Actuarial valuations 108-04110000

The following situations may require an actuarial valuation to be completed:

• value of a life interest created by a person, their partner or upon the death of their partner
• value of a reversionary, remainder or contingent interest created by a person, their partner or upon the death of their partner
• value of a surrendered life interest for disposal purposes
• value of a purchased (private) annuity or annuity received on transfer of property for disposal purposes, not an annuity purchased from a financial institution

From 27 October 2011, actuarial valuations are no longer requested to assess asset-test exempt lifetime and life expectancy income streams for deprivation or return of purchase price. CAOs calculate the return of purchase price and deprivation is assessed from commencement of the income stream.

An actuarial valuation is used to discount future benefits of a life, remainder, reversionary or contingent interest created by the person, partner or upon the death of a partner, taking into account such factors as life expectancy and the projected effects of inflation. An actuarial valuation request should be referred to a CAO. The CAO will determine if an actuarial valuation is required based on whether the customer is likely to be affected by the Assets Test once an actuarial value of the life interest is calculated and applied.

If there is no effect on a customer's rate under the Income Test or Assets Test, then there is no need to obtain a formal actuarial valuation.

Before a formal valuation is requested from the AGA, the CAO will calculate an approximate value based on income multiplied by life expectancy using life expectancy quasi tables. For customers under 50 years of age the CAO will refer to the appropriate life expectancy table. For the purposes of this calculation, income is defined as follows:

• actual income
• potential income from the asset or another asset if sold and re-invested

Where a life or remainder interest is assessable and is likely to impact the customer's rate of income support payment then it should be valued by the Australian Government Actuary.

Private annuities are assessed under the ordinary Income Test and Assets Test. They are not subject to the Income Streams Initiative, which took effect on 20 September 1998.

• A private annuity is an arrangement between two parties, where one party provides an income in exchange for payment, or other valuable consideration. They are not subject to prudential regulation. To be classed as a private annuity this arrangement must be in the form of a legally binding contract between the two parties
• Each private annuity is a separate contract that must be assessed on its particular merits

Recent examples of private annuities have included arrangements where a landowner, usually operating in the rural industry, exchanges title to a farming property for a series of payments over a defined period of time.

An actuarial value of a customer's private annuity is required to establish its value for Assets Test purposes. This is because private annuities are usually family arrangements and are not traded in the market. The valuation is also required to determine whether or not the annuity is adequate consideration for the purchase price or whether the deprivation rules apply.

An initial valuation should be obtained when:

• an income support payment is claimed, or
• the private annuity is purchased

Further valuations are generally required when:

• the number of annuitants (those receiving payments) changes
• terms and conditions of the annuity change
• the amount paid by the annuity changes
• the annuity is wholly or partly commuted

The AGA can supply an actuarial value. The AGA must be supplied with all the relevant details of the annuity including:

• payment rate
• indexation rate (if any)
• date of birth of each annuitant
• ability to commute the annuity (if any)
• a copy of the contract

From 27 October 2011, AGA valuations are no longer requested for ATE lifetime and life expectancy income streams paid from Self Managed Superannuation Fund (SMSF) and Small APRA Superannuation Fund (SAF). The request can only be made by a CAO. The AGA previously undertook two calculations for the Department:

• present value of the future payments from the income stream
• dollar amount of payments from the income stream (return of purchase price)

CAOs will undertake an approximate calculation of the return of purchase price based on the term of the income stream product, multiplied by the gross annual income of the income stream product.