DATE OF ISSUE: 6 MAY 1997
ASSET TESTING OF ALLOCATED PENSIONS & INCOME STREAM PRODUCT ASSESSMENT INFORMATION
Purpose
The purpose of this Departmental Instruction (DI) is to:advise of the implementation and effect of the Budget 1996/97 measure to align DVA assets test treatment of allocated pensions with that of DSS; and provide information about the “undeducted purchase price” used in the calculation of income for allocated pensions.
Table of Contents
BACKGROUND
PREVIOUS INCOME AND ASSET TEST RULES
NEW ASSET TEST RULES
LEGISLATION CHANGES
SPECIAL DATA COLLECTION EXERCISE
SYSTEMS AND ADVICE LETTER CHANGES
WHERE TO RECORD ALLOCATED PENSIONS ON PIPS
FORMS AND POLICY DOCUMENTATION CHANGES
PUBLICITY
INCOME STREAM PRODUCT INFORMATION
CONTACT FOR QUESTIONS
INCOME STREAM PRODUCTS - SUMMARY OF CURRENT DVA ASSESSMENT RULES
INCOME STREAM PRODUCTS - DEFINITIONS USED BY DVA
BACKGROUND
What is an allocated pension? An allocated pension is an investment account in a superannuation fund which the purchaser can use to provide regular income payments when they retire. Unlike traditional superannuation pensions which have fixed payments (with or without indexation), the owner of an allocated pension can elect to draw a pension at a variable rate (subject to minimum and maximum limits) until the pension account balance is exhausted.
DSS July 1994 changes
In July 1994 the DSS treatment of allocated pensions for age pension purposes was amended so that the current asset value of allocated pension investments purchased on or after 1 July 1992 was taken into account under the assets test regardless of the person's age.
Rationale for DSS changes
DSS introduced the asset testing of allocated pensions because it was recognised that allocated pensions did not have the characteristics of traditional superannuation pensions in that the investor could access the underlying assets of the investment at any time.
DVA did not follow DSS changes
DVA did not introduce a similar amendment at the time of the DSS amendment and continued to assess allocated pensions using the superannuation pension rules.
Budget 1996/97 - DVA aligns with DSS
In the 1996/97 Budget a measure was introduced to align the DVA assets test treatment of allocated pensions with that of DSS. Detail on those changes is provided in this DI.
PREVIOUS INCOME AND ASSET TEST RULES
Allocated pensions previously considered as super. pensions Prior to introduction of the DVA Budget 1996/97 changes (outlined later in this DI), there was no specific definition of “allocated pension” in the Veterans' Entitlements Act 1986 (VEA). Therefore, allocated pensions were considered to be superannuation pensions in accordance with subsection 5J(1) of the Veterans' Entitlements Act 1986 (VEA).
Previous asset test rules
Under the previous rules, allocated pensions were not asset tested. DVA previously assessed allocated pensions by applying the existing superannuation pension rules and the asset value was disregarded for the purposes of the assets test in accordance with paragraph 52(1)(d) of the VEA.
Income test rules
Under the income test assessable income was calculated using the gross pension payment minus the deductible amount in accordance with section 46U of the VEA. (See the “Income Stream Products” tables at pages 13 to 15 of this DI for more information about the calculation of assessable income for allocated pensions.)
Income test rules unchanged
It is most important to note that the income test rules described above have not changed and will continue to apply to all allocated pensions regardless of purchase date.
NEW ASSET TEST RULES
New asset test rules
The 1996/97 Budget introduced measures which ensure that the current asset value of allocated pensions purchased on or after 21 August 1996 will be taken into account for the purposes of the VEA assets test (regardless of a person's age) in accordance with amended paragraph 52(1)(d) of the VEA. The new rules only apply to the asset value of allocated pensions purchased on or after 21 August 1996.
No change to rules for allocated annuities
The changes do not apply to allocated annuities. Allocated annuities will continue to be assessed under the rules that apply to immediate annuities. (See the “Income Stream Products” tables at pages 13 to 15 of this DI for more information about the calculation of assessable income for allocated annuities.)
Rollover and commutation policy
It is important to note that it remains current policy that where a person rolls over or commutes their allocated pension to another allocated pension, they are taken to have purchased a new allocated pension on the date of rollover or commutation. Therefore, a person who purchased an allocated pension prior to 21 August 1996 may be affected by the new asset test rules where they take action on or after 21 August 1996 to roll over or commute an amount from their pre 21 August 1996 to another allocated pension. In such circumstances the allocated pension purchased through the roll over or commutation action will be taken to have been purchased on the date of roll over or commutation ie., the specific action date on or after 21 August 1996.
LEGISLATION CHANGES
Legislation changes
The changes made to the VEA to introduce asset testing of allocated pensions are contained in the Veterans' Affairs Legislation Amendment (1996-97 Budget Measures) Act 1997. The following is a brief description of the legislative changes: · section 5 (index of definitions) amended to include a reference to the newly inserted definition of “allocated pension”; · subsection 5J(1) amended to note that definition of “allocated pension” found at subsection 5J(10);
the following definition added at the end of section 5J; “(10) A pension is an allocated pension for the purposes of this Act if: (a) the pension was purchased after 20 August 1996; and (b) either: (i) the rate of payment of the pension; or (ii) the basis for variations in the rate of payment of the pension: is not fully defined in the relevant trust deed or contract.”; and
paragraph 52(1)(d) amended to ensure that the value of a superannuation pension is disregarded for the purposes of the assets test provided that it is a superannuation pension “other than an allocated pension”.
Royal Assent Royal Assent to the Veterans' Affairs Legislation Amendment (1996-97 Budget Measures) Act 1997 was given on 5 March 1997.
When the changes take effect and persons affected
Although the legislative amendments specify that allocated pensions purchased on or after 21 August 1996 will be subject to the new rules, it is important to note that the amending Act specifies (subsection 2(1)) that the new legislation commences on Royal Assent to the amending Act. Therefore the earliest that the provisions may be applied to pensioner assessments is on or after 5 March 1997 - the measure is not to be applied retrospectively to 21 August 1996.
SPECIAL DATA COLLECTION EXERCISE
Special data collection exercise
A special, one-off data collection and reassessment exercise will be performed following Royal Assent to apply the new allocated pension asset assessment rules to pensioners who purchased an allocated pension on or after 21/8/96. The aim of this exercise will be to ensure that the current asset value of these allocated pensions is collected and included in pensioner assessments. More detailed processing information will be forwarded to State Offices in a specific processing guide.
SYSTEMS AND ADVICE LETTER CHANGES
PIPSPC changes
The only change to the Pensions Information Processing System (PIPSPC) is that the “Allocated Pension” data collection screen has been modified so that an “Asset Value” field will allow input of an asset value if a date of 21/8/96 or greater is entered in the “Start Date” field. Note that the “Asset Value” field must be entered for an “Add” action to be completed successfully.
Changes to auto reassessment routine
The automatic assessment routine which calculates and applies the total of a person's assets to their assessment will take into account the asset value of an affected allocated pension recorded in a person's assessment for asset test purposes.
Changes to advice letters
Daily advice letters will be to include the following details for an allocated pension purchased by a person on or after 21 August 1996:
name of allocated pension product; ·current asset value of the allocated pension; and income per fortnight currently held for the product. These details will appear in advice letters under the new income/asset group heading “Allocated Pensions” (allocated pensions - together with allocated annuities - are currently listed under the “Immediate Annuities” grouping). These changes were scheduled to be made upon implementation of the changes to the treatment of allocated pensions. However, implementation of the changes has been delayed and is now due to occur during the next two months.
WHERE TO RECORD ALLOCATED PENSIONS ON PIPS
Finding the PIPSPC Allocated Pension screen
The “Allocated Pension” data collection screen is accessed through the PIPSPC Worksheet Navigator path “Income and Assets/ Income Streams/ Allocated Pensions”.
DO NOT use the super. Screen
Some staff may still be recording allocated pensions on the PIPSPC superannuation data collection screens “Miscellaneous (Fixed Pension)” or “Miscellaneous (Indexed Pension)”. Staff are reminded that all allocated pensions held by pensioners must be recorded on the Allocated Pensions screen only.
Remove allocated pensions from super. Screen
Should allocated pension records be found on the superannuation screen when processing a client review, action should be taken to delete the allocated pension from the superannuation screen and re-enter the pension details on the allocated pension screen. Staff must obtain the pensioner's file in order to enter the correct details for the allocated pension.
FORMS AND POLICY DOCUMENTATION CHANGES
GOSP amendments
Amendments have been prepared and submitted for inclusion in the next available release of the General Orders Service Pension (GOSP).
Departmental form changes
This opportunity will be taken to revise where appropriate the income stream, investment and other Departmental forms which currently request information in respect of allocated pensions and/or superannuation investments for service pensioners and income support supplement recipients.
PUBLICITY
Publicity
DVA pensioners will be informed of the change in the treatment of allocated pensions through brief articles appearing in DVA's “Vetaffairs” publication (April issue) and the DSS “Age Pension News” newsletter (June issue).
INCOME STREAM PRODUCT INFORMATION
Information on assessment of income stream products
There have been many recent enquiries for some up to date, easy to use information about the assessment of income stream products such as allocated pensions, immediate annuities, superannuation pensions, etc. To assist DVA staff with understanding how various income stream products are assessed under the income and assets tests, the (NSW State Office-based) Investment Database Unit has produced two easy to use tables. These tables are attached at pages 13 to 15 of this instruction.
CONTACT FOR QUESTIONS
New allocated pension rules
Any questions about the new policy and legislation for allocated pensions outlined in this instruction should be directed to Martin Dibb on telephone 06-2896751, fax. 06-2894853, LAN C-C-BA-02.
Income stream product information
Any questions about income stream products and the assessment of those products should be directed to Eddie Bolanac, Investment Database Unit Manager, telephone 02-92137875, fax. 02-92137885, LAN N-B-IDUMGR.
MURRAY HARRISON
BRANCH HEAD
INCOME SUPPORT
6 May 1997
INCOME STREAM PRODUCTS - SUMMARY OF CURRENT DVA ASSESSMENT RULES
PRODUCT INCOME ASSESSMENT UNDEDUCTED PURCHASE PRICE (UPP) NON-ASSESSABLE PURCHASE PRICE (NAPP) DEDUCTIBLE AMOUNT (DA) ASSET ASSESSMENT
IMMEDIATE ANNUITY (Purchased with CASH) Gross Payment less Deductible Amount Total Purchase Price NAPP = UPP = PP (NAPP - RCV) ¸ RN IF PURCHASED PRE 15.8.89 The greater of - Commutable Value or RCV IF PURCHASED ON OR AFTER 15.8.89 The greater of - (PP-RCV) x [RN - (YE+1)] + RCV RN or RCV
ONE YEAR IMMEDIATE ANNUITY (If Purchased with CASH & Makes Only 1 Payment & Has No RCV ) Assess as a Financial Asset (as a Debenture) Purchase Price to be Deemed Not Applicable Not Applicable Not Applicable TOTAL PURCHASE PRICE
IMMEDIATE ANNUITY (Purchased with ETP or Rollover Money) OR ALLOCATED ANNUITY (Must be Purchased with ETP or Rollover Money) Gross Payment less Deductible Amount Pre 1.7.83 Component + Post 30.6.83 Undeducted Contributions + Concessional Component For the FIRST ANNUITY NAPP = the lesser of either the PP or UPP + Taxable Amount (aka Upper Limit) For any SUBSEQUENT ANNUITY NAPP = UPP only (NAPP - RCV) ¸ RN NOTE: RCV not applicable for Allocated Annuities IF PURCHASED PRE 15.8.89 The greater of - Commutable Value or RCV IF PURCHASED ON OR AFTER 15.8.89 The greater of - (PP-RCV) x [RN - (YE+1)] + RCV RN or RCV
INCOME STREAM PRODUCTS - SUMMARY OF CURRENT DVA ASSESSMENT RULES, Continued
PRODUCT INCOME ASSESSMENT UNDEDUCTED PURCHASE PRICE (UPP) NON-ASSESSABLE PURCHASE PRICE (NAPP) DEDUCTIBLE AMOUNT (DA) ASSET ASSESSMENT
ALLOCATED PENSION (In Drawdown Phase Must be Purchased with ETP or Rollover Money) Gross Payment less Deductible Amount Pre 1.7.83 Component + Post 30.6.83 Undeducted Contributions + Concessional Component NAPP = UPP only UPP ¸ RN IF PURCHASED PRE 21.8.96 No Asset Held IF PURCHASED ON OR AFTER 21.8.96 Current Account Balance
SUPERANNUATION PENSION (Purchased with ETP or Rollover Money) Gross Payment less Deductible Amount Pre 1.7.83 Component + Post 30.6.83 Undeducted Contributions + Concessional Component NAPP = UPP only UPP ¸ RN NO ASSET HELD
SUPERANNUATION PENSION (Traditional Super Pension accumulated in an employer fund during the working life of an employee) Gross Payment less Deductible Amount Pre 1.7.83 Excess Contributions + Post 30.6.83 Undeducted Contributions NAPP = UPP only Note: This definition of UPP is different to the definition of UPP relating to superannuation pensions purchased with ETP or Rollover money. See UPP Column Definitions. UPP ¸ RN NO ASSET HELD
INCOME STREAM PRODUCTS - DEFINITIONS USED BY DVA
ABBREVIATIONS DEFINITIONS
ETP 'ELIGIBLE TERMINATION PAYMENT' - some of the payments received on retirement (including resignation, retrenchment, redundancy and unused sick leave); payments from superannuation funds and rollovers; and commutations of pensions and annuities.
ROLLOVER MONEY 'ROLLOVER MONEY' - money which originally came from an ETP, but which has subsequently been rolled over into a 'Deferred Annuity(DA); or Approved Deposit Fund (ADF)'; or Superannuation Fund; or Rollover Annuity; or Super Pension, thereby maintaining its ETP components.
CASH MONEY 'CASH MONEY' - money which has not come from an 'ETP' or 'Rollover', commonly referred to as 'Ordinary' money.
PP 'PURCHASE PRICE' - is the total purchase price of the annuity or pension (not to be confused with Undeducted Purchase Price - UPP).
UPP 'UNDEDUCTED PURCHASE PRICE' - that portion of the purchase price of an annuity or pension for which no previous tax deduction had been allowed. DVA and DSS use the Pre 1.7.94 ATO Definition of UPP, as follows:
For annuities purchased with Cash - the UPP is the total purchase price.
For annuities and pensions purchased with 'ETP or Rollover' monies - the UPP is made up of only the 'Pre 1 July 1983 Component', the 'Post 30 June 1983 Undeducted Contributions, and the 'Concessional Component'.
For 'traditional superannuation' pensions (not purchased with 'ETP or Rollover' monies) - the UPP is made up of only the 'Pre 1 July 1983 Excess Contributions' and the 'Post 30 June 1983 Undeducted Contributions. Pre 1/7/83 Component = the employer contributions to a superannuation fund, and the earnings of the fund which relate to the period before 1/7/83. Post 30/6/83 Undeducted Contributions = any contributions made by a person to a superannuation fund since 1/7/83. Pre 1.7.83 Excess Contributions = any contributions made by a person to a superannuation fund, prior to 1 July 1983, for which no taxation rebate has previously been claimed. Concessional Component = redundancy, invalidity or approved early Retirement Scheme Payments.
NAPP 'NON-ASSESSABLE PURCHASE PRICE' - is a term used by DVA.
For annuities purchased with Cash - the NAPP is the total purchase price, which is also equal to the UPP.
For annuities purchased with ETP or Rollover money - the NAPP may be less than the total purchase price, but either greater than or equal to the UPP depending on whether it is the first annuity purchased with ETP or Rollover money. In this case the NAPP must be calculated by DVA in order to arrive at the deductible amount for service pension purposes (see formula in the Summary Table).
DA 'DEDUCTIBLE AMOUNT' - is the that portion of each annuity payment that represents a return of the investors capital for which they have not received a prior tax deduction.
RN 'RELEVANT NUMBER' - is the length of time in years that the annuity or pension will be payable.
For 'Fixed Term' annuities and pensions - the RN is the term of the annuity or pension as specified in the contract.
For 'Life' annuities and pensions - the RN is the life expectancy factor of the annuitant. If the annuity or pension is in joint names or specifies a reversionary beneficiary (i.e. reverts to a beneficiary when the annuitant dies) the RN is the life expectancy of the person with the largest life expectancy factor. If a life annuity also has a minimum guaranteed period, the RN must always be the greater of the life expectancy figure or the minimum guaranteed period.
RCV 'RESIDUAL CAPITAL VALUE' - is a lump sum amount which is paid at the end of the annuity term. The RCV may be the same as the purchase price (i.e. 100%); or a lesser amount (e.g. 10% to 90%); or NIL (i.e. 0%).
YE 'YEARS ELAPSED' - is the number of whole years elapsed since the commencement of annuity payments.
TAXABLE AMOUNT 'TAXABLE AMOUNT' - is a term used by DVA to refer to the upper limit of the threshold applied by the ATO to the Post 83 Component which is subject to lower taxation. This is also commonly referred to as the 'Upper Limit' - UP. The taxable amount to be used in the NAPP calculation applies to the financial year in which the annuity commenced to be paid. For annuities which commenced on or after 1 July 1996 the current taxable amount is $86,495.
DRAWDOWN PHASE 'DRAWDOWN PHASE' - refers to an Allocated Pension where the owner has commenced drawing pension payments.