Disclaimer: the information provided here is not intended as financial product advice or legal advice. It is offered on a best-effort basis only, and should be used only as starting point to consider the options available to SMSFs. Consult your financial adviser or lawyer before acting on any information in this document. Always consult closely with Centrelink/DVA before altering asset-test exempt income streams. There are significant penalties for breaching the strict compliance conditions imposed on asset-test exempt income streams.

What is an asset-test exempt income streams?

Asset-test exempt income streams are special pensions payable from SMSFs that satisfy the requirements of both the Social Security Act and the SIS Act. Pensions started before 20/09/2004 are eligible for 100% asset exemption. Pensions started on or after 20/09/2004 but before 20/09/2007 are eligible for 50% exemption.

To be asset-test exempt these pensions must satisfy one of the following pairs of regulation/legislation:

• lifetime - SIS Reg 1.06(2) and Social Security Act section 9A; or
• life expectancy - SIS Reg 1.06(7) and Social Security Act section 9B; or
• market-linked - SIS Reg 1.06(8) and Social Security Act section 9BA.

In the SMSF industry these pensions are also collectively referred to as legacy pensions. The lifetime and life expectancy types are no longer available to SMSFs, except as annuities prescribed by SIS Reg 1.05 from a life office. Market-linked pensions can be started in SMSFs only from the commutation of an already existing complying pension.

Can an asset-test exempt income stream be commuted?

Generally, no it can't.

except for special circumstances. Be very careful. Those circumstances are described here.

There is a simple rule-of-thumb: a complying pension can be commuted to another type of complying pension. Only. This means you must start one of the following pensions using the lump-sum equivalent of the original pension:

• a market-linked pension in the SMSF; or,
• a complying annuity from a life office.

The lump-sum commutation value of lifetime pensions is discussed here.

The lump-sum commutation value of life expectancy pensions is discussed here.

The lump-sum commutation value of market-linked pensions will normally be the full account balance.

If the lump-sum value of the original pension is less than the account balance then the left-over capital remains in an unallocated reserve in the SMSF. Unallocated reserves are discussed here.