Asset-Test Exempt Income Streams - Life Expectancy

Purchase date

To be an asset-test exempt income stream, the income stream must have been purchased before 20 September 2007, unless certain conditions are met. The purchase date also determines whether the income stream is 100% or 50% asset-test exempt.     

General characteristics of life expectancy asset-test exempt income streams

An asset-test exempt life expectancy income stream has all of the following characteristics:

• if the income stream is purchased before 20 September 2004, is purchased on or after the day that the person reaches pension age,
• is payable for a fixed term based on life expectancy,
• has a fixed annual payment, or an indexed annual payment with indexation capped at no greater than 5% or CPI+1%,
• commences on the day it is purchased or acquired,
• converts the purchase price wholly into income,
• has no residual capital value,
• is non-commutable except in limited circumstances,
• has limited reversionary benefits,
• cannot be used as security for borrowing, and
• if the income stream is a life expectancy income stream paid from a self-managed superannuation fund or a small APRA fund, has a current actuarial certificate in force.     
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Jointly owned income streams

Where an income stream is jointly owned, the characteristics of the income stream must be satisfied in relation to each owner.

Commencement day

An asset-test exempt life expectancy income stream's commencement day is the first day of the period to which the first payment relates, even if the payment is made at the end of a twelve month period. The commencement day is usually the day the income stream was purchased.

Term and relevant number of an asset-test exempt life expectancy income stream

The term of the income stream is a fixed term, as specified in the income stream contract, and is also known as its relevant number. To comply as an asset-test exempt income stream the relevant number must meet the criteria in the table below. The relevant number is always calculated using the person's age on the income stream's commencement day, which is the same as the purchase date for purchased income streams.     

Amount of annual payments

Payments must be made at least annually. The contract must specify the total amount of payments that may be made in the first year after the commencement day, excluding allowable commutations. In any other year the payments may only vary by:

• indexed amounts, and
• allowable commutations.

The yearly indexation cannot be a negative value and must be capped at the larger of:

• 5% if the indexation method is fixed, or
• the CPI plus 1% if the indexation method is not fixed.

Purchase price and residual capital value

The purchase price is the amount invested to purchase the income stream, less any allowable commutations. The amount paid as the purchase price must be wholly converted into income. The income stream must have no residual capital value.

Income stream is non-commutable

In order to be assessed as asset-test exempt, the income stream must be non-commutable except in limited circumstances. The benefit payable after the commutation cannot be greater than the benefit payable before the commutation. Commutation is allowed in the following circumstances:

• if the income stream was purchased before 20 September 2004:

• on death of the person to a reversionary beneficiary or the person's estate, or
• on death of the reversionary beneficiary to another reversionary beneficiary or to the reversionary beneficiary's estate,

• if the income stream was purchased on or after 20 September 2004:

• on death of the primary beneficiary where there is no reversionary partner, or
• where the income stream is paid to the reversionary partner following the death of the primary beneficiary, on death of the reversionary partner,

• if the income stream is not a commutation funded income stream, within six months of the commencement day,
• where the commutation is transferred directly to the purchase of a new income stream with the characteristics of an asset-test exempt income stream,
• to the amount necessary to pay a superannuation contribution surcharge amount,
• to the amount necessary to pay a hardship amount,
• to the amount necessary to pay the person's spouse or former spouse in a payment split under Part VIIIAA or Part VIIIB of the Family Law Act 1975.

Commutation of non-compliant self managed superannuation or small APRA fund 100% asset-test exempt income streams

In recognition of the global financial crisis of 2008 and 2009, temporary relief has been provided for holders of 100% asset-test exempt income streams, sourced from a SMSF or SAF, who are forced to restructure after failing to meet the high probability test.    

Security for borrowing

For an income stream to be asset-test exempt, neither of the following can be used as security for borrowing:

• the capital value of the income stream, nor
• the income from the income stream.

Transfer to a reversionary beneficiary

In order for a life expectancy income stream to qualify for asset-test exempt status, the contract or governing rules must specify that the income stream can only be transferred to a reversionary beneficiary or to the person's estate on the death of the primary beneficiary. To ensure that no income is deferred, the payment to a reversionary beneficiary cannot be greater than the payment the primary beneficiary received immediately before death.

Re-testing of reversionary income streams purchased before 20 September 2004

If the primary beneficiary or owner of a:

• life expectancy, or
• 15 year minimum term asset-test exempt income stream

dies and the income stream reverts to the nominated reversionary beneficiary, the income stream must be re-tested for asset-test exempt status as at the date of reversion using the age and life expectancy of the reversionary beneficiary and remaining term of the income stream on that date.

If, on the date of reversion:

• the reversionary beneficiary had not attained pension age, or
• the remaining term of the income stream did not meet the term requirements for a life expectancy or 15 year minimum term income stream purchased before 20 September 2004,

the income stream would no longer meet the characteristics of an asset-test exempt income stream and would instead be assessed as an asset-tested income stream (long term). The income stream retains the same commencement day, purchase price and relevant number regardless of whether it is assessed as asset-test exempt or as asset-tested. The gross payment may reduce as specified in the income stream contract.    

Re-testing of reversionary income streams purchased on or after 20 September 2004

The income stream continues to be asset-test exempt if the reversionary beneficiary was the partner of the primary beneficiary on the day of the primary beneficiary's death. In all other cases, the income stream ceases to be asset-test exempt on reversion. In any case, the income stream retains the same commencement day, purchase price and relevant number. The gross payment may reduce as specified in the income stream contract.

Period of payments to reversionary beneficiary

The reversionary benefit for life expectancy income streams is the balance of payments that would have been paid to the primary beneficiary under the contract terms.

Removal or change of reversionary beneficiary

Removing or changing the reversionary beneficiary has no impact on the asset test exempt status of the income stream.