changes to the income stream legislation.  Other terms have been redefined or repealed.

New terms (see definitions below)

See Page

Asset-test exempt income stream

43

Asset-test exempt income stream - lifetime income stream

43

Asset-test exempt income stream -life expectancy or 15 year minimum term income stream

43

Asset-tested income stream (long term)

48

Asset-tested income stream (short-term)

48

Commencement day

48

Defined benefit income stream

49

Governing rules

49

Income Stream

49

Life expectancy

49

Pension Valuation Factor

49

Retirement savings account

50

Social security payment

50

Superannuation contributions surcharge

50

Redefined terms  (see definitions below)

See Page

Deductible amount (substituted)

51

Financial investments (amended)

51

Managed investments (substitute new (f), (g) and add (h).

51

Purchase price (substituted)

51

Relevant number (substituted)

51

Residual capital value (amended)

51

Repealed terms

See Page

Allocated pension

52

Determination of entitlement

52

Immediate annuity

52

Non-assessable purchase price

52

Rolled-over amount; roll-over immediate annuity; and
roll-over purchase price

52

Superannuation pension

52


VEA ref

New term

Definitions

Comments

ss5JA & 5JB

Asset-test exempt income stream

These may be:

  • an asset-tested exempt income stream - lifetime income streams (5J(A)), and

  • an asset-test exempt income stream - life expectancy or 15 year minimum term income streams (5J(B))

The characteristics are designed to ensure it provides a steady drawdown over the whole retirement period that it allows no further access to the capital underlying the income stream.

These income streams are described together below. Differences are highlighted.

5JA Meaning of asset-test exempt income stream - lifetime income streams

5JB   Meaning of asset-test exempt income stream -life expectancy or 15 year minimum term income streams

General requirements

(1) An income stream provided to a person is an asset-test exempt income stream for the purposes of this Act:

(a) if it is an income stream arising under a contract, or governing rules, that meet the requirements of subsection (2) and the Commission has not made a determination under subsection (4) in respect of the income stream; or

(b) if the Commission has not made a determination under subsection (5) in relation to the income stream.

Note:     For income stream see subsection 5J(1).

General requirements

(1) An income stream provided to a person is an asset-test exempt income stream for the purposes of this Act if:

(a) the person has reached pension age on or before the day on which the person purchases the income stream; and

(b) either of the following circumstances apply:

(i) the income stream arises under a contract, or governing rules, that meet the requirements of subsection (2) and the Commission has not made a determination under subsection (3) in respect of the income stream;

(ii) the Commission has made a determination under subsection (4) in respect of the income stream.

Note 1:     For income stream see subsection 5J(1).

Note 2:     For pension age see subsection (6).


5JA  Meaning of asset-test exempt income stream—lifetime income streams

General requirements

(1)An income stream provided to a person is an asset?test exempt income stream for the purposes of this Act:

(a)if it is an income stream arising under a contract, or governing rules, that meet the requirements of subsection (2) and the Commission has not made a determination under subsection (4) in respect of the income stream; or

(b)if the Commission has made a determination under subsection (5) in respect of the income stream.

Note:              For income stream see subsection 5J(1).

5JB  Meaning of asset-test exempt income stream—life expectancy or 15 year minimum term income streams

General requirements

(1)An income stream provided to a person is also an asset?test exempt income stream for the purposes of this Act if:

(a)the person has reached pension age on or before the day on which the person purchases or acquires the income stream; and

(b)either of the following circumstances apply:

(i)the income stream arises under a contract, or governing rules, that meet the requirements of subsection (2) and the Commission has not made a determination under subsection (3) in respect of the income stream;

(ii)the Commission has made a determination under subsection (4) in respect of the income stream.

Note 1:              For income stream see subsection 5J(1).

Note 2:              For pension age see subsection (6).

Requirements of contract/governing rules for provision of income stream

(2)A contract, or the governing rules, for the provision of an income stream to a person meet the requirements of this subsection if the contract or governing rules specify:

(a)that payments under the income stream are to be made at least annually throughout the life of the person and, if there is a reversionary beneficiary:

(i)throughout the reversionary beneficiary's life; or

(ii)if the reversionary beneficiary is a child of the person or of a former reversionary beneficiary under the income stream—at least until he or she turns 16; or

(iii)              if the child referred to in subparagraph (ii) is a full?time student who has turned 16—at least until the end of his or her full?time studies or until he or she turns 25, whichever occurs sooner; and

(b)the total amount of the payments that may be made under the income stream in the first year after the commencement day of the income stream (not taking commuted amounts into account); and

(c)that the total amount of the payments that may be made under the income stream in any other year (not taking commuted amounts into account) may not fall below the total amount of the payments made under the income stream in the immediately preceding year (the previous total), and may not exceed the previous total:

(i)if subparagraph (ii) does not apply—by more than 5% of the previous total; or

(ii)if the index number for the second last quarter before the day on which the first of those payments is to be made (recent index number) exceeds the index number for the same quarter in the immediately preceding year (base index number) by more than 4% of the base index number—by more than such percentage of the previous total as is worked out under the formula:

(d)if the income stream is purchased—that the first payment under the income stream relates to the period commencing on the day on which the income stream is purchased; and

(e)if the income stream is not purchased—that the first payment under the income streams relates to the period commencing on the day on which the income stream is acquired; and

(f)if the income stream is not a defined benefit income stream—that the amount paid as the purchase price for the income stream is wholly converted into income; and

(g)that the income stream has no residual capital value; and

(h)that the income stream cannot be commuted except:

(i)if the commutation is made within 6 months after the commencement day of the income stream; or

(ii)if the commutation is made to the benefit of a reversionary beneficiary or of the person's estate, on the death of the person within 10 years after the commencement day of the income stream; or

(iii)               if the payment resulting from the commutation is transferred directly to the purchase of another income stream arising under a contract, or governing rules, that meet the requirements of this subsection or subsection 5JB(2); or

(iv)to the extent necessary to cover any superannuation contributions surcharge that the person is liable to pay in his or her capacity as purchaser of the income stream; and

(i)that the income stream:

(i)can be transferred only on the death of the person; and

(ii)               can then only be transferred to a reversionary beneficiary; and

(j)that neither the capital value of the income stream, nor the income from it, can be used as security for a borrowing; and

(k)that, if the income stream reverts, it must not have a reversionary component greater than the benefit that was payable immediately before the reversion; and

(l)that, if the income stream is commuted, the commuted amount must not be greater than the benefit that was payable immediately before the commutation.

Requirements of contract/governing rules for provision of income stream

(2)A contract, or the governing rules, for the provision of an income stream to a person meets the requirements of this subsection if the contract or governing rules specify:

(a)that the payments under the income stream are to be made at least annually:

(i)              if the person's life expectancy is less than 15 years—throughout a period equal to the person's life expectancy (rounded up at the person's option, if it does not consist of a whole number of years, to the next whole number); or

(ii)               if the person's life expectancy is 15 years or more—throughout a period that is not less than 15 years but not more than the person's life expectancy (rounded up at the person's option, if it does not consist of a whole number of years, to the next whole number); and

(b)the total amount of the payments that may be made under the income stream in the first year after the commencement day of the income stream (not taking commuted amounts into account); and

(c)that the total amount of the payments that may be made under the income stream in any other year (not taking commuted amounts into account) may not fall below the total amount of the payments made under the income stream in the immediately preceding year (the previous total), and may not exceed the previous total:

(i)if subparagraph (ii) does not apply—by more than 5% of the previous total; or

(ii)if the index number for the second last quarter before the day on which the first of those payments is to be made (recent index number) exceeds the index number for the same quarter in the immediately preceding year (base index number) by more than 4% of the base index number—by more than such percentage of the previous total as is worked out under the
formula:

(d)if the income stream is purchased—that the first payment under the income stream relates to the period commencing on the day on which the income stream is purchased; and

(e)if the income stream is not purchased—that the first payment under the income stream relates to the period commencing on the day on which the income stream is acquired; and

(f)if the income stream is not a defined benefit income stream—that the amount paid as the purchase price for the income stream is wholly converted into income; and

(g)that the income stream has no residual capital value; and

(h)that the income stream cannot be commuted except:

(i)if the commutation is made within 6 months after the commencement day of the income stream; or

(ii)if the payment resulting from the commutation is transferred directly to the purchase of another income stream provided under a contract, or governing rules, that meet the requirements of this subsection or subsection 5JA(2); or

(iii)              if the legal or equitable interest in the payment resulting from the commutation is transferred, on the death of the person, to a reversionary beneficiary or (if there is no reversionary beneficiary) to the person's estate; or

(iv)to the extent necessary to cover any superannuation contributions surcharge that the person is liable to pay in his or her capacity as purchaser of the income stream; and

(i)that the income stream:

(i)can be transferred only on the death of the person; and

(ii)can then only be transferred to a reversionary beneficiary or to the person's estate; and

(j)that neither the capital value of the income stream, nor the income from it, can be used as security for a borrowing; and

(k)that, if the income stream reverts, it must not have a reversionary component greater than the benefit that was payable immediately before the reversion; and

(l)that, if the income stream is commuted, the commuted amount must not be greater than the benefit that was payable immediately before the commutation.

Matters not required of income stream

(3)              For the purpose of determining whether an income stream meets the requirements of subsection (2), it is immaterial that:

(a)              if the primary beneficiary dies within 10 years after the commencement day of the income stream, a surviving reversionary beneficiary may be paid an amount equal to the total of the payments that the primary beneficiary would (if he or she had not died) have received from the day of the death until the end of the period of 10 years; and

(b)if:

(i)the primary beneficiary dies within 10 years after the commencement day of the income stream; and

(ii)there is no surviving reversionary beneficiary;

              an amount, not exceeding the difference between:

(iii)              the sum of the amounts that would have been so payable to the primary beneficiary in the period of 10 years; and

(iv)              the sum of the amounts paid to the primary beneficiary;

              is payable to the primary beneficiary's estate, and

(c)if:

(i)the primary beneficiary dies within 10 years after the commencement day of the income stream; and

(ii)there is a surviving reversionary beneficiary who also dies within that period;

              there is payable to the reversionary beneficiary's estate an amount determined as described in paragraph (b) as if that paragraph applied to the reversionary beneficiary.

Determination that income stream not asset-test exempt

(4)              The Commission may determine that an income stream that meets the requirements of subsection (2) is not an asset-test exempt income stream if the Commission is satisfied that the person who has purchased the income stream has commuted an asset-test exempt income stream within 6 months after its commencement day on at least 3 occasions since the person first received a service pension, an income support supplement or a social security payment.

Determination that income stream not asset-test exempt

(3)              The Commission may determine that an income stream that meets the requirements of subsection (2) is not an asset-test exempt income stream if the Commission is satisfied that the person who has purchased the income stream has commuted an asset-test exempt income stream within 6 months after its commencement day on at least 3 occasions since the person first received a service pension, an income support supplement or a social security payment.

Determination that income stream is asset-test exempt

(5)The Commission may determine, in writing, that an income stream that does not meet the requirements of subsection (2) is an asset?test exempt income stream for the purposes of this Act. In making the determination, the Commission is to have regard to the guidelines determined under subsection (6).

Determination that income stream is asset-test exempt

(4)              The Commission may determine, in writing, that an income stream that does not meet the requirements of subsection (2) is an asset?test exempt income stream for the purposes of this Act. In making the determination, the Commission is to have regard to the guidelines determined under subsection (5).

Guidelines to be complied with in making determination

(6)The Commission may determine, in writing, guidelines to be complied with when making a determination under subsection (5). The determination is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901.

Guidelines to be complied with in making determination

(5)              The Commission may determine, in writing, guidelines to be complied with when making a determination under subsection (4). The determination is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901.

VEA ref

New term

Definitions

Comments

ss5J(1)

Asset-tested income stream (long term)

means an income stream that:

(a) is not an asset-test exempt income stream; and

(b) has, on its commencement date:

(i) a term of more than 5 years; or

(ii) if the person who has acquired the income stream has a life expectancy of 5 years or less - a term equal to or greater than the person's life expectancy.

Allows access to capital, but is still for more than 5 years.  It is asset tested and will receive the same income test treatment as those in the first category.

Ss5J(1)

Asset-tested income stream (short-term)

means an income stream that is neither:

(a) an asset-test exempt income stream; nor

(b) an asset-tested income stream (long-term).

Allows access to capital and is for a short term only, (five years or less).  It is asset tested and deemed under the income test.

Ss5J(1)

Commencement day

in relation to an income stream, means the first day of the period to which the first payment under the income stream relates.

This definition ensures that the income stream is assessed from the beginning of the period even if the annual payment is deferred until the end of a 12 month period.

NOTE:  If an allocated product is purchased between 1 April and 30 June, the income amount for that period only may be zero.

Ss5J(1E)

Defined benefit income stream

An income stream is a defined benefit income stream if the amount of payments under it:

(a) is not fully determined by the purchase price; but

(b) is determined:

(i) by reference to the purchaser's salary before retirement or the purchaser's years of service; or

(ii) by the governing rules.

Commonwealth superannuation is a good example of this.

Ss5J(1)

Governing rules

in relation to an income stream, means any trust instrument, other document or legislation, or combination of them, governing the establishment and operation of the income stream.

Ss5J(1)

Income Stream

means:

(a) an income stream arising under arrangements that are regulated by the Superannuation Industry (Supervision) Act 1993; or

(b) an income stream arising under a public sector scheme (within the meaning of that Act); or

(c) an income stream arising under a retirement savings account; or

(d) an income stream provided by a life insurance business (within the meaning of the Life Insurance Act 1995); or

(e) an income stream provided by a friendly society (within the meaning of the Income Tax Assessment Act); or

(g) an income stream designated in writing by the Commission for the purposes of this definition, having regard to the guidelines determined under subsection (1F)

but does not include any of the following:.

(g)available money;

(h)deposit money;

(i)a managed investment;

(j)a listed security;

(k)a loan that has not been repaid in full;

(l)an unlisted public security;

(m)gold, silver or platinum bullion.

Ss5J(1)

Life expectancy

has the same meaning as life expectancy factor has in section 27H of the ITAA.

There it defines life expectancy through the Tables of Life Expectancy Factors. The table to be used is the one that applies at the beginning of the period to which the first payment of the income stream relates. .

52B

Pension valuation factor

Means the pension valuation factor for a defined benefit superannuation scheme that applies to the person in accordance with the determination made by the Minister.

The pension valuation factors and the rules for applying them are at Attachment D.

Ss5J(1)

Retirement savings account

has the meaning that it has in the Retirement Savings Account Act 1997.

This is a deposit or life policy that has a tax advantage.  It is provided by banks, building societies, credit unions and life insurance companies.  It is similar to a superannuation fund but does not have a trust structure..

Ss5Q(1)

Social security payment

has the same meaning as in the Social Security Act.

ie:

(a) a social security pension; or

(b) a social security benefit; or

(c) an allowance under the SSA; or

(d) a family payment; or

(da) a family tax payment; or

(e) any other kind of payment under Chapter 2 of the SSA; or

(f) a pension, benefit or allowance under the 1947 SSA;

ss5J(1)

Superannuation contributions surcharge

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

This is the superannuation contributions surcharge payable on surchargable contributions for high-income individuals, for payments made since, or for the period from 20 August 1996.  For defined benefit superannuation schemes, a notional amount will be determined by the Commissioner for Taxation.


Redefined terms

A number of terms have been redefined.

VEA ref.

Term

Definition

Comments

5J(1)

Deductible amount

(new definition)

in relation to an income stream, means the amount that would be the deductible amount in relation to the income stream under subsection 27H(2) of the Income Tax Assessment Act, if the references in that subsection to an annuity were references to an income stream.

The VEA definition relates to defined benefit income streams. The post 1 July 1994 Tax definition will be used.  The pre 1 July 1994 definition is retained for existing superannuants only.

NOTE: DVA also uses this term for purchased income streams
DSS uses the term ‘deduction' for purchased products.

5J(1)

Financial investments:

(amended to include)

; or (h) as asset-tested income stream (short-term).

This amendment makes financial investment products subject to the deeming rules.

5J(C)(f) & (g)

Managed investments

(substitute new (f), (g) and add (h).

(f) an asset-test exempt income stream;

(a) an asset-tested income stream (long term)

(b) an asset-tested income stream (short term).

References to immediate annuities and superannuation pensions omitted.

5J(1)

Purchase price

(new definition)

in relation to an income stream, means 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 ITAA definition previously used in no longer adequate for the new income streams regime.

5J(1)

Relevant number

(new definition)

in relation to an income stream, means:

(a) if the income stream is payable for a fixed number of years - that number; or

(b) if the income stream is payable during the lifetime of a person and no longer - the number of years of the person's life expectancy; or

(c) if the income stream:

(i) if jointly owned by a person and his or her partner and is payable for the lifetime of the person or the partner; or

(ii) is payable during the lifetime of a person and then for the lifetime of a reversionary beneficiary;

the number of years in the longer of the relevant life expectancies; or

(d) in any other case - the number that the Commission considers appropriate having regard to the number of years in the total period during which the income stream will be, or may reasonably be expected to be, payable.

The ITAA definition has been inserted into the VEA.  This new definition has been expanded to deal with the situation of people who are a member of a couple.

If a life expectancy income stream is jointly owned, the RN is based on the longer of the two life expectancies.  It there is a reversionary beneficiary, the RN is based on the life expectancy of the primary beneficiary.

For both joint and reversionary lifetime income streams the RN is based on the longest life expectancy.

5J(1)

Residual capital value

(amended)

Omit “annuity” and substitute “income stream”

Consequential amendment as annuity is no longer used.

Repealed terms

These are no longer relevant under the new legislation.

VEA ref.

Term

Comments

5J(10)

Allocated pension

Redundant income stream type from 20 September 1998

5Q(1)

Determination of entitlement

Redundant income stream type from 20 September 1998.

5J(1)

Immediate annuity

Redundant income stream type from 20 September 1998.

5J(1)

Non-assessable purchase price

Used in the taxation concept of a deductible amount, modified to provide a more generous income test treatment to rollover annuities and allocated annuities.  No required under the new means testing arrangements.

5J(1)

Rolled-over amount; roll-over immediate annuity; and
roll-over purchase price

Rollover amount was used in the definition of rollover immediate annuity and rollover purchase price.  It is no longer used to provide a more generous deductible amount to rollover annuities and allocated annuities, so these terms are all deleted.

5J(1)

Superannuation pension

Now redundant as it has been replaced by new items.


Attachment B

Attachment B: Details of requirements of income streams under new classification system

Asset-test exempt - lifetime income streams

A contract, or the governing rules, for the provision of an asset-test exempt  - lifetime income stream, must meet the following requirements:

5JA  (2)

Item

Requirements which must be specified in contract or governing rules

(a)

Duration and frequency of payments to owner

Payments to be made at least annually during the lifetime of the person.

(a)(i), (ii) & (iii)

Duration and frequency of payments to reversionary beneficiary

If there is a reversionary beneficiary, the payments must be made throughout the life of the reversionary beneficiary, except:

  • if the reversionary beneficiary is a child of the primary beneficiary, or of another reversionary beneficiary, payments must be made at least annually until the child turn 16; or

  • if the child is a full-time student which has turned 16, the income stream must be paid until the end of the student's full-time studies or until the student turns 25, whichever occurs first.

(b)

Payments for first year specified

The total amount of payments that may be made in the first year must be specified.  (The specified amount does not include any commuted amounts.)

(c)

Payments in other years indexed as specified

The total amount of payments after the first year, with allowances for indexation and certain allowable commutations (see ‘Commutations' below), may not exceed the total amount of the payments made under the income stream in the immediately preceding year.

The indexation allowed is capped at the greater of either:

  • 5% or

  • the rate of increase in the consumer price index over the last quarter, plus 1%.

  • (d)

  • (e)

Commencement day of income stream

The first payment under the income stream must relate to:

  • if the income stream was purchased, the day on which the income stream was purchased, or

  • for reversionary beneficiaries and for defined benefit income streams which are not purchased, the day on which it was acquired.

These provisions are designed to ensure that there is no deferral of the income stream.

(f)

Full purchase price converted to income

If the income stream is not a defined benefit income stream, the amount paid as the purchase price must be wholly converted into income.

(g)

Residual capital value

The income stream must not have a residual capital value.

(h)

  • (i) & 5JA(4)

  • (ii)

  • (iii)

  • (iv)

Limited commutation

In general, the income stream cannot be commuted, except:

  • in the first 6 months by 3 times rule:  The Commission can determine that an income stream is not an asset-test exempt income stream if it has been commuted within 6 months after its commencement day on at least 3 occasions since the person first received a service pension, income support supplement or social security payment.  After the third commutation, no subsequent income stream will qualify for asset-test exemption unless the Commission is satisfied that, having regard to all the circumstances of the case, the commutation is not for the purpose of retaining control of capital.  This exemption will provide a recourse for a person who may have purchased an inadequate product;  or

  • proceeds transferred to like product rule:  if the payment resulting from the commutation is transferred directly to the purchase of another income stream that meets all the listed characteristics or the requirements as asset-test exempt income stream; or

  • to reversionary beneficiary within 10 years rule:  if the commutation is made to the benefit of a reversionary beneficiary or to the person's estate on the death of a person, within 10 years of the commencement day; or

  • proceeds to pay superannuation contribution surcharge rule:  if the commutation is made to pay an amount in respect of the superannuation contribution surcharge the person is liable to pay as a purchaser of that income stream, and only to the extent that is necessary to pay that surcharge.

(i)

Not transferable during life

The income stream cannot be transferred to another person, apart from a reversionary beneficiary on the death of the person, or to another reversionary beneficiary on the death of the reversionary beneficiary.

(j)

Cannot be borrowed against

Neither the capital value of the income stream, nor the income from it, can be used as security for borrowing.

(k)

Reversionary value

If the income stream reverts to a reversionary beneficiary, it must not have a reversionary component greater than the benefit that was payable immediately before the reversion.

(l)

Commutation value

The income stream cannot be transferred to another person, apart from a reversionary beneficiary on the death of the person, or to another reversionary beneficiary on the death of the reversionary beneficiary.

Asset-test exempt - life expectancy or 15 year minimum term income stream

A contract, or the governing rules, for the provision of an asset-test exempt  - life expectancy or 15 year minimum term income stream, must meet the following requirements:

5JB (2)

Requirements

Contract or governing rules to specify requirements

(a)

Frequency of payments

At least annually during the lifetime of the person as follows:

  • if the person's life expectancy is less than 15 years, the income stream must be paid for the person's life expectancy (rounded up at the person's option to the next whole number)

  • if the person's life expectancy is 15 years or more, the income stream must be paid for at least 15 years but not more than the person's life expectancy (rounded up at the person's option to the next whole number).

(b)

Payments for first year specified

The total amount of payments that may be made in the first year must be specified.  (The specified amount does not include any commuted amounts.)

(c)

Payments in other years indexed as specified

The total amount of payments after the first year, with allowances for indexation and certain allowable commutations (see ‘Commutations' below), may not exceed the total amount of the payments made under the income stream in the immediately preceding year.

The indexation allowed is capped at the greater of either:

  • 5%; or

  • the rate of increase in the consumer price index over the last quarter, plus 1%.

(d) & (e)

Commencement day of income stream

The first payment under the income stream must relate to

  • if the income stream was purchased, the day on which the income stream was purchased; or

  • for reversionary beneficiaries and for defined benefit income streams, which are not purchased, the day on which it was acquired.

These provisions are designed to ensure that there is no deferral of the income stream.

(f)

Purchase price converted to income

If the income stream is not a defined benefit income stream, the amount paid as the purchase price must be wholly converted into income.

(g)

Residual capital value

The income stream must not have a residual capital value.

(h)

  • (i)

  • (ii)

  • (iii)

  • (iv)

Limited commutation

In general, the income stream cannot be commuted, except:

  • in the first 6 months by 3 times rule:  The Commission can determine that an income stream is not an asset-test exempt income stream if it has been commuted within 6 months after its commencement day on at least 3 occasions since the person first received a service pension, income support supplement or social security payment.  After the third commutation, no subsequent income stream would qualify for asset-test exemption unless the Commission is satisfied that, having regard to all the circumstances of the case, the commutation is not for the purpose of retaining control of capital.  This exemption will provide a recourse for a person who may have purchased an inadequate product; or

  • proceeds transferred to like product rule:  if the payment resulting from the commutation is transferred directly to the purchase of another income stream that meets all the listed characteristics or the requirements as asset-test exempt income stream; or

  • to reversionary beneficiary within 10 years rule:  if the commutation is made to the benefit of a reversionary beneficiary or to the person's estate on the death of a person, within 10 years of the commencement day; or

  • proceeds to pay superannuation contribution surcharge rule:  if the commutation is made to pay an amount in respect of the superannuation contribution surcharge the person is liable to pay as a purchaser of that income stream, and only to the extent that is necessary to pay that surcharge.

(i)

Not transferable during life

The income stream can be transferred only on the death of the person and then, only transferred to a reversionary beneficiary or to the person's estate.

(j)

Cannot be borrowed against

Neither the capital value of the income stream, nor the income from it, can be used as security for borrowing.

(k)

Reversionary value

If the income stream reverts to a reversionary beneficiary, it must not have a reversionary component greater than the benefit that was payable immediately before the reversion.

(l)

Commutation value

If the income stream is commuted, the commuted amount must not be greater than the benefit that was payable immediately before the commutation.

Asset-tested income streams (long term)

To be an asset-tested income stream (long term), the income stream must:

(a) NOT be an asset-test exempt income stream; and

(b) have, on its commencement day:

(i) a term of more than 5 years; or

(ii) if the person who has acquired the income stream has a life expectancy of 5 years or less - a term equal to or greater than the person's life expectancy.

Asset-tested income streams (short term)

To be an asset-tested income stream (short term), the income stream must be:

(a) NOT an asset-test exempt income stream; and

(b) NOT an asset-tested income stream (long term).


Attachment C: Classification terminology used by Centrelink and the financial industry.

Classification terminology used by DSS & financial industry

It is worth noting that DSS use a slightly different classification and terminology, as do some parts of the finance industry.  These are as follows:

Centrelink Information sheet included with the Data Collection notices (2 categories)

  • Asset-test exempt products:  lifetime and life expectancy products which meet required characteristics; and

  • Asset tested products:  products which don't have all of the required characteristics for asset-test  exemption, subdivided by having a term:

  • greater that five years; or

  • less than five years.

Centrelink also use five categories in their user documentation.  These are:

  • Category 1   Asset-test exempt - non-defined benefit scheme

  • Category 2   Asset tested (long term)

  • Category 3   Asset tested (short term)

  • Category 4   Asset-test exempt - defined benefit

  • Category 5   Asset tested - defined benefit scheme.

The finance industry use Tiers, in reverse order to the order use by DVA:

  • Tier 1   Asset test (short term)

  • Tier 2   Asset tested (long term)

  • Tier 3   Asset-test exempt.

The DSS categories are compared to equivalent DVA and provider classifications.

DSS classification

DVA equivalent

Provider equivalent

Category 1

Asset-test exempt
(only if non-defined benefit)

Tier 3 Asset-test exempt
(only if non-defined benefit)

Category 2

Asset tested (long term)

Tier 2

Category 3

Asset tested (short term)

Tier 1

Category 4

Asset-test exempt
(only if defined benefit)

Tier 3  Asset-test exempt
(only if defined benefit)

Category 5

Asset tested (long term) or Asset tested (short term)
(only if defined benefit)

Tier 2 or Tier 1 Asset tested (long term) or Asset tested (short term)
(only if defined benefit)


Attachment D: Pension Valuation Factors

What are Pension Valuation Factors

Defined benefit income streams do not have an account balance or a purchase price.  To establish an asset value, the Minister may determine, under VEA subsection 52 B(1), a pension valuation factor that applies to the person.

The older the person, the less their life expectancy and hence the less the PVF.  The type of indexation will also affect the PVF.

he PVFs may need to be adjusted from time to time to take account of changes in interest rates or life expectancies.  Therefore, the PVFs, developed by the Australian Government Actuary's Office are embodied in a disallowable instrument.

How are PVFs used

If a defined benefit income stream fails the asset-test exempt routine, the system will compare the person's age and the date of commencement of the income stream to assign a PVF, reflecting the ‘value' of the pension to the person for a given life expectancy.

The asset value held will be:

Annual Gross Income  x  PVF.

PVF for reversionary beneficiary

PVFs have been determined without consideration of a reversionary beneficiary.  If the owner dies, the reversionary beneficiary's age next birthday is used to determine the PVF for the reversionary beneficiary.

Specific cases

There are some specific cases in which the characteristics other than the indexation rate and age affect or determine the PVF for a particular defined benefit scheme.  These are as follows:

Specific cases

Comment

Indexation rate is greater than 8%

If the income stream is a defined benefit income streams that is:

  • to be indexed at a rate greater than 8% each year; or

  • included in a class of income streams that are to be indexed at a rate that is greater than 8% each year;

The pension valuation factor is the factor determined in writing by the Minister for Social Security, on a case-by-case basis, in relation to the person.

Income stream is indexed to movements in salary

If the governing rules of the superannuation fund provide that the defined benefit income stream is indexed to movements in salary, the PVF is the relevant factor specified in the table relating to an indexation rate of at least 7% but less than 8%.

Income stream is indexed to movements in a price index published by the Australian Statistician

If the defined benefit income stream is indexed by reference to movements in a price index published by the Australian Statistician, the PVF for the income stream is the relevant factor specified in the table relating to an indexation rate of at least 6% but less than 7%.

Income stream is indexed at the discretion of trustees to the superannuation fund

If the rules of a superannuation fund provide for a defined benefit income stream to be indexed at the discretion of the trustees of the fund, the indexation rate is worked out by:

  • adding together the indexation rates determined by the trustees for the person's income stream or for a class of income streams that includes the person's income stream, for the five years immediately preceding the relevant assessment year; and

  • dividing the result by 5.

If the rules of a superannuation fund provide for a defined benefit income stream to be indexed at the discretion of the trustees of the fund and the fund has been in existence, or making income stream payments to the person, for less than five years, then the indexation factor is taken to be a rate of at least 6%, but less than 7%.

General cases

The pension valuation factor for any other defined benefit income stream is the factor applicable to the pension under the following tables. Generally, the table to be used will be determined by the indexation rate. The factor is derived by selecting the row containing the person's age on their next birthday and the column containing the indexation rate applicable.  The pension valuation factor that applies is the number contained in the box where the relevant row and column combine.

The Pension Valuation Factors Table

The PVF is derived by selecting the row containing the person's age on their next birthday and the column containing the indexation rate applicable.

Indexation factor for person's income stream

Age of person on next birthday

8%

At least 7% but less than 8%

At least 6% but less than 7%

At least 5% but less than 6%

At least 4% but less than 5%

At least 3% but less than 4%

At least 2% but less than 3%

At least 1% but less than 2%

Less than 1%

Pension valuation factor

20 or less

34

27

22

19

16

14

12

11

10

21 to 25

32

26

22

18

16

14

12

11

10

26 to 30

30

25

21

18

16

14

12

11

10

31 to 35

28

23

20

17

15

13

12

11

10

36 to 40

26

22

19

16

14

13

11

10

9

41 to 45

23

20

17

15

14

12

11

10

9

46 to 50

20

18

16

14

13

11

10

9

9

51 to 55

18

16

14

13

12

11

10

9

8

56 to 60

15

14

12

11

10

10

9

8

8

61 to 65

12

11

11

10

9

8

8

7

7

66 to 70

10

9

9

8

8

7

7

6

6

71 to 75

8

7

7

7

6

6

6

5

5

76 to 80

6

6

5

5

5

5

4

4

4

81 to 85

4

4

4

4

4

4

3

3

3

86 to 90

3

3

3

3

3

3

3

2

2

91 to 95

2

2

2

2

2

2

2

2

2

96 to 100

2

2

2

2

2

2

2

2

2

101+

1

1

1

1

1

1

1

1

1