This section contains information on the deeming provisions as they apply to various types of managed investments.
Conventional life insurance policies are not financial investments [3]. While the main purpose of conventional life insurance policies is to provide death cover, some policies include an investment element which may pay bonuses (profits) to the investor. A person who invests in such a life insurance policy is seen as deriving income from a profit-making transaction.
Bonuses accumulate on conventional life insurance policies during the term of the policy. Bonuses are not assessed as ongoing income during the life of the policy. However, on withdrawal, surrender or maturity of the policy, the difference between the total amount received on withdrawal, surrender or maturity and the sum of the purchase price and premiums paid by the investor is assessed as income for 12 months
More [4]
The difference between the total amount received by a pensioner on withdrawal, surrender or maturity of the policy, and the full cost of the policy over its lifetime, is regarded as a net return to the pensioner and is assessable as income at the time it is received. Bonus payments nominally accruing to the policy during pre-pension years are not excluded from the income assessment, as they fall within the definition of income at the time of receipt.
Where a life insurance payment on withdrawal, surrender or maturity of a policy is not available for the pensioner's own use or benefit, it does not meet the definition of income and should be excluded from the assessment. This exception will not arise where the proceeds from the policy are gifted, as the normal disposal rules will apply. However, the proceeds may be excluded where, for example, one life insurance policy is terminated, with the proceeds immediately being applied by the life office to the arrears on another policy.
Where a pensioner receives only a partial payment from the full policy value, it is important to check that the policy is of a type that genuinely permits partial withdrawals. If there is satisfactory evidence that the non-withdrawn balance of the policy is continuing as a conventional life insurance product, the partial withdrawal may be separately assessed based on a pro-rata proportioning of the overall policy bonuses and costs.
Where the policy has matured but none, or only a partial withdrawal of the entitlement on maturity is accessed, the assessment is the same as if a withdrawal of the full amount had been made. This is because income is assessable when a person first has legal entitlement to it. It is not necessary that the funds be actually received by the pensioner, as legal control over the funds at the time that the policy matures is sufficient to satisfy the income test.
Arrangements between the pensioner and the insurance company for the matured funds to remain with the insurance company in a different form should not be recognised, as the exemption of life insurance policies from the normal deeming rules for financial investments is based on the funds not being accessible to the pensioner prior to maturity.
A pensioner should not be regarded as having a legal entitlement to access the full value of a policy if the policy provides for a significant financial penalty associated with the early surrender or redemption prior to maturity.
On maturity, the continuing exemption of conventional life insurance policies from the deeming rules is no longer applicable as the funds become accessible. A partial (or nil) withdrawal of funds after maturity will result in some funds still being maintained by the insurance company. These funds should be regarded as deposit money, now falling within the definition of a financial asset, and should be deemed.
However, this deeming assessment should not commence until the 12 month assessment provided for under section 46A has concluded. This is because an assessment under this section requires a finding that the amounts are not otherwise being deemed.
The main purpose of conventional life insurance policies is to provide death cover, however some policies also:
The following table describes how to identify a conventional life insurance policy:
If a policy... | Then it is... |
Includes a commitment by the life office to carry a significant insurance risk by paying a specified minimum benefit to the pensioner in the event of a particular incident, such as the death of the insured. | a conventional life insurance policy, such as:
|
Does not feature a significant insurance risk | not a conventional life insurance policy, but is classified as a managed investment and treated accordingly. This includes savings plans that return only contributions and bonuses on the premature death of the insured. More [5]
|
Assessment of life insurance products that are regarded as managed investments
9.5.6/Deemed Income from Life Insurance Products Regarded as Managed Investments [8]
According to section 5J of the VEA, a financial investment means:
but does not include an investment in an FHSA (within the meaning of the First Home Saver Accounts Act 2008) or a designated NDIS amount.
The following life insurance products are regarded as managed investments and hence are subject to deeming provisions:
Unbundled insurance policies are also known as universal life plans. These policies separate:
Generally, the policy owner can:
Unlike conventional policies, where bonuses are paid out of the life insurance company surplus, returns on the investment element of unbundled policies are paid out of a separate investment account or portfolio.
More ? [11]
Insurance bonds are essentially investment products, however, because they are marketed by life offices and regulated under the Insurance Contracts Act, they:
They are offered by:
Insurance bonds may also be known as:
Friendly society bonds:
Friendly societies are regulated by state government legislation.
Insurance bonds, friendly society bonds and savings plan equivalents:
Assessment of conventional life insurance policies
9.5.6/Income from Life Insurance Products - Conventional Policies [12]
Public unit trusts may be listed on the Stock Exchange. Whether listed or not, they are:
Public unit trusts are:
The return on unit linked investments may be:
If the unit price remains fixed, the return is in the form of interest allocations only, as with cash management and mortgage trusts.
Investors may have one of the following three investment options with a unit trust investment:
The following table describes the different types of public unit trusts.
Type |
Description |
Common fund |
Unit trusts operated by a public trustee company. Most common funds are similar to cash management trusts, as the:
Common funds, depending on the portfolio of the fund, may also be similar to:
|
Cash management trusts |
Cash management trusts:
Investors purchase units in the trust, and the trust manager invests the funds in government, semi-government, and other short term fixed interest securities. |
Type |
Description |
Mortgage trusts |
Mortgage trusts are:
During the life of the loan the trust receives interest, which is passed on to unit holders as distributions of income, usually monthly or quarterly. |
Bond trusts |
Bond trusts:
They are also known as:
|
Type |
Description |
Property trusts |
Property trusts:
Capital growth is through:
Income distributed to unit holders is generally from rents received on the properties. |
Equity and imputation trusts |
Equity trusts:
Imputation trusts are equity trusts that take advantage of the dividend imputation provisions of the Income Tax Assessment Act. |
Forms of investment that are classed as superannuation fund investments
Superannuation and roll-over investments include:
Pensioners may:
Superannuation and roll-over investments are treated differently depending on the age and circumstances of the pensioner as described in the following table.
If the pensioner... | Then their superannuation or roll-over investment is... |
|
|
|
|
Note: Where a person is unable to access any part of their superannuation fund investment after they reach pension age, the value of their investment may be exempted from the income and assets tests. The pensioner must apply in writing for an exemption under Section 52AA [17] of the VEA, stating why they cannot access any part of their superannuation investment. A copy of the Request for Income and Assets Test Exemption application form can be obtained from the Investment Database Unit.
The following table describes the treatment of additional superannuation fund contributions made by pensioners whose superannuation investments are being assessed:
If the contributions are made by... | Then... |
A pensioner | The additional contributions, as they are made:
|
A pensioner's employer | Only the amount that is paid by the employer as part of their obligations under the Superannuation Guarantee Contribution will be disregarded as income. All contributions add to the value of the financial investment for deeming purposes and the assets test. |
Salary sacrifice of income for superannuation | They are considered to be income in the hands of the pensioner. All contributions add to the value of the financial investment for deeming purposes. |
The following table describes the assessment of investments owned by non-pensioner partners, for the purpose of working out the pensioner partner's entitlement:
If the non-pensioner partner is... | Then... |
Less than pension age [3] | all amounts in superannuation and roll-over investments owned by them are exempt from assessment. If they make a withdrawal prior to age pension age, no assessment is made of investment growth. |
Pension age | superannuation and roll-over investments owned by them are assessable when working out the pensioner partner's entitlement, whether or not the non-pensioner partner claims pension. |
Switching between superannuation fund [3] investments is allowed. No realisation is considered to have occurred when the amount concerned is switched directly (i.e. rolled over) into another superannuation fund investment or income stream [3] product.
More [18]
Assessing withdrawals of superannuation benefits
10.4.3/General Provisions for Assessing Withdrawals of Superannuation Benefits [21]
Currently, the pension age for a veteran is 60 years of age (VEA 5QA).
The pension age for a non-veteran is determined by the table below:
Date of birth (both dates inclusive) | Age Pension age |
1 July 1952 to 31 December 1953 | 65 years and 6 months |
1 January 1954 to 30 June 1955 | 66 years |
1 July 1955 to 31 December 1956 | 66 years and 6 months |
On or after 1 January 1957 | 67 years |
Qualifying age is defined in section 5Q(1) of the [23]VEA [23]and is equivalent to the pension age for a veteran which is described in section 5QA VEA as:
Currently, the pension age for a veteran is 60 years of age (VEA 5QA).
The pension age for a non-veteran is determined by the table below:
Date of birth (both dates inclusive) | Age Pension age |
1 July 1952 to 31 December 1953 | 65 years and 6 months |
1 January 1954 to 30 June 1955 | 66 years |
1 July 1955 to 31 December 1956 | 66 years and 6 months |
On or after 1 January 1957 | 67 years |
A superannuation fund is defined in the VEA as being:
According to subsection 5J(1) of the VEA [25], an income stream includes:
but does not include any of the following:
Deeming applies to managed investments [3] held overseas.
Deeming applies to funeral bonds that are not exempt assets [3].
More → [27]
The following table describes the application of deeming to private unit trusts:
More → [28]
If the private unit trust is... | then it is... |
a managed investment | subject to deeming. |
not a managed investment, because it does not meet all of the criteria for a managed investment. For example, if an investor in a private unit trust exercises control over the management of the invested assets then it is not a managed investment. |
|
The following table describes the application of deeming to ostrich and emu farming investments.
More → [29]
Investment Type | Application of Deeming |
Speculative | Investments of this type are not financial investments [3] and therefore, not subject to deeming. For assessment purposes:
|
Share farming scheme | Share farming investments are considered to be businesses, therefore assessment is made of gross income from the business, less allowable deductions. An arrangement is subject to deeming if it is established that the:
|
Managed investment scheme | These schemes are managed investments and are subject to deeming. |
The following table describes the application of deeming to afforestation projects:
More → [30]
If the investor is... | Then... |
Carrying on a business alone or with other participants, with a direct investment in an identifiable area of land and associated commodities | assessment is made of gross income from the business, less allowable deductions. |
Not carrying on a business | the arrangement must be examined to establish whether it is a managed investment. NOTE: While forestry investments may be marketed as being managed investments, and may be assessed as managed investments for taxation purposes by the ATO, they have been found in the past to not satisfy the VEA requirements. Careful examination of the prospectus is required because if the investment remains in the name of the individual investor, with the investor being able to exercise a degree of effective control over the management of the invested asset, the investment is not considered a managed investment. Managed investments are subject to deeming. |
Asset-tested lifetime income streams purchased on or after 1 July 2019 which were purchased with non-superannuation monies, are considered managed investments and deemed before the assessment day [31] (prior to payments commencing or the owner reaching pension age). After the assessment day, they are no longer considered managed investments and other rules apply, see 10.5.4 Means Test Assessment of Lifetime Income Streams and Glossary term 'Assessment Day'.
What constitutes the different types of ostrich and emu farming investments
9.5.6/Description - Other Managed Investments [34]
An investment is a managed investment if:
For a full definition see also:
Sections 5J(1A), 5J(1B) and 5J(1C) of the VEA [23].
An exempt asset is one that is disregarded when calculating the value of a person's assets [3] under the assets test [3]. Examples of exempt assets include:
For a full legislative definition see section 52 of the VEA.
In 1990 the government introduced legislative changes called “deeming” to simplify the assessment of cash deposits and income from certain investments. These changes were made:
Deemed income is the minimum rate that the government expects income support pensioners to earn from investments.
Banks created “pensioner accounts” which paid interest at the deeming rate set by the government.
On 1 July 1996 further changes meant the deeming rate was applied to all financial assets as defined in section 5J(1) of the VEA [25].
According to section 5H of the VEA [38] income is:
According to section 5J of the VEA, a financial investment means:
but does not include an investment in an FHSA (within the meaning of the First Home Saver Accounts Act 2008) or a designated NDIS amount.
Private unit trusts are:
Investors in ostrich and emu farming ventures fall into three categories, described in the following table.
More ? [41]
Investor |
Description |
Speculative investors |
These investors buy chicks or juvenile birds which are:
The Australian Taxation Office:
|
Share farming investors |
These investors purchase birds, but instead of selling them after 2 years, enter into a share farming arrangement with the farmers. This involves an agreement where:
The ATO:
|
Investors in a managed investment scheme |
These are investors whose funds are pooled and who do not hold specific livestock as their own investment asset. The investment scheme must comply with Australian Securities Commission requirements for the registration and issue of a prospectus. |
Participation in afforestation schemes typically involves purchasing an identified parcel of trees:
The promoter of the afforestation scheme:
The ATO treats profits, losses, and business expenses under business rules. ATO Ruling IT 360 outlines the ATO position that, 'where a person alone or in association with others acquires an interest in an identifiable area of land and enters into an agreement to have that land developed, planted, and maintained by a management company for the purpose of growing forest trees it is accepted that the person may be carrying on a business of afforestation'.
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