Income Assessment of Purchased Income Streams

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Income assessment of purchased income streams

For a purchased income stream that is either asset-test exempt or asset-tested (long term), the assessable income equals the annual income stream payment less a deduction that is based on the return of the purchase price over the term of the income stream.    

The annual amount of ordinary income produced by these income streams is determined by the following formula:

Annual Ordinary Income = Annual payment – (Purchase price ÷ Relevant number).

Purchase price to be reduced by commutations and residual capital value

Where partial commutations have been made from the income stream, the purchase price should be reduced by the amount of the commutations. For income streams that are not asset-test exempt income stream, the purchase price must be further reduced by the income stream's residual capital value (if any).

Example of income assessment

Mark is sixty five years old and single. He purchases an asset-test exempt income stream for $100,000 with a term of 16 years. His life expectancy at the commencement day is 15.41 years, (which for a life expectancy income stream must be rounded up to the next whole number being 16 years). His annual payment from the annuity totals $9,895. His assessable income from this income stream equals:

$9,895 - ($100,000 ÷ 16 years) = $3,645 per annum.

It should be noted, that if this product were paid for life, then the relevant number could not be rounded up in the assessment.

Minimum payment for certain income streams

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An account based income stream must make one or more payments during the financial year and the annual payment must not be less than the minimum payment.

Account based income streams must meet certain requirements regarding minimum payments. If the annual payment under the income stream is less than the minimum payment, the assessable income is taken to be the minimum payment.

For allocated income streams, the minimum payment is calculated:

• before 1 July 2007 using a pension valuation factor, using the following formula:

​     minimum payment = account balance ÷ payment valuation factor; and

• from 1 July 2007 using a percentage factor, using the following formula:
  
  minimum payment = account balance x percentage factor

For market linked income streams, the minimum payment is calculated using a payment factor using the following formula:

minimum payment = account balance ÷ payment factor    

For the purposes of each formula:

• the account balance is the balance as at 1 July or, if the payment is for the first year, the balance at the commencement day,
• the result is rounded to the nearest $10.00.

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

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

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

Temporary relief was again applied over the period 1 July 2019 to 30 June 2023 in response to the Coronavirus pandemic.  Income stream recipients were able to elect to reduce their minimum annual payment to 50%  of the required minimum payment for the period commencing 1 July 2019 to 30 June 2023.

Calculating the annual payment

The annual payment under the income stream is calculated by the income stream provider and must always satisfy the rules for the minimum and maximum payments relevant to that particular type of income stream. The annual payment for an income stream is calculated using the formula:

annual payment = A + B

If the year is a part year, the annual payment reported by the income stream provider will be annualised using the formula:

annual payment = (A + B) x C ÷ D

where:

• A is the amount received so far during the financial year
• B is the amount expected to be received for the rest of the financial year
• C is the number of days in the financial year, and
• D is the number of days between the commencement of the income stream and 30 June.

Income assessment of asset-tested income streams (short term and long term deemed)

An income stream that is an asset-tested income stream (short term)  or an asset-tested income stream (long term) deemed is treated as a financial investment. Its assessable income is determined under the deeming provisions.    More

Income assessment of asset-tested income streams (lifetime)

An income stream that is an asset-tested income stream (lifetime) has the following income test applied: