This section contains general information about the assessment of income streams.
Last amended: 13 May 2008
VEA ? [3]
When a partial commutation [4] is made from a purchased income stream the:
The assessable income must be reviewed when a partial commutation is made from a defined benefit income stream [4] as the:
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.
More ? [6]
Pensioners may commute a non-commutation funded asset test exempt income stream [4] within six months of the commencement day [4] 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 [4] 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.
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.
VEA ? [8]
If a person commutes (in whole or in part) an asset test exempt income stream contrary to the contract or governing rules [4] 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) [4] from later of the:
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).
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.
More ? [9]
VEA ? [10]
Section 52ZMA [11] 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.
Section 5JA(2) (h) [11] VEA - Commuting assets test exempt income streams lifetime
Section 5JB(2) (h) [11] VEA - Commuting other assets test exempt income streams
Asset assessment of an income stream after a partial commutation
10.5.4/Assets Assessment of Defined Benefit and Purchased Income Streams [13]
Section 5JA(4) [11] VEA - three strike policy on assets test exempt income stream commutations – income streams payable for life
Section 5JB(3) [11] VEA - three strike policy on assets test exempt income stream commutations – income streams payable for life expectancy or 15 year minimum
Section 5JBA(10)
Section 52ZMA [11] VEA – Debt resulting from commutation of asset-test exempt income stream contrary to subsection 5JA(2), 5JB(2) or 5JBA(2)
Section 52ZMA(11) [11] VEA – Section 52ZMA does not apply if a 5JA(5) [11] or 5JB(4) [11] determination is in force
A commutation, in relation to an income stream [4], is the conversion of part or all of the future income stream payments into a lump sum. A commutation is similar to a withdrawal.
An income stream's relevant number is the length of time an income stream is paid for. It can be a fixed term or the life expectancy factor of the payee or reversionary beneficiary.
The purchase price of an income stream is the nominal sum of the paymetns made to purchase the income stream (including amounts paid by way of employer and employee contributions) less any commuted amounts.
Note: In determining the means test assessment of asset-tested income streams (lifetime), the purchase price is not used. Rather, the grossed up purchase amount.
Legislation: Section 5J(1) [22]of the VEA [22]
The residual capital value is the amount (if any) remaining at the end of an income stream's term, consisting of a portion of the initial capital invested in the income stream [4].
A defined benefit income stream is an income stream [4] where the payments are not fully determined by a purchase price [4]. Instead, payments are made with reference to a set formula based on:
According to section 5J of the VEA [22], a deductible amount, in relation to an income stream, means the sum of the amounts that are the tax free component [4], worked out under the tax law, of the payments received from the DBIS [4].
An income stream is an asset-test exempt income stream if it is purchased before 20 September 2007 and must be:
and:
Legislative reference:
Veterans' Entitlements Act 1986:
The commencement day in relation to an income stream [4] is the first day of the period to which the first income stream payment relates. This is usually one instalment period before the date of the first income payment.
The commencement day cannot occur prior to:
Legislative reference: subsection 5J(1) of the Veterans' Entitlements Act 1986.
Income support pension is:
The governing rules of an income stream are either:
governing the establishment and operation of the income stream.
An income stream is an asset-tested long term income stream if it is:
Note: income streams that pay for the life of an individual or individuals, purchased or acquired on or after 1 July 2019, are assessed as asset-tested lifetime income streams.
Legislative reference: subsection 5J(1) Veterans' Entitlements Act 1986
Last amended: 23 March 2010
The income stream [4] provisions have no general saving provisions. This means that all income streams are assessable under the current legislation unless an exemption has been granted.
VEA ? [25]
The Minister has the power to exempt a pensioner from the current income stream assessment rules if the pensioner:
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:
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.
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 [4] under the income test [4]. Effectively, significant disadvantage exists where:
(New rate of pension + other income) is less than the (maximum rate of pension + income free area).
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.
According to subsection 5J(1) of the VEA [22], an income stream includes:
but does not include any of the following:
A service pension is an income support payment broadly equivalent to the social security age and disability support pensions. It may be paid once a veteran or partner has reached the nominated age or is incapacitated for work.
ISS is an income support payment that may be paid to eligible war widows and widowers under the VEA and persons receiving wholly dependent partners' compensation under the MRCA, and who satisfy the means tests. It is an indexed rate, increased twice-yearly in March and September in line with changes to the cost of living and/or average wages. Income Support Supplement (ISS) legislation commenced on 20 March 1995. It is a payment created to replace the ceiling rate income support age, carer, wife and disability support pensions, paid to war widows/widowers by Centrelink.
A Social Security payment refers to the following:
The income free area is the amount of income that an income support pensioner may receive without suffering any reduction in pension under the income test.
One element of the means test [4] for income support pensions whereby the rate of pension payable to a pensioner reduces progressively as their income increases above a certain threshold known as the income free area (IFA) [4].
VEA ? [32]
The Commission has made several determinations in the form of legislative instruments that regardless of its commencement day [4], a defined benefit income stream [4] is 100% asset test exempt.
VEA ? [33]
An asset test exempt income stream [4] commencing before 20 September 2004 is 100% asset test exempt.
VEA ? [34]
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:
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:
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.
In general terms, the Principles under which a new income stream can retain its asset test exemption are limited to commutations made to enable:
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 2022 (legislation.gov.au) [37]
Legislation library\Income Support\Income Streams\1999/6 – Lifetime Income Stream [27]
Legislation library\Income Support\Income Streams\1999/5 – Lifetime Income Stream Guidelines [27]
Legislation library\Income Support\Income Streams\1998/12 – Lifetime Income Stream [27]
Legislation library\Income Support\Income Streams\1998/11 – Lifetime Income Stream [27]
Legislation library\Income Support\Income Streams\1998/10 – Lifetime Income Stream Guidelines [27]
Legislation Library – Principles for determining whether an income stream is asset test exempt
Income streams - VE-PRINCIPLES/2011-Retention of Exemption for Asset-test Exempt Income Streams [27]
Legislation Library – Principles for determining whether an income stream is asset test exempt
Income streams - VE-PRINCIPLES/2011-Retention of Exemption for Asset-test Exempt Income Streams [27]
The commencement day in relation to an income stream [4] is the first day of the period to which the first income stream payment relates. This is usually one instalment period before the date of the first income payment.
The commencement day cannot occur prior to:
Legislative reference: subsection 5J(1) of the Veterans' Entitlements Act 1986.
A defined benefit income stream is an income stream [4] where the payments are not fully determined by a purchase price [4]. Instead, payments are made with reference to a set formula based on:
An income stream is an asset-test exempt income stream if it is purchased before 20 September 2007 and must be:
and:
Legislative reference:
Veterans' Entitlements Act 1986:
A commutation, in relation to an income stream [4], is the conversion of part or all of the future income stream payments into a lump sum. A commutation is similar to a withdrawal.
Superannuation contributions surcharge has the meaning that it has in the Superannuation Contributions Tax (Assessment and Collection) Act 1997.
A person may apply to the Commission in writing to be allowed to commute the whole or part of an income stream because of extreme financial hardship. According to s.5JA of the VEA, the Commission may determine an amount as allowable commutation if these conditions are satisfied:
Last amended: 13 May 2016
Ongoing disability or invalidity benefits paid from a superannuation fund [4] are treated as defined benefit income streams [4]. 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.
More → [44]
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 [4] 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.
More → [45]
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:
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 [4], relevant number [4] 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.
Asset Test Exempt Income Streams - Defined Benefit
10.5.2/Asset Test Exempt Income Streams - Defined Benefit [46]
Compensation recovery provisions
Chapter 9.11 [47]
A superannuation fund is defined in the VEA as being:
A defined benefit income stream is an income stream [4] where the payments are not fully determined by a purchase price [4]. Instead, payments are made with reference to a set formula based on:
A commutation, in relation to an income stream [4], is the conversion of part or all of the future income stream payments into a lump sum. A commutation is similar to a withdrawal.
The purchase price of an income stream is the nominal sum of the paymetns made to purchase the income stream (including amounts paid by way of employer and employee contributions) less any commuted amounts.
Note: In determining the means test assessment of asset-tested income streams (lifetime), the purchase price is not used. Rather, the grossed up purchase amount.
Legislation: Section 5J(1) [22]of the VEA [22]
An income stream's relevant number is the length of time an income stream is paid for. It can be a fixed term or the life expectancy factor of the payee or reversionary beneficiary.
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