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Special Determination S54: Application of financial arrangements rules to Investors in the Lifetime Income Fund

This Determination may be cited as Special Determination S54: Application of financial arrangements rules to Investors in the Lifetime Income Fund.

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

  1. This determination relates to the Lifetime Income Fund (the Fund), which is a managed investment scheme in which investors (Investors) can invest their retirement savings in return for a stream of regular payments (the Lifetime Withdrawal Benefit) for the rest of their life.
  2. Investors can elect to commence receiving their Lifetime Withdrawal Benefit at any time from age 60 until age 90. The Lifetime Withdrawal Benefit is calculated as a percentage of the Investor’s Protected Income Base.  An Investor’s Protected Income Base is the Investor’s original capital sum invested in the Fund net of any applicable fees and Unplanned Withdrawals, and includes any increase in value during the Deferral Period (the period up to the time the Investor begins receiving payments of the Lifetime Withdrawal Benefit).  Each Investor’s Lifetime Withdrawal Benefit is paid in two phases:
    1. Protected Income Phase: This period commences on the date the Investor elects for the commencement of Lifetime Withdrawal Benefits (the Initial Regular Payment Date), and ends when all Units held by the Investor in the Fund have been redeemed.  During this period the Lifetime Withdrawal Benefit is paid 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 Investor’s original capital sum.
    2. Insured Income Phase: This period commences from the end of the Protected Income Phase and ends on the date of death of the Investor.  During this period the Lifetime Withdrawal Benefit is funded from the proceeds of a group life insurance policy (the Policy) that the Manager of the Fund is required to take out in the name of the Supervisor of the Fund for the benefit of Investors.  During this phase the life insurer pays the Lifetime Withdrawal Benefit in the form of an annuity to Investors under the Policy.  However, under the Fund’s trust deed, payments from the life insurer are made directly to the manager of the Fund.  Those payments are then treated as a subscription on behalf of that Investor in the Fund’s Cash Portfolio.  Provided payments are received under the Policy in respect of an Investor, all payments of Lifetime Withdrawal Benefits to the Investor during their Insured Income Phase are then funded by redeeming the relevant Units in the Cash Portfolio until the date of death of the Investor.
  3. The arrangement referred to above (the Arrangement) is the subject of product ruling BR Prd 17/04 issued on 18 August 2017 and private ruling BR Prv 17/35 issued on 18 August 2017, and is fully described in those rulings.
  4. This determination prescribes:
    1. the amount of consideration that is solely attributable to an Investor’s Units in the Fund; and
    2. the amount of consideration that is solely attributable to the annuity that an Investor receives from the life insurer under the Policy.

2. Reference

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

3.Scope of determination

  1. This determination relates to the Arrangement under which Investors can invest their retirement savings in the Fund in return for regular fortnightly or monthly payments of a Lifetime Withdrawal Benefit for the rest of their life.  The Fund is a managed investment scheme as defined in the Financial Markets Conduct Act 2013.  The terms and conditions applicable to the Fund are set out in a trust deed dated 17 July 2017 (the Trust Deed).
  2. Under the Trust Deed, the Manager of the Fund is required to effect with Lifetime Income Limited, in the name of the Supervisor and for the benefit of Investors, the Policy to provide regular payment benefits in respect of Investors during their Insured Income Phase.
  3. Investors can elect to commence receiving their Lifetime Withdrawal Benefit at any time from age 60 until age 90.  The Lifetime Withdrawal Benefit is calculated as a percentage of the Investor’s Protected Income Base.  An Investor’s Protected Income Base is the Investor’s original capital sum invested in the Fund net of any applicable fees and Unplanned Withdrawals, and includes any increase in value up to the time the Investor begins receiving payments of the Lifetime Withdrawal Benefit.
  4. Each Investor’s Lifetime Withdrawal Benefit is paid in two phases:
    1. Protected Income Phase: This period commences on the date the Investor elects for the commencement of Lifetime Withdrawal Benefits (the Initial Regular Payment Date) and ends when all Units held by the Investor in the Fund have been redeemed.  During this period, the Lifetime Withdrawal Benefit is paid 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 Investor’s original capital sum.
    2. Insured Income Phase: This period commences from the end of the Protected Income Phase and ends on the date of death of the Investor.  During this period, the Lifetime Withdrawal Benefit is funded from the proceeds of the Policy.  During this phase, the life insurer pays the Lifetime Withdrawal Benefit in the form of an annuity to Investors under the Policy.  However, under the Fund’s trust deed, payments from the life insurer are made directly to the Manager of the Fund, and it is then treated as a subscription on behalf of that Investor in the Fund’s Cash Portfolio.  Provided that payments are received under the Policy in respect of an Investor, all payments of Lifetime Withdrawal Benefits to the Investor during their Insured Income Phase are then funded by redeeming the relevant Units in the Cash Portfolio until the date of death of the Investor.
  5. This determination applies to Investors in the Fund in relation to all of the following aspects of the Arrangement:
    1. redemption of Investors’ Units in the Fund to fund the payment of Lifetime Withdrawal Benefits during the Investors’ Protected Income Phase;
    2. redemption of Investors’ Units in the Fund if they make Unplanned Withdrawals from the Fund;
    3. annuities paid by the life insurer to Investors under the Policy during the Investors’ Insured Income Phase; and
    4. redemption of Investors’ Units in the Fund to fund the payment of Lifetime Withdrawal Benefits during the Investors’ Insured Income Phase.
  6. This determination is made subject to the following condition:
    1. The continued application of private ruling BR Prv 17/35 (the Ruling) issued on 18 August 2017 (including any ruling issued to replace the Ruling, provided that the change to the Ruling does not affect the application of this determination).

4. Principle

  1. The following components of the Arrangement are excepted financial arrangements:
    1. Investors’ Units in the Fund (the Units); and
    2. annuities paid by Lifetime Income Limited to Investors during their Insured Income Phase (the Annuities).
  2. Any amount that is solely attributable to an excepted financial arrangement described in s EW 5(2) to (16) is not an amount that is taken into account under the financial arrangements rules (s EW 6(2)).  This determination specifies the amounts that are solely attributable to the Units and the Annuities, and are therefore not taken into account under the financial arrangements rules.

5. Interpretation

  1. All legislative references in this determination are to the Income Tax Act 2007, unless otherwise stated.
  2. Capitalised terms and phrases in this determination should be taken to have the meaning attributed to that term or phrase in clause 1 of the Trust Deed or in the description of the Arrangement in product ruling BR Prd 17/04 issued on 18 August 2017.  This determination has no specialised terms that need to be defined further.

6. Method

  1. The amounts that are solely attributable to the Units are the:
    1. Lifetime Withdrawal Benefits received by Investors from the Fund during the Investors’ Protected Income Phase;
    2. proceeds received by an Investor on redemption of their Units in the Fund when the Investor makes an Unplanned Withdrawal; and
    3. Lifetime Withdrawal Benefits received by Investors from the Fund during the Investors' Insured Income phase.
  2. The amounts that are solely attributable to the Annuities are the payments made by Lifetime Income Limited to Investors under the Policy during their Insured Income Phase. (These amounts are then treated as a subscription on behalf of that Investor in the Fund’s Cash Portfolio to fund the ongoing payment of Lifetime Withdrawal Benefits during this phase.)

7. Examples

  1. The following examples illustrate the application of the method set out in this determination.

Example A

  1. 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 the Policy.
  2. The Investor opts to receive their Lifetime Withdrawal Benefit from the Fund from age 70, which means the Lifetime Withdrawal Benefit is set at 5.5% per annum of their Protected Income Base of $112,900.  This means the Investor receives $6,209.50 per annum in fortnightly instalments from the Fund.
  3. At age 97, the Investor’s capital in the Fund is exhausted, and the Investor continues to receive a minimum income of $6,209.50 per annum in fortnightly instalments under the annuity.
  4. The payments of $6,209.50 per annum paid by the Fund are solely attributable to the Units in the Fund.  The payments of $6,209.50 per annum made by LIL to an Investor under the Policy are solely attributable to the Annuity.

Example B

  1. An Investor invests $150,000 in the Fund at age 67 and elects to start receiving a Lifetime Withdrawal Benefit immediately.  The Lifetime Withdrawal Benefit is set at 5% per annum of the Investor’s Protected Income Base.  This means the Investor receives $7,500 per annum in fortnightly instalments from the Fund.  At age 72 the Investor withdraws $20,000 as an Unplanned Withdrawal.  This reduces the Lifetime Withdrawal Benefit payments to $6,500 per annum in fortnightly payments.
  2. The payments of the Lifetime Withdrawal Benefit by the Fund to the Investor during their Protected Income Phase are solely attributable to the Units in the Fund.

This Determination is signed by me on the 18th day of August 2017.

 

Howard Davis
Director (Taxpayer Rulings)