Assessing lifetime income streams paid from Self Managed Superannuation Funds (SMSF) or Small APRA Superannuation Funds (SAF) 108-05060080

Section 17A(1) of the Superannuation Industry (Supervision) Act 1993 defines a SMSF as a superannuation fund which meets all of the following basic conditions:

• has fewer than 7 members (from 1 July 2021, the maximum number of members for SMSFs and APRA funds increased from 4 to 6)
• all members are trustees (or directors of the trustee company if a corporate trustee is present) and no other persons are trustees (or directors)
• no member is an employee of another member, unless the members concerned are relatives
• no trustee of the fund receives remuneration for their services as a trustee

There are four exceptions to these basic conditions:

• where a SMSF has only one member
• where a member is under a legal disability
• where the member is a minor
• where a member is deceased

The References page contains more information about these exceptions.

For classification as a SMSF under the superannuation legislation, a fund must meet all of the above conditions. A customer receiving the benefits from a SMSF must be a trustee of the fund. However, reversionary beneficiaries of members need not be members of the fund. The Australian Taxation Office (ATO) has supervised SMSFs since October 1999.

Superannuation funds with fewer than 7 members that do not meet the conditions to be classed as a SMSF are SAFs. SAFs differ from SMSFs in that they must have a corporate trustee that is approved by APRA. SAFs are regulated by APRA.

Most Self - Managed Superannuation Funds (SMSF) and Small APRA Superannuation Funds (SAFs) can be identified by their name. Often the name of the SMSF will include the customer's family name. However, it is not necessary that all SMSFs will have the customer's family name in the fund name. The income stream schedule (SA330) would also assist in identifying if the income stream is paid from a SMSF or a SAF.

Where a customer uses their member balance in the SMSF or SAF to purchase an income stream, it is assessed under the income stream rules.

These funds may offer both asset-test exempt and asset-tested income streams:

• Any asset-test exempt income stream purchased before 20 September 2004 will continue to receive a 100% assets test exemption
• Income streams purchased from 20 September 2004 and before 20 September 2007 which meet the characteristics for assets test exemption will be 50% asset-test exempt

Note: SMSFs and SAFs are not permitted under the Superannuation Industry (Supervision) Act 1993 to offer compliant lifetime income streams on or after 1 January 2006.

All income streams purchased from 20 September 2007 are fully assets tested. Exception: In a limited number of circumstances, certain ATE lifetime income streams purchased prior to 1 January 2006 that are commuted and rolled over into post 20 September 2007 ATE lifetime, life expectancy or market-linked income streams will be allowed to retain a 100% or 50% asset test exemption (whichever is applicable), provided certain conditions are satisfied, see note above. For more information on the eligibility criteria and conditions for relief, see the References page.

Lifetime income streams

Asset-test exempt (ATE) lifetime income streams must:

• meet all of the characteristics of an ATE income stream including actuarial certification, and
• meet the documentation requirements

The purchase price of a lifetime income stream paid from a SMSF or SAF is amount of money from the member’s account that was used to commence the income stream less any commutations. The purchase price of an individual's income stream paid from the SMSF or SAF, will be drawn from the member's beneficial interest in the fund. However, the whole interest may not necessarily be used to purchase one income stream. It is common for a member to have an ATE product and an account-based product.

A defined benefit income stream for Social Security purposes (section 9(1) of Social Security Act 1991) is an income stream where payments are defined by factors like years of service, final salary or final average salary over recent years, or by criteria determined by fund's governing rules. Payments are not defined by amount of funds used to purchase the income stream.

Pensions (except account-based and market-linked pensions) paid from SMSFs and SAFs are classified as 'defined benefit pensions' under section 228 of the Superannuation Industry (Supervision) Act 1993. However, they are not defined benefit income streams for the purposes of the Social Security Act 1991.

A customer, or the trustee of the fund (often the same person), who receives a lifetime income stream from an SMSF or SAF and wants asset-test exempt (ATE) status for the income stream, must supply documentation about the income stream to Services Australia to allow assessment of whether the product meets the requirements of section 9A of the Social Security Act 1991. Any deficiencies in the information provided may lead to delays in assessment of the income stream.

The trust deed or governing rules must specify the exact terms and conditions of the income stream, including required characteristics of an ATE lifetime income stream. If not, a contract or other documentation (trustee letter, trustee resolution or minutes or agreement) with a full and accurate description of the benefits certified by the trustees of the SMSF or SAF is required. Specifying the required characteristics in any of the documentation will assist Services Australia to determine whether the product complies with section 9A of the Social Security Act. The required documentation provides details of the benefit provided by the superannuation fund to the individual.

SMSFs and SAFs paying an asset-test exempt lifetime income stream are subject to an annual actuarial review. A customer will have to provide a new actuarial certificate at the end of every 12 month 'in force' period of the certificate. Note: there is a grace period of six months following the expiry of the previous actuarial certificate during which time a new certificate can be provided. The actuarial certificate must be referred to a Complex Assessment Officer (CAO) to check if the certificate expresses a 'high probability' opinion that the fund can make the income stream payments specified in the trust deed or governing rules. This is necessary for determining the ongoing asset test exempt status of the product.

Until 27 October 2011, all cases were referred to the Australian Government Actuary (AGA) to assess asset test exempt (ATE) lifetime income streams for deprivation. This is no longer necessary as deprivation is assessed from commencement of the income stream and cannot have occurred in the last five years. Deprivation occurred when the purchase price of an ATE lifetime income stream was greater than the present value of the future payments from the income stream. As the present value was not readily identifiable, a valuation by AGA was necessary. To determine if deprivation had occurred, Services Australia compared the present value of the ATE income stream over its term or life (as calculated by the AGA) with the purchase price. If deprivation had occurred, normal deprivation procedures were applied, including allowable disposal rules.

A deprivation assessment could only be conducted after a customer purchased an ATE lifetime income stream. It could not be reviewed or reassessed, as the assessment related to the purchase of the ATE income stream, which could not be reversed.

The purchase price must be returned as income over the customer's life expectancy for lifetime products. This is consistent with the requirement that asset test exempt (ATE) products cannot have a Residual Capital Value (RCV).

Until 27 October 2011, all cases were referred to the Australian Government Actuary (AGA) to assess asset test exempt (ATE) lifetime income streams for return of purchase price. The AGA included an estimation of the dollar amount of the payments from the income stream in their valuation report. This calculation provided evidence as to whether or not the purchase price of the income stream would convert wholly to income. Now, Complex Assessment Officers (CAOs) can 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 amount of the income stream product. If the dollar amount is equal to or higher than the purchase price of the product, the income stream meets the return of purchase price requirement for an ATE income stream.

If the dollar amount is lower than the purchase price of the income stream, the income stream product does not meet this requirement and therefore, cannot be ATE. The product should be assessed as an asset-tested income stream. Contact the Financial Industry and Network Support (FINS) Helpdesk to check accuracy of the calculated figure and before any reassessment.