Debts arising from commutation of asset-test exempt income streams 107-04020120

Section 1223A took effect from 20 September 2001 and was amended on:

• 15 April 2003 to:
• limit the practice of commuting (withdrawing funds) to an existing ATE income stream (a regular series of payments for life or a fixed term) to a new ATE income stream, and
• then commuting a lump sum
• 20 September 2004 to include the new market-linked income streams

Most Services Australia payments are income and assets (means) tested. ATE income streams are exempt from the assets test because they meet certain conditions. These include:

• income payments for the life expectancy of the customer, and
• cannot be commuted fully or partially into a lump sum, except in limited circumstances

Within 6 months of the commencement date of a non-commutation funded income stream (for income stream commenced prior to 20 September 2007)

A non-commutation funded income stream is an income stream purchased with funds that did not come from the commutation of another ATE income stream.

Prior to 20 September 2007, a customer could commute an ATE income stream to a lump sum during the first six months after purchase. Provided it was a non-commutation funded income stream. From 20 September 2007, commutation within six months is no longer relevant. All new ATE income streams will be commutation funded.

Prior to 20 September 2007, a customer could:

• partially or fully commute an ATE income stream, and
• place the proceeds directly into another ATE income stream

From 20 September 2007:

• commutation (rollover) to another ATE income stream is only allowed under the conditions for retention of an asset-test exemption
• the original income stream must be commuted in full and the entire commuted amount (including reserves if income stream is from SMSF/SAF) rolled over to the new income stream

To retain the asset-test exemption for an original income stream 100% ATE:

• the commuted amount must be rolled over to a ATE income stream:
• Lifetime, or
• Life expectancy

Reversionary beneficiary

Purchased or acquired ATE lifetime or term income streams prior to 20 September 2004, may be:

• commuted by a reversionary beneficiary (or their estate) or the customer’s estate if:
• stated in the contract, and
• done within 10 years of the start of the income stream

Purchased or acquired ATE lifetime or term income streams on or after 20 September 2004 may be:

• commuted by a reversionary beneficiary (or their estate) or the customer’s estate if:
• stated in the contract, and
• done within the shorter of 20 years, or
• the primary beneficiary’s life expectancy at purchase

A life expectancy or market-linked income stream may be commuted on:

• the primary beneficiary's death, if there is no reversionary partner, or
• the reversionary partner's death if there is a reversionary partner who outlives the primary beneficiary

To pay the superannuation contributions surcharge

A commutation may be made to pay the superannuation contributions surcharge of the customer.

The income stream can be commuted:

• partially, or
• in full. If commuted in full, after paying the surcharge, the remaining amount must be rolled over to a new ATE income stream

To pay a hardship amount

This only applies to income streams purchased with non-superannuation monies. This is as per Superannuation Industry (Supervision) Regulations 1994. The income stream is commutable:

• partially, or
• in full. If in full after paying the hardship amount, the remaining payment must be rolled over to a new ATE income stream.

Advise the customer to make an application to commute prior to making the commutation. The Service Officer must forward a copy of the relevant forms and supporting documentation to the Financial Industry and Network Support (FINS) Helpdesk. They will provide a recommendation as to whether the customer's proposed commutation meets the definition of hardship amount.

The agency will then assess if the customer meets extreme financial hardship rules.

To split an income stream pursuant to a divorce property settlement

The income stream can be commuted:

• partially, or
• in full. If commuted in full, any amount remaining after actioning the split must be rolled over to a new ATE income stream

The Department of Social Services (DSS) undertake means test assessments of 'split' income stream payments. Service Officers must forward a copy of the supporting documentation to the Financial Industry and Network Support (FINS) Helpdesk.

To pay the excess contributions tax amount of the customer, up to the maximum tax payable

A DSS legislative instrument allows a customer to pay an excess contributions tax amount by commuting an ATE income stream:

• partially, or
• in full

Funds remaining after paying the tax must be rolled over to a new ATE income stream.

Assets must be used to purchase particular types of income streams, if an ATE income stream is:

• sourced from Self-Managed Superannuation Funds (SMSF) or Small APRA Superannuation Fund (SAF), and
• commuted

This is to retain asset test exemption. The type depends on the commencement date of the original income stream.

All conditions for retention of asset test exemption must be met. The income stream:

• must be fully commuted, and
• all assets including reserves used to purchase the new income stream

The commuted assets (all assets including the reserves):

• can be used to purchase a lifetime or life expectancy ATE income stream from a retail provider under the conditions for retaining asset-test exemption
• cannot be used to purchase an ATE market-linked income stream (MLI)

MLI’s are also known as Term Allocated Pensions (TAP). Any commutation is non-allowable. MLI’s are asset-tested income streams. The original income stream is treated as if it was never ATE, resulting in a debt being raised.

Note: debt waiver provisions relief is available from 25 August 2011. Waive debts due to non-allowable commutation under section 1237AB of the Social Security Act 1991.

The commuted assets (all assets including the reserves) can be used to purchase:

• an ATE market-linked income stream (MLI) from the SMSF or SAF, or
• a lifetime, life expectancy or market-linked ATE income stream directly from a retail provider

Conditions must be met to retain an asset-test exemption.

Permanent debt relief is available to:

• customers with 50% ATE income streams from their SMSFs or SAFs, who restructure by a full commutation and
• rollover into an asset-tested MLI either from a retail provider or within their fund at any time

From 20 September 2001, customers will incur a debt if:

• they cash in an ATE income stream product, either partially or fully, and
• it is not an allowable commutation

The debt will be the difference between the:

• amount of income support the customer would have received if the product had been asset tested initially, and
• the amount actually received during the period of time the product was ATE

Debts are assessed from when the asset-test exemption ceased (the date of commutation) back to the most recent of the following:

• five years before the date of commutation, or
• the commencement day of the income stream, or
• 20 September 2001

Note: the commencement day of the current ATE income stream is deemed the same as the first ATE income stream. This is if the current ATE income stream is:

• purchased from the commutation of one or
• more previous ATE income streams

For example, a customer purchases an ATE income stream on 1 April 2006.

On 1 May 2007, the customer commutes the income stream and purchases a new ATE income stream with the entire proceeds.

If the customer subsequently commutes a non-allowable lump sum from the new ATE income stream, the commencement day for debt recovery purposes will be 1 April 2006.