Questions and answers
Social security income and assets tests
Better Super: Changes to means test rules for income streams
Last reviewed: 9 October 2007These questions and answers are about the income and assets tests treatment of income streams and the impact of the plan to simplify and streamline superannuation.
Centrelink and product providers are working together to facilitate these changes without the need for further information from recipients.
- What changes are being made to the means test rules that apply to income streams as a result of the Australian Government's Better Super Plan to simplify and streamline superannuation?
- Consistent with the Australian Government's plan to simplify and streamline superannuation, there are only limited changes to the application of the social security means test to retirement income stream products.
- The main change relating to income streams is that there is no social security assets test exemption for purchased income streams that commenced on or after 20 September 2007.
- When will these changes apply? Will these changes affect individuals who already have an income stream that is fully or partially exempted from the assets test?
- No, the changes do not affect anybody who is fully or partially exempted from the assets test as of 20 September 2007. These changes are not retrospective. All asset test exempt income streams purchased before 20 September 2007 will continue to receive either a 100 per cent or a 50 per cent assets test exemption. This means that no individual will have their social security payment reduced on the introduction of this change.
- Individuals who purchase an asset test exempt income stream before 20 September 2007 but do not come onto a social security payment until after that date will still receive the exemption from the assets test.
- Will I lose my current exemption from the assets test if I commute and rollover to another income stream from 20 September 2007? Will individuals be worse off as a result of the changes?
- If a lifetime or life expectancy income stream commenced before 20 September 2004 is subsequently commuted and rolled over from 20 September 2007 to a new income stream with the characteristics specified in sections 9A and 9B of the Social Security Act 1991, the new income stream may retain the 100 per cent exemption in certain limited circumstances.
- If a lifetime, life expectancy, or market-linked income stream is commenced between 20 September 2004 and 19 September 2007 inclusive, is subsequently commuted and rolled over from 20 September 2007 to a new income stream with the characteristics specified in one of sections 9A, 9B and 9BA of the Social Security Act 1991, the new income stream may retain the 50 per cent exemption in certain limited circumstances.
- Market-linked income streams that are commenced before 20 September 2007 may be commuted and rolled over from that date without restriction, provided that:
- all the assets backing the original income stream are rolled over to the new income stream, and
- the new income stream meets the requirements that would have applied under section 9BA of the Social Security Act 1991 if the income stream was purchased before 20 September 2007.
- all the assets backing the original income stream are rolled over to the new income stream, and
- In all other cases, the requirements for retention of the exemption are that:
- The new income stream has the characteristics that qualify it for exemption from the assets test that apply to income streams that enjoy either a 100 per cent or 50 per cent exemption from the assets test, i.e. those characteristics specified in sections 9A, 9B and 9BA of the Social Security Act 1991; as they would have applied before 20 September 2007.
- that the commutation and rollover arises because of one of the following events:
- Circumstances arising from the removal of a reversionary beneficiary because of the death of the reversionary beneficiary, or because the primary and reversionary beneficiaries are no longer members of a couple (as defined in the Social Security Act 1991). (This exemption, limited to lifetime, life expectancy, and market-linked asset-test exempt (ATE) income streams where payments made under the income stream are calculated on the basis of the life expectancy of the reversionary beneficiary. Generally, this exemption can be applied only once).
However, there is an exception in circumstances where an original ATE income stream purchased before 20 September 2004 has been commuted between 20 September 2004 and 19 September 2007 (inclusive) on the death of the reversionary partner, or where the partners separate. In this situation, if the primary beneficiary subsequently re-partners, and then commutes the second income stream on or after 20 September 2007 to purchase a new income stream based on the new reversionary partner's life expectancy, the third income stream can retain the assets test exemption).
- Allow some flexibility for income streams where the superannuation fund holding the income stream fails to meet actuarial reserving requirements.
- Because of the transfer of the income stream resulting from a 'successor fund' transfer under Regulation 1.03 of the Superannuation Industry (Supervision) Regulations 1994.
- Partial commutation of an income stream to meet:
- a payment split arising from a divorce property settlement-
- payment of a hardship amount (under the social security rules), and
- payment of a superannuation contributions surcharge.
- To meet the requirements specified in section 6.21(2A) of the Superannuation Industry (Supervision) (SIS) Regulations 1994 that, from 1 July 2007, an income stream may revert only to a dependant of the income stream recipient and, in the case of a child, the child must:
- be less than 18 years old, or
- if 18 years or older, be financially dependant on the member and less than 25 years of age, or have a disability as described in subsection 8(1) of the Disability Services Act 1986.
The following conditions must apply:
The original asset test exempt income stream must have been purchased before 1 July 2007, and the income stream is being commuted to purchase a new income stream that satisfies the characteristics specified for lifetime, life expectancy and market-linked asset-test exempt income streams that applied before 20 September 2007, or the income stream contract is being altered. - To allow a primary beneficiary to purchase a new asset-test exempt income stream from a retail provider following the closure of a self managed superannuation fund because:
- a member of the fund supporting the original income stream has died, or
- the administrative responsibilities of the fund supporting the original income stream have become too onerous due to the age or incapacity of a trustee.
(The new income stream must:- be purchased using all the assets from the commutation of the original asset-test exempt income stream sourced from the self managed superannuation fund that has been closed, and
-
satisfy the characteristics specified for lifetime, life expectancy and market-linked asset-test exempt income streams that applied before 20 September 2007.)
- It should be noted that, with the exception specified in the note below, retention of either the 100 per cent or 50 per cent exemption is limited to only one commutation and rollover to a new income stream where this arises because of the:
- death of a reversionary beneficiary, or
- separation of a couple, or
- failure of a superannuation fund to meet actuarial reserving requirements.
(Note: The only exception to the limitation to one commutation/rollover to a new income stream is where the primary beneficiary re-partners following the death of, or separation from, a reversionary beneficiary (see above)).
- a member of the fund supporting the original income stream has died, or
- Will individuals be worse off as a result of the changes?
- No. The changes do not reduce an age pensioner's existing entitlements.
- Are there any changes to the provisions covering reversion to a reversionary partner, or other reversionary beneficiary, on the death of the primary beneficiary?
- With the exception of the new provisions that apply to defined benefit income streams (see questions eight and nine), the current provisions for reversion of an income stream to a reversionary partner, or other reversionary beneficiary, continue to apply.
- Are there any changes to the income test treatment of income streams?
- No. Gross payments from income streams with a term of more than five years will continue to be reduced by an amount that reflects a return of the capital used to purchase the income stream.
- Recipients still have to advise Centrelink their gross annual payment at the start of the financial year. If a recipient makes a withdrawal during the financial year, they must notify Centrelink:
- if the withdrawal should be assessed as income, and added to the gross annual nominated payment advised originally, or
- if the withdrawal is in the nature of a commutation.
An income stream schedule is required when a change is notified.
- This distinction between an income payment and a commutation is allowed under the existing income streams rules.
- Are there any changes to the notification requirements to Centrelink?
- There are no changes to the current notification requirements to Centrelink. There is increased flexibility in the amount of income that individuals can withdraw from an income stream product, in particular, an account-based income stream product. The changes that result from the Australian Government's plan, remove the existing upper limits on withdrawal of income and reduce the existing lower limits.
As indicated in question and answer six, recipients are still required to notify Centrelink when they change their gross nominated annual payment or make a commutation from their income stream. They have to obtain an income stream schedule from the income stream provider and provide it to Centrelink. -
Recipients who commence a 'purchased' income stream from 1 July 2007 are still responsible for notifying Centrelink of their income stream details. An income stream schedule completed by the income stream provider has to be provided to Centrelink. Income stream providers have to continue to report the Relevant Number on the income stream schedule for purchased income streams commenced from 1 July 2007. The Relevant Number is the life expectancy at commencement of the income stream or, where the income stream is paid for a specific term, the term of the product.
This is because, from 1 July 2007, Centrelink will continue to calculate assessable income for social security purposes under the same income test arrangements that existed before that date, i.e. assessable income from these 'purchased' products will continue to be calculated by reducing gross income by an amount equal to the purchase price divided by the:
- individual's life expectancy (for lifetime or 'allocated' account-based products), or
- term of the product (products with a specific term, including life expectancy and market-linked income streams).
- has a term of five years or less, and
- the term is less than the person's life expectancy.
- individual's life expectancy (for lifetime or 'allocated' account-based products), or
- You say that the income test is not changing but what about the changes to the new limits for account based income streams?
- The abolition of upper limits, and the establishment of lower minimum limits, on the withdrawal of income from account based income streams will give individuals greater flexibility in determining their income requirements. However, the income test will continue to be applied in determining assessable income for social security purposes.
- What is the assessment for any deductible amount for new defined benefit income streams acquired from 1 July 2007?
- The changes to the calculation of deductible amounts for defined benefit income streams arise from changes in the taxation system that flow through to the assessment of lifetime defined benefit income streams under the means test.
- Defined benefit income streams acquired from 1 July 2007 have their deductible amounts expressed as a proportion of the superannuation interest that gives rise to the income stream payments. This deductible amount is based on any 'tax-free components' that are included in the total superannuation interest. 'Tax-free components':
- Are calculated for tax purposes and can include 'after tax' contributions to superannuation, pre 1983-components of superannuation interests, and certain invalidity payments. ('After tax' contributions and invalidity payments constitute the existing 'undeducted purchase price', used in conjunction with the individual's life expectancy to calculate a deductible amount for the income stream. For defined benefit income streams acquired before 1 July 2007, gross income less the deductible amount constitutes assessable income for social security purposes.)
- Constitute a proportion of the superannuation interest and, in most cases, will constitute a fixed proportion of individual payments made to a recipient. This means that, in most cases, if the payments are indexed (for example CPI), the deductible amount will increase in the same proportion as any increase in the payments.
- What happens to the deductible amount if I acquired my defined benefit income stream before 1 July 2007?
- Where a defined benefit income stream was acquired before 1 July 2007, calculation of the deductible amount for social security purposes is subject to certain transitional arrangements:
- For social security purposes, the income stream will retain the current deductible amount unless the recipient experiences a trigger day, ie:
- 1 July 2007 if the recipient has turned age 60 by the end of 30 June 2007
- the day the recipient turns age 60 if they are under age 60 at the end of 30 June 2007.
- Where the recipient experiences a trigger day, the deductible amount for an income stream payment is determined as being the greater of the:
- Current deductible amount.
- Sum of the amounts that comprise the 'tax-free components' of the income stream payment received from the income stream during the year. (The sum of the amounts of the tax-free components are worked out under subsections 307-125(4)-(7) of the Income Tax (Transitional Provisions) Act 1997)). The 'tax-free components' at the trigger day comprise any 'unused undeducted purchase price' (UUPP) just before the trigger day plus any 'pre-1983 component' of the superannuation interest giving rise to the income stream.
- Where payments from a defined benefit income stream are indexed periodically, and the current deductible amount is greater than the sum of the amounts of the 'tax-free components' on the trigger day, the current deductible amount is retained until the sum of the amounts of the 'tax-free components' exceeds the current deductible amount. At this point, the sum of the amounts of the 'tax-free components' becomes the deductible amount and remains so for as long as payments are made.
- The deductible amount may also vary:
- if the income stream is partially commuted on or after 1 July 2007, or
- following the death of the recipient, on reversion of the income stream to a reversionary beneficiary.
Where the income stream payments are indexed, the sum of the amounts that comprise the 'tax-free components' of the income stream payments will increase in line with the indexation increases. This means that, at some point in time, the sum of the amounts that constitute the 'tax-free components' may become greater than the original deductible amount.