4.9.4.60 Assessment of Non-Performing Income Streams Paid from SMSFs or SAFs

Summary

This topic outlines the assessment of income streams, paid from either SMSFs or SAFs, where these funds are unable, or expect to be unable to, pay an income stream according to the trust deed or governing rules of the fund. It covers:

• general provisions, which includes:
  • where an income stream ceases to be an income stream,
  • reporting arrangements,
  • trustee report not available or not acceptable,
  • where a fund is to be 'wound-up',
• treatment for ATE income streams,
• treatment for asset-tested income streams (long term), and
• treatment for asset-tested income streams (short term).

Treatment where an income stream ceases to be an income stream

Generally, an income stream paid from a SMSF or a SAF ceases to be an income stream under the SSAct when the SMSF or SAF cannot pay at least one payment during an income year (i.e. for the current year, a period equalling 12 months that corresponds to period from commencement day to the anniversary of the commencement day). There are 2 options:

• where NO PAYMENT has been made during the income year, the income stream is deemed to have ceased on the FIRST DAY to which the income stream payment relates. That is, the first day of the income year in which no payment was made, and
• where a trustee decides to 'wind-up' the fund, an income stream paid from the fund would cease on the day on which there is no obligation to make any future income stream payments. That is, where a trustee makes a decision to wind-up their fund, the date of effect would be the date the fund is wound-up, and not the date the trustee made the resolution to wind-up the fund (though these could be the same date).

On the day the income stream ceases to be an income stream (as per the above guidelines), the assets backing the income stream are assessed in the same manner as superannuation. The treatment for income support recipients will depend on whether they are BELOW or ABOVE age pension age. Refer to 4.8.2.10.

Note: Particular income streams have specific requirements regarding the amount of annual payments required (i.e. to be an ATE income stream, annual payments must equal a specific amount which is specified at the beginning of each income year). Further guidance is provided later in this topic for all social security income stream types.

Example 1: The Smith Family Superannuation Fund pays a quarterly income stream with a commencement date of 1 April 2002. On 1 November 2002 the trustee determines that the fund is unable to make further income stream payments and makes a resolution to discontinue payments from 1 November 2002. The income support recipient informs Centrelink that the income stream ceased to be paid from 1 November 2002, it is no longer assessed as an income stream product from 1 November 2002.

If the income support recipient does not inform Centrelink of the trustee resolution and the product remains assessed as an income stream until the next Centrelink review, a debt can be raised for overpayment from 1 November 2002 if the result of reassessment is a reduction in the person's income support payments.

Example 2: The Jones Family Superannuation Fund pays an income stream with a date of commencement of 1 January 2002. The payment is made annually on 31 December of each year. During July 2002 the fund encounters financial difficulties. In early December, the trustee becomes aware that the fund cannot pay the annual payment. On 5 January 2003, the income support recipient informs Centrelink that the annual payment for 2002 was not paid. Centrelink will assess the income stream as ceasing on 1 January 2002 as this was the first day relating to the income stream payment on 31 December 2002. Centrelink may raise an overpayment from 1 January 2002 if the result of the reassessment is a reduction in the person's income support payment.

Act reference: SSAct section 23(2) For the purposes of this Act (other than section 735)…

Policy reference: SS Guide 4.8.2.10 Principles for Assessing Superannuation Investments

Reporting arrangements

The income support recipient should report to Centrelink if their SMSF or SAF is experiencing financial difficulty. Where Centrelink is aware of problems, they may request this information under SS(Admin)Act sections 63-71 and 192-197. It is the income support recipient's responsibility to either provide, or ensure that the trustee provides, this documentation to Centrelink.

A trustee's report should be provided to Centrelink within 3 months of the problem being identified by the income support recipient (or trustee). The trustee's report should outline details on:

• the action that has, or will be, taken to either wind-up the fund or restore the fund to being a viable entity,
• the expected date for finalising the above action, and any other major milestone dates,
• the associated consequences for the income stream, and
• if the income stream is to be terminated altogether, the trustee report should indicate the expected date of termination and what the trustee plans to do with the remaining assets, if any.

Trustee report not available or not acceptable

If a trustee's report is not available or is not considered acceptable, the existing asset value will be taken to be the current market value of the assets backing the income stream. A report may not be acceptable where the:

• contents of the report are not consistent with other information on the fund's affairs held by Centrelink, or
• report contains insufficient information to allow Centrelink to determine an appropriate value for the income support recipient's beneficial interest in the fund.

Where a fund is to be wound-up

If the income stream is to be wound-up, the trustee should provide details to Centrelink on the:

• date on which the income stream is to be terminated, and
• proposed action in relation to the assets backing the income stream.

Treatment for ATE income streams - funds that cease to make income stream payments

The income stream will be assessed as superannuation from the date the income stream ceased as per the above guidelines. Refer to 4.8.2.10.

Where an ATE product ceases to be an income stream (i.e. the fund cannot pay at least one payment during an income year), it will lose ATE status because it fails to satisfy the requirements for lifetime (section 9A(2)), life expectancy (section 9B(2)), or market-linked (section 9BA(2)) products. The income support recipient will be assessed as if the income stream never had ATE status (i.e. it will be treated as an asset-tested income stream (4.9.3.10) from its commencement day). This may result in a debt being raised. Refer to 4.9.2.40 'calculating a debt resulting from a non-allowable commutation'.

The assets backing the ATE income stream may be commuted and 'rolled over' to another ATE income stream before the original income stream loses ATE status (for pre-20 September 2004 ATE income streams refer to 4.9.2.10, and for post-20 September 2004 ATE income streams refer to 4.9.2.15). Where this occurs, the debt provisions will not apply.

Note: From 20 September 2004, where an ATE income stream is commuted and rolled over into another ATE income stream, it will be eligible for only a 50% asset test exemption (4.9.2.15). However, in limited circumstances, certain pre-20 September 2004 lifetime and life expectancy ATE income streams that are commuted and rolled over into post-20 September 2004 lifetime and life expectancy ATE income streams will be allowed to retain a 100% exemption from the assets test. Refer to 4.9.2.17.

Act reference: SSAct section 9A(2) Requirements of contract/governing rules for provision of income stream, section 9B(2) Requirements of contract/governing rules for provision of income stream, section 9BA(2) Requirements of contract/governing rules for provision of income stream

Policy reference: SS Guide 4.8.2.10 Principles for Assessing Superannuation Investments, 4.9.1.20 General Provisions for Assessing Income Streams, 4.9.2.10 Characteristics of pre-20/09/2004 Asset-Test Exempt Income Streams, 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, 4.9.2.40 Commuting an Asset-Test Exempt Income Stream, 4.9.3.10 General Provisions for Asset-Tested Income Streams

Treatment for ATE income streams - funds that make reduced income stream payments

If there is a reduction in payments, which is not associated with an allowable commutation (4.9.2.40), the income stream will lose its ATE status, because it fails to satisfy the requirements for lifetime (section 9A(2)), life expectancy (section 9B(2)), or market-linked (section 9BA(2)) products.

The income stream will be assessed as if it never had ATE status (i.e. it will be treated as an asset-tested income stream (4.9.3.10) from its commencement day). This may result in a debt being raised. Refer to 4.9.2.40 'calculating a debt resulting from a non-allowable commutation'.

The assets backing the ATE income stream may be commuted and rolled over to another ATE income stream before the original income stream loses ATE status (for pre-20 September 2004 ATE income streams refer to 4.9.2.10, and for post-20 September 2004 ATE income streams refer to 4.9.2.15). Where this occurs, the debt provisions will not apply.

Note: From 20 September 2004, where an ATE income stream is commuted and rolled over into another ATE income stream, it will be eligible for only a 50% asset test exemption (4.9.2.15). However, in limited circumstances, certain pre-20 September 2004 lifetime and life expectancy ATE income streams that are commuted and rolled over into post-20 September 2004 lifetime and life expectancy ATE income streams will be allowed to retain a 100% exemption from the assets test. Refer to 4.9.2.17.

Act reference: SSAct section 9A(2) Requirements of contract/governing rules for provision of income stream, section 9B(2) Requirements of contract/governing rules for provision of income stream, section 9BA(2) Requirements of contract/governing rules for provision of income stream

Policy reference: SS Guide 4.9.2.10 Characteristics of pre-20/09/2004 Asset-Test Exempt Income Streams, 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, 4.9.2.40 Commuting an Asset-Test Exempt Income Stream, 4.9.3.10 General Provisions for Asset-Tested Income Streams, 4.9.4.20 General Provisions for Assessing Income Streams Paid from SMSFs or SAFs

Treatment for asset-tested income streams (long term) - funds that cease to make income stream payments

The income stream will be assessed as superannuation from the date the income stream ceased, as per the above guidelines. Refer to 4.8.2.10.

Act reference: SSAct section 9(1) Financial assets and income streams definitions

Policy reference: SS Guide 4.9.3.10 General Provisions for Asset-Tested Income Streams, 4.8.2.10 Principles for Assessing Superannuation Investments

Treatment for asset-tested income streams (long term) - funds that make reduced income stream payments

Where the fund reduces the income stream payments, the income stream will continue to be assessed as an asset-tested income stream (long term). There is no change in the assets test treatment. The income test treatment will reflect the reduced payments. There is no change in the deduction amount, as the income stream is not being assessed as a new income stream and the asset value has not changed.

Policy reference: SS Guide 4.9.3.20 Assets Test Assessment of Asset-Tested Income Streams, 4.9.3.30 Income Test Assessment of Asset-Tested Income Streams

Treatment for asset-tested income streams (short term) - funds that cease to make income stream payments

The income stream will be assessed as superannuation from the date the income stream is ceased, as per the above guidelines. Refer to 4.8.2.10 and 4.9.3.20.

Act reference: SSAct section 9(1) Financial assets and income streams definitions

Policy reference: SS Guide 4.9.3.10 General Provisions for Asset-Tested Income Streams, 4.8.2.10 Principles for Assessing Superannuation Investments

Treatment for asset-tested income streams (short term) - funds that make reduced income stream payments

Where an asset-tested income streams (short term) reduces its income stream payments, there is no change in its assessment under the means test (4.9.3.10). The asset value is counted for assets test purposes, and is subject to the deeming rules for income test purposes.

Policy reference: SS Guide 4.4.1 General Provisions for Deeming

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Last reviewed: 1 October 2010