By Mark Ellem
From 1 January 2015, superannuation pensions will be assessed differently for the Centrelink Income Test than those commenced before this date. However, the change will not apply to all pensions, as some will come under grandfathering rules. Whilst these new rules are yet to be passed by the Senate (previously passed by the Lower House), the report from the Senate Committee, on the Bill, has recommend (on party lines) that the changes be adopted. Even for those members of the Senate Committee (non Government) that opposed the Bill as a whole, they did not object to the specific changes to the assessment of superannuation pensions for the Centrelink Income Test. Consequently, we should expect these changes to become law.
Let’s look at how the changes affect both the Age Pension and the CSHC entitlements.
From 1 January 2015, the deeming rules, for the income test, will apply to superannuation pensions, as it currently applies to non pension assets. Currently, a superannuation pension is assessed for the income test by taking the purchase amount of the pension (the value at commencement), deducting any lump sum commutations since commencement, and dividing the result by the “relevant number”. The “relevant number” is the life expectancy of the pension recipient or the reversionary pensioner (whichever gives the highest relevant number) at the time of commencement of the superannuation pension.
For example, Joe, single, commences a non reversionary account based pension at age 65 on $300,000. Joe’s relevant number is 18.54 and consequently the amount of his yearly pension draw that is treated as a return of capital and not income, is $16,181. Where Joe draws an annual pension of $20,000, then the amount that currently counts towards the Centrelink income test is $3,819.
However, from 1 January 2015, the amount that will be assessed against the income test will be based on the income deeming rule. Consequently, for Joe, where applicable, the amount that counts towards the income test (using thresholds current as at 1 July 2014) is as follows:
Joe’s total deemed income is $9,780 under the new rule. This compares to $3,819 under the current rule. Consequently, the increase in the amount that counts towards the income test may result in a reduction of Joe’s Age Pension entitlements. This will depend on whether Joe’s Age Pension entitlement is determined by the Asset Test or the Income Test.
However, where the pension commenced prior to 1 January 2015 and the pension recipient was receiving age pension entitlements, the current income test rule will be grandfathered for that pension, whilst it remains in place. Consequently, care needs to be taken when considering any refreshing or “sweeping” of the pension or changing the pension provider, as this may result in a new pension being commenced and the post 1 January 2015 rule applying.
There are also special rules in relation to the death of the pension recipient and where the pension was reversionary to a surviving spouse. For the grandfathering rule to continue to apply to the pension, the reversionary beneficiary will need to be in receipt of Government income support payments, e.g. age pension, at the time of the reversion. Further, care must be taken not to interrupt the pension, for example by way of a stop and restart of the pension or change to the pension provider.
Currently, eligibility to the CSHC is predominantly based on an income test only (there are also other requirements, e.g. Age Pension age and residency requirements). However, there is no asset test. The income test is based on an adjusted taxable income, being currently:
Note: indexation of these thresholds (in line with CPI) will apply from 20 September 2014 (they were not previously subject to indexation – this change has been passed by the Senate).
Adjusted taxable income is predominantly based on taxable income, which does not include tax free pensions, and tax free pensions are not one of the add backs. Accordingly, a person, of Age Pension age, whose main source of income was their SMSF pension, would easily qualify for the CSHC.
However, from 1 January 2015, the income deeming rule will also apply in relation to eligibility for the CSHC. This will mean that those with substantial pension balances will most likely not be entitled to the CSHC under the new test.
As with the changes to the income test for the Age Pension, where a person is an existing CSHC holder prior to 1 January 2015, the current income test will continue to apply. Again, if the pension is interrupted, for example, by way of a stop and restart of the pension or change to the pension provider, then the new 1 January rules would apply.
The following is an example from a Department of Social Services fact sheet to illustrate the change:
“Jasmin is single, aged 64, and turns 65 on 15 January 2015. Jasmin is a self-funded retiree and is drawing down on her account based income stream account balance of $2 million. She also receives $5,000 per annum from a term deposit. Jasmin lodges a claim for the CSHC on 15 January 2015. Under the CSHC income test beginning from 1 January 2015, Jasmin’s account based income stream is assessed under the deeming rules as earning $68,462 per year. Combined with her taxable income her total assessable income would be $73,462, which is above the annual CSHC income test limit of $50,000 for singles. As a result her claim for a CSHC is rejected.”
In the above example, where Jasmine turned 65 prior to 1 January 2015 and applied for the CSHC, the amount that would count toward the income test would be nil and consequently she would be eligible for the CSHC. Further, provided there was no interruption to her superannuation pension, she would retain the CSHC after the rule change under the grandfathering rule.
Eligibility for the CSHC is tested from the applicant’s viewpoint and the relevant rules applied. Consequently, for a couple, where one partner is a pre 1 January 2015 CSHC holder and the second partner applies for the CSHC on or after 1 January 2015, the pre 1 January 2015 pension will be subject to the post 1 January 2015 rules for the second partner. This is illustrated in the following example from the DSS fact sheet on changes to the CSHC from the 2014-15 Federal Budget:
“David is aged 68, and the current holder of a CSHC. David has a balance of $500,000 in an account based income stream, from which he is deemed to receive $15,962 per year. He also receives $45,000 taxable income per year from property investments. Under the CSHC income test beginning from 1 January 2015, David’s tax free income stream payment of $15,962 per year is NOT assessed and is grandfathered. However, his partner Deb who is 64 years old (turning 65 in February 2015) has an account based income stream deemed to earn $30,000 per annum. The combined annual income of David and Deb is assessed to be $75,000 pa ($45,000 + $30,000), which is still below the CSHC income threshold of $80,000 for couples. This means David would retain his CSHC.
Note - In this example if Deb applies for a CSHC in February 2015 she would not qualify. This is because the grandfathering provisions do not apply to Deb. Because David’s deemed income of $15,962 from his account based income stream would be included in the CSHC income test her income is assessed to be $90,962, which is over the $80,000 per year income limit for couples."
Further, there is debate in relation to how the grandfathering rules work, if at all, when it comes to a pre 1 January 2015 pension reverting to a beneficiary, after the death of the primary beneficiary. The law containing the change to the rules for the CSHC does not contain the same grandfathering provisions as for the Age Pension. This implies that where a pre 1 January 2015 pension reverts to a beneficiary, after the death of the primary beneficiary, that the reversionary beneficiary will not be able to apply the old rules for the Centrelink Income Test for eligibility to the CSHC. If this is the case, effectively any grandfathering of the pre 1 January 2015 pension will cease on death of the primary beneficiary.
In the lead up to these changes on 1 January 2015, clients should be reviewed to ascertain if any action should be taken to “lock in” the current income test rule.
Using SuperMate’s Data Extract tool at the multi fund level, you can extract a report of member data across all funds on your site, or a specified list of funds. This excel file (originally created as a csv file) can then be filtered on member ages to ascertain which fund members will be Age Pension age as at 31 December 2014 (set the end date range to 31/12/2014 before submitting the report request). This will provide you with a client target list to review for action that may be required in light of the 1 January 2015 change to the Centrelink Income Test.
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