VEA [2]
For a purchased income stream that is either asset-test exempt or asset-tested (long term), the assessable income equals the annual income stream payment less a deduction that is based on the return of the purchase price [5] over the term of the income stream [5].
More [6]The annual amount of ordinary income [5] produced by these income streams is determined by the following formula:
Annual Ordinary Income = Annual payment [5] – (Purchase price ÷ Relevant number [5]).
Where partial commutations have been made from the income stream, the purchase price should be reduced by the amount of the commutations. For income streams that are not asset-test exempt income stream [5], the purchase price must be further reduced by the income stream's residual capital value [5] (if any).
Mark is sixty five years old and single. He purchases an asset-test exempt income stream [5] for $100,000 with a term of 16 years. His life expectancy [5] at the commencement day [5] is 15.41 years, (which for a life expectancy income stream must be rounded up to the next whole number being 16 years). His annual payment from the annuity totals $9,895. His assessable income from this income stream equals:
$9,895 - ($100,000 ÷ 16 years) = $3,645 per annum.
It should be noted, that if this product were paid for life, then the relevant number could not be rounded up in the assessment.
VEA [7]
An account based income stream must make one or more payments during the financial year and the annual payment must not be less than the minimum payment.
Account based income streams must meet certain requirements regarding minimum payments. If the annual payment under the income stream is less than the minimum payment, the assessable income is taken to be the minimum payment.
For allocated income streams, the minimum payment is calculated:
minimum payment = account balance ÷ payment valuation factor; and
More [10]
For market linked income streams, the minimum payment is calculated using a payment factor using the following formula:
minimum payment = account balance ÷ payment factor
More [11]
For the purposes of each formula:
For the period commencing on 1 July 2008 and ending 30 June 2013, temporary relief measures were applied by the Government in response to the Global Financial Crisis to allow all account-based income stream recipients to elect to reduce their minimum annual payment to :
These temporary relief measures ceased to apply from 1 July 2013.
Temporary relief was again applied over the period 1 July 2019 to 30 June 2023 in response to the Coronavirus pandemic. Income stream recipients were able to elect to reduce their minimum annual payment to 50% of the required minimum payment for the period commencing 1 July 2019 to 30 June 2023.
The annual payment under the income stream is calculated by the income stream provider and must always satisfy the rules for the minimum and maximum payments relevant to that particular type of income stream. The annual payment for an income stream is calculated using the formula:
annual payment = A + B
If the year is a part year, the annual payment reported by the income stream provider will be annualised using the formula:
annual payment = (A + B) x C ÷ D
where:
An income stream that is an asset-tested income stream (short term) [5] or an asset-tested income stream (long term) deemed [5]is treated as a financial investment [5]. Its assessable income is determined under the deeming provisions [5]. More [12]
An income stream that is an asset-tested income stream (lifetime) has the following income test applied:
Purchased with | Income test |
---|---|
superannuation monies | BEFORE the assessment day (see Glossary), there is no assessable income. ON OR AFTER the assessment day, |
non-superannuation monies | BEFORE the assessment day, the purchase amount is deemed using the deeming rates (9.5) ON OR AFTER the assessment day, |
The purchase price of an income stream is the nominal sum of the paymetns made to purchase the income stream (including amounts paid by way of employer and employee contributions) less any commuted amounts.
Note: In determining the means test assessment of asset-tested income streams (lifetime), the purchase price is not used. Rather, the grossed up purchase amount.
Legislation: Section 5J(1) [21]of the VEA [21]
According to subsection 5J(1) of the VEA [21], an income stream includes:
but does not include any of the following:
The ordinary income of a person for a period means, as described in section 46 of VEA [22], the gross ordinary income from all sources for that period without any reduction, other than a reduction of business income.
Annual payment means the amount payable to the person for the year under the income stream.
An income stream's relevant number is the length of time an income stream is paid for. It can be a fixed term or the life expectancy factor of the payee or reversionary beneficiary.
An income stream is an asset-test exempt income stream if it is purchased before 20 September 2007 and must be:
and:
Legislative reference:
Veterans' Entitlements Act 1986:
The residual capital value is the amount (if any) remaining at the end of an income stream's term, consisting of a portion of the initial capital invested in the income stream [5].
An income stream is an asset-test exempt income stream if it is purchased before 20 September 2007 and must be:
and:
Legislative reference:
Veterans' Entitlements Act 1986:
Life expectancy is the length of time a person is expected to live and has the same meaning as 'life expectancy factor' under section 27H of the Income Tax Assessment Act 1936.
The commencement day in relation to an income stream [5] is the first day of the period to which the first income stream payment relates. This is usually one instalment period before the date of the first income payment.
The commencement day cannot occur prior to:
Legislative reference: subsection 5J(1) of the Veterans' Entitlements Act 1986.
An income stream is an asset-tested short term income stream if the term of the income stream is five years or less and it is not any of the following:
Legislation: subsection 5J(1) Veterans' Entitlements Act 1986
An income stream is an asset-tested long term income stream if it is:
Note: income streams that pay for the life of an individual or individuals, purchased or acquired on or after 1 July 2019, are assessed as asset-tested lifetime income streams.
Legislative reference: subsection 5J(1) Veterans' Entitlements Act 1986
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.
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 [21].
Links
[1] https://clik.dva.gov.au/user/login?destination=node/16344%23comment-form
[2] https://clik.dva.gov.au/book/export/html/16344#tgt-cspol_part10_ftn658
[3] https://clik.dva.gov.au/legislation-library
[4] https://clik.dva.gov.au/book/export/html/16344#ref-cspol_part10_ftn658
[5] https://clik.dva.gov.au/%23
[6] https://clik.dva.gov.au/book/export/html/16344#tgt-cspol_part10_ftn659
[7] https://clik.dva.gov.au/book/export/html/16344#tgt-cspol_part10_ftn660
[8] https://clik.dva.gov.au/service-eligibility-assistant-updates/all-determinations-order-date-signed-oldest-most-recent/determinations-under-vea
[9] https://clik.dva.gov.au/book/export/html/16344#ref-cspol_part10_ftn660
[10] https://clik.dva.gov.au/book/export/html/16344#tgt-cspol_part10_ftn661
[11] https://clik.dva.gov.au/book/export/html/16344#tgt-cspol_part10_ftn662
[12] https://clik.dva.gov.au/book/export/html/16344#tgt-cspol_part10_ftn663
[13] https://clik.dva.gov.au/compensation-and-support-policy-library/part-9-principles-determining-pension-rate/95-deeming-provisions
[14] https://clik.dva.gov.au/book/export/html/16344#ref-cspol_part10_ftn663
[15] https://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/105-income-streams/1057-life-expectancy-tables-pension-valuation-factors-and-payment-factors
[16] https://clik.dva.gov.au/book/export/html/16344#ref-cspol_part10_ftn659
[17] https://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/105-income-streams/1057-life-expectancy-tables-pension-valuation-factors-and-payment-factors/payment-factors-allocated-income-streams
[18] https://clik.dva.gov.au/book/export/html/16344#ref-cspol_part10_ftn661
[19] https://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/105-income-streams/1057-life-expectancy-tables-pension-valuation-factors-and-payment-factors/payment-factors-market-linked-income-streams
[20] https://clik.dva.gov.au/book/export/html/16344#ref-cspol_part10_ftn662
[21] http://clik.dva.gov.au/legislation-library
[22] http://www.comlaw.gov.au/Series/C2004A03268