B29/1990 COMPULSORILY PRESERVED SUPERANNUATION

DATE OF ISSUE:  6 AUGUST 1990

COMPULSORILY PRESERVED SUPERANNUATION

PURPOSE:

1.The purpose of this instruction is to advise staff of changes in assessment procedures for superannuation benefits which are generally retained in super funds, super bonds, approved deposit funds (ADFs) or deferred annuities (DAs).

2.These products, in whole or part, may be subject to compulsorily preserved standards which restrict access to benefits until retirement after attaining 55 years of age.  For pension purposes, all amounts contained within super funds and super bonds are considered to be compulsorily preserved benefits in their entirety.  ADFs and DAs may contain preserved and non-preserved benefits.

ASSESSMENT PROCEDURES:

3.Amendments to Sections 35, 37B and 50(1)(iiic) of the VEA effective from 1 February 1990 have set new rules under the income and assets tests for the assessment of superannuation products according to the age of the person holding such products:

Income Test:From 1 February 1990 the earnings on superannuation benefits which cannot be used until retirement will be disregarded under the income test until attaining "pensionable age" which is defined in Section 35(1) of the Act as 60 years for a male veteran, 55 years for a female veteran, 65 years for any other male and 60 years for any other female. Upon attaining pensionable age, a pensioner is subject to assessment of income from any holdings of superannuation products.  The amount of the income from these products is to be assessed according to the provisions set down for managed investment products.

Assets Test:From 1 February 1990 preserved benefits will be disregarded under the assets test until the person attains pensionable age.  The preserved benefit is then assessed as an asset.

Withdrawal Before Pensionable Age:From 1 February 1990 where a person makes a withdrawal from a preserved benefit prior to pensionable age, any profit or capital growth component of that withdrawal which was earned while that person was in receipt of a pension is to be assessed as income for twelve months following the date of withdrawal.  In the case where the withdrawal was from a super fund or a super bond, the balance of moneys remaining in the product will continue to be regarded as a preserved benefit and disregarded under the income and asset tests until the pensioner attains pensionable age.  In the case of an ADF or DA, the withdrawal is generally taken to indicate retirement and the balance of the investment is no longer considered a preserved benefit.

4.These changes mean that where a service pensioner has attained pensionable age of 60 years for a male or 55 years for a female:-

.a super fund or super bond will be subject to assessment as a managed investment product; and

.the total amount of an ADF or DA will be assessed as a managed investment product.

5.In all cases, the examiner will have to verify who owns the product which is to be assessed and whether or not that pensioner is of "pensionable age".  If the pensioner is not of "pensionable age", the examiner will then have to record on file, details shown in documentary evidence received from the pensioner of any "compulsorily preserved" amounts.  All superannuation funds, bonds, ADFs and DAs will be recorded on the PIPS system as set out below.

6.Any assessable product is to be entered onto the Other Assets (OA) screen with a type of "OT" (Other).  Examiners will need to obtain the information regarding unit values, earnings rates, etc. from either the Investment Policy Officer in each State Branch or the fund manager.

7.Until system changes are made to accommodate the new policy, examiners are to enter compulsorily preserved benefits on the OA screen as type OT with an asset value of one cent, "0.01", and no income amount.  Reviews are to be entered manually for the pensioner/owner's "pensionable age" birthday.  On review, the product will be entered through the II screen as a normal managed investment.

8.A data collection exercise is currently being conducted with the objective of listing superannuation and rollover products on the managed investment database.  The products may then be viewed on II screen and it will be possible to add the products on the MI screen through that facility.

9.Inevitably some of the lesser known funds and super investments will not be found on the II screen.  The Investment Policy Officer should be consulted for advice on the action to be taken with these products.

PROCEDURES

10.The following procedures are divided into five sections:

.assessment of preserved benefits of non pensionable age pensioners;

.reassessment on implementation;

.assessment of withdrawals from preserved benefits prior to pensionable age;

.assessment at pensionable age;

.other issues.

Assessment of Preserved benefits of non-pensionable age pensioners

11.To establish whether a pensioner has a preserved benefit, the he/she should be asked to provide evidence.  In the case of an ADF or DA, the pensioner's copy of the Australian Taxation Office Rollover Payment Notification should be sought.  If this is no longer available, the pensioner should be asked to obtain documentary evidence of the preserved benefit from the rollover fund.  If the information is not provided by the pensioner, the full amount invested in the ADF or DA should be assessed under the normal investment rules for managed investments.  In the case of superannuation funds or bonds only the present capital value of the benefit need be ascertained.

12.Some ADFs and DAs may contain either preserved or non-preserved components or a mixture of both.  Only the preserved component should be assessed under these procedures.

13.Any amount identified as a preserved benefit should be disregarded for income and asset test purposes until pensionable age.  However, if a withdrawal is made prior to pensionable age the procedures outlined in paragraphs 19 to 24 apply.

14.A review should be inserted for the date when the pensioner reaches pensionable age.

Reassessments on implementation

15.Existing pensioners will be reassessed under the new rules as they come to notice.  This could be under the normal review process, or by the pensioner contacting the Department.

16.When on or before 1 May 1990 a current pensioner advises the Department of a preserved benefit, the reassessment takes effect from the most recent of the following dates:

.1 February 1990, or

.the day on which the person acquired the preserved benefit, or

.date of grant of service pension.

That is, the earliest period in respect of which arrears can be paid is 1 February 1990.

17.If a normal review conducted prior to 1 May 1990 identifies a case involving preserved benefit, arrears may be payable from 1 February 1990.

18.Client advice should be made on reassessment on implementation.

Assessment of withdrawal of preserved benefit when pensioner not of pensionable age

19.Any growth attributable to a period during which the person was in receipt of pension will be assessed as income for 12 months from the date of the withdrawal.  However those periods where the person was in receipt of pension, but which occurred prior to a continuous period of two or more years during which no pension or benefit was paid, are excluded.  Income is calculated as follows:

a)calculate start of the assessable period by disregarding periods before a two year period of non-receipt of pension/benefit from DVA or DSS (a check with DSS needs to be made);

b)obtain value of preserved benefit at start of assessable period, irrespective of whether the preserved benefit was in another fund;

c)obtain value of preserved benefit immediately prior to withdrawal;

d)calculate growth by (c-b);

e)if partial withdrawal reduces assessable growth proportionately, as follows;

Growth (d) x Amount of withdrawal

Value of Comp. Pres. Super. before withdrawal (c)

f)if there is a gap in eligibility of less than two years after the start of the assessable period, disregard growth in respect of that period;

Growth (d or e) x Period in receipt

Assessable period

g)income assessed is to be included for twelve months from the date of withdrawal.

20.An example of the calculation of income using the steps outlined in 19 above is illustrated hereunder;

Client is granted service pension (invalidity) on 1 June 1990.  He has no prior pension/benefit from DVA or from DSS.  Value of super fund preserved benefit at date of grant is $95,000.  Client withdraws $20,000 on 1 January 1991.  At time of withdrawal, value of the preserved benefit is $100,000.

Income is calculated as follows:

a)assessable growth period commences 1/6/90;

b)value of preserved benefit at start of assessable period is $95,000;

c)value of preserved benefit at withdrawal is $100,000;

d)total growth is $100,000 - $95,000 = $5,000;

e)assessable growth is [$5,000*$20,000] / $100,000 = $1,000;

f)does not apply;

g)hold income of $1,000 per annum for 12 months from 1 January 1991.

21.As outlined at Attachment A, paragraph 4, where a partial withdrawal of preserved benefit is made from a super fund, the remaining balance is maintained as a preserved benefit.

22.A review should be inserted to delete the income assessed on the anniversary of the withdrawal.  An advice letter should be sent to the pensioner.

23.As outlined at paragraph 12, where the withdrawal is "rolled over directly" into an immediate annuity, no income is assessed in respect of that withdrawal but the normal treatment for immediate annuities applies.

24.A withdrawal is regarded as directly rolled over if it is paid to the fund manager of the annuity directly by the institution operating the ADF, DA or superannuation fund.  That is, if the moneys withdrawn are held by the client at any point of time in these transactions, it is not considered a direct rollover.

Assessment at pensionable age

25.When a pensioner reaches pensionable age normal income and asset rules apply to any preserved benefit.  This means that the preserved benefit will be treated as an assessable asset.  Income test treatment will depend upon the type of investment and when it was purchased.  For instance, if the preserved benefit is taken to have commenced after 8 September 1988, income in respect of that benefit will be assessed on an ongoing basis.

26.An example of reassessment of a male veteran pensioner reaching age 60 years illustrates procedures.  He has a $60,000 capital guaranteed deferred annuity, of which $20,000 is preserved.  The deferred annuity has an earnings rate of 12.5%.  Prior to pensionable age, income of $5,000 per annum ($40,000 x 12.5%) would have been assessed.  On reaching pensionable age, income of $7,500 per annum ($60,000 x 12.5%) would be assessed.  The relevant assessable asset would increase from $40,000 to $60,000.

27.Commencement date of a preserved benefit is as follows:

.for an ADF, DA or superannuation bond - the date the investment was made.

.for a benefit retained in the original superannuation fund - the date of commencement of fund membership.

30.Where a pensioner is re-assessed on reaching pensionable age a manual advice should be issued to the pensioner.

Other issues - switching

31.As a general rule the existing policy on switching of managed investments will apply.  That is, the pensioner is considered to have realised those investments from which he/she has switched and to have invested in a new range of products to which he/she has switched.

32.Prior to pensionable age, if the benefits remain preserved after switching, no income will be assessable, in line with the policy set out above.

33.After attaining pensionable age, the commencement date of investment for the preserved benefit is taken to be the date on which the switch occurred.  Where a preserved benefit is accessed prior to pensionable age, the profit or growth component of the withdrawal is to be calculated on the basis of the earlier date for the product held before the switch was made.

34.The following example may help to clarify these switching rules:

.pensioner purchased a market linked ADF pre 9/9/88;

.on 1/6/90 pensioner switches to a different market linked ADF.  At the date of switch the pensioner is not of pensionable age;

.for the non-preserved component of the original ADF, a realisation would be deemed to have occurred.  The second ADF would be assessed on an ongoing basis;

.however, growth on the preserved component of the first ADF will not be assessed;

.on reaching pensionable age, the preserved benefit component would be regarded as having been invested on the date the switch occurred.

35.Attachment A details the legislative changes and the interpretation of those changes.

PETER HAWKER

NATIONAL PROGRAM DIRECTOR

BENEFITS

1 AUGUST 1990

ATTACHMENT A

LEGISLATION

1.Changes to the Veterans' Entitlements Act effective from 1 February 1990 are:

I. Section 35, Subsection (1):

-insertion under the definition of market linked investment "a superannuation benefit vested in a person held in a superannuation fund (unless a superannuation pension funded by that benefit is presently payable to that person)".

-insertion of "(including an investment in the nature of superannuation)" after "investment" in the definition of return.

-insertion of the definition of pensionable age (i.e. female veteran - 55; male veteran - 60; any other woman - 60; and, any other man - 65).

-insertion of the definition of assessable growth component (i.e. in relation to an amount of superannuation benefit, means so much (if any) of the return as is attributable to the assessable period).

-insertion of the definition of assessable period (i.e. in relation to a person, means any period during which the person received a relevant pension, except any such period occurring before a continuous period of at least two years during which the person did not receive relevant pension).

-insertion of the definition of compulsorily preserved superannuation (i.e. in relation to a person, means a superannuation benefit of a person the person's access to which is restricted by specified laws or contract).

-insertion of the definition of superannuation benefit (i.e. in relation to a person, means a benefit arising directly or indirectly from amounts contributed to a superannuation fund in respect of the person).

-insertion in the definition of income, subsection (ad), to exclude any return from a compulsorily preserved benefit prior to pensionable age

II. Section 35, Subsection (10A):

-insertion of the new subsection, "For the purposes of the definition of 'accruing return investment' in Subsection (1), a superannuation benefit vested in a person that is held in a superannuation fund is to be taken to be an investment of that person, unless a superannuation pension funded by that benefit is presently payable".

III. Section 37B:

-substitution of the Section with, "(1) Where:  (a) a person becomes entitled to receive an amount that was, until the person became so entitled, a compulsorily preserved superannuation benefit; and (b) the person has not reached pensionable age; the person is, for the purposes of this Act, to be taken to receive one fifty-second of the assessable growth component of that amount as income of the person during each week in the period twelve months starting on the day when the person becomes entitled to receive that amount.  (2) Subsection (1) does not apply to any amount received by a person by way of a superannuation pension or a payment under an immediate annuity."

IV. Section 50(1):

-insertion of a new subsection (iiic) which excludes holding of the value of any compulsorily preserved superannuation benefit under the assets test prior to pensionable age.

INTERPRETATION OF THE LEGISLATION

Prior to Pensionable Age

2.Pensionable age is defined in the legislation as female veteran - 55, male veteran - 60, any other woman - 60 and any other man - 65.  From 1 February 1990 income will not be assessed on any preserved benefit unless a withdrawal is made.  That is, prior to pensionable age, a pensioner is only considered "entitled to receive" a benefit where the product has been accessed and moneys withdrawn.

3.If a withdrawal is made, any growth attributable to a period during which the person was in receipt of pension or benefit will be assessed as income for 12 months from the date of withdrawal.  However those periods where the person was in receipt of pension, but which occurred prior to a continuous period of two or more years during which no pension or benefit was paid, are excluded.As a matter of policy, if the money is rolled over directly into an immediate annuity, the growth will not be assessed as income.  The immediate annuity will be treated in accordance with the current rules.

4.A pensioner may choose to withdraw only part of the moneys contained within a product.  In the case of a partial withdrawal from a super fund or a super bond, the balance of the investment remains a preserved benefit.  A partial withdrawal from an ADF or a DA is taken to indicate genuine retirement and the balance of the investment is no longer considered a preserved benefit.  However, in the case of an ADF or DA where the partial withdrawal has been made under the "personal hardship" condition specified under the occupational superannuation standards, then the balance of the investment is to continue to be held as a preserved benefit.

Pensionable Age

5.On the pensioner reaching pensionable age, the preserved benefit will be assessed under usual managed investment rules.  For example, if the investment was a market-linked product and commenced after 8/9/88, income would be assessed on an ongoing basis using an earnings rate applied from the date of attaining pensionable age.  That is, the product is assessed according to the provisions for managed investments from the date of attaining pensionable age and any earnings on that product which accrued before that date are not assessed as income at any stage whether or not that person had previously been receiving a pension payment.

6.In applying the provisions for managed products to preserved benefits, the commencement date of the product is taken to be the date at which the person first joined the super fund or purchased the super bond, ADF or DA.

ASSETS TEST

Prior to Pensionable Age

7.From 1 February 1990, the value of any preserved benefit will be disregarded under the Asset Test.

In the event of a partial withdrawal from a preserved benefit the balance of the investment in a super fund or a super bond will be maintained as a preserved benefit.  The balance held in an ADF or DA will no longer be considered as a preserved benefit and will be treated as an assessable asset except where the withdrawal was made under conditions of "hardship".

Pensionable Age

8.Once a pensioner attains pensionable age, the preserved benefit will be treated as an assessable asset.