Purchase amount

For asset-tested income streams (lifetime), the purchase amount is used to determine the income stream’s assessable asset value. The purchase amount is a sum of all payments made for the lifetime income stream, with certain payments grossed up if they were made prior to a person’s assessment day.

Note: The purchase amount is only used for the means test assessment for asset-tested income streams (lifetime). For other types of income streams, a nominal purchase price is used.

Calculation of the purchase amount

For most products, the purchase amount is the sum of:

• each amount paid for the income stream before the assessment day, grossed up each year by the ‘above threshold deeming rate’ (compounded amounts); and
• each amount paid for the income stream on or after the assessment day,

less any commuted amounts.

For specific products outlined below, the Commission has determined via legislative instrument a different method for working out the purchase amount.

Legislation: VEA subsections 52BAB(13), 46J(2)

More: Means Test Assessment of Asset-tested Income Streams (lifetime)

Compounded amounts

Each amount paid to purchase the income stream prior to the assessment day is increased over time to account for investment returns. The increased value of the amount paid to purchase the income stream is referred to as a compounded amount.

Compounded amounts are re-calculated on adjustment days. Adjustment days occur:

• on each 12 month anniversary of the day the amount was paid to purchase the income stream; and
• on the assessment day for the income stream.

Note: If the income stream is purchased in instalments, there may be multiple compounded amounts. Each compounded amount may have different adjustment days.

On each adjustment day, the following formula is used to increase the compounded amount:

Previous compounded amount MULTIPLIED BY (1 + relevant above threshold rate)

The ‘previous compounded amount’ is:

• for the first adjustment day – the nominal amount paid to purchase the income stream;
• for each subsequent adjustment day – the compounded amount that was calculated at the last adjustment day.

The ‘relevant above threshold rate’ is based on the ‘above threshold deeming rate’ in force on the adjustment day.

• If the adjustment day is a 12 month anniversary of the day the amount was paid to purchase the income stream – the full ‘above threshold deeming rate’ in force on the adjustment day, expressed as a decimal fraction.
• If the adjustment day is the assessment day – a pro-rata ‘above threshold deeming rate’ in force on the adjustment day, calculated based on the number of days that have passed since the previous adjustment day.

Explanation: If the adjustment day is the assessment day, the ‘relevant above threshold rate’ is the ‘above threshold deeming rate’, multiplied by the number of days beginning after the previous adjustment day, ending at the end of the assessment day.

Example: Amy purchases a deferred income stream with superannuation monies in four instalments of $50,000. Each instalment is made one year apart. The first instalment is made on 1 July 2020, the second instalment is made on 1 July 2021, the third instalment is made on 1 July 2022 and the fourth instalment is made on 1 July 2023.

Amy’s assessment day is 1 November 2022, the day she meets a relevant condition of release, for example, retires.

Each year, each instalment increases in value depending on the ‘above threshold rate’ at each 12 month anniversary of the instalment being made, or at the assessment day.

For this example, assume the above threshold rate is 3.25 per cent on 1 July 2021, 3.25 per cent on 1 July 2022, and 3.5 per cent on 1 November 2022.

When an instalment is increased across a full year, the full deeming rate applies. For the final part year before the adjustment day (e.g. in this example, between 1 July 2022 and 1 November 2022), the rate is a pro-rata rate, meaning it only accounts for the number of days in the year for which the instalment is being increased.

The compounded amount is therefore the following amounts on the following days:

1 July 2020: $50,000

1 July 2021: $50,000, increased by deeming rate at 1 July 2021

                        = $50,000 x (1 + 3.25%)

                        = $51,625

1 July 2022: $51,625, increased by deeming rate at 1 July 2022

                        = $51,625 x (1 + 3.25%)

                        = $53,302.81

1 November 2022: $53,302.81, increased by a pro-rata deeming rate at 1 November 2022

Note that there are 123 days between 1 July 2022 and 1 November 2022.

                        = $53,302.81 x (1 + 3.50 x (123 ÷365))

                        = $53,931.49

This process is done for the three instalments made before the assessment day for the income stream on 1 November 2022:

On the assessment day, the purchase amount for Amy’s income stream is $156,755.11.

Amy makes one more instalment after her assessment day, of $50,000 on 1 July 2023. This is added to her total purchase amount at the assessment day, $156,755.11, for a total of $206,755.11.

As Amy makes no more instalments to the products after 1 July 2023, her purchase amount does not change after 1 July 2023 and remains at $206,755.11.

The full process for calculating Amy’s purchase amount is stepped out in the table below.

VEA: subsection 52BAB(14)

Policy reference: Means Test Assessment of Asset-tested Income Streams (lifetime)

Purchase amounts of joint income streams

If the income stream is a joint income stream, then the ‘amount paid’ for the income stream used for the purchase amount calculation is the amount paid, multiplied by the proportion of the income stream attributable to the person on the date of assessment.

VEA: subsection 52BAB(15)

Policy reference: Means Test Assessment of Asset-tested Income Streams (lifetime)

Purchase amount for the lifetime component of guaranteed minimum income for life products

Guaranteed minimum income for life products are account-based income streams, with a lifetime component that makes regular payments to an individual once the account balance of the account-based income stream is reduced below a threshold specified in the product’s contract.

The purchase amount for these products is the sum of:

• if the lifetime component is financed (wholly or partly) by fees or charges – the amount of any such fees or charges paid by the person; and
• if the lifetime component is financed (wholly or partly) by a specified fund in which the individual was required to invest in, and an amount was invested prior to the assessment day – the compounded amount of the individual’s investment in the specified fund; and
• If the lifetime component is financed (wholly or partly) by a specified fund in which the individual was required to invest in, and an amount was invested on or after the assessment day – the amount of the individual’s investment in the specified fund.

However, if the Commission is satisfied that the lifetime component is not wholly financed by the means specified above, the purchase amount can be determined by an actuarial certificate.

Note: the account-based income stream component of the product is assessed as an asset-tested income stream long term (deemed). The full account balance is assessed as an asset.

Legislation: VEA subsection 52BAB(13)

Policy reference: Means Test Assessment of Asset-tested Income Streams (lifetime)

Purchase amount for lifetime income streams packaged with account-based income streams

Lifetime income stream products can be sold alongside, or in combination with, account-based income stream products.

The purchase amount for the lifetime income stream component of these products is the sum of:

• if the lifetime component is financed (wholly or partly) by fees or charges – the amount of any such fees or charges paid by the person; and
• if the lifetime component is financed (wholly or partly) by a specified fund in which the individual was required to invest in, and an amount was invested prior to the assessment day – the compounded amount of the individual’s investment in the specified fund; and
• if the lifetime component is financed (wholly or partly) by a specified fund in which the individual was required to invest in, and an amount was invested on or after the assessment day – the amount of the individual’s investment in the specified fund.

However, if the Commission is satisfied that the lifetime component is not wholly financed by the means specified above, the purchase amount can be determined by an actuarial certificate.

Note: the account-based income stream component of the product is assessed as an asset-tested income stream long term (deemed). The full account balance is assessed as an asset.

Legislation: VEA subsection 52BAB(13)

Policy reference: Means Test Assessment of Asset-tested Income Streams (lifetime)