DATE OF ISSUE: 16 May 1990
AMENDMENTS TO INCOME TESTING OF SUPERANNUATION PENSIONS AND INCOME/ASSETS TESTING OF IMMEDIATE ANNUITIES UNDER THE VEA
INTRODUCTION
This instruction covers changes to the treatment of superannuation payments and immediate annuities under the Veterans' Entitlement Act. These changes were contained in the Social Security and Veterans' Affairs Legislation Amendment Bill (No. 4) 1989, which received Royal Assent on 19 December 1989.
BACKGROUND
2.Currently, the total amount of income being received from a superannuation pension or an immediate annuity is held in the assessment of a service pension under the income test, although in some cases a portion of that income represents a return of the pensioner's own contributions.
3.Immediate annuities are not asset tested, unless the annuity has a residual capital value (i.e. a predetermined amount payable in a lump sum on termination); and/or is commutable.
4.As part of the 1989 Budget the Government determined that the treatment of income from superannuation pensions and immediate annuities for service pension purposes should be aligned with the taxation treatment of such income. Under the Income Tax Assessment Act, that portion of superannuation or immediate annuity income which represents the return of the initial investment or pensioner contributions, in most cases, is not taxable. This is known as the Undeducted Purchase Price (UPP).pa
CHANGES
5.As from 19 April 1990, the treatment of superannuation pensions and immediate annuities under the income/asset test will be as follows -
.only the taxable portion of the income will be held under the income test; and
.the purchase price of an immediate annuity purchased after 15 August 1989 will be treated as an asset, but proportionally reducing over the term of the annuity.
LEGISLATION
6.Sections 35 (Interpretation); 37 (Method of calculation of income); and 50 (Calculation of value of property) of the VEA have been amended to reflect these changes.
ASSESSMENT
Superannuation Pensions under the Income Test
7.The amount of income to be held in the assessment of service pension will be calculated according to the following formula -
GROSS - DEDUCTIBLE AMOUNT = AMOUNT (P/F)
where
gross=gross fortnightly pension
deductible amount=the fortnightly apportioned amount of non-assessable purchase price (NAPP has the same meaning in the VEA as the UPP in the Tax Act)
amount (p/f)=the assessable income
Example
Mr Digger receives a superannuation pension from the NRMA Superannuation Fund. Gross fortnightly pension is $451.90; the NAPP or the deductible amount (DA) is $50.00. Therefore -
$451.90 - $50.00 = $401.90 p/f to be held in the assessment
Immediate Annuities under the Income Test
8.The amount of income to be held in the assessment of service pension will be calculated according to set formulae, which discounts that portion of the return which represents the return of the non-assessable purchase price (NAPP).
9.The amount of NAPP will depend on whether or not the annuity was purchased with cash, or with rollover funds.
Immediate Annuities purchased with cash
10.Where an annuity is purchased with non rollover funds, the total amount of the purchase price is the NAPP.
Step 1 -Calculate the deductible amount (DA) by the following formula
NAPP - RCV /26 = DA of $ p/f
RN
where NAPP=the nonassessable purchase price
RCV=the residual capital value
RN=the relevant number i.e. the term in years of the annuity
Example
Mr Brown owns an annuity purchased for $100,000 with a residual capital value of $10,000. Gross annual return is $12,000 and the term of the annuity is 10 years (i.e. RN).
100,000 - 10,000 /26 = DA of $346.15 p/f
10
Step 2 - Calculate the fortnightly rate of income by deducting DA from gross return
Annual Return of $12,000 / 26= $461.53 p/f
- 346.15 (DA)
Income p/f= $115.38
Immediate Annuities purchased with rollover funds
11.An immediate annuity purchased with rollover funds means that it has been purchased with funds which have initially come from a superannuation fund.
12.Because of the favourable tax treatment of superannuation and roll-over funds, only that portion which represents the veteran's own contributions can be treated as "after tax" money, or UPP.
13.Immediate annuities purchased with rollover funds will contain some or all of the following-
.UPP
.a pre '83 component
.post '83 component
14.For income test purposes and as a further concession to pensioners, it has been determined that for one annuity only,the UPP amount will be increased by an additional amount up to -
.the balance of the purchase price;
OR
.the taxable amount - WHICHEVER IS THE LESSER.
NOTE - The taxable amount refers to a portion of the post 1983 component which attracts a lower rate of lump sum tax - currently up to a maximum of $64,500. The taxable amount is indexed annually to average weekly earnings. The taxable amount to be applied in each individual case is the amount which was applicable in the year the annuity was purchased.
Step 1 - Calculate the NAPP by comparing
(a)the Purchase PriceVS(b)the UPP + Maximum Taxable Amount
Example
Mr Brown purchased an annuity with rollover funds for $100,000 with a residual capital value of $10,000. Gross annual return is $12,000 for a 10 year term. The UPP has been valued at $20,000.
(a)$100,000VS(b)$ 20,000 + $64,500
THEREFORE THE NAPP = $ 84,500
Step 2 - Calculate the DA as per formula
84,500 - 10,000 / 26 = DA $ 286.53
10
Step 3 - Calculate assessable fortnightly income by reducing gross return by the DA amount
$12,000 / 26 = $ 461.53
- 286.53
$ 175.00p/f
NOTE - The additional deduction should be applied to the annuity first notified. Where more than one annuity is notified at the same time, the concession is to be applied to the annuity which would provide the most benefit to the pensioner.
15.Any other annuities purchased with rollover funds will receive a reduction on income based only on the UPP component.The following is an example -
Example
Mr Brown purchases another annuity with a roll-over fund. Purchase price $100,000; with a residual capital value $10,000. The gross annual return is $12,000 for a 10 year term. The UPP has been valued at $20,000.
Step 1 - Calculate the DA
20,000 - 10,000 / 26 = DA $38.46 p/f
10
Step 2 - Calculate the assessable income by reducing gross return by DA
$12,000 : 26 = $ 461.53
- 38.46
$ 423.07 p/f
Additional Undeducted Purchase Price
16.Where a veteran in receipt of a superannuation pension or an immediate annuity advises the Department that he/she has a UPP amount in excess of the amount quoted by the superannuation fund/life office, and provides documentary evidence -eg latest income tax return/assessment notice/letter from the Australian Taxation Office (ATO), this amount will be used to further reduce the gross superannuation or immediate annuity.
17.If the veteran has more than one superannuation pension or immediate annuity, the total additional amount quoted by the ATO will be apportioned against all payments.
Immediate Annuities under the Asset Test
18.Immediate annuities purchased on/or after 15 August 1989 will be assessed under the asset test, however only that portion of the purchase price which is still to be returned will be held and this amount will be reduced on an annual basis. Those that were bought prior to that date will continue to be assessed as currently - ie nil asset value, or only the residual capital value or commutable amount being assessable (paragraph 3 refers).
19.The following formula will be used to determine the assessable asset amount , and the calculation will be done automatically -
RN - ( YE + 1) x (PP - RCV)
RN+ RCV = ASSET AMOUNT; OR
ASSET AMOUNT=RCV, whichever is the GREATER.
where
PP=the purchase price of the annuity
RCV=the residual capital value
RN=the relevant number -i.e. the term of the annuity
YE=the number of full years that have elapsed since the annuity became payable
Example
Mr Brown purchased an annuity in October 1989, for $100,000 with a residual capital value of $10,000 for a 10 year term. Pension is being reassessed in October 1990.
10 - (1+1)x(100,000 - 10,000)
10+ 10,000 = $82,000
ASSET AMOUNT = $ 82,000 (which is greater than RCV of $10,000)
PIPS SYSTEM CHANGES
Superannuation
20.The existing "Superannuation" field on the Income screen has been modified to reflect the new form of assessment (Refer to Attachment A for screen design and detailed information of the data items).
Immediate Annuities
21.A new "Immediate Annuities" (PP.IA) screen will be available under PIPS for immediate annuities (Refer to Attachment B for screen design and detailed information of the data items).
22.The system will -
.automatically calculate the deductible amount (DA);
.calculate assessable income by deducting DA from gross return; and
.calculate the asset amount.
23.A further "summary" IA screen will also be available which will provide ready viewing of all annuities recorded in the case (up to 12 per page), and easy access to individual IAs recorded. The "summary " screen will be displayed on entering PP.IA where annuities already exist in the case.
IMPLEMENTATION
Implementation Date
24.The commencement date for these changes is 19 April 1990, to coincide with the April AL.
Procedures
Automatic Superannuation Funds
25.Commonwealth, DFRB, and the State superannuation funds which currently provide the department with tapes for automatic matching have been requested to modify the existing format, to enable automatic reassessment of all veterans who are eligible to receive a reduction in their assessable income - ie who have a deductible amount. The following format has been requested -
.old gross rate (the total amount of payment)
.new gross rate
.old taxable amount
.new taxable amount (the net amount which will be held in the assessment).
NOTE: It is not certain that all funds will be able to provide the necessary information to enable automatic updating.
Manual Superannuation Funds and Immediate annuities
26.Superannuation Funds and Life Offices have been requested to write to their clients, highlighting the new treatment of superannuation pensions and immediate annuities under the VEA, advising their clients to contact DVA with a request for a review of their entitlement under the new guidelines, and where possible providing them with a schedule listing relevant date to be forwarded to DVA together with the veteran's request (Attachments C & D). Confirmation of pensioner's UPP will be obtained by reference to his/her latest income tax returns and assessment notice.
27.Requests will be treated as Pensioner Initiated Reviews (PIR). Where the veteran does not approach the Department, manual superannuation cases currently listed on the superannuation screen, or immediate annuities stored on the income screen, will be amended as they come to notice ie the veteran is to be contacted to obtain the relevant information; the superannuation pension or immediate annuity will then be data collected (on the new screen for immediate annuities) and the old entry deleted.
DATA COLLECTION AND DATA ENTRY
Superannuation
28.The new system will be available for manual data collection and entry from 19 March 1990. All requests for reassessment received in the department will be registered on the CMS as PIRs. The pension reviews examiner will manually calculate the deductible amount as per formula outlined at paragraph 7.
29.The case will be submitted to a delegate for checking and determination. Reassessment will occur automatically on conversion during the weekend of 31 March/1 April.
30.Veterans who are in receipt of a pension from a superannuation fund which is updated automatically will either be manually reassessed upon request or automatically updated on the provision of the tape.
Immediate Annuities
31.It is anticipated that the new Immediate Annuities screen will be available for data collection and data entry from 30 May 1990. Requests for reassessment will be registered on CMS as PIR's. A special attribute for immediate annuities number 375 will be set automatically on determination.
32.The pension reviews examiner will complete the special worksheet (Attachment E) from the details contained on the "Schedule of information on your immediate annuity" form provided by the veteran.
33.When the system is available, data from the worksheet will be entered onto the new screen, and the case submitted to a delegate for determination. At the same time any details already stored in the system concerning the same immediate annuity will be deleted.
EFFECTIVE DATES
34.For all increases the effective date is 19 April 1990 providing that the veteran's advice was received prior to that date.
35.Requests for reassessment received after the 19 April, will be treated as for PIR's - i.e. the effective date is the payday after receipt of advice.
36.For continuations, the effective date for the data collection is 19 April, or the payday following receipt of advice.
37.Reductions and cancellations will be effected from the current reduction date.
REVIEWS
38.Where the service pensions are asset tested, the asset values for immediate annuities will be reviewed annually as a bulk exercise as part of the normal asset reviews (usually April).
ACTION UPON DEATH
39.When payments from a superannuation pension or an immediate annuity are transferred to the surviving spouse of a deceased superannuate, these payments will be reduced by the deductible amount (DA) applicable prior to death, regardless of the level of new payments, unless the surviving spouse advises of a change in circumstances - eg change in the relevant number, in which case the DA will be reviewed.
ADVICES
Superannuation
Manual Cases
40.Where a veteran's service pension has been increased as a result of the change in the treatment of superannuation pensions a special advice must be forwarded which outlines the reason for the increase. The advice should outline his/her specific obligations concerning this matter. A suggested draft appears at Attachment F for the Branches use either as a PC letter or as a locally produced advice. A copy of this advice must be placed on file. Thereafter, the customary advices will be sent whenever the veteran's service pension is varied. In respect of cases which will be automatically reassessed there will be no automatic advice as is the current practice.
Rejections
41.In some cases, where a reassessment of service pension is requested by the veteran, it may be that the total amount of superannuation pension is taxable (ie there is no deductible amount ), and therefore the rate of super remains the same. The veteran should be advised that there is no variation to his pension (Attachment G).
Immediate Annuities
42.Where a veteran's service pension has been increased as a result of the change in the treatment of immediate annuities a special advice must be forwarded which outlines the reason for the increase (Attachment H refers).
43.Advice must also be forwarded where the service pension has been reduced due to the immediate annuity being held as an asset.(a draft appears at Attachment I).
APPEALS
44.If the veteran appeals against the deductible amount used to reduce his/her income on the grounds that the actual amount of UPP is higher than that held by the Department and provides supportive documentary evidence - eg latest income tax return/ assessment notice/ letter from ATO, this amount will be held in the assessment.
45.For immediate annuities, if the veteran disagrees with the "relevant number" set down by the ATO he/she will be advised to appeal directly to the Commissioner of Taxation, and the ATO number will be maintained in the assessment until advised by the ATO that it has been changed.
GOSPs
46.The GOSPs are currently being amended and should be available shortly.
FORMS
47.Claim forms for Service Pension (SP1/2); Income Assessment Statement form (SP3A); and Income and Asset Statement form (SP3) will be amended shortly and distributed to the Branches when available.
48.New forms D2720 (immediate annuities - Attachment J) and D2721 (superannuation - Attachment K) have been formulated.
These forms are to be used -
.as attachment to SP1;
.as attachment to SP3/SP3A ;
.for distribution to veterans who request a reassessment of service pension, and who have not been supplied with the "schedules of information" from the superannuation fund or life office.
KAY GRIMSLEY
NATIONAL PROGRAM
DIRECTOR BENEFITS