Adding or updating a defined benefit or military invalidity pension income stream 108-05060060

A defined benefit income stream is a pension paid from a defined benefit superannuation fund or scheme, for example the defined benefit pensions paid from the:

• public sector superannuation schemes such as:
• Commonwealth Super Scheme (CSS), Public Sector Super Scheme (PSS), and
• State Super schemes such as Super SA and QSuper
• private sector defined benefit funds such as Commonwealth Bank Officers Super Fund and the BHP Staff Super Fund
• industry funds such as UniSuper and Health Super

Most of these superannuation funds also offer account-based income streams and lifetime income streams. Take care when determining when the product is a defined benefit income stream or not.

The payments from a defined benefit income stream are defined by factors such as:

• an individual's age
• salary at retirement
• the number of years of service in the organisation, or
• by criteria determined by the fund's governing rules

Payments are not defined solely by the amount of accumulated superannuation funds used to purchase the income stream.

A defined benefit income stream is not:

• a 'purchased' income stream, or
• an income stream provided from self-managed superannuation funds (SMSFs) and small APRA funds (SAFs)

Even though the documents provided by SMSFs/SAFs may mention their pension as being a defined benefit pension.

Some state government and private sector defined benefit funds allow commutations. A defined benefit income stream from the Commonwealth Superannuation Corporation (CSC), such as a CSS or PSS pension, cannot be commuted after it has started.

The Federal Court of Australia’s decision in Commissioner of Taxation vs Douglas (2020) FCAFC 220 (the Douglas decision) found that certain invalidity pensions did not meet the definition of a defined benefit income stream. These are invalidity pensions:

• granted on or after 20 September 2007
• paid under:
• Military Superannuation and Benefits scheme (MSB)
• Defence Force Retirement and Death Benefits scheme (DFRDB)

Legislation was passed in May 2024 to define these affected income streams as military invalidity pensions. The new assessment of a military invalidity pension income stream within the means test for income support payments is designed to produce the same result as the historical assessments as defined benefits, thereby having no impact on the income and asset assessment for these customers, retrospectively or ongoing.

Note: until a system release is available, military invalidity pension income streams must be coded as defined benefit income streams.

Defined benefit and military invalidity pension income streams are classified as asset-test exempt (ATE).

Gross income - deductible amount = assessable income

Deductible amount

The formula used to calculate the tax-free component (TFC) changed from 1 July 2007. The calculation varies, depending on when the income stream started.

The deductible amount is the tax-free component (TFC) of the income stream as calculated by the superannuation fund. Not all defined benefit income streams will have a tax-free component.

From 1 January 2016, the deductible amount is capped at 10% of the gross income received from the income stream. This means if the income stream has a TFC greater than 10% of the gross income, the TFC is capped at 10%.
Exception: the 10% cap does not apply to a person receiving a Service Pension or the following Military defined benefit income streams:

• Military Superannuation and Benefits Scheme, also known as MilitarySuper
• Defence Force Retirement and Death Benefits Scheme (DFRDBS)
• Defence Force Retirement Benefits Scheme (DFRBS)

Gross income - special reduction amount = assessable income

Special reduction amount

The special reduction amount is the tax-free component (TFC) of the income stream worked out under Subdivision 307 - C of the Income Tax Assessment Act 1997, if it were assumed that the military invalidity pension income stream is a superannuation income stream within the meaning of that Act.

The special reduction amount is uncapped for income streams relating to military service. These are paid by:

• Military Superannuation and Benefits Scheme, or
• Defence Force Retirement and Death Benefits Scheme (DFRDBS)

If the income stream is not related to military service, the special reduction amount is capped at 10% of the gross income received from the income stream.

From 1 July 2007, a one page Defined Benefit Income Stream Schedule (or similar), is needed for pensions paid from all defined benefit schemes. This includes public sector schemes such as Commonwealth Super Scheme (CSS), Public Sector Super Scheme (PSS), MilitarySuper, and State Super schemes.

The Resources page has a link to the schedule.

The original recipient of the income stream may nominate a person to receive the income after their death, for example, their surviving spouse or partner. This person is the reversionary beneficiary.

On reversion to a reversionary beneficiary or partner, the defined benefit income stream:

• is assessed from the day after date of death of the primary beneficiary (deceased spouse or partner), which is the date the customer (reversionary beneficiary) is entitled to receive the payments
• is treated as a continuation of the original income stream
• start date will be the same as the original income stream
• gross income may be reduced as the surviving partner generally receives a percentage of the pension paid to the primary beneficiary

There may be a gap between the death of the original beneficiary and the date the reversionary starts to receive regular payments. A lump sum arrears payment is made to the reversionary beneficiary to cover the gap. The lump sum is assessed as income from the income stream for the period to which it relates. This may result in a debt for that period if the customer has been receiving an income support payment.

Waiver provisions came into effect from 9 May 2018:

• where the lump sum arrears results in a debt during the bereavement period for the surviving spouse, and certain conditions are met
• only debts within the 14 week bereavement period can be waived under these rules

The 9 May 2018 rules are not retrospective. Any of the debts occurring before 9 May 2018 cannot be waived using these rules.

See the References page for a link to the legislation.

A Successor Fund Transfer (SFT) is where all members of a superannuation fund move to another superannuation fund. This includes members who have an income stream.

For an income stream recipient, there can be no change to the terms and conditions of the income stream product. The income stream will continue to have the same start date as the original income stream. The only change would be to the provider name and possibly the product reference number. The exemption from the assets test would continue to apply to the income stream.

Refer to the FINS Bulletin for a listing of SFT/IFTs.

An automatic update is made to the customer's record if there are any changes to the customer's fortnightly gross income or fortnightly tax free component (deductible amount) due to indexation. The data is provided to the agency as part of the Automation of Income Stream Reviews (AISR) process.

If a customer advises an update to their gross income amount, check if the agency received the information as part of a bulk update. The bulk updates reduce customer contact and reduce the risk of error. If the information on the record came from the income stream provider, the channel type on the latest update will be ISP.

• Customers can advise of a defined benefit or military invalidity pension income stream via their Centrelink online account
• Customers cannot make changes to existing defined benefit or military invalidity pension income streams online

Manual handoff will occur where a customer advises of a new defined benefit or military invalidity pension income stream. A DOC with keyword OIAICS will start on the customer's record and a work item for staff manual action is created on the customer's record with the details provided by the customer. Staff can select the work item to process the update in Process Direct.

Customers may receive disability benefits in the form of a lifetime invalidity pension. A lifetime invalidity pension paid from a defined benefit fund, other than a military invalidity pension, is assessed as a defined benefit income stream (product type DEF).

Lifetime invalidity pensions and military invalidity pensions are assessed from the date the person is notified of the approval of their policy, it is not the date the person applied for the benefit.

A lump sum arrears payment may be paid to cover the period before regular payments started. For the period since notification of the approval, the arrears will be assessed as a defined benefit. See Income from personal injury insurance schemes and disability benefits for more information on assessing lump sum arrears.

Regular ongoing periodic payments not paid as a lifetime invalidity pension from a defined benefit fund are not assessed as an income stream. See Income from personal injury insurance schemes and disability benefits for more information.

Special Rate Disability Pension (SRDP) payments paid under the Veterans' Entitlement Act (VEA) 1986 are reduced by Commonwealth Superannuation payments, at a rate of 60%. The superannuation that is used to determine the SRDP reduction amount is exempt income for Social Security purposes.

Note: since 1 January 2022, SRDP payments are also exempt from the income test.

Requests for information to update income streams owned by a non-current partner are sent to the customer.

Where the customer or partner is unable, or unwilling, to provide information due to Family and domestic violence, escalate to AISR support. AISR support will request the information directly from the provider.