Income from Property Settlements and Life Interest

Last amended: 11 February 2003

Property Settlement

Property settlements are generally defined as the division of property following the breakdown of a marital or de facto relationship. A property settlement may also occur between multiple business structures. It would be advisable to consider the terms of any settlement documents, contracts, court orders, etc, in the course of your assessment of a property settlement arrangement. This is necessary to help establish the nature of the financial transactions in terms of capital component, interest component, and outstanding balance.

Property settlement - capital component

Property settlements are repayments of the pensioner's own property and are not assessed as income if they are received as:

• a one-time only payment, or
• regular repayments of the capital component of the property settlement.

Property settlement - interest component

A property settlement may be received in regular instalments and the order or agreement may provide for interest to be paid on the outstanding balance of the settlement. Any interest payable is assessed as ordinary income throughout the period that it accrues.

Property settlement - outstanding balance

The outstanding balance of a property settlement is an asset and is reviewed at the same time as an income review is made. Any interest payable on the outstanding balance is assessed as ordinary income throughout the period that it accrues.    

Life interest in property

A pensioner may have a life interest in an asset that may involve real estate, investments or even a business. Any income received by or credited to the pensioner is assessed as ordinary income.

If a pensioner only has the right to occupy a property in which they have a life interest, they are not automatically entitled to income from rent. This depends on the terms of the bequest.

Life interest in an estate

A pensioner may have a life interest created by a will, where they retain the right to the income of an estate during their lifetime. Any income received by or credited to the pensioner is assessed as ordinary income.

The income from a life interest in an estate cannot be assessed until probate has been granted, unless the income is actually received by the pensioner. A remainder interest is not assessed, on the basis that no income or benefit is currently being received.

Life interest in income - non-discretionary trust management

A pensioner may have a life interest in income from real estate, investments or a business managed by a non-discretionary trust. Any allocation or distribution received by or credited to the person is assessed as ordinary income.

Life interest in income - self-management

A pensioner may have a life interest in income from real estate, investments or a business, and has effective control over how they are managed.  The pensioner's income from these sources is assessed according to the structure of the life interest assets using the appropriate guidelines for assessing:

• direct investments,
• managed investments, or
• businesses.

Self-management could involve a discretionary trust of which the pensioner is trustee and sole beneficiary.