Income from Private Annuities

Assessment of private annuities

Private annuities do not satisfy the definition of an income stream, as they do not meet the requirements for prudential regulation. Private annuities are assessed under the ordinary income and assets test. To be classed as a private annuity the arrangement must be in the form of a legally binding contract between the two parties. Each private annuity must be assessed on its particular merits and an actuarial value is required in all cases.

Actuarial value required for private annuity

An actuarial valuation of a person's private annuity is required to determine:

• the assessable asset value,
• whether or not the person received adequate financial consideration for the purchase price, and
• whether or not the deprivation provision apply.

Initial Actuarial value required for private annuity

An actuarial valuation is required because private annuities are usually family or private arrangements where one party provides regular income payments in exchange for a lump sum payment, or other valuable consideration. The arrangements are normally not determined by financial markets. For example, a pensioner who is a landowner in the rural industry may exchange the title to a farming property for a series of payments over a defined period of time.

An initial actuarial valuation of a person's private annuity is required when the:

• annuity is first established, or
• an income support pension is claimed.

Additional Actuarial value required for private annuity

Additional actuarial valuations of a person's private annuity are required when the:

• number of annuitants (those receiving payments) changes,
• terms and conditions of the annuity change,
• amount paid by the annuity changes, or
• annuity is wholly or partly commuted.

Private annuity - obtaining an actuarial value

The Australian Government Actuary can supply an actuarial value. The Actuary must be supplied with all the relevant details of the annuity including:

• the purchase price,
• the commencement date,
• the term,
• the payment rate,
• the indexation rate (if any),
• the date of birth of each annuitant,
• the ability to commute the annuity (if any), and
• a copy of the contract.

The following table shows additional information requirements.    

Income assessment for private annuities

For private annuity payments made before 20 September 1998, the gross annuity payments is reduced by a deductible amount using the income assessment rules which applied at that time.

From 20 September 1998, private annuities do not satisfy the new definition of an income stream and are assessable under the ordinary income and assets test.  The gross annuity payments as specified in the annuity contract are fully assessable under the income test from the commencement date of the annuity contract. No deductible amount is allowed    

Assessment of One-Year, One-Payment Private Annuities

One-year, one-payment private annuities are not classified as annuities for DVA purposes. They are assessed as a financial asset assessed using the deeming provisions.    

Deprivation of income – private annuity

A pensioner is assessed for deprivation of income if they have elected to forgo a payment to which they were entitled to receive from the private annuity under the annuity contract.

This can occur where the pensioner either gifts the annuity payment to a third party, or 'forgives' the annuity payment. The term 'forgiving a payment' refers to circumstances where the annuitant does not require that the annuity provider make the annuity payment as specified in the annuity contract.    

Example of deprivation of income – private annuity payments forgone

A pensioner receives $10,000 per year from a private annuity, in the form of two payments of $5,000 each at 6 monthly intervals. The pensioner decides to forgo the first payment, but keeps the annuity contract in force. An amount of $5,000 should be assessed as deprived income under the normal rules. If the pensioner also decides to forgo the second payment, the amount of deprived income should be increased to $10,000 from the date of the second payment specified in the annuity contract.

Deprivation of assets

Generally when a person acquires or disposes of an income producing asset without [glossary:adequate:] [glossary:financial:] [glossary:consideration:], the deprived amount is maintained and deemed. It would be 'double-dipping' to also assess the forgone income as income deprivation. Therefore assets deprivation provisions only are applied if a person:

• acquires an interest in a private annuity but does not receive adequate consideration for the amount of the purchase price,
• surrenders their interest in a private annuity, or
• otherwise disposes of their rights under the contract and does not receive adequate consideration.