4.9.1.50 History of the Treatment of Income Streams

Introduction

This topic contains a historical overview of the treatment of income streams with the major changes occurring on 20 September 1998. It covers:

• means test treatment of income streams prior to 20 September 1998,
  • commencement day of payments,
  • relevant number for fixed term superannuation pensions,
  • undeducted purchase price,
  • deductible amount for superannuation pensions in general,
  • deductible amount for lifetime superannuation pensions,
  • deductible amount for fixed term superannuation pensions,
  • deductible amount for allocated pensions,
• exemptions from assessment for income streams purchased prior to 20 September 1998,
  • conditions for gaining an exemption,
  • continuation of exemption,
• Family and Community Services Legislation (Simplification and Other Measures) Act 2001,
• superannuation and divorce - Family Law Legislation Amendment (Superannuation) (Consequential Provisions) Act 2002,
• Family and Community Services Legislation (Income Streams) Act 2004, and
• Tax Law Amendment (Simplified Superannuation) Act 2007.

Note: ALL income streams (1.1.I.70) are assessable under the 20 September 1998 provisions. The ONLY income streams that are assessed under the pre-September 1998 rules are those that have been exempted by the Minister under the special rules outlined below.

Means test treatment of income streams prior to 20 September 1998

Details of the means test treatment of income streams prior to 20 September 1998 can be found under the next 7 headings.

Commencement day of payments

Before 20 September 1998, if an income support recipient was due to have a birthday around the time that income stream payments start, it was ESSENTIAL to establish clearly the commencement day for social security purposes.

Explanation: If the income stream was a lifetime pension or annuity, the commencement day was important in determining the income support recipient's life expectancy (the relevant number) in any deductible amount for income test purposes.

If an income support recipient purchased an income stream the commencement day was generally the date of purchase. The exception to this is that the date of purchase for income test purposes was 1 July, if an income support recipient:

• purchased an allocated pension, allocated annuity or ETP between 1 April and 30 June, AND
• chose to receive the first payment after 30 June.

For assets test purposes the commencement day was generally the date of purchase.

Relevant number for fixed term superannuation pensions

The relevant number for fixed term superannuation pensions with a term of one year or less was 1. If an income support recipient had an allocated pension, the relevant number was the recipient's life expectancy (section 9(1)-'life expectancy') at the original purchase date if the recipient:

• exercised an option to convert the allocated pension to a superannuation pension for a set period, AND
• reverted to receiving the original allocated pension at the end of the superannuation pension's term.

Act reference: SSAct section 9(1)-'life expectancy'

Undeducted purchase price

The definition of UPP applying to fixed term superannuation pensions was as follows:

• the pre-1 July 1983 component, AND
• the post-30 June 1983 undeducted contributions, AND
  • the concessional component for ETPs made pre-1 July 1994, OR
  • the post-30 June 1994 invalidity component.

This definition also applied to the following income streams purchased with ETPs:

• ETP annuities, also called roll-over annuities,
• allocated annuities, AND
• allocated pensions.

The formula for determining the deductible amount for a fixed term superannuation pension was:

• UPP - RCV/relevant number (section 9(1)-'relevant number')

Act reference: SSAct section 9(1)-'relevant number'

Deductible amount for superannuation pensions in general

Before 26 April 1990 the full amount of regular superannuation payments was treated as income, EXCLUDING amounts for children. There was NO allowance for the return of the recipient's own contributions to the superannuation fund (section 9(1)-'superannuation fund').

From 26 April 1990 to 20 September 1998, a deductible amount was allowed for income streams generally. The formula used varied according to:

• the type of income stream, AND
• whether it was:
  • paid as a defined benefit, or
  • purchased by the recipient.

Act reference: SSAct section 9(1)-'superannuation fund'

Deductible amount for lifetime superannuation pensions

For lifetime superannuation pensions, the deductible amount before 20 September 1998 was UPP divided by relevant number.

Deductible amount for fixed term superannuation pensions

The deductible amount for a fixed term superannuation pension was determined differently from that of a lifetime superannuation pension, because fixed term superannuation pensions are:

• a relatively recent development, AND
• purchased with ETPs from superannuation funds.

The deductible amount was affected by:

• the components of the ETP that determine the UPP, AND
• any RCV (section 9(1)-'residual capital value') in the fixed term superannuation pension.

Act reference: SSAct section 9(1)-'residual capital value'

Deductible amount for allocated pension

Before 20 September 1998, the deductible amount for allocated pensions purchased with an ETP or from a roll-over fund was determined using the same formula as lifetime superannuation pension.

Exemptions from assessment for income streams purchased prior to 20 September 1998 - conditions for gaining an exemption

Income streams (1.1.I.70) purchased before 20 September 2004 are assessable under the 20 September 1998 provisions, except for those income streams that have been exempted by the Minister under the special rules outlined below.

SSAct subclause 120A of Schedule 1A gives the Minister the power to exempt income support recipients from the new rules if they:

• have entered into a binding arrangement for an income stream before 13 May 1997. An arrangement is binding 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 income support recipient SEVERE DETRIMENT (severe detriment is determined by assessing the cost of exiting the product in relation to the recipient's specific financial circumstances),
• were receiving a social security payment (section 23(1)-'social security payment') at 19 September 1998 (before commencement of the current rules), AND
• in the Minister's opinion, are significantly financially disadvantaged by the application of income streams legislation.

The exemption applies to an income support recipient's investment rather than to certain product types. If a recipient has 2 products, then each product held by that recipient will need to be considered separately against the exemption criteria.

As most products affected by the legislation can be commuted, and contracts can generally be renegotiated with the agreement of the parties involved, it is expected that few income support recipients will meet the criteria for a binding arrangement.

Act reference: SSAct section 23(1)-'social security payment', Schedule 1A clause 120A Amendments relating to treatment of income streams

Exemptions from assessment for income streams purchased prior to 20 September 1998 - continuation of exemption

An income support recipient MUST be in continuous receipt of a social security payment to continue to have the benefit of an exemption.

Act reference: SSAct Schedule 1A clause 120A Amendments relating to treatment of income streams

Family and Community Services Legislation Act 2001

The Family and Community Services Legislation (Simplification and Other Measures) Act 2001 introduced some minor amendments to the existing income streams provisions.

These involve minor technical amendments to close off some loopholes and provide clearer guidance to the intent of the 1998 rules. They came into effect on 20 September 2001, and include:

• required characteristics that must be met by an income stream if it is to remain an ATE income stream,
• limits to the ability of a person to circumvent the requirement that cash commutations occur only within the first 6 months of an ATE income stream,
• easing of provisions to permit commutation for hardship purposes, and
• asset test exemption to be retained by all jointly owned lifetime income streams when one of the owners dies.

Policy reference: SS Guide 4.9.2.40 Commuting an Asset-Test Exempt Income Stream, 4.9.2.50 Joint Income Streams

Superannuation & divorce - Family Law Legislation Amendment (Superannuation) (Consequential Provisions) Act 2002

In 2002, the Family Law Act was changed to allow superannuation to be split following marriage breakdown by the Family Court or a superannuation agreement. The SSAct was also amended to ensure that the social security means test is applied consistently and fairly to income support recipients who have their superannuation entitlements split as part of a property settlement on marriage breakdown. These changes came into effect on 28 December 2002. Refer to 4.9.6 for a detailed description of the assessment process.

Policy reference: SS Guide 4.9.6 Assessment of Divorce Property Settlements

Family and Community Services Legislation (Income Streams) Act 2004

The Family and Community Services Legislation (Income Streams) Act 2004 (no.116) introduced a range of changes relating to income streams, which included:

• introduction of market-linked income streams,
• changing the social security assets test exemption from 100 per cent to 50 per cent for ATE income streams purchased on or after 20 September 2004,
• changing the characteristics of life expectancy products to align them with the market-linked products, and
• amending the guarantee period for ATE lifetime products.

Policy reference: SS Guide 4.9.2.15 Characteristics of Asset-Test Exempt Income Streams Purchased from 20/9/2004 & before 20/09/2007, 4.9.2.17 Retention of Asset Test Exemption for ATE Income Streams Purchased from 20/09/2004, or from 20/09/2007

Tax Law Amendment (Simplified Superannuation) Act 2007

The Tax Laws Amendment (Simplified Superannuation) Act 2007 (no.9) introduced a range of changes relating to superannuation. One of these changes affected income streams, which was the removal of the social security assets test exemption for ATE income streams purchased on or after 20 September 2007. In effect, the exemption was reduced from 50% to 0%.

Policy reference: SS Guide 4.9.2.17 Retention of Asset Test Exemption for ATE Income Streams Purchased from 20/9/2004, or from 20/9/2007

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Last reviewed: 9 February 2012