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This topic covers income test assessment for:
The assessable income (section 8(1)-'income') from a lifetime or life expectancy ATE income stream (section 9(1)-'asset-test exempt income stream') is the annual payment (1.1.A.155) LESS the deduction amount. The deduction amount is the purchase price less commutations (1.1.P.500) divided by the relevant number (1.1.R.135).
Example 1: Fran is 64 years old and single. She purchases an ATE lifetime pension for $150,000. The relevant number is equal to her life expectancy of 22 years. Her annual payment from the pension totals $11,400. Her assessable income from this income stream equals:
$11,400 - ($150, 000 ÷ 22 years) = $4,582 per annum
Example 2: Mark is 65 years old and single. He purchases an ATE life expectancy annuity for $100,000 with a term based on life expectancy (i.e. 17.7 years rounded up to 18 years). The relevant number is equal to the term of the contract (i.e. 18 years). His annual payment from the annuity totals $9,895. His assessable income from this income stream equals:
$9,895 - ($100,000 ÷ 18 years) = $4,339 per annum
Act reference: SSAct section 8(1)-'income', section 9(1)-'asset-test exempt income stream', section 9(1)-'relevant number', section 1099 Income-income stream not a defined benefit income stream, section 9(1) Financial assets and income streams definitions
Policy reference: SS Guide 1.1.R.135 Relevant number, 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, 4.9.5 Life Expectancy, Pension Valuation Factor & Payment Factor Tables
The assessable income (section 8(1)-'income') from a market-linked income stream is the annual payment (1.1.A.155) LESS the deduction amount. The deduction amount is the purchase price (1.1.P.500) less commutations divided by the relevant number (1.1.R.135).
Note: The annual payment can vary between plus or minus 10% of the default annual payment for the year (i.e. account balance ÷ payment factor).
Note: For the financial years commencing 1 July 2008 and ending 30 June 2012, temporary relief measures reducing the minimum annual amounts apply. Refer to 'pension drawdown relief' on the Australian Taxation Office website. The annual income amount for a market-linked income stream is calculated as detailed in 4.9.2.15.
The amount that should be reported for Centrelink purposes is specified later in 'Income reporting requirements for market linked income streams'.
Example 1: Bill Symthe, who turns 60 on 1 July 2006, commences a market-linked income stream from that date based on an initial account balance of $500,000 and a term of 30 years.
In the first year, the default annual payment amount is worked out using the formula in subsection 9BA(5). In this case the amount is:
= $500,000 ÷ 18.39 (rounded to the nearest $10)
= $27,190
= $2,265.83 per month
Bill elects to draw down monthly payments of $2,100 for the financial year, i.e. a total of $25,200. Assessable annual income on these payments is determined according to the formula in subsection 1099AA(2):
= {($25,200 ÷ 365 - $500,000 ÷ (30 x 365)} x 365
= $8,533.34
On 1 January 2007, Bill elects to draw down monthly payments of $2,400 for the remainder of the financial year.
Bill has received $12,600 (from July to December) and will receive $14,400 (from January to June). Total payments for the year will be $27,000.
Assessable annual income on these payments is determined according to the formula in subsection 1099AA(2):
= {($27,000 ÷ 365) - $500,000 ÷ (30 x 365)} x 365
= $10,333.33
Example 2: John Smith, who turns 65 on 1 July 2006, commences a market-linked income stream from that date based on an initial account balance of $400,000 and a term of 25 years.
In the first year, the default annual payment amount is worked out using the formula in subsection 9BA(5). In this case the amount is:
= $400,000 ÷ 16.48 (rounded to the nearest $10)
= $24,270
Mr Smith fails to notify the specific amount that he is planning to withdraw during the first financial year when the income stream is paid.
In this case, the default amount of $24,270, calculated under subsection 1099AA(3), is the amount of income that will be assessed against Mr Smith.
Under the formula in subsection 1099AA(3), the annual rate of income assessed is:
= {($24,270 ÷ 365) - $400,000 ÷ (25 x 365)} x 365
= $8,270
Act reference: SSAct section 8(1)-'income'
Policy reference: SS Guide 1.1.R.135 Relevant number, 4.9.2.15 Characteristics of Asset-Test Exempt Income Streams Purchased from 20/9/2004 & before 20/09/2007, 4.9.5 Life Expectancy, Pension Valuation Factor & Payment Factor Tables
Note: For the financial years commencing 1 July 2008 and ending 30 June 2012, temporary relief measures reducing the minimum annual amounts apply. Refer to 'pension drawdown relief' on the Australian Taxation Office website.
An income support recipient must receive one or more payments during the financial year from their market-linked income stream. Where the income stream commences on or after 1 June, there is no obligation to make a payment in the first financial year (i.e. in June).
Payments must be made at least annually (1.1.A.155) and must be between plus or minus 10% of the amount determined under the following formula:
The payment period is the whole financial year, except where the income stream is purchased during that financial year, in which case it is the period from the income stream's commencement date to the end of the first financial year.
For Centrelink reporting purposes, the 'gross annual nominated payment' is the sum of all payments the recipient has received and is expected to receive for the current whole financial year. In effect, this amount will reflect the amount that the recipient expects to report for tax purposes after the end of a financial year, except in the first year, where the income stream does not commence on 1 July, the amount will be an annual amount (see formula below). For the income stream to meet the requirements for a 50% exemption from the assets test, the annual payment reported must always be between plus or minus 10% of the amount specified according to the above formula.
Where an income support recipient specifies an annual payment that is outside the 10% minimum or maximum range, the income stream will become non-complying and penalties may apply.
Where the income stream commences during a financial year, the income support recipient will receive a pro-rated payment amount to reflect the number of days remaining in the financial year. The pro-rated payment amount MUST NOT be reported to Centrelink.
For Centrelink reporting purposes the 'gross annual nominated payment' will be equal to the sum of actual payments received, plus payments to be received, in the financial year grossed-up to reflect an annual amount (i.e. an amount which reflects what the client would have received for a full financial year had their payments not been pro-rated). It is calculated as follows:
= [Sum of all payments already received and to be received during the financial year] x [number of days in financial year ÷ number of days from commencement until 30 June]
Example 1: George, who turns 65 on 1 January 2007, commences a 20 year market-linked income stream from that date based on an initial account balance of $300,000.
The default annual payment is:
= $300,000 ÷ 14.21
= $21,111.89
= $21,110 (rounded to nearest $10)
George elects to receive 6 monthly payments of $1,800 commencing on 1 January 2007 for the remainder of 2006-07. George will receive $10,800 for the 6-month period. This amount is between the minimum payment limit of $9,421 [$21,110 x 90% x (181 ÷ 365)] and maximum payment limit of $11,515 [$21,110 x 110% x (181 ÷ 365)].
For Centrelink reporting purposes, the gross annual nominated payment is calculated as follows:
= [Sum of all payments already received and to be received during the financial year] x [number of days in financial year ÷ number of days from commencement until 30 June]
= $10,800 ÷ 181 x 365
= $21,779.00
Example 2: On 1 April 2007, George elects to vary his monthly payment to $1,900. He has already received $5,400 (between January and March) and wants to receive $5,700 from April to June.
George will receive $11,100 in 2006-07 (1 January 2007 to 30 June 2007), which is between the minimum and maximum limits of $9,421 and $11,515, respectively.
For Centrelink reporting purposes, the gross annual nominated payment is calculated as follows:
= [Sum of all payments already received and to be received during the financial year] x [number of days in financial year ÷ number of days from commencement until 30 June]
= $11,100 ÷ 181 x 365
= $22,383.98
For subsequent financial years after an income stream's commencement date, for Centrelink reporting purposes the 'gross annual nominated payment' will be equal to the sum of actual payments received, plus payments to be received in the financial year. It is calculated as follows:
= [Sum of all payments already received and to be received during the financial year from 1 July to 30 June]
Example 3: Bill, who turns 65 on 1 July 2006, commences a market-linked income stream with a 20 year term, and based on an initial account balance of $300,000.
The default annual payment is:
= $300,000 ÷ 14.21
= $21,111.89
= $21,110 (rounded to nearest $10)
Bill elects to receive $1,700 per month for the financial year, which is an annual amount of $20,400 (12 payments of $1,700). This amount is between the minimum and maximum payment limits of $18,999 (90% of $21,110) and $23,221 (110% of $21,110), respectively.
For Centrelink reporting purposes, the gross annual nominated payment to be reported on the Centrelink schedule is $20,400.
Example 4: On 1 January 2007, Bill elects to vary his monthly payments to $1,800. He has already received $10,200 (between July and December) and wants to receive $10,800 from January to June.
Bill will receive $21,000 for the financial year comprising of the payments received and expected to be received for the full financial year, which is between the minimum and maximum limits of $18,999 and $23,221, respectively.
For Centrelink reporting purposes, the gross annual nominated payment to be reported on the Centrelink schedule from 1 January 2007 is $21,000.
Act reference: SSAct section 1098 Income from asset-test exempt income stream, section 1099AA Income from market-linked asset-test exempt income stream
Policy reference: SS Guide 4.9.2.15 Characteristics of Asset-Test Exempt Income Streams Purchased from 20/9/2004 & before 20/09/2007, 4.9.2.30 Income Test Assessment of Asset-Test Exempt Income Streams, 4.9.5.70 Payment Factors for Market-Linked Income Streams
Prior to 1 July 2007, the deductible amount for social security purposes was based on the UPP in accordance with section 27H(2) of the Income Tax Assessment Act 1936 (as in force just before 1 July 2007).
The income test assessment for income support recipients who were receiving payments from a defined benefit income stream, was calculated as follows:
For defined benefit income streams commenced from 20 September 1998 and before 1 July 2007, the deductible amount was based on the tax definition that applied during this period.
Where an income support recipient was simultaneously receiving a social security benefit AND payments from a defined benefit income stream on or before 19 September 1998, the deductible amount was based on the pre-1 July 1994 definition of UPP in the Income Tax Assessment Act.
From 1 July 2007, the deductible amount is based on the 'tax free component' as worked out under subdivision 307-C of the Income Tax Assessment Act 1997 or if applicable, subsection 307-125 of the Income Tax (Transitional Provisions) Act 1997.
The income test assessment for income support recipients who were receiving payments from a defined benefit income stream, is calculated as follows:
Defined benefit income streams commenced 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 proportion will be the proportion that the 'sum of the amounts of the tax free component' of the superannuation interest comprises of the total superannuation interest.
As the sum of the amounts of the tax free component constitutes a fixed proportion of the superannuation interest that gives rise to the income stream, in most cases, the deductible amount will increase in the same proportion as any increase (e.g. CPI indexation) in the payments.
The income assessment of defined benefit income streams commenced before 1 July 2007 changed from 1 July 2007 to take account of the following transitional arrangements.
Where a defined benefit income stream has commenced before 1 July 2007, for social security purposes, the income stream will retain the pre 1 July 2007 deductible amount unless the income support recipient experiences a 'trigger day' i.e.:
Where the income support recipient experiences a trigger day the deductible amount for an income stream payment, subject to the additional requirements being satisfied, will be determined as being the greater of:
The income support recipient will also need to satisfy the following additional requirements:
Note: As indicated above, where payments from the income stream are indexed, the deductible amount usually will increase in the same proportion. Accordingly, where an income support recipient experiences a trigger day and the pre 1 July 2007 deductible amount taken into account in calculating the income support payments received before the recipient's trigger day, is greater than the sum of the amounts of the tax free components on the trigger day, the pre 1 July 2007 deductible amount will be retained initially. However, once the sum of the amounts of the tax free components exceeds the current deductible amount, the deductible amount will then be based on the sum of the amounts of the tax free components.
The deductible amount may also vary if:
Where these events occur, the 'new' deductible amount based on the tax free component will be chosen irrespective of whether it is lower than the deductible amount prior to the event, i.e. these events do not constitute a 'trigger day' for social security purposes.
Note: Where defined benefit income stream payments to a reversionary beneficiary include a component on behalf of a dependent child, this component is not included in the reversionary beneficiary's assessable income (refer to 4.2.1.20 and 4.3.2.30). However, it will affect the child's entitlement to income support.
Act reference: SSAct section 8(8)(j) Excluded amounts-general
Policy reference: SS Guide 1.1.A.155 Annual payment, 1.1.D.44 Deductible amount, 1.1.R.135 Relevant number, 4.2.1.20 Additional Free Area for Dependant Children, 4.3.2.30 Income Exempt from Assessment - Legislated, 4.9.1.30 Specific Provisions for Assessing Income Streams
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Last reviewed: 1 July 2011
