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Assets Assessment of Defined Benefit and Purchased Income Streams
Last amended: 13 May 2008
Asset value of 100% asset test exempt income streams
Regardless of whether an income stream is a 100% asset test exempt income stream or a defined benefit income stream, no asset value is held in the assessment.
Asset value of asset tested income streams and 50% asset test exempt income steams
For asset tested income streams, the asset value assessed is the asset value of the income stream. If the income stream is a 50% asset test exempt income stream, only 50% of the asset value is assessed. The asset value is determined either once per year or twice per year as described in the following table.
If an income stream pays a pensioner...
Then the asset value is determined...
Once per year
Once a year at the start of the year
More than once per year
Twice a year at the start of each six month period.
If the income stream has no account balance, the asset value is determined using the following formula:
Asset value = purchase price - [(purchase price - residual capital value) ? relevant number] x term elapsed.
If the income stream has an account balance, the asset value is the current account balance.
Note – the purchase price should be adjusted to take account of any commutation — s made from the income stream since commencement.
Calculation of term elapsed
The term elapsed is the number of years that have elapsed since the income stream's commencement day. The number of years is rounded down to the nearest:
- half-year, when the asset value is determined on a six monthly basis, or
- whole year when the asset value is determined annually.
Example of asset value of asset tested income streams
Sally is sixty five years old and single. She purchases a ten year annuity for $150,000 with a residual capital value of $20,000. She receives a total payment of $18,337 per year. Monthly payments commence on 1 January. Her assessable asset from 1 January for the first six months will be:
$150,000 - [($150,000 - $20,000) ? 10 years] x 0 years = $150,000.
Her assessable asset from 30 June in that year will be:
$150,000 - [($150,000 - $20,000) ? 10 years] x 0.5 years = $143,500.
Example of asset value after a partial commutation
John purchases a five year term annuity for $50,000 with no residual capital value. At the end of two years, the assessable asset value is: $50,000 - [($50,000-$0) ? 5] x 2 = $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 - $0) ? 5] x 2 = $44,000 - $17,600 =$26,400.
Assets test assessment of defined benefit income streams
Under Commission determinations 1998/11, 1998/12 and 1999/6, defined benefit income streams are determined to be 100% asset test exempt.
An income stream is an asset-test exempt income stream if it is purchased before 20 September 2007 and must be:
- paid for the income support recipient's lifetime for lifetime products; or
- paid for a fixed period based on the income support recipient's life expectancy or that of their reversionary partner's;
- make payments at least annually;
- specify the payment to be made in the first year;
- not pay less than the previous year's payments in any year;
- limit indexation to no more than 5% or CPI plus 1% in any year;
- convert the purchase price wholly into income;
- have no residual capital value;
- have limited commutation;
- have limited reversionary benefits;
- have limited transferability;
- not be able to be borrowed against; and
- in respect of market-linked income streams, must make payments according to the formula in the Superannuation Industry (Supervision) Regulations 1994.
Veterans' Entitlements Act 1986:
- section 5JA - lifetime income streams;
- section 5JB - life expectancy income streams; or
- section 5JBA - market-linked income streams.
A defined benefit income stream is an income stream where the payments are not fully determined by a purchase price. Instead, payments are made with reference to a set formula based on:
- the person's salary before retirement,
- years of service, and/or
- the governing rules of the income stream.
According to subsection 5J(1) of the VEA, an income stream includes:
- an income stream arising under arrangements that are regulated by the Superannuation Industry (Supervision) Act 1993; or
- an income stream arising under a public sector scheme (within the meaning of that Act); or
- an income stream arising under a retirement savings account; or
- an income stream provided as life insurance business by a life company registered under section 21 of the Life Insurance Act 1995; or
- an income stream provided by a friendly society (within the meaning of the Income Tax Assessment Act 1996); or
- an income stream designated in writing by the Commission for the purposes of this definition, having regard to the guidelines determined under subsection 5J(1F) of the VEA;
but does not include any of the following:
- available money;
- deposit money;
- a managed investment;
- an investment in a public unit trust;
- an investment in an insurance bond;
- an investment with a friendly society;
- an investment in a superannuation fund;
- an investment in an approved deposit fund;
- an investment in an ATO small superannuation account;
- a listed security;
- a loan that has not been repaid in full;
- an unlisted public security;
- gold, silver or platinum bullion; or
- a payment of compensation in relation to a person's:
- inability to earn, derive or receive income from remunerative work; or
- total and permanent disability or incapacity.
The purchase price of an income stream is the nominal sum of the paymetns made to purchase the income stream (including amounts paid by way of employer and employee contributions) less any commuted amounts.
Note: In determining the means test assessment of asset-tested income streams (lifetime), the purchase price is not used. Rather, the grossed up purchase amount.
Legislation: Section 5J(1) of the VEA
The residual capital value is the amount (if any) remaining at the end of an income stream's term, consisting of a portion of the initial capital invested in the income stream.
An income stream's relevant number is the length of time an income stream is paid for. It can be a fixed term or the life expectancy factor of the payee or reversionary beneficiary.
A commutation, in relation to an income stream, is the conversion of part or all of the future income stream payments into a lump sum. A commutation is similar to a withdrawal.
The commencement day in relation to an income stream is the first day of the period to which the first income stream payment relates. This is usually one instalment period before the date of the first income payment.
The commencement day cannot occur prior to:
- when all of the capital which is to support the income stream is available to the income stream provider;
- the day established as the commencement day in relation to the terms and conditions agreed between the income stream provider and the individual; and
- in circumstances where the individual or their beneficiary becomes entitled to the income stream as per the terms and conditions, the time at which the entitlement to start the income stream arises.
Legislative reference: subsection 5J(1) of the Veterans' Entitlements Act 1986.