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Special Determination S31: Application of financial arrangements rules to investors in the Lifetime Income Fund

This determination may be cited as Special Determination S31: "Application of financial arrangements rules to Investors in the Lifetime Income Fund".

1. Explanation (which does not form part of the determination)

  1. The Lifetime Income Fund (the Fund) is a unit trust in which members of the general public up to the age of 85 can invest their retirement savings (or a proportion of them) built up through savings in a KiwiSaver scheme or otherwise.  The Fund will manage the investment in a similar manner to a KiwiSaver scheme through the Balanced Portfolio which will invest in low cost share and fixed interest index funds.  The Fund will also manage distributions to provide income (the Lifetime Withdrawal Benefit) for the Investor over their retirement lifetime (from age 65 onwards). 
  2. The Lifetime Income Fund will achieve this by purchasing a life insurance policy or policies in the name of the Trustee and for the benefit of Investors (the Lifetime Withdrawal Benefit), along with offering an investment in a managed fund.  The Cash Portfolio will be invested in cash and liquid fixed income investments.  Premiums will be paid by the Fund manager to Lifetime Income Limited (LIL) annually by redeeming units held for an Investor in the Cash Portfolio.  The amount of the premiums will be actuarially calculated based on factors specific to the Investor.
  1. The Lifetime Withdrawal Benefit of the Investor is set at a percentage of their Protected Income Base, being the original capital sum invested in the Fund net of any applicable fees and including any increase in value during the Investor's Deferral Period (the period up to the time the Investor begins receiving payments of the Lifetime Withdrawal Benefit).  The Investor may elect to commence receiving their Lifetime Withdrawal Benefit at any time from age 65 until age 85. The payments will be made:
    • first, out of the capital invested by an Investor in the Lifetime Income Fund and the Investor's proportion of the Fund's post-tax earnings accumulated as a result of investing the original capital sum and;
    • second, from a life insurance policy or policies purchased by the Fund for the benefit of each individual Investor. 
  1. The Arrangement is the subject of product ruling BR Prd 14/10 and private ruling BR Prv 14/82 issued on 24 December 2014, and is fully described in those rulings.
  2. The Arrangement is a financial arrangement under s EW 3 of the Income Tax Act 2007.  The units in the Fund are excepted financial arrangements under s EW 5(13) and the annuity provided by LIL is an excepted financial arrangement under s EW 5(2), forming part of the financial arrangement.
  3. Under s EW 6(2), an amount that is solely attributable to an excepted financial arrangement described in any of ss EW 5(2) to (16) is not an amount taken into account under the financial arrangements rules.  This determination specifies the amounts that are solely attributable to the units and the annuity. 

2. Reference

This determination is made under s 90AC(1)(h) of the Tax Administration Act 1994.

3. Scope of determination

  1. This determination applies to an investment in the Lifetime Income Fund (the Fund) and payments received by Investors from the Fund and Lifetime Income Limited (LIL).  The Fund is a unit trust that will elect to be a portfolio investment entity (PIE) under s HM 71.
  2. The Fund is a product in which members of the general public up to the age of 85 can invest their retirement savings (or a portion of them) built up through savings in a KiwiSaver scheme or otherwise.  The Fund will manage the investment in a similar manner to a KiwiSaver scheme through the Balanced Portfolio, which will invest in low cost share and fixed interest index funds.  The Fund will also manage distributions to provide income (the Lifetime Withdrawal Benefit) for the Investor over their retirement lifetime (from age 65 onwards). 
  3. The Fund will achieve this by purchasing a life insurance policy or policies in the name of the Trustee and for the benefit of Investors (the Lifetime Withdrawal Benefit), along with offering an investment in a managed fund.  The Cash Portfolio will be invested in cash and liquid fixed income investments.  Premiums will be paid by the Fund manager to LIL annually by redeeming units held for an Investor in the Cash Portfolio.  The amount of the premiums will be actuarially calculated based on factors specific to the Investor.    
  1. The Lifetime Withdrawal Benefit of the Investor is set at a percentage of their Protected Income Base, being the original capital sum invested in the Fund net of any applicable fees and including any increase in value during the Investor's Deferral Period (the period up to the time the Investor begins receiving payments of the Lifetime Withdrawal Benefit).  The Investor may elect to commence receiving their Lifetime Withdrawal Benefit at any time from age 65 until age 85. The payments will be made:
    • first, out of the capital invested by an Investor in the Fund and the Investor's proportion of the Fund's post-tax earnings accumulated as a result of investing the original capital sum and;
    • second, from a life insurance policy or policies purchased by the Fund for the benefit of each individual Investor. 
  1. This determination is made subject to the condition that private ruling Br Prv 14/82 continues to apply (under s 91EB of the Tax Administration Act 1994).

4. Principle

  1. The Arrangement is a financial arrangement under s EW 3.  The units in the Fund are excepted financial arrangements under s EW 5(13) and the annuity provided by LIL is an excepted financial arrangement under s EW 5(2), forming part of the financial arrangement.
  2. Under s EW 6(2), an amount that is solely attributable to an excepted financial arrangement described in any of ss EW 5(2) to (16) is not an amount taken into account under the financial arrangements rules. 
  3. This determination specifies the amounts received by an Investor that are solely attributable to the units and the annuity. 
  4. Due to the amounts set out in specified in this determination being solely attributable to excepted financial arrangements, no income or expenditure will arise for an Investor in the Fund under the financial arrangements rules. 

5. Interpretation

This determination has no specialised terms that need to be defined further.

6. Method

  1. The amounts that are solely attributable to the units in the Fund are:
    • any payments received by an Investor from the Fund under the Lifetime Withdrawal Benefit; and
    • any gains or losses made by an Investor who buys or sells units in the Fund.
  1. The amounts that are solely attributable to the annuity paid by LIL to an Investor are any annuity payments received by the Investor under the Lifetime Withdrawal Benefit.

7. Example

These examples illustrate the application of the method set out in this determination.

Example A

An Investor invests $100,000 in the Fund at age 65 and in return acquires units in the Fund. The investment grows in value after five years to $112,900 net of fees and taxes During that period, the Fund pays premiums on behalf of the Investor to LIL under a life insurance policy.

The Investor opts to receive their Lifetime Withdrawal Benefit from the Fund from age 70, which means the Benefit is set at 6% of their Protected Income Base of $112,900.This means they receive $6,774 per annum in fortnightly payments.

At age 97, the Investor's capital in the Fund is exhausted and the Investor continues to receive a minimum income of $6,774 per annum in fortnightly payments under the annuity.

The payments of $6,774 per annum paid by the Fund are solely attributable to the units in the Fund. The payments of $6,774 per annum made by LIL to an Investor under the life insurance policy are solely attributable to the annuity.

Example B

This example follows Example A but, at age 75, the Investor withdraws $20,000 as an Unplanned Withdrawal, reducing the Lifetime Withdrawal Benefit payments to 5.20% per annum. This means they receive $5,871 per annum in fortnightly payments.

The payments made by the Fund are solely attributable to the units in the Fund. The payments made by LIL to an Investor under the life insurance policy are solely attributable to the annuity.

This Determination is signed by me on the 24th day of December 2014.

 

Howard Davis
Director
Taxpayer Rulings