Commutation of asset-test exempt (ATE) income streams 108-05060120

Income streams that comply with requirements in sections 9A (lifetime income stream), 9B (life expectancy income stream) or 9BA (market-linked income stream) of the Social Security Act 1991 are ATE. All ATE income streams purchased before 20 September 2004 receive a 100% asset-test exemption. ATE income streams purchased on or after 20 September 2004 and before 20 September 2007 are 50% asset-test exempt. Income streams purchased from 20 September 2007 are fully asset-tested.

The exceptions to this are:

• defined benefit and military invalidity pension income streams, these continue to be 100% asset-test exempt irrespective of start date
• in a limited number of circumstances, certain ATE income streams purchased before to 20 September 2007, that are commuted and rolled over into a post 20 September 2007 ATE income stream, are allowed to retain a 100% or 50% asset-test exemption (whichever is applicable), provided certain conditions are satisfied. The References page contains more information

There are limited circumstances where an ATE income stream product (lifetime or life expectancy or market-linked income streams) may be commuted, either fully or partially, without losing their asset-test exemption and possibly incurring a debt:

Full commutation and rollover to another ATE income stream

Before 20 September 2007, a customer could at any time commute, partially or fully, an ATE income stream and directly place the proceeds of that commutation into another ATE income stream.

From 20 September 2007, any commutation/rollover is only allowed under the conditions for retention of asset-test exemption. The original income stream must be commuted in full and the entire commuted amount (including reserves if income stream is from Self Managed Superannuation Fund (SMSF)/ Small APRA Superannuation Funds (SAF)) rolled over to the new income stream.

Note: if the original income stream is a 100% ATE income stream, the commuted amount can only be rolled over to a lifetime or life expectancy ATE income stream for retention of asset-test exemption. If the original income stream is a market-linked income stream (MLI), the commuted amount can only be rolled over to another MLI. The References page contains more information.

To pay a superannuation contributions surcharge

Partial or full commutation is allowed to pay the superannuation contributions surcharge of the customer, up to the maximum surcharge payable.

Note: the income stream can be commuted partially or fully. Where the income stream is commuted in full, any amount remaining after paying the surcharge must be rolled over to a new ATE income stream.

Income stream split pursuant to a divorce property settlement

Partial or full commutation is allowed to split an income stream pursuant to a divorce property settlement in accordance with a superannuation agreement or a court order under the Family Law Act 1975 Part VIIIAA (income streams purchased as an annuity from a life office or friendly society) or Part VIIIB (income streams purchased or acquired from a superannuation fund). Where the income stream is fully commuted, any amount remaining after actioning the split must be rolled over to a new ATE income stream.

The Department of Social Services (DSS) undertakes all Means Tested assessment of 'split' income stream payments. The Service Officer must forward a copy of the supporting documents to the Level 2 Policy Helpdesk.

To pay a Hardship amount

Partial or full commutation is allowed to pay a hardship amount as the customer is facing extreme financial hardship or unavoidable expenditure. Where the income stream is commuted in full to pay for the hardship amount, any amount remaining after the payment must be rolled over to a new ATE income stream. This only applied to income streams purchased with non-superannuation monies, per Superannuation Industry (Supervision) Regulations 1994. Services Australia will assess if the customer meets the extreme financial hardship rules.

The customer must make an application to commute prior to commutation. The Service Officer must forward a copy of the relevant forms and supporting documents to the Level 2 Policy (Financial Industry and Network Support (FINS)) Helpdesk for their recommendation as to whether the customer's proposed commutation meets the definition of hardship amount. The agency’s delegate must determine that a hardship amount may be commuted from the income stream if they are satisfied:

• the customer's circumstances are exceptional and could not reasonably be foreseen at the time the person purchased the income stream
• the amount commuted is needed to meet unavoidable expenditure, and
• the customer has insufficient liquid assets

For more information, see Application to be allowed to commute all or part of an asset-test exempt income stream due to extreme financial hardship

To pay an excess contributions tax amount

Partial or full commutation is allowed to pay the excess contributions tax amount of the customer, up to the maximum tax payable. Where the income stream is commuted in full to meet this payment, any amount remaining after paying the tax must be rolled over to a new ATE income stream.

By a reversionary beneficiary

Before 20 September 2004, if it is stated in the contract, a reversionary beneficiary or the customer's estate may commute an ATE lifetime income stream, if it is done within 10 years of the start of the income stream. An ATE life expectancy or term income stream may be commuted by a reversionary beneficiary (or their estate) or the customer's estate.

On or after 20 September 2004, if it is stated in the contract, a reversionary beneficiary or the customer's estate may commute an ATE lifetime income stream, if it is done within 20 years or the primary beneficiary's life expectancy at purchase, whichever period is shorter. A life expectancy or market-linked income stream may be commuted on the primary beneficiary's death if there is no reversionary partner, or only on the reversionary partner's death, if there is a reversionary partner who outlives the primary beneficiary.

Within six months of the commencement date of a non-commutation funded income stream

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

Before 20 September 2007, a customer could commute an ATE income stream to a lump sum during the first 6 months after purchasing it, provided it was a non-commutation funded income stream. Note: from 20 September 2007, commutation within 6 months is no longer relevant as any new ATE income stream will be a commutation funded income stream.

Commute the excess above the transfer balance caps, to comply with taxation requirements

From 4 August 2022, commutations are allowed to the extent necessary in order to comply with section 136-80 in Schedule 1 to the Taxation Administration Act 1953 as per allowable reasons under S9B (2)(h)(ivc) and S9BA (2) (f) (ivc).

The Transfer Balance Cap (TBC) is the maximum amount an individual may transfer from accumulation phase to pension phase in their lifetime. Where the transfer amount was larger than the TBC of $1,700,000 (as at 01 July 2021 and subject to indexation), additional tax was payable. This change allows those customers to commute enough to bring them within the TBC.

If a commutation is made from an ATE income stream that is not an allowable commutation, the income stream will lose its ATE status. Treat the income stream as an asset-tested income stream from its commencement date and the customer may incur a debt resulting from a non-allowable commutation.

Treat a commutation of an asset-test exempt (ATE) income stream for a non-allowable reason as a 'non-allowable commutation'. Where a customer commutes contrary to section 9A(2)(h), 9B(2)(h) or 9BA(2)(f) of the Social Security Act 1991 from an ATE income stream, they are in effect demonstrating that their ATE income stream never met the requirements for exemption under section 9A(2)(h), 9B(2)(h) or 9BA(2)(f).

This allows for a debt to be calculated for the amount the customer received but would not have been entitled to if their income stream product had been subject to the assets test. The debt would be assessed over the period from when the asset-test exemption ceased (the date of commutation) back to the most recent of the following 3 dates:

• Five years before the date of lump sum commutation, or
• The commencement day of the income stream. Note: where the current ATE income stream is the result of commuting one or more previous ATE income streams, the commencement day of the current ATE income stream will be considered to be the same as the commencement day of the first ATE income stream in the succession of ATE income streams, and not the commencement day of the most recent ATE income stream, or
• 20 September 2001

For more information on debts, see Raising subsection 1223A debts for commutation of asset-test exempt income streams contrary to subsection 9A(2), 9B(2) or 9BA(2).

A partial allowable commutation will change the deduction amount and the asset value:

• for a non-account based product, the purchase price is reduced by the commutation amount to recalculate the new asset value
• for an account based product, for example, market-linked income stream, the asset value after a commutation is the account balance after the funds have been withdrawn

A customer may report a change in the gross income amount after a partial commutation during the financial year. However, in the case of a market-linked income stream, the new gross income amount following a partial commutation can never be less than the minimum amount required to be drawn in the financial year. The minimum amount is based on:

• the 1 July account balance and calculated at the start of the financial year, or
• the opening account balance if the income stream starts during the financial year

If a customer specifies an annual income amount for the current financial year that is below the minimum limit, Services Australia will assess the minimum amount in accordance with section 1099AA of the Social Security Act 1991.

This information relates to the commutation of an original ATE lifetime or life expectancy income stream from a Self Managed Superannuation Fund (SMSF), or Small APRA Superannuation Funds (SAF), and rollover to a new ATE income stream on or after 20 September 2007.

If an ATE income stream is commuted, the assets can only be used to purchase particular types of income streams in order to retain asset-test exemption. The type will depend on the commencement date of the original income stream. In addition, the conditions for retention of asset-test exemption have to be met. The income stream has to be fully commuted and all the assets including the reserves used to purchase the new income stream for retention of asset-test exemption.

If the original ATE income stream was purchased:

• before 20 September 2004 (100% ATE), the commuted assets:
• can be used to purchase a lifetime or life expectancy ATE income stream from a retail provider
• cannot be used to purchase an ATE market-linked income stream (MLI). A MLI is also known as a Term Allocated Pension (TAP). If done, treat the commutation as a non-allowable commutation. Assess the market-linked income stream as an asset-tested income stream. The original income stream is treated as if it was never ATE resulting in a debt being raised. Note: the permanent debt relief is available from 25 August 2011
• between 20 September 2004 and 20 September 2007 (50% ATE), the commuted assets may be used to purchase an ATE market-linked income stream (MLI) from the SMSF or SAF. Alternatively, the commuted assets may be used to purchase a lifetime or life expectancy or market-linked ATE income stream directly from a retail provider