VEA [53]

Purchase date

To be an asset-test exempt income stream [2], the income stream must have been purchased before 20 September 2007, unless certain conditions are met. The purchase date also determines whether the income stream is 100% or 50% asset-test exempt.     

General characteristics of a lifetime asset-test exempt income stream

An asset-test exempt income stream, paid for life has all of the following characteristics:

• is payable for the pensioner's lifetime,
• has a fixed annual payment, or an indexed annual payment with indexation capped at no greater than 5% or CPI [2]+1%,
• commences on the day it is purchased or acquired,
• converts the purchase price [2] wholly into income,
• has no residual capital value [2],
• is non-commutable except in limited circumstances,
• has limited reversionary benefits, and
• cannot be used as security for borrowing, and
• if the income stream is a lifetime income stream paid from a self managed superannuation fund (SMSF) or a small APRA fund (SAF), has a current actuarial certificate in force.      More [57]

Commencement day

The commencement day [2] is the first day of the period to which the first payment under the income stream relates, even if the payment is made at the end of a twelve month period. The commencement day is usually the day the income stream was:

• purchased, or
• acquired (for defined benefit income streams that are not purchased).

Term and relevant number of a lifetime asset-test exempt income stream

Although the term of a lifetime income stream is for the life of the beneficiary, the relevant number [2] is either the:

• life expectancy [2] of the primary beneficiary (ie where there is no nominated reversionary beneficiary), or
• longest life expectancy of either the primary beneficiary or reversionary beneficiary (ie where there is a nominated reversionary beneficiary or where the income stream is purchased in joint names).

When determining the relevant number the actual life expectancy factors are used (ie there is no rounding). If there is a guaranteed period [2], the relevant number will be based on the life expectancy, not the guaranteed period. The relevant number is always calculated using the person's age on the income stream's commencement day, which is the same as the purchase date for purchased income streams.    

Exemption not affected by guarantee period

The asset-test exemption for a lifetime income stream is not affected if the income stream provides the following guarantee conditions:

• if a primary beneficiary dies within the guarantee period, any further payments they would have received in the guarantee period, had they lived, can be paid as an income stream or a lump sum to:

• a reversionary beneficiary, or
• the primary beneficiary's estate, if there is no reversionary beneficiary.

• if a reversionary beneficiary also dies within the guarantee period, any further payments due in the guarantee period can be paid to their estate.

The maximum guarantee period for an income stream purchased:

• before 20 September 2004 is 10 years
• on or after 20 September 2004 is the lesser of the person's life expectancy or 20 years.

Amount of annual payments

Payments must be made at least annually. The contract must specify the total amount of payments that may be made in the first year after the commencement day, excluding allowable commutations [2]. In any other year the payments may only vary:

• by indexed amounts, and
• allowable commutations.

The yearly indexation cannot be a negative value and must be no greater than:

• 5% where the indexation method is fixed, or
• the CPI plus 1% where the indexation method is not fixed.

Purchase price and residual capital value

The purchase price is the amount invested to purchase the income stream, less any allowable commutations. The amount paid as the purchase price must be wholly converted into income. The income stream must have no residual capital value.

Income stream is non-commutable

In order to be assessed as an asset-test exempt income stream, the income stream must be non-commutable except in limited circumstances. The benefit payable after the commutation cannot be greater than the benefit payable before the commutation. Commutation is allowed in the following circumstances:

• to a reversionary beneficiary or the person's estate on death of the person

• if the income stream was purchased before 20 September 2004, within ten years of the commencement day, or
• if the income stream was purchased on or after 20 September 2004, within the shorter of the period of the person's life expectancy on the commencement day or 20 years

• if the income stream is not a commutation funded income stream, within six months of the commencement day,
• where the commutation is transferred directly to the purchase of a new income stream with the characteristics of an asset test exempt income stream,
• to the amount necessary to pay a superannuation contributions surcharge [2] amount,
• to the amount necessary to pay a hardship amount [2],
• to the amount necessary to pay the person's spouse or former spouse in a payment split under Part VIIIAA or Part VIIIB of the Family Law Act 1975.

Commutation of non-compliant self managed superannuation or small APRA fund 100% asset-test exempt income streams

In recognition of the global financial crisis of 2008 and 2009, temporary relief has been provided for holders of 100% asset-test exempt income streams, sourced from a SMSF or SAF, who are forced to restructure after failing to meet the high probability test.    

Security for borrowing

For an income stream to be asset-test exempt, neither of the following can be used as security for borrowing:

• the capital value of the income stream, or
• the income [2] from the income stream.

Reductions in payments

Payments may only decrease as a result of:

• commutation,
• death of one of the owners of a jointly owned income stream, or
• on reversion to a reversionary beneficiary.

Transfer to a reversionary beneficiary

In order for a lifetime income stream to qualify for asset-test exempt status, the contract or governing rules [2] must specify that the income stream cannot be transferred to another person, apart from:

• a reversionary beneficiary on the death of the primary beneficiary, or
• another reversionary beneficiary on the death of the first reversionary beneficiary.

To ensure that no income is deferred, the payment to a reversionary beneficiary cannot be greater than the primary beneficiary received immediately before death.

Reversion to reversionary beneficiary or death of a joint owner

On reversion to a reversionary beneficiary upon the death of the primary beneficiary or the death of one of the owners of a jointly owned income stream, the income stream is treated as a continuation of the original income stream. The asset-test exempt status, purchase price, commencement day and relevant number remain unchanged. The gross payment may be reduced in accordance with the contract.

Period of payments to reversionary beneficiary

Payments to a reversionary beneficiary must be paid at least annually, either:

• throughout the reversionary beneficiary's life,
• if the reversionary beneficiary is a child of the primary beneficiary, or former reversionary beneficiary, at least until the child turns sixteen, or
• if the child is a full-time student who has turned sixteen, until the earlier of when the student:

• finishes full-time study, or
• turns 25.

Removal or change of reversionary beneficiary

Where the reversionary beneficiary is removed or is changed, the income stream is treated as a new income stream from that date. The commencement day is the date that the reversionary beneficiary changed and the purchase price is the net present value of the future income stream payments as calculated by the income stream provider. The relevant number is calculated on the person's circumstances on the new commencement day.

Purchase date

To be an asset-test exempt income stream [2], the income stream [2] must have been purchased before 20 September 2007, unless certain conditions are met. The purchase date also determines whether the income stream is 100% or 50% asset-test exempt.     

General characteristics of life expectancy asset-test exempt income streams

An asset-test exempt life expectancy income stream has all of the following characteristics:

• if the income stream is purchased before 20 September 2004, is purchased on or after the day that the person reaches pension age [2],
• is payable for a fixed term based on life expectancy [2],
• has a fixed annual payment, or an indexed annual payment with indexation capped at no greater than 5% or CPI [2]+1%,
• commences on the day it is purchased or acquired,
• converts the purchase price [2] wholly into income,
• has no residual capital value [2],
• is non-commutable except in limited circumstances,
• has limited reversionary benefits,
• cannot be used as security for borrowing, and
• if the income stream is a life expectancy income stream paid from a self-managed superannuation fund or a small APRA fund, has a current actuarial certificate in force.      More [69]

Jointly owned income streams

Where an income stream is jointly owned, the characteristics of the income stream must be satisfied in relation to each owner.

Commencement day

An asset-test exempt life expectancy income stream's commencement day [2] is the first day of the period to which the first payment relates, even if the payment is made at the end of a twelve month period. The commencement day is usually the day the income stream was purchased.

Term and relevant number of an asset-test exempt life expectancy income stream

The term of the income stream is a fixed term, as specified in the income stream contract, and is also known as its relevant number [2]. To comply as an asset-test exempt income stream the relevant number must meet the criteria in the table below. The relevant number is always calculated using the person's age on the income stream's commencement day, which is the same as the purchase date for purchased income streams.     

Amount of annual payments

Payments must be made at least annually. The contract must specify the total amount of payments that may be made in the first year after the commencement day, excluding allowable commutations. In any other year the payments may only vary by:

• indexed amounts, and
• allowable commutations.

The yearly indexation cannot be a negative value and must be capped at the larger of:

• 5% if the indexation method is fixed, or
• the CPI plus 1% if the indexation method is not fixed.

Purchase price and residual capital value

The purchase price is the amount invested to purchase the income stream, less any allowable commutations. The amount paid as the purchase price must be wholly converted into income. The income stream must have no residual capital value.

Income stream is non-commutable

In order to be assessed as asset-test exempt, the income stream must be non-commutable except in limited circumstances. The benefit payable after the commutation [2] cannot be greater than the benefit payable before the commutation. Commutation is allowed in the following circumstances:

• if the income stream was purchased before 20 September 2004:

• on death of the person to a reversionary beneficiary or the person's estate, or
• on death of the reversionary beneficiary to another reversionary beneficiary or to the reversionary beneficiary's estate,

• if the income stream was purchased on or after 20 September 2004:

• on death of the primary beneficiary where there is no reversionary partner, or
• where the income stream is paid to the reversionary partner following the death of the primary beneficiary, on death of the reversionary partner,

• if the income stream is not a commutation funded income stream, within six months of the commencement day,
• where the commutation is transferred directly to the purchase of a new income stream with the characteristics of an asset-test exempt income stream,
• to the amount necessary to pay a superannuation contribution surcharge [2] amount,
• to the amount necessary to pay a hardship amount [2],
• to the amount necessary to pay the person's spouse or former spouse in a payment split under Part VIIIAA or Part VIIIB of the Family Law Act 1975.

Commutation of non-compliant self managed superannuation or small APRA fund 100% asset-test exempt income streams

In recognition of the global financial crisis of 2008 and 2009, temporary relief has been provided for holders of 100% asset-test exempt income streams, sourced from a SMSF or SAF, who are forced to restructure after failing to meet the high probability test.    

Security for borrowing

For an income stream to be asset-test exempt, neither of the following can be used as security for borrowing:

• the capital value of the income stream, nor
• the income from the income stream.

Transfer to a reversionary beneficiary

In order for a life expectancy income stream to qualify for asset-test exempt status, the contract or governing rules [2] must specify that the income stream can only be transferred to a reversionary beneficiary or to the person's estate on the death of the primary beneficiary. To ensure that no income [2] is deferred, the payment to a reversionary beneficiary cannot be greater than the payment the primary beneficiary received immediately before death.

Re-testing of reversionary income streams purchased before 20 September 2004

If the primary beneficiary or owner of a:

• life expectancy, or
• 15 year minimum term asset-test exempt income stream

dies and the income stream reverts to the nominated reversionary beneficiary, the income stream must be re-tested for asset-test exempt status as at the date of reversion using the age and life expectancy of the reversionary beneficiary and remaining term of the income stream on that date.

If, on the date of reversion:

• the reversionary beneficiary had not attained pension age, or
• the remaining term of the income stream did not meet the term requirements for a life expectancy or 15 year minimum term income stream purchased before 20 September 2004,

the income stream would no longer meet the characteristics of an asset-test exempt income stream and would instead be assessed as an asset-tested income stream (long term) [2]. The income stream retains the same commencement day, purchase price and relevant number regardless of whether it is assessed as asset-test exempt or as asset-tested. The gross payment may reduce as specified in the income stream contract.    

Re-testing of reversionary income streams purchased on or after 20 September 2004

The income stream continues to be asset-test exempt if the reversionary beneficiary was the partner of the primary beneficiary on the day of the primary beneficiary's death. In all other cases, the income stream ceases to be asset-test exempt on reversion. In any case, the income stream retains the same commencement day, purchase price and relevant number. The gross payment may reduce as specified in the income stream contract.

Period of payments to reversionary beneficiary

The reversionary benefit for life expectancy income streams is the balance of payments that would have been paid to the primary beneficiary under the contract terms.

Removal or change of reversionary beneficiary

Removing or changing the reversionary beneficiary has no impact on the asset test exempt status of the income stream.

VEA [81]

Purchase date

To be an asset-test exempt income stream [2], a market linked income stream must have been purchased before 20 September 2007, unless certain conditions are met.     

General characteristics of asset-test exempt market linked income streams

An asset-test exempt market linked income stream has all of the following characteristics:

• the commencement day [2] is on or after 20 September 2004
• the income stream [2] is provided to the primary beneficiary, or the primary beneficiary's reversionary partner on the date of the primary beneficiary's death
• on reversion, the reversionary component cannot be greater than the account balance immediately prior to reversion
• the income stream is payable for a fixed term in whole years based on life expectancy [2]
• the payments under the income stream are made at least annually and are calculated under the legislated formula
• the first payment under the income stream relates to the period commencing on the date of purchase of the income stream
• the income stream has no residual capital value [2]
• the income stream has limited commutability
• on commutation [2], the amount commuted cannot be greater than the account balance immediately prior to the commutation
• the income stream cannot be used as security for borrowing.

Commencement day

An asset-test exempt market linked income stream's commencement day is the first day of the period to which the first payment relates, even if the payment is made at the end of a twelve month period. The commencement day is usually the day the income stream was purchased.

Term and relevant number of an asset-test exempt market linked income stream

The term of the income stream is a fixed term specified in the income stream contract and is also known as its relevant number [2]. To comply as an asset-test exempt income stream the relevant number must meet the criteria in the table below. The relevant number is always calculated using the person's age on the income stream's commencement day, which is the same date as the purchase day.     

Range of payments for a market linked income stream

The annual payment is calculated on the commencement day of the income stream and on 1 July each year. The annual payment made under the income stream for a financial year [2] must be at least 90% and not more than 110% of the default annual payment worked out by the formula:

                  Default annual payment = Account balance / payment factor

For the purposes of the formula:

• the account balance is the balance at the start of the financial year, or if the income stream commenced during the financial year, the balance at the commencement day,
• the payment factor is a factor worked under principles determined by the Commission, and     More [85]
• the default annual payment must be rounded to the nearest $10.00, rounding amounts ending in $5.00 up.

Rules determining the choice of payment factor

The payment factor used in calculating the annual payment depends on the remaining term of the income stream. The remaining term of the income stream is rounded using the following rules:

• for income streams commencing between 1 July and 31 December, the remaining term of the income stream is rounded down to the next whole number
• for income streams commencing between 1 January and 30 June, the remaining term of the income stream is rounded up to the next whole number
• if the remaining term rounds to zero, a payment factor of one is used.

Other rules for payments from a market linked income stream

Temporary reduction in minimum payments

For the financial years 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 :

• 50% of the required minimum payment for the financial years commencing 1 July 2008 and ending 30 June 2011; and
• 75% of the required minimum payment for the financial years commencing 1 July 2011 and ending 30 June 2013.

These temporary relief measures ceased to apply from 1 July 2013.

Purchase price and residual capital value

The purchase price is the amount invested to purchase the income stream, less any allowable commutations. The income stream must have no residual capital value.

Income stream is non-commutable

In order to be assessed as asset-test exempt, the income stream must be non-commutable except in limited circumstances. The benefit payable after the commutation cannot be greater than the benefit payable before the commutation. Commutation is allowed in the following circumstances:

• on death of the primary beneficiary where there is no reversionary partner,
• where the income stream is paid to the reversionary partner following the death of the primary beneficiary, on death of the reversionary partner,
• if the income stream is not a commutation funded income stream, within six months of the commencement day,
• where the commutation is transferred directly to the purchase of a new income stream with the characteristics of an asset-test exempt income stream,
• to the amount necessary to pay a superannuation contributions surcharge [2] amount,
• to the amount necessary to pay a hardship amount [2],
• to the amount necessary to pay the person's spouse or former spouse in a payment split under Part VIIIB of the Family Law Act 1975.

Security for borrowing

For an income stream to be asset-test exempt, neither of the following can be used as security for borrowing:

• the capital value of the income stream, nor
• the income from the income stream.

Re-testing of reversionary income streams

The income stream continues to be asset-test exempt if the reversionary beneficiary was the partner of the primary beneficiary on the day of the primary beneficiary's death. In all other cases, the income stream ceases to be asset-test exempt on reversion. In any case, the income stream retains the same commencement day, gross payment, purchase price and relevant number as the original income stream.

Period of payments to reversionary beneficiary

Payments will be made to the reversionary beneficiary for the remainder of the contract term. To ensure that no income [2] is deferred, the reversionary benefit cannot be greater than the payment the account balance immediately before reversion.

VEA [91]

General characteristics of defined benefit income streams

A defined benefit income stream [2] is an income stream that:

• meets the definition of 'pension' as specified in the Superannuation Industry (Supervision) (SIS) Regulations 1994,
• is paid from a public sector or private sector defined benefit superannuation fund [2],
• determines the payment rate by factors other than the purchase price [2], such as the length of service and final salary.

Conditions for exemption to be extended

All of the following conditions must be met for a defined benefit income stream to be asset-test exempt:

• the scheme or fund from which the income stream is paid:

• was established before 20 September 1998, and
• provided the income stream product before that date,

• the income stream product was treated as a superannuation pension [2] and was exempt from the assets test [2] before 20 September 1998,

• a pensioner started the income stream:

• before 20 September 1998, or
• after 20 September 1998 from a pre-20 September 1998 defined benefit superannuation pension product,

• for a private sector scheme or fund, unless the pensioner is a reversionary beneficiary:

• the income stream is directly connected to the pensioner's previous employment, and
• the payments from the defined benefit income stream become payable to, or for, the pensioner because of that employment.

Term and relevant number of a defined benefit income stream

Although the term of a defined benefit income stream is for the life of the beneficiary, the relevant number [2] is either the:

• life expectancy [2] of the primary beneficiary (ie where there is no nominated reversionary beneficiary), or
• longest life expectancy of either the primary beneficiary or reversionary beneficiary (ie where there is a nominated reversionary beneficiary or where the income stream is purchased in joint names).

When determining the relevant number the actual life expectancy factors are used (ie there is no rounding).

Reversion to reversionary beneficiary

Defined benefit income streams continue to be asset-test exempt on reversion to a reversionary beneficiary. On reversion, the gross payment, deductible amount [2] and the deductible amount calculation method may change.

VEA [96]

Asset-tested income streams (long term)

An asset-tested income stream (long term) [2] is an income stream [2] that:

• was purchased on or after 20 September 2007, or
• was purchased before 20 September 2007 and does not meet all the characteristics of an asset test exempt income stream [2].

An asset-tested income stream (long term) is an income stream wher ethe specified term of the contract is:

• more than five years, or
• five years or less provided the term is equal to or greater than the owner's life expectancy [2].

If the income stream was purchased before 20 September 2007 and doesn not meet all the characteristics of an asset-test exempt income stream, it is an asset-tested income stream (long term).

Income streams that are paid for the life of the owner and were purchased on or after 1 July 2019 are classified as asset-tested income streams (lifetime).

Term and relevant number of an asset-tested income stream (long term)

The term of an asset-tested income stream (long term) is also known as its relevant number [2]. For an asset-tested income stream (long term) paid for a fixed term, the relevant number is the fixed term that the income stream is payable for as specified in the contract. For asset-tested income streams (long term) paid for life and for all allocated income streams, the relevant number is either:

• the life expectancy of the primary beneficiary (that is, where there is no nominated reversionary beneficiary), or
• the longest life expectancy of either the primary beneficiary or reversionary beneficiary (ie where there is a nominated reversionary beneficiary or where the income stream is purchased in joint  names).    More [98]

When determining the relevant number, the actual life expectancy factors are used (that is, there is no rounding). If there is a guaranteed period [2], the relevant number will be based on the life expectancy, not the guaranteed period.

Asset-tested income streams (long term deemed)

An account-based income stream, also known as an allocated pension or transition to retirement pension, is an asset-tested (long term deemed) income stream and is treated as a financial asset and deemed if either:

• the income stream commenced on or after 1 January 2015; or
• the income stream commenced before 1 January 2015 and the owner has not been in continuous receipt of an income support payment since 31 December 2014.

Under grandfathering provisions, an account-based income stream is not an asset-tested (long term deemed) income stream, and will continue to be assessed as an asset-tested (long term) income stream, if it:

• commenced before 1 January 2015, and
• was assessed after 1 January 2015 as an asset-tested (long term) income stream, and
• reverted to a reversionary beneficiary under the income stream contract following the death of the original owner, and
• the reversionary beneficiary has been continuously in receipt of an income support payment since the reversion of the income stream.

Under grandfathering provisions, an account-based income stream is not an asset-tested (long term deemed) income stream, and will continue to be assessed as an asset-tested (long term) income stream, if it:

• was assessed as an asset-tested (long term) income stream, and
• was commuted on or after 1 January 2015 as part of a divorce/separation settlement (a court order under Part VIIIAA or Part VIIIB of the Family Law Act 1975), and
• a new account-based income stream was purchased by direct rollover of the proceeds, and
• the owner has been continuously in receipt of an income support payment since the commencement of the new income stream.

Asset-tested income streams (lifetime)

An asset-tested lifetime income stream is an income stream that:

• was purchased on or after 1 July 2019,
• once regular payments commence, the payments continue for the rest of the owner's life,
• the amounts paid are based on the age, life expectancy or other factors relevant to the mortality of the owner, and
• does not have the characteristics of an asset-test exempt income stream or a defined benefits scheme.

More: 10.5.2 Asset-tested Income Streams - Lifetime and 10.5.4 Income and Assets Assessment of Income Streams.

VEA: section 5JE.

Asset-tested income streams (short term)

An income stream is classified as an asset tested income stream (short term) [2], when the term is five years or less and it is not an:

• asset-test exempt income stream,
• asset-tested income stream (long term), or
• asset-tested income stream (lifetime).    More [99]

Certain income streams purchased on or after 20 September 2007 may be asset-test exempt

Most income streams purchased on or after 20 September 2007 are asset-tested income streams.  There are some exceptions for income streams purchased from the commutation of an asset-test exempt income stream, if certain conditions are met.   

Last amended: 10 March 2011

What is a Family Law Affected income stream?

Any income stream [2], whether asset test exempt or asset tested, may become a [glossary:Family Law Affected (FLA):] income stream [2]. An income stream becomes an FLA income stream when the primary beneficiary's former partner [2] becomes entitled to be paid some or all of the income stream under:

• a payment split under Part VIIIB of the Family Law Act 1975; or
• an order under Part VIIIAA of the Family Law Act 1975.

Deprivation rules not to apply to splits under the Family Law Act 1975

The deprivation rules do not apply to the disposal of the whole or a part of a superannuation interest pursuant to an order under Part VIIB or VIIIAA of the Family Law Act 1975.

Assessment of family law affected income streams

Assessment of an FLA income stream depends on the type of income stream involved.      

Last amended: 13 May 2008

Partial commutation of a purchased income stream

When a partial commutation [2] is made from a purchased income stream the:

• relevant number [2] does not change for income support purposes,
• purchase price [2] is reduced by the actual amount/s commuted,     More ? [112]
• residual capital value [2] may need to be reduced, information must be sought to determine whether an adjustment to this value is also necessary,
• asset value is adjusted, as the new asset value is calculated using the adjusted purchase price and adjusted residual capital value,
• gross income may need to be reduced, information must be sought to determine whether an adjustment to the income stream payments is also necessary, and
• deduction is reduced, as the deduction is calculated using the adjusted purchase price and adjusted residual capital value.

Partial commutation of a defined benefit income stream

The assessable income must be reviewed when a partial commutation is made from a defined benefit income stream [2] as the:

• gross income,
• deductible amount [2] and
• method under which the deductible amount is calculated

may all change as a result of a partial commutation.

If the deductible amount was calculated under the saving provision immediately before the commutation, the saving provision will continue to apply, however the deductible amount may be recalculated.   

Three strike policy on commutation of an asset test exempt income stream

Pensioners may commute a non-commutation funded asset test exempt income stream [2] within six months of the commencement day [2] of the income stream. They can use this provision at least twice within the first 6 months for one or more income streams after they first receive an income support pension [2] without the income stream losing asset test exempt status. On the third commutation, the Commission may determine that any further income streams owned by the person do not qualify for asset test exemption.

Transfer of funds from one asset test exempt income stream to another

A transfer of all the funds in one asset test exempt income stream directly to the purchase of another asset test exempt income stream is not a commutation for the purposes of the three strikes policy. A commutation does occur, when part, or all, of the funds in an asset test exempt product are accessed or not directly transferred to the purchase of another asset test exempt product.

Retrospective reclassification of an asset test exempt income stream following commutation

If a person commutes (in whole or in part) an asset test exempt income stream contrary to the contract or governing rules [2] as specified under subsection 5JA(2), 5JB(2) or 5JBA(2), section 52ZMA will be applied to retrospectively reclassify the commuted income stream as an asset tested income stream (long term) [2] from later of the:

1. day five years before the day the income stream was commuted, or
2. commencement day of the income stream (or if the income stream is part of a succession of asset test exempt income streams, the commencement day of the first asset test exempt income stream in the succession of asset test exempt income streams), or 
3. date income support pension was granted (ie. SP/ISS/Centrelink pension), or
4. 20 September 2001 (the date section 52ZMA took effect).

Retrospectively reclassifying the income stream as an asset tested income stream (long term) has the effect of including the assessable asset value of the income stream in the pension assessment for the relevant period, with provision for asset depletion under subsection 52A(4).

Debt arising from retrospective reclassification

Retrospective reclassification of an asset test exempt income stream to an asset tested income stream may result in an overpayment. The overpaid amount must be recovered under existing policy.     

Debts not raised for commutation of asset test exempt defined benefit income stream

Section 52ZMA [54] of the VEA provides for the calculation of a debt if an overpayment arises following the commutation of an asset test exempt income stream in contravention to the contract or governing rules under which the income stream was provided. However, subsection 52ZMA(11) provides that section 52ZMA is not applicable to income streams where a determination under subsection 5JA(5), 5JB(4), or 5JBA(11) is in force. As there is a Commission determination under subsection 5JA(5) for all existing defined benefit income streams, section 52ZMA cannot be applied when a defined benefit income stream is commuted.

Last amended: 23 March 2010

No saving provisions for income stream provisions

The income stream [2] provisions have no general saving provisions. This means that all income streams are assessable under the current legislation unless an exemption has been granted.

Conditions for gaining an exemption

The Minister has the power to exempt a pensioner from the current income stream assessment rules if the pensioner:

• has entered into a binding arrangement for an income stream before 13 May 1997,
• has continuously been [glossary:receiving a:] service pension [2], income support supplement [2], or a social security payment [2] since 19 September 1998 up to the date when a claim for exemption was lodged, and
• would, in the Minister's opinion, be financially significantly disadvantaged by the application of the current rules.

What is a binding arrangement?

A decision on whether a person has entered into a binding arrangement is determined by a delegate of the Commission. Only if a case satisfies this criterion should consideration be given to seeking a ministerial opinion in respect of significant disadvantage. A binding arrangement exists if the product:

• cannot be commuted, or have its terms of contract altered to qualify for asset test exemption, or
• cannot be commuted without causing the pensioner severe detriment (severe detriment is determined by assessing the cost of exiting the product in relation to the pensioner's specific financial circumstances). Cases involving severe detriment should be referred to the Benefits, Payments and Rehabilitation Policy team in the Canberra office.      More ? [129]

Application of exemption

The exemption from assessment of an income stream applies to individual income streams held by individual pensioners. If a pensioner has multiple products, then each product held by that pensioner will need to be considered separately against the exemption criteria. Granting an exemption to an individual pensioner in respect of an income stream product is not a precedent to granting an exemption to other pensioners with the same product. As most products affected by the 20 September 1998 amending changes can be commuted, and contracts can generally be renegotiated with the agreement of the parties involved, it is expected that few pensioners will meet the criteria for a binding arrangement.

Acceptance of request for exemption

A request for exemption will generally be granted on the grounds of significant disadvantage if the assessment under the new rules reduces the person's total income to below the maximum rate of pension/allowance plus the income free area [2] under the income test [2]. Effectively, significant disadvantage exists where:

(New rate of pension + other income) is less than the (maximum rate of pension + income free area).

Continuation of exemption

A pensioner must have been in continuous receipt of an income support payment since 19 September 1998 to continue to have the benefit of an exemption. Transfer from one payment to another is acceptable, but if an income support pension ceases to be payable for a period, and pension is reinstated at a future date, the exemption is lost unless the Minister makes a new written declaration that the person's income stream be exempt from assessment under the current rules.

Last amended: 20 August 2012

Defined benefit income streams are 100% asset test exempt

The Commission has made several determinations in the form of legislative instruments that regardless of its commencement day [2], a defined benefit income stream [2] is 100% asset test exempt.

Asset test exempt income streams commencing before 20 September 2004 are 100% asset test exempt

An asset test exempt income stream [2] commencing before 20 September 2004 is 100% asset test exempt.

Asset test exempt income streams commencing on or after 20 September 2004 and before 20 September 2007 are generally 50% exempt

Most asset test exempt income streams commencing on or after 20 September 2004 and before 20 September 2007 are 50% asset test exempt. However, principles have been developed allowing the Commission to determine that certain asset test exempt income streams commencing on or after 20 September 2004 and before 20 September 2007 are 100% asset test exempt. The income stream must:

• have been purchased using funds directly from an allowable commutation [2] of an existing asset test exempt income stream, and
• have the characteristics of an asset test exempt income stream, and
• meet one of the criteria in clauses 2.2 to 2.10 of the principles.     More ? [137]

Income streams commencing on or after 20 September 2007 are generally not asset test exempt

Most income streams commencing on or after 20 September 2007 are not asset test exempt. However, principles have been developed allowing the Commission to determine that certain income streams commencing on or after 20 September 2007 are either  50% or 100% asset test exempt. The income stream must:

• have been purchased using funds directly from an allowable commutation of an existing asset test exempt income stream,
• have the characteristics of an asset test exempt income stream, and
• meet one of the criteria in clauses 3.2 to 3.11 of the principles.     More ? [138]

The level of asset test exemption (50% or 100%) will be the same as the asset test exemption applicable to the existing asset test exempt income stream.

Principles under which a new income stream can be asset test exempt

In general terms, the Principles under which a new income stream can retain its asset test exemption are limited to commutations made to enable:

• changes to be made to the income stream where either:

• the reversionary beneficiary predeceases the primary beneficiary, or
• the primary beneficiary and the reversionary beneficiary are no longer members of a couple,

• compliance with actuarial certification,
• a transfer to a successor fund,
• a payment split under Part VIIIB of the Family Law Act 1975,
• a Family Court order or injunction under Part VIIIAA of the Family Law Act 1975,
• payment of a superannuation contributions surcharge [2] debt,
• payment of excess contributions tax,
• payment of a hardship amount [2],
• transfer of all assets supporting a market linked income stream to another market linked income stream,
• closure of a self managed superannuation fund,
• compliance with regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994, or
• payment of excess contributions tax.

The original income stream must be commuted in full, in one complete transaction, and the commuted amount rolled over to the new income stream, except for commutations made in relation to payment splits under the Family Law Act, or payment of a superannuation contributions surcharge debt, excess contributions tax or hardship amount, which can be partial commutations.  A partial commutation based on a partial transfer of assets cannot be recognised, outside of the limited allowed circumstances, including in those cases where the transfer of the remaining asset value has been delayed.

Full details of each allowable commutation event are outlined in the Veterans Entitlements (Retention of exemption for asset-test exempt income streams) Principles 2011.    

Last amended: 13 May 2016

Ongoing disability/invalidity benefits paid from a superannuation fund

Ongoing disability or invalidity benefits paid from a superannuation fund [2] are treated as defined benefit income streams [2]. The presence of an offset clause in the superannuation fund's group insurance policy does not alter the treatment of the disability/invalidity benefit as a defined benefit income stream, and does not invoke the compensation recovery provisions. However, pre-assessment payments paid by the Commonwealth Superannuation Corporation (CSC) while a person is waiting for a decision on their request to the CSC for invalidity retirement are considered to be compensation and are assessed under the compensation recovery provisions.    

Income streams paid to a trust or company

Income streams paid to a trust or company are assessed under the Trusts and Companies rules. If the ownership structure subsequently changes so that the income stream is paid to the beneficiary, this is treated as a commutation [2] and the commencement of a new income stream on that date. However, an income stream purchased by a self managed superannuation fund (SMSF) or small APRA fund (SAF) from a commercial provider and paid to the beneficiary through the SMSF or SAF is assessed under the income stream rules where the income stream is purchased in the beneficiary's name.    

Successor funds

A successor fund, in relation to a transfer of superannuation benefits of a member from one superannuation fund to another, is a fund which satisfies the following conditions:

• the fund gives the member equivalent rights to the rights they had in the original fund in respect of the superannuation benefits, and
• before the transfer, the trustee of the fund agreed with the trustee of the original fund that the fund will confer on the member equivalent rights to the rights that the member had under the original fund in respect of the benefits.

Where the fund is a successor fund, then the transfer of the right to an income stream continues with the same commencement day, original purchase price [2], relevant number [2] and deduction, unless the person elects to commute part of the income stream. The impact of commutation will depend on the type of income stream.

Last amended: 13 May 2008

Income assessment of defined benefit income streams

The following formula is used to determine the amount of annual ordinary income [2] from a defined benefit income stream [2]:

Annual ordinary income = gross annual payment [2] - deductible amount [2]

The deductible amount is a term defined in the VEA as an amount calculated under the taxation law [2], and referred to as the tax free component [2] under the taxation law. The gross annual payment excludes any abatements.

Payments for dependent children are exempt

If the income stream [2] contract specifies that part of the income stream is made for dependent children, that amount is exempt from the income test [2].    

Calculating the deductible amount/tax free component

The method of calculating the deductible amount/tax free component depends on the person's individual circumstances. The available methods are:

• new 1 July 2007 rules method
• pre 1 July 2007 rules method
• the saving provision.

Determining which method applies

Income stream providers determine whether the pre 1 July 2007 rules method or the new 1 July 2007 rules method applies to the defined benefit income stream. DVA determines whether the saving provision applies. DVA cannot determine whether the pre 1 July 2007 rules method or the new 1 July 2007 rules method applies.

Deductible amount/tax free component calculation under the new 1 July 2007 rules method

Under the new 1 July 2007 rules method, the income stream provider calculates the deductible amount/tax free component under tax law. The provider then notifies DVA of the deductible amount/tax free component and the calculation method.

Deductible amount/tax free component may increase under the new 1 July 2007 rules method

The deductible amount/tax free component is based on a proportion of the total value of the superannuation interest. As the tax free component is a proportion of the gross payment, the deductible amount/tax free component may increase as payments from the income stream are increased with indexation.

Deductible amount/tax free component calculation under the pre 1 July 2007 rules method

Under the pre 1 July 2007 rules method, the income stream provider notifies DVA of the person's undeducted purchase price [2] (UPP), the deductible amount/tax free component, and the calculation method.

No increase under the pre 1 July 2007 rules method

The deductible amount/tax free component calculated under the pre 1 July 2007 rules method is fixed and cannot increase as the income stream payment increases with indexation. However, the deductible amount/tax free component may reduce if the person makes a commutation from their income stream that includes a part of the UPP.

Saving provision

A saving provision applies where all of the following conditions are met:

• the defined benefit income stream commenced prior to 1 July 2007,
• the person receives an income support pension [2] for a period commencing before and ending on or after their trigger day,
• the person has not made a commutation between 1 July 2007 and their trigger day,
• immediately before the trigger day a deductible amount/tax free component calculated under the pre 1 July 2007 rules method was recorded in the person's assessment,
• an income stream provider advises a new deductible amount/tax free component calculated under the new 1 July 2007 rules method, and
• the deductible amount/tax free component calculated under the new 1 July 2007 rules method is less than the deductible amount/tax free component calculated under the pre 1 July 2007 rules method.

The trigger day is the later of 1 July 2007 and the person's 60 — th birthday.

When the saving provision ceases to apply

The saving provision ceases to apply when any of the following events occur:

• the person ceases to receive an income support pension,
• the income stream ceases,
• the person dies, or
• the deductible amount/tax free component under the new 1 July 2007 rules method is greater than or equal to the deductible amount/tax free component under the pre 1 July 2007 rules method.

Abatements

An abatement occurs when an employee elects to take additional units of superannuation, but cannot pay the full amount due at the time of their retirement. The amount is repaid over a number of years after retirement by annually deducting a lump sum before the superannuation is made available. During the abatement period the abatement amount is not income [2] and not included in the gross payment for income test [2] purposes.

Last amended: 13 May 2008

Example 1 - Person over 60, no deductible amount in assessment

Jack, a 62 year old service pensioner [2], did not notify of the deductible amount [2] for his income stream [2] prior to 1 July 2007. The income stream commenced prior to 1 July 2007. Because no deductible amount was recorded under the pre 1 July 2007 rules method, Jack is not covered by the saving provision. From 1 July 2007, the new 1 July 2007 rules method will apply.

Example 2 - Person under 60, deductible amount already in assessment

James, a 58 year old service pensioner, did not notify of the deductible amount for his income stream prior to 1 July 2007. The income stream commenced prior to 1 July 2007. On 4 July 2007, the income stream provider notifies DVA that James has a deductible amount. Because he is not yet 60, the deductible amount is calculated under the pre 1 July 2007 rules method. The deductible amount applies from the date of notification. When James turns 60, the income stream provider notifies DVA that James' deductible amount has changed. The new deductible amount, calculated under the new 1 July 2007 rules method, is lower than the deductible amount calculated under the pre 1 July 2007 rules method. James is covered by the saving provision and the old deductible amount continues to apply.

Example 3 - Person over 60, covered by saving provision

Julia, a 70 year old service pensioner, advised of her deductible amount before 1 July 2007. Apart from her defined benefit income stream [2] of $100 per fortnight, she has no other income.  Her deductible amount is $20 per fortnight so the assessable income is $80 per fortnight. The deductible amount under the New 1 July 2007 rules method would be $0. Even though Julia's service pension has not been reduced by the income from the defined benefit income stream, the saving provision will apply from 1 July 2007. Because the deductible amount was notified prior to 1 July 2007, the service pension is considered to have been affected prior to the trigger day and the requirements of the saving provision are satisfied.

Example 4 - Claim for income support pension lodged after turning 60

John's claim for service pension lodged on 10 August 2007 is granted with that date as his start date. John has already turned 60. John is not covered by the saving provision because he did not receive a pension prior to his trigger day (the later of his 60 — th birthday and 1 July 2007) that was affected by a deductible amount calculated under the pre 1 July 2007 rules method. The deductible amount is therefore calculated under the New 1 July 2007 rules method.

Example 5 - Saving provision ceases to apply when new deductible amount is higher

Jenny, a 71 year old service pensioner, notified of her deductible amount prior to 1 July 2007. Her deductible amount under the New 1 July 2007 rules method was lower and the saving provision was applied. On 1 July 2008, her income stream provider advises of a new deductible amount that is higher than the old deductible amount. The saving provision ceases to apply from that date.

Example 6 - Commutation when assessed under pre 1 July 2007 rules method

Jerry, a 58 year old service pensioner, notified of his deductible amount prior to 1 July 2007. His deductible amount is assessed under the pre 1 July 2007 rules method. He makes a commutation [2] on 30 September 2007. From that date, the deductible amount is calculated under the new 1 July 2007 rules method.

Example 7 - Commutation after saving provision has been applied

Joseph, a 65 year old service pensioner, has his deductible amount calculated under the saving provision. He makes a commutation from his income stream on 30 September 2007. Because the commutation is not made between 1 July 2007 and his trigger day, his deductible amount continues to be calculated under the saving provision.

Example 8 - Saving provision ceases when person ceases to receive service pension

Jane receives service pension from mid 2005. She notified of her deductible amount prior to 1 July 2007. She turned 60 in 2006 and her deductible amount from 1 July 2007 was assessed under the saving provision. On 20 August 2007, her service pension is reduced to nil due to income from a part time job. Jane reapplies for service pension on 15 April 2009 after her income reduces. She is granted from that date and the deductible amount is calculated under the new 1 July 2007 rules method.

VEA [166]

Income assessment of purchased income streams

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 [2] over the term of the income stream [2].    

The annual amount of ordinary income [2] produced by these income streams is determined by the following formula:

Annual Ordinary Income = Annual payment [2] – (Purchase price ÷ Relevant number [2]).

Purchase price to be reduced by commutations and residual capital value

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 [2], the purchase price must be further reduced by the income stream's residual capital value [2] (if any).

Example of income assessment

Mark is sixty five years old and single. He purchases an asset-test exempt income stream [2] for $100,000 with a term of 16 years. His life expectancy [2] at the commencement day [2] 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.

Minimum payment for certain income streams

VEA [169]

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:

• before 1 July 2007 using a pension valuation factor, using the following formula:

​     minimum payment = account balance ÷ payment valuation factor; and

• from 1 July 2007 using a percentage factor, using the following formula:
  
  minimum payment = account balance x percentage factor

For market linked income streams, the minimum payment is calculated using a payment factor using the following formula:

minimum payment = account balance ÷ payment factor    

For the purposes of each formula:

• the account balance is the balance as at 1 July or, if the payment is for the first year, the balance at the commencement day,
• the result is rounded to the nearest $10.00.

For the financial years 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 :

• 50% of the required minimum payment for the financial years commencing 1 July 2008 and ending 30 June 2011; and
• 75% of the required minimum payment for the financial years commencing 1 July 2011 and ending 30 June 2013.

These temporary relief measures ceased to apply from 1 July 2013.

Calculating the annual payment

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:

• A is the amount received so far during the financial year
• B is the amount expected to be received for the rest of the financial year
• C is the number of days in the financial year, and
• D is the number of days between the commencement of the income stream and 30 June.

Income assessment of asset-tested income streams (short term and long term deemed)

An income stream that is an asset-tested income stream (short term) [2]  or an asset-tested income stream (long term) deemed [2]is treated as a financial investment [2]. Its assessable income is determined under the deeming provisions [2].    More [173]

Income assessment of asset-tested income streams (lifetime)

An income stream that is an asset-tested income stream (lifetime) has the following income test applied:

Last amended: 13 May 2008

Asset value of 100% asset test exempt income streams

Regardless of whether an income stream is a 100% asset test exempt income stream [2] or a defined benefit income stream [2], no asset value is held in the assessment.

Asset value of asset tested income streams and 50% asset test exempt income steams

For asset tested income streams, the asset value assessed is the asset value of the income stream.  If the income stream is a 50% asset test exempt income stream, only 50% of the asset value is assessed.  The asset value is determined either once per year or twice per year as described in the following table.

If the income stream [2] has no account balance, the asset value is determined using the following formula:

Asset value = purchase price [2] - [(purchase price - residual capital value [2]) ? relevant number [2]] x term elapsed.

If the income stream has an account balance, the asset value is the current account balance.

Note – the purchase price should be adjusted to take account of any commutation [2] — s made from the income stream since commencement.

Calculation of term elapsed

The term elapsed is the number of years that have elapsed since the income stream's commencement day [2]. The number of years is rounded down to the nearest:

• half-year, when the asset value is determined on a six monthly basis, or
• whole year when the asset value is determined annually.

Example of asset value of asset tested income streams

Sally is sixty five years old and single. She purchases a ten year annuity for $150,000 with a residual capital value of $20,000. She receives a total payment of $18,337 per year. Monthly payments commence on 1 January. Her assessable asset from 1 January for the first six months will be:

$150,000 - [($150,000 - $20,000) ? 10 years] x 0 years = $150,000.

Her assessable asset from 30 June in that year will be:

$150,000 - [($150,000 - $20,000) ? 10 years] x 0.5 years = $143,500.

Example of asset value after a partial commutation

John purchases a five year term annuity for $50,000 with no residual capital value. At the end of two years, the assessable asset value is: $50,000 - [($50,000-$0) ? 5] x 2 = $30,000.

He commutes $6,000 at this point. The new assessable asset value after commutation is:

($50,000 - $6,000) - [( $50,000 - $6,000 - $0) ? 5] x 2 = $44,000 - $17,600 =$26,400.

Assets test assessment of defined benefit income streams

Under Commission determinations 1998/11, 1998/12 and 1999/6, defined benefit income streams are determined to be 100% asset test exempt.

Last amended: 10 March 2011

Self managed superannuation funds

The Superannuation Industry (Supervision) Act 1993 defines a self managed superannuation fund (SMSF) as a superannuation fund [2] meeting the following criteria:

• less than five members, and
• all members are trustees, or are directors of the corporate trustee
• no other person is a trustee, or a director of the corporate trustee
• no member is an employee of another member unless the members are related
• no trustee receives remuneration for acting as trustee

Exceptions to trustee requirements for SMSFs

The following exceptions apply to certain SMSFs and trustees:

• If the SMSF has only one member, there may be two trustees or two directors of the corporate trustee provided that either:

• the two trustees or directors are related, or
• the two trustees or directors are not in an employee/employer relationship

• If a member is under a legal disability or is subject to a guardianship order or similar arrangement, their personal legal representative may act on their behalf as trustee or director of the corporate trustee
• If the member is a minor, their parent, guardian or personal legal representative may act on their behalf as trustee or director of the corporate trustee
• If the member is deceased, their personal legal representative may act on their behalf as trustee or director of the corporate trustee until the deceased member's benefits are paid out from the fund

Small Australian Prudential Regulatory Authority (APRA) Funds

A Small APRA Fund (SAF) is a superannuation fund with less than five members that does not meet the criteria for an SMSF. The trustee of an SAF must be a corporate trustee approved by APRA. The trustee may receive remuneration for acting as trustee.

Types of income stream available from SMSFs and SAFs

Prior to 1 January 2006, SMSFs and SAFs were able to provide any type of income stream [2] except for a defined benefit income stream [2]. From 1 January 2006, SMSFs and SAFs may only offer allocated income streams and market linked income streams. However, any lifetime or life expectancy asset test exempt income streams that commenced prior to that date may continue to be paid.

Last amended: 10 March 2011

Documentation required to ensure ATE compliance for SMSFs and SAFs

In addition to the income stream schedule, a self managed superannuation fund (SMSF) or small APRA fund (SAF) must supply the following documentation to determine whether an income stream is an asset test exempt income stream [2][glossary:.:]:

• a copy of the trust deed,
• a copy of the contract or other documentation under which the income stream is paid from the SMSF or SAF to the member,
• if the fund has purchased an annuity to fund the income stream, a copy of the contract for the annuity, verifying compliance with the VEA,
• documentation describing the indexation rate of the income stream and whether indexation is guaranteed,
• for lifetime and life expectancy income streams (except where the SMSF or SAF has purchased the income stream from a life office to directly fund the income stream to the member), an actuarial certificate prepared in accordance with the Institute of Actuaries Australia's Guidance Note 465, and     More ? [188]
• any other relevant documents or agreements setting out the conditions of the income stream.

Expiration of actuarial certificate

Actuarial certificates are valid for one year, ending on 30 June. The first actuarial certificate issued for an income stream will be valid for the period between the commencement day [2] and 30 June. When the actuarial certificate expires, a 26 week grace period applies, during which, the income stream retains asset test exempt status. If a new certificate has still not been supplied at the end of the grace period, the income stream is reassessed as if it had never been asset test exempt. Any resulting overpayment should be recovered under existing policy.     

Actuarial certificate does not express a positive opinion

If the actuarial certificate does not express a positive opinion (or a high probability that the fund will be able to meet the income stream payments required) under Guidance Note 465, the income stream will retain asset test exempt status for 12 weeks to allow time for the income stream to be rolled over to a new asset test exempt income stream, or in the case of an error in the certificate, to obtain a new certificate expressing a positive opinion.

If no action is taken, the income stream will lose its asset test exempt status and become asset tested at the end of the 12 week period. The pensioner will be assessed as if the income stream never had asset test exempt status from the commencement day. This may result in a debt being raised.     

Temporary debt relief where actuarial certificate does not express a positive opinion

In recognition of the global financial crisis of 2008 and 2009, temporary relief has been provided for holders of 100% asset test exempt income streams sourced from a SMSF or SAF who fail to meet the high probability test.      

Last amended: 10 March 2011

Confirming return of purchase price for self managed superannuation funds and small APRA funds

For lifetime and life expectancy income streams paid by self managed superannuation funds (SMSFs) and small APRA funds (SAFs) to be asset test exempt, the purchase price [2] must be wholly converted to income. The Australian Government Actuary (AGA) will estimate the total payments to be paid under the income stream. The total must be equal to or greater than the purchase price for the income stream to be asset test exempt. If the total payments are less than the purchase price, the income stream cannot be asset test exempt.

Investigation of deprivation involving SMSFs and SAFs

The income stream must also be investigated to ensure no deprivation has occurred. Deprivation occurs where the income stream's purchase price exceeds its net present value, as calculated by the AGA. An income stream may still be asset test exempt where deprivation has occurred, but the deprived amount is included in the person's assessment as a deprived asset.

Example of deprivation involving SMSFs and SAFs

$100,000 is paid for a 10 year income stream which paid $6,000 per annum as income, not indexed. The total payments paid by the income stream are $60,000, but the net present value of the income stream as determined by an actuary is only $53,000.

The deprived amount is therefore $100,000 less $53,000 = $47,000.

The amount assessed as a deprived asset [2] is therefore $47,000, less $10,000 allowed limit per pension year = $37,000.

The deprived amount is treated as a financial asset [2] for pension assessment purposes for 5 years.    

Treatment of unallocated reserves in SMSFs and SAFs

SMSFs and SAFs may hold unallocated reserves. This represents assets of the fund that have not been attributed to a specific member. Unallocated reserves should be attributed to each member of the fund in proportion to their interest in the fund. If it is not possible to attribute unallocated reserves in this manner, they should be attributed equally between all members.

Last amended: 10 March 2011

Closure of fund

Where a self managed superannuation fund (SMSF) or small APRA fund (SAF) is wound up, the income ceases to be paid on the date that the fund is wound up. Any remaining assets in the fund are assessable in the same manner as superannuation from that date.

Reporting arrangements

It is important that the department is informed when a SMSF or SAF is experiencing financial difficulty. A trustee's report should be provided, which should outline details on action being taken to either wind up the fund or restore the fund to viability and the expected date for finalising actions,

No payment for a period of more than twelve months

If an income stream [2] ceases to make payments for a period of more than twelve months, it ceases to exist as an income stream. This is because it no longer meets the criterion of making payments at least annually. Any remaining assets in the fund are assessable as superannuation from the date that the income stream ceases to exist.

The income stream is reassessed as if it was never an asset test exempt income stream from the commencement date. This may result in a debt being raised. Any resulting overpayment is recoverable under existing policy.      

Loss of asset test exempt status can be avoided by commuting the income stream to a new asset test exempt income stream [2] prior to the end of the twelve month period since the last payment, that is, before the original stream loses asset test exempt status. When this happens, the debt provisions will not apply. Principles have been established to determine whether the new income stream is 100% or 50% asset test exempt.    

Funds that made reduced payments

Where payments under an asset test exempt income stream are reduced below the amount specified in the contract, the income stream will lose its asset test exemption and is treated as though it was never an asset test exempt income stream. This may result in a debt. Any overpayment resulting from loss of asset test exempt status is recoverable under existing policy. Loss of asset test exempt status can be avoided by commuting the income stream to a new asset test exempt income stream prior to the reduction in payments.     

Actuarial certificate does not express a positive opinion

Where a 100% asset test exempt income stream fails to meet the high probability requirements for actuarial certification and loses its asset test exemption, the income stream owner will have the option to either:

• keep their asset test exemption by restructuring their income stream into an appropriate retail product, as outlined in the Veterans' Entitlements (Retention of Exemption for Asset-test Exempt Income Streams) Principles 2007, or      More ? [206]
• lose their asset test exemption by restructuring their income stream into an asset tested market linked income stream (long term) within the SMSF or SAF.

Waiver of debt under temporary debt relief arrangements

Under normal circumstances if the income stream is restructured to form a market linked income stream, the income stream would be retrospectively reclassified as an asset tested (long term) income stream. A debt to the Commonwealth would be raised if the pension the person received exceeds what they should have received if the income stream had always been assessed as asset-tested (long term). Under the temporary relief arrangements, the debt will be waived if it meets the terms outlined in the Veterans' Entitlements (Class of Debts – Self Managed Superannuation and Small APRA Funds) Specification 2010. All such cases should be referred to the DVA Investment Database Unit, Sydney Office.     

Duration of temporary debt relief arrangements

The temporary debt relief arrangements apply only to actuarial opinions given in the 2008-2009 and 2009-2010 financial years and expired on 30 June 2010.

    Legislation [216]

Types of Family Law Affected income stream

An income stream is Family Law Affected if it is split between a person and their former partner under Part VIIB or VIIIAA of the Family Law Act 1975.  The table below describes the different types.

How an original FLA income stream is affected by separation

The original FLA income stream is split into the primary and secondary FLA income streams according to the terms of a superannuation agreement or a court order. The split may take one of two forms:

• a percentage payment split, in which the owner and the former partner are each awarded a percentage of the original FLA income stream
• a base amount payment split, in which the entitlement of the owner and former partner are specified as dollar amounts.

Percentage payment splits

Under a percentage payment split, the asset value, income stream payments and deduction in respect of return of capital applying to the original FLA income stream is the same as the sum of the portions of those amounts applying to the primary FLA income stream and the secondary FLA income stream.

Trustee discretion to pay lump sum to former partner under percentage payment split

Before the first income stream payment is paid under the split, the income stream provider may exercise their discretion under regulation 14G of the Family Law (Superannuation) Regulations 2001 to pay out the entitlement of the former partner as a lump sum. This can be done by either:

• creating a separate income stream in favour of the former partner,
• rolling the amount over to another fund or retirement savings account in favour of the former partner, or
• paying the amount directly to the former partner.

In each case, the former partner's claim is finalised and there is no further entitlement to any payments in respect of the original FLA income stream.

Base amount payment splits

The income stream provider will generally seek to pay out the former partner's base amount interest in full immediately after the operative date by transfer, rollover or commutation to a lump sum. When this is done, the former partner is not entitled to receive any further payments in respect of the income stream. In some cases, this is not possible and the income stream is split into primary and secondary FLA income streams.

Means test assessment of base amount payment splits before date of first splittable payment

The former partner does not need to decide how they want to receive the base amount until the date of the first splittable payment. The assessable income from the primary and secondary FLA income streams cannot be calculated until the decision is made. Therefore, no income is assessed from either the primary or secondary FLA income streams between the operative time and the date of the first splittable payment. However, the asset value is still assessed in respect of income streams that are not 100 per cent asset test exempt.

Operative time

The operative time is the date from which assessment of the split payments commences. This table describes how the operative time is calculated.

Generally, superannuation fund trustees will seek to pay out the non-member's 'base amount' interest immediately after the operative time via the transfer, roll-over or commutation to a lump sum.  However, in some cases, the payment of the base amount will be more complex.

Notional purchase price

The notional purchase price (NPP) refers to the purchase price of an FLA income stream at the time that the FLA income stream is assessed. The NPP is different from the purchase price of the original FLA income stream on its commencement day [2].

Calculating the asset value

This table shows how to calculate the asset value of an asset-test exempt income stream where the superannuation agreement or court order specified that payments from the original Family Law Affected income stream owned by the member are to be split with the former partner (non-member) on a percentage basis.

For Allocated or Account-based Income Streams, Defined Benefit Income Streams, Asset-tested Long Term Income Streams or Lifetime Income Streams, see the relevant pages under 10.5.6 Family Law Affected Income Streams.

Note that the assets test assessment for asset-test exempt income streams depends on the purchase date of the income stream:

• for income streams purchased before 20 September 2004, no asset value is assessed
• for income streams purchased between 20 September 2004 and 19 September 2007, 50% of the asset value is assessed
• for income streams purchased from 20 September 2007, 100% of the asset value is assessed.

Impact of subsequent commutations on asset value

Any commutation [2] made after the operative time is apportioned between the primary and secondary FLA income streams in the same proportion as the original percentage payment split. The commutation will affect the NPP and therefore the asset value of both the primary and secondary FLA income streams.

Subsequent reviews of asset value

FLA income streams are subject to the same asset value reviews as other income streams. The first six or twelve monthly review of the primary and/or secondary FLA income streams is taken from the time of the previous review date of the original FLA income stream. If the original FLA income stream has not yet had its first review, the review of the primary and/or secondary FLA income stream is taken from the commencement day of the original FLA income stream.

Income test assessment

This table shows how to calculate the assessable income from the income stream.

Impact of subsequent commutations on assessable income

Any commutation made after the operative time is apportioned between the primary and secondary FLA income streams in the same proportion as the original percentage payment split. The commutation will affect the gross income, NPP and therefore the deduction amount for both the primary and secondary FLA income streams.

Calculating the asset value

This table shows how to calculate the asset value of an Asset-tested Long Term Income Stream where the superannuation agreement or court order specifies that payments from the original Family Law Affected income stream owned by the member are to be a split with the former partner (non-member) on a percentage basis.

For Asset-test Exempt Income Streams, Allocated or Account-based Income Streams, Defined Benefit Income Streams or Lifetime Income Streams, see the relevant pages under 10.5.6 Family Law Affected Income Streams.

For Asset-tested Long Term Income Streams:

Impact of subsequent commutations on asset value

Any commutations made after the operative time are apportioned between the primary and secondary FLA income streams in the same proportion as the original percentage payment split. The commutation will affect the NPP and therefore the asset value of both the primary and secondary FLA income streams.

Subsequent reviews of asset value

FLA income streams are subject to the same asset value reviews as other income streams. The first six or twelve monthly review of the primary and/or secondary FLA income streams is taken from the time of the previous review date of the original FLA income stream. If the original FLA income stream has not yet had its first review, the review of the primary and/or secondary FLA income stream is taken from the commencement day of the original FLA income stream.

Income test assessment

This table shows how to calculate the assessable income from the income stream.

Impact of subsequent commutations on assessable income

Any commutations made after the operative time are apportioned between the primary and secondary FLA income streams in the same proportion as the original percentage payment split. The commutation will affect the gross income, NPP and therefore the deduction amount for both the primary and secondary FLA income streams.

Example: Henry buys a fixed term pension from XYZ super fund on 1 January 1998. His income stream is assessed by DVA as an 'asset-tested income stream (long term)'.

Purchase price = $100,000

Term = 20 years

Pension payments = $9,000 p.a. (paid monthly)

RCV = Nil

5 years after purchasing his income stream, Henry and Wilma get divorced.

Court orders a percentage payment split with 60% of payments going to Henry and 40% of payments going to Wilma. No commutations were made from the income stream between the commencement date and the operative time. Operative time is 1 January 2003.

Under the payment split, Henry receives a primary FLA income stream with annual payments of $5,400 and Wilma receives a secondary FLA income stream with payments of $3,600. These amounts are advised to DVA by the trustee.

Assets test

In the above example:

• the asset value of Henry's split income stream at the operative time is $45,000,
• the asset value of Wilma's income stream at the operative time is $30,000.

Income Test

On 1 January 2005, 2 years after the operative time (1 January 2003) and 7 years after the commencement date (1 January 1998), the asset value of Henry's split income stream will be $39,000. The asset value of Wilma's income stream two years after the operative time will be $26,000.

Term elapsed since commencement date of the original FLA income stream: 7 years.

Member asset value (Henry) = $60,000 − {[($60,000 − 0) ÷ 20] × 7} = $39,000.

Non-member asset value (Wilma) = $40,000 − {[($40,000 − 0) ÷ 20] × 7} = $26,000.

Effect of commutations after operative time

On 1 January 2006 (three years after the operative time and eight years after the commencement date), Henry made a commutation of $10,000 from his income stream. As this is a FLA income stream, Henry is only entitled to receive 60% of the commuted amount (i.e. $6,000), while 40% will go to Wilma (i.e. $4,000). The 'proportional split' was originally set out in the superannuation agreement or court order.

Assets test when a commutation is made under a percentage payment split

In the above example:

• the asset value of Henry's income stream is $32,400,
• the asset value of Wilma's income stream is $21,600.

On 1 January 2007, 4 years after the operative date (1 January 2003) and 9 years after the commencement date (1 January 1998), the asset value of Henry's FLA affected income stream will be $29,700. The asset value of Wilma's FLA income stream will be $19,800.

Term elapsed since the commencement date of the original FLA income stream: 9 years.

Member asset value (Henry): $54,000 − {[($54,000 − 0) ÷ 20] × 9} = $29,700.

Non-member asset value (Wilma): $36,000 − {[($36,000 − 0) ÷ 20] × 9} = $19,800.

Income test when a commutation is made under a percentage payment split.

Calculating the asset value

This table shows how to calculate the asset value of Allocated (Account-based) and Market Linked Income Streams where the superannuation agreement or court order specifies that payments from the original Family Law Affected Income Stream, owned by the member, are to be split with the former partner (non-member) on a percentage basis.

For Asset-test Exempt Income Streams, Defined Benefit Income Streams, Asset-tested Long Term Income Streams or Lifetime Income Streams, see the relevant pages under 10.5.6 Family Law Affected Income Streams.

For Allocated (Account-based) or Market Linked Income Streams:

Although there are two separate income streams (the primary and secondary FLA income streams), there is only one account balance. The account balance is only notionally split between the primary and secondary income streams.

Impact of subsequent commutations on asset value

Any commutation [2] made after the operative time is apportioned between the primary and secondary FLA income streams in the same proportion as the original percentage payment split. The commutation will affect the account balance and therefore the asset value of both the primary and secondary FLA income streams.

Subsequent reviews of asset value

FLA income streams are subject to the same asset value reviews as other income streams. The first six or twelve monthly review of the primary and/or secondary FLA income streams is taken from the time of the previous review date of the original FLA income stream. If the original FLA income stream has not yet had its first review, the review of the primary and/or secondary FLA income stream is taken from the commencement day of the original FLA income stream.

Income test assessment

This table shows how to calculate the assessable income from the income stream.

Impact of subsequent commutations on assessable income

Any commutations made after the operative time are apportioned between the primary and secondary FLA income streams in the same proportion as the original percentage payment split. The commutation will affect the gross income, NPP and therefore the deduction amount for both the primary and secondary FLA income streams.

Calculating the asset value

Defined benefit income streams are not included in a person's assessable assets.

Income test assessment

All required information for the primary and secondary Family Law Affected (FLA) income streams is calculated by the income stream provider. The assessable income is the gross income less the deductible amount [2].

Other types of income streams

For Asset-test Exempt Income Streams, Allocated or Account-based Income Streams, Asset-tested Long Term Income Streams or Lifetime Income Streams, see the relevant pages under 10.5.6 Family Law Affected Income Streams.

This table shows how to calculate the asset value of an Asset-test Exempt Income Stream where the superannuation agreement or court order specifies a base payment amount, rather than a percentage, from the original Family Law Affected income stream, owned by the member.

For Allocated or Account-based Income Streams, Defined Benefit Income Streams, Asset-tested Long Term Income Streams or Lifetime Income streams, see the relevant pages under 10.5.6 Family Law Affected Income Streams.

Calculating the asset value between the operative time and the date of the first splittable payment for Asset-test Exempt Income Streams

Note that the assets test [2] assessment depends on the purchase date of the income stream:

• for income streams purchased before 20 September 2004, no asset value is assessed
• for income streams purchased between 20 September 2004 and 19 September 2007, 50% of the asset value is assessed
• for income streams purchased from 20 September 2007, 100% of the asset value is assessed.

Asset value generally not reviewed until date of first splittable payment

The asset value calculated between the operative time and the date of the first splittable payment is generally not reviewed until the date of the first splittable payment. However, the value is reviewed if the former partner's base value amount is paid out in full prior to the date of the first splittable payment.

Calculating the asset value from the date of the first splittable payment

This table shows how to calculate the asset value of the income stream. Note that the assets test assessment depends on the purchase date of the income stream:

• for income streams purchased before 20 September 2004, no asset value is assessed
• for income streams purchased between 20 September 2004 and 19 September 2007, 50% of the asset value is assessed
• for income streams purchased from 20 September 2007, 100% of the asset value is assessed.

Impact of subsequent commutations on asset value

Any commutation made after the operative time is apportioned between the primary and secondary FLA income streams in the same proportion as the original percentage payment split. The commutation will affect the NPP and therefore the asset value of both the primary and secondary FLA income streams.

Subsequent reviews of asset value

FLA income streams are subject to the same asset value reviews as other income streams. The first six or twelve monthly review of the primary and/or secondary FLA income streams is taken from the time of the previous review date of the original FLA income stream. If the original FLA income stream has not yet had its first review, the review of the primary and/or secondary FLA income stream is taken from the commencement day of the original FLA income stream.

Income test assessment

This table shows how to calculate the assessable income from the income stream.

Impact of subsequent commutations on assessable income

Any commutation made after the operative time is apportioned between the primary and secondary FLA income streams in the same proportion as the proportions of the regular splittable payments. The commutation will affect the gross income, NPP and therefore the deduction amount for both the primary and secondary FLA income streams.

This table shows how to calculate the asset value of Long Term Income Streams where the superannuation agreement or court order specifies a base payment amount, rather than a percentage, from the original Family Law Affected income stream owned by the member.

For Asset-test Exempt Income Streams, Defined Benefit Income Streams, Asset-tested Allocated (Account-based) and Market Linked Income Streams or Lifetime Income Streams, see the relevant pages under 10.5.6 Family Law Affected Income Streams.

Calculating the asset value between the operative time and the date of the first splittable payment

Note that the assets test [2] assessment depends on the purchase date of the income stream:

• for income streams purchased before 20 September 2004, no asset value is assessed
• for income streams purchased between 20 September 2004 and 19 September 2007, 50% of the asset value is assessed
• for income streams purchased from 20 September 2007, 100% of the asset value is assessed.

Asset value generally not reviewed until date of first splittable payment

The asset value calculated between the operative time and the date of the first splittable payment is generally not reviewed until the date of the first splittable payment. However, the value is reviewed if the former partner's base value amount is paid out in full prior to the date of the first splittable payment.

Calculating the asset value from the date of the first splittable payment

This table shows how to calculate the asset value of the income stream. Note that the assets test assessment depends on the purchase date of the income stream:

• for income streams purchased before 20 September 2004, no asset value is assessed
• for income streams purchased between 20 September 2004 and 19 September 2007, 50% of the asset value is assessed
• for income streams purchased from 20 September 2007, 100% of the asset value is assessed.

Impact of subsequent commutations on asset value

Any commutations made after the operative time are apportioned between the primary and secondary FLA income streams in the same proportion as the original percentage payment split. The commutation will affect the NPP and therefore the asset value of both the primary and secondary FLA income streams.

Subsequent reviews of asset value

FLA income streams are subject to the same asset value reviews as other income streams. The first six or twelve monthly review of the primary and/or secondary FLA income streams is taken from the time of the previous review date of the original FLA income stream. If the original FLA income stream has not yet had its first review, the review of the primary and/or secondary FLA income stream is taken from the commencement day of the original FLA income stream.

Income test assessment

This table shows how to calculate the assessable income from the income stream.

Impact of subsequent commutations on assessable income

Any commutation made after the operative time is apportioned between the primary and secondary FLA income streams in the same proportion as the proportions of the regular splittable payments. The commutation will affect the gross income, NPP and therefore the deduction amount for both the primary and secondary FLA income streams.

Example: Henry buys a fixed term pension from the ZYX Super Fund on 1 January 1998 that makes the first income payment on 1 February 1998. His income stream is assessed by DVA as an 'asset tested income stream (long term) (ATLT)'.

Purchase price = $500,000

Term = 20 years

Pension payments = $45,000pa (payable once a year)

RCV = nil

Henry commutes $50,000 on 1 January 2003 and his pension payments are reduced to $39,500 pa.

Henry and Wilma subsequently divorce and on 2 January 2005, the court awards a base amount of $200,000 from Henry's income stream. The operative time is 1 January 2005.

As a result of the court order, Wilma receives the full amount of the first payment from the income stream (the first splittable payment) of $39,500 on 1 February 2005. Wilma then requests 25% of the remaining base amount as a lump sum. The remainder of the base amount will then be paid to Wilma as a secondary FLA, determined in accordance with Division 6.3 of the Family Law (Superannuation) Regulations 2001.

The superannuation fund paying Henry's pension notifies Wilma that she will receive a lump sum of $38,120 and a secondary FLA of $16,530 pa.

Note: The figure of $38,120 that Wilma receives is not 25% of $200,000 reduced by $39,500, i.e. $40,125. The difference between the two figures arises because of the need to take account of the pension valuation factors that apply to the commutation. Further details on these factors are contained in Regulation 58(5) of the Family Law (Superannuation) Regulations 2001.

Henry's annual payments (the primary FLA) will be $18,200 pa. The first of the split payments to Henry and Wilma commence on 1 February 2006.

Assets test: Stage 1 - assessment between operative time and date of first splittable payment, i.e. 2 January 2005 to 1 February 2005.

Note: There will be no further reassessment of asset values for the primary FLA and secondary FLA prior to the date of the first splittable payment unless the non-member's interest is paid out in full.

Assets test: stage 2 (assessment from date of first splittable payment)

At the date of the first splittable payment, Wilma receives the full amount of the payment that would have gone to Henry if the payment split had not occurred plus a lump sum of $38,120.

The remainder of Wilma's base amount is paid via a split income stream payment of $16,530 pa. Henry receives a split income stream payment of $18,200 pa.

Income test: stage 1 (assessment between operative time and date of first splittable payment)

• No income assessed.
• Any income payments assessed as exempt lump sums.

Income Test: stage 2 (assessment from date of first splittable payment).