Editors --- "Age pension: whether income from life annuity is an 'income stream'" [2006] SocSecRpr 54; (2006) 8(4) Social Security Reporter, Article 11

• SMITH and SECRETARY TO THE DFaCSIA
• Background
• The issue
• The law
• Discussion
• Formal decision

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Age pension: whether income from life annuity is an ‘income stream’

SMITH and SECRETARY TO THE DFaCSIA

Decided: 6th October 2006 by L.R. Tovey

Background

Mr and Mrs Smith migrated to Australia on 25 November 1979. Prior to their migration Mr Smith entered into a contract with a Canadian company called Crown Life Insurance (the Company). In consideration for a single premium of CAN$236,351.56, the Company agreed to pay to Mr Smith monthly payments of CAN$2,061.10 commencing on 1 December 1979 and continuing during the lifetime of Mr Smith (the Annuity).

On 29 October 2003 Mr and Mrs Smith lodged claims for age pension. In determining the rate of age pension payable Centrelink took into account the full amount of payments under the Annuity.

The issue

The issue before the AAT was whether the whole of the payments under the Annuity should be taken into account in determining the rate of age pension payable to the Smiths. This required the AAT to determine if the Annuity was an ‘income stream’ pursuant to s.9 of the Social Security Act 1991 (the Act). If the Annuity was an ‘income stream’ the Smiths would be entitled to a deduction of the amount of the Annuity which is taken into account in determining their rate of payment.

The law

The term ‘income stream’ is defined in section 9(1) of the Act to mean:

(a) an income stream arising under arrangements that are regulated by the Superannuation Industry (Supervision) Act 1993; or

(b) an income stream arising under a public sector superannuation scheme (within the meaning of that Act); or

(c) an income stream arising under a retirement savings account; or

(d) an income stream provided by a life insurance business (within the meaning of the Life Insurance Act 1995); or

(e) an income stream provided by a friendly society; or

(f) an income stream designated in writing by the Secretary for the purposes of this definition, having regard to the guidelines determined under subsection (1E); or

(fa) a family law affected income stream;

but does not include any of the following:

(g) available money;

(h) deposit money;

(i) a managed investment;

(j) a listed security;

(k) a loan that has not been repaid in full;

(l) an unlisted public security;

(m) gold, silver or platinum bullion.

Discussion

The AAT considered if the Annuity met any of the criteria in s.9(1) of the Act. As to paragraph (d) of the definition, the Tribunal noted the term ‘life insurance business’ is relevantly defined in section 11 of the Life Insurance Act 1995 as:

(1) A reference in this Act to life insurance business is a reference to:

(a) business that consists of any or all of the following:

(i) the issuing of life policies ... ; and

(b) any business that relates to business referred to in paragraph (a).

A ‘life policy’ is defined in section 9(1) of the Life Insurance Act to include:

a contract of insurance that provides for the payment of an annuity for a term dependent on the continuance of human life.

The AAT considered that the Annuity fell within the definition as it was a contract of insurance which provided for the payment of an annuity for a term dependent on the continuation of Mr Smith’s life.

The AAT addressed the Department’s argument that overseas policies are not assessed as income streams as they are not governed by the Life Insurance Act 1995, which only covers Australian registered companies. The AAT accepted that the Annuity and the Company were not regulated by the Life Insurance Act, however:

that is not the question posed by paragraph (d) of the definition of ‘income stream’ in s. 9(1) of the Act. The question is whether the income stream is provided by a life insurance business within the meaning of the Life Insurance Act. The question is not whether it is provided by a life insurance business which is regulated by the Life Insurance Act. Nor is the question whether it was provided by a life company or a company registered under the Life Insurance Act. The definition of ‘life insurance business’ in the Life Insurance Act is not cast in terms of the identity of the person who carries on the business. (Reasons, para.43)

The AAT found that the payments under the Annuity were provided by a life insurance business within the meaning of the Life Insurance Act and therefore satisfied subsection (d) of s.9(1).

The AAT then turned to consider whether the payments under the Annuity were excluded by any of paragraphs (g) to (m) of s.9(1) of the Act. Specifically, the AAT considered whether the Annuity payments arose from ‘an investment in a deferred annuity’, which is a type of managed investment, which would then be excluded under paragraph (i) of the definition of ‘income stream’ in s.9(1) of the Act. As the Annuity was an annuity that is presently payable, the AAT held it not to be a deferred annuity (see section 27A(1) of the Income Tax Assessment Act 1936).

The AAT distinguished this matter from the decisions in Bersee and Secretary, Department of Family and Community Services[2003] AATA 201; (2003) 72 ALD 461 and Cocci and Secretary, Department of Family and Community Services (2004) AATA 196, which where concerned with overseas pensions rather than life annuities.

The AAT stated:

To allow the recipients of payments under life annuities purchased overseas to take advantage of the income stream provisions of the Act is consistent with providing choice to retired people investing in longer term income streams. It will not allow for a ‘loophole’, as the investment must still satisfy the criteria specified in the definition of ‘life policy’ in the Life Insurance Act, and the definitions of ‘asset-tested income stream (long term)’ or an ‘asset-test exempt income stream’ in the Act, in order to qualify for a deduction. (Reasons, para. 42)

Formal decision

The AAT found that the Annuity was an ‘income stream’ within the definition of s.9(1) of the Act. Therefore the Smiths were entitled to a deduction from the income received from the Annuity when calculating their rate of age pension. The AAT noted that the extent of the deduction would depend on whether the Annuity was an ‘asset-tested income stream (long term)’ or an ‘asset-test exempt income stream’. The AAT remitted the matter back to Centrelink to determine the rate in accordance with its directions.

[J. F.]