Life interest in an asset or income 043-04110010

A life interest can be created in three ways:

• when a customer transfers an asset to another person but retains a life interest in the asset (gifting may apply in some circumstances)
• when a customer acquires the right to use an asset or the income produced by the asset
• in a will of a deceased individual, where the deceased specifies a certain income or assets from their estate can be used and enjoyed by a customer during that customer's lifetime

A life interest remains current:

• for life, or
• until the asset is sold or surrendered (unless another asset is purchased), or
• the income is surrendered

The actuarial value of a customer's life interest is an assessable asset if the life interest was created by the:

• customer
• the customer's partner, or
• on the death of the customer's partner

The exception is where the life interest is in the customer's principal home.

A life interest, whether it is in property or income, has a capital value based on the actuarial value.

The actuarial value is in turn based on:

• the person's life expectancy, and
• the income that could be derived from the asset

The same rules apply for the asset assessment of a reversionary interest, remainder interest and a contingent interest.

If the life interest held is in the customer's principal home, the customer is treated as a homeowner for Assets Test purposes and the principal home is an exempt asset. That is, even when created by a customer, their partner or upon the death of their partner.

Note: if the trust deed allows the customer access to trust capital, then the trust is assessed under the post 1 January 2002 trust and company rules.

If an actuarial valuation is required, the case must be referred to a Complex Assessment Officer (CAO). All relevant documentation must be scanned for processing and noted in the CAO referral. The following details may be required:

• copy of the will (if the life interest was initially inherited by the customer)
• copy of the deed of arrangement
• copy of the valuation if property is involved
• copy of investment documentation
• copy of financial statements
• age details of the customer
• statement regarding any other relevant factors

These details are also needed if the customer formally surrenders their life interest.

The CAO will determine if a formal valuation of the life interest (or surrender of a life interest) is to be requested from the Australian Government Actuary (AGA) by using the following calculation:

income x quasi actuarial life expectancy

• income x quasi-actuarial life expectancy. For the table on quasi-actuarial life expectancy, see Guide to Social Security Law, 4.6.4.60 Granny Flats - Reasonable Value Conversion Factors on the References page.
  The income assessed will comprise:
• actual income
• potential income from the asset or another asset if sold and re-invested

Only if the asset value is likely to have an impact on the customer's rate of income support payment will there be a requirement to refer to the AGA for an actuarial value. Any assessment of the impact on a customer's income support payment must also take into account whether the deprivation amount would affect the customer under the Income Test.

Note: when members of a couple own the property as joint tenants, on the death of one of the member’s the property passes automatically to the surviving partner. If this occurs, a life interest is not created unless the surviving partner subsequently creates a life interest for themselves. See Interest in an estate.

Any income received from a life interest is assessable under the income test. Only the actual allocations or distributions received are assessed. A customer who has a life interest in financial assets held in an estate, such as cash or shares, is assessed on the actual allocations or distributions paid to them and not the deemed or rate of return amount on the investments.

If the customer does not receive all the income they are entitled to, the gifting provisions may apply to the income not received.

If a customer has a life interest in the income of a financial investment, the assessment of capital gains within the investment is determined by the deed of arrangement or will.
If the deed of arrangement or will:

• allows for capital gains to be distributed, then any gross capital gains generated by the investments will be included in the assessable income, or
• is not specific in relation to the investment gains, any capital gains generated by the investment is not included in the assessable income unless distributed to the customer

If a customer has a life interest in the investments (not part of an estate or trust) and has the power to make investment decisions, the customer’s income is assessed on the actual return from these investments, not deemed income.

If a customer becomes the sole beneficiary of a life interest in a rental property, all rental income received is assessed irrespective of whether the 'trustee' makes a distribution. If the 'trustee' decides to sell the property the customer has the life interest in, then the customer could take action to prevent the property being sold (a caveat could be lodged on the title of a property), thus protecting the customer's income stream. If the customer failed to prevent the sale of the property, deprivation may occur unless the customer continued to have a life interest in the proceeds of the investment or the rent from a new rental property. If there is deprivation then the amount of deprivation is the actuarial value as outlined below.

Note: if the will allows the customer access to trust capital, then the trust is assessed under the post  1  January 2002 trust and company rules.

If the life interest was established after 7:30 pm on 9 May 2000 or by a person's death where the death occurred after 31 March 2001, the trust and company rules apply to a remainder interest.
See Testamentary trusts for more information on remainder and contingent interests activated by a person's death.

Social Security Law has anti avoidance legislation providing for the assessment of life interests under post 1  January  2002 trust and company rules if it is concluded the life interest was created for the sole or dominant purpose of obtaining a social security advantage.

The surrender of a life interest is a gift and an actuarial valuation of the surrendered life interest must be calculated. This applies even when a life interest is an exempt asset. For example, when it is not created by a customer, partner or death of a partner.

If a customer surrenders a life interest, refer the case to a Complex Assessment Officer (CAO). Scan relevant documents for processing and note on the CAO referral DOC. See the list in the How a life interest is assessed section for the details required.

Code the asset amount of the gift on the Gifted/Deprived Asset (GIFT) screen.

Normally, if a life interest is surrendered, an Australian Government Actuary (AGA) valuation is required. Prior to sending the case to the AGA the CAO must calculate an approximate value as detailed above.