Income Assessment of Defined Benefit Income Streams

Last amended: 1 January 2016

Income assessment of defined benefit income streams

The following formula is used to determine the amount of annual ordinary income from a defined benefit income stream:

Annual ordinary income = gross annual payment - deductible amount

The deductible amount is a term defined in the VEA as an amount calculated under the taxation law, and referred to as the tax free component under the taxation law. The gross annual payment excludes any abatements.

Income assessment for social security payments

From 1 January 2016, the assessment of income from non-military defined benefit income streams changed for social security payments such as age pension.  The change limits the size of the deductible amount of a person’s non-military defined benefit income stream to a maximum of 10 per cent of the gross non-military defined benefit income stream payment.

The cap on the deductible amount does not apply to military defined benefit income streams such as those paid under the Defence Force Retirement & Death Benefits Scheme or the Military Superannuation & Benefits Scheme.

Payments for dependent children are exempt

If the income stream contract specifies that part of the income stream is made for dependent children, that amount is exempt from the income test.    

Calculating the deductible amount/tax free component

The method of calculating the deductible amount/tax free component depends on the person's individual circumstances. The available methods are:

• new 1 July 2007 rules method
• pre 1 July 2007 rules method
• the saving provision.

Determining which method applies

Income stream providers determine whether the pre 1 July 2007 rules method or the new 1 July 2007 rules method applies to the defined benefit income stream. DVA determines whether the saving provision applies. DVA cannot determine whether the pre 1 July 2007 rules method or the new 1 July 2007 rules method applies.

Deductible amount/tax free component calculation under the new 1 July 2007 rules method

Under the new 1 July 2007 rules method, the income stream provider calculates the deductible amount/tax free component under tax law. The provider then notifies DVA of the deductible amount/tax free component and the calculation method.

Deductible amount/tax free component may increase under the new 1 July 2007 rules method

The deductible amount/tax free component is based on a proportion of the total value of the superannuation interest. As the tax free component is a proportion of the gross payment, the deductible amount/tax free component may increase as payments from the income stream are increased with indexation.

Deductible amount/tax free component calculation under the pre 1 July 2007 rules method

Under the pre 1 July 2007 rules method, the income stream provider notifies DVA of the person's undeducted purchase price (UPP), the deductible amount/tax free component, and the calculation method.

No increase under the pre 1 July 2007 rules method

The deductible amount/tax free component calculated under the pre 1 July 2007 rules method is fixed and cannot increase as the income stream payment increases with indexation. However, the deductible amount/tax free component may reduce if the person makes a commutation from their income stream that includes a part of the UPP.

Saving provision

A saving provision applies where all of the following conditions are met:

• the defined benefit income stream commenced prior to 1 July 2007,
• the person receives an income support pension for a period commencing before and ending on or after their trigger day,
• the person has not made a commutation between 1 July 2007 and their trigger day,
• immediately before the trigger day a deductible amount/tax free component calculated under the pre 1 July 2007 rules method was recorded in the person's assessment,
• an income stream provider advises a new deductible amount/tax free component calculated under the new 1 July 2007 rules method, and
• the deductible amount/tax free component calculated under the new 1 July 2007 rules method is less than the deductible amount/tax free component calculated under the pre 1 July 2007 rules method.

The trigger day is the later of 1 July 2007 and the person's 60 — th birthday.

When the saving provision ceases to apply

The saving provision ceases to apply when any of the following events occur:

• the person ceases to receive an income support pension,
• the income stream ceases,
• the person dies, or
• the deductible amount/tax free component under the new 1 July 2007 rules method is greater than or equal to the deductible amount/tax free component under the pre 1 July 2007 rules method.

Abatements

An abatement occurs when an employee elects to take additional units of superannuation, but cannot pay the full amount due at the time of their retirement. The amount is repaid over a number of years after retirement by annually deducting a lump sum before the superannuation is made available. During the abatement period the abatement amount is not income and not included in the gross payment for income test purposes.