Newsletter No. 11, November 2014

Changes to eligibility assessment for the Age Pension and Commonwealth Seniors Health Card

The assessment of your eligibility for Age Pension and Commonwealth Seniors Health Card (CSHC) is changing from 1 January 2015. By failing to put plans in place (if necessary) prior to this date, could mean you receive a smaller Age Pension or you could be ineligible for the CSHC.

If you are currently receiving an Account Based Pension from your SMSF and a social security Age Pension or you hold a CSHC, then you need to read this article.

You also need to read this if you are not receiving an Age Pension or hold a CSHC at present but are considering applying for one.

Is everyone affected by the changes?

Not everyone who receives the Age Pension will be affected by the changes as entitlements to the Age Pension and CSHC depend on a test of a person’s assets and income.  Both tests are applied and the test that gives the lower entitlement is used. If you fail one of the tests, then you will not be eligible for the Age Pension.

People who are not in receipt of an Age Pension or hold a CSHC, but intend on applying for either on or after 1 January 2015, will be affected by the changes if their eligibility for these benefits is based on the Income test rather than the Assets’ Test.  If their eligibility is based on the Assets’ Test, they will not be affected by the changes. This is because the account balance of a person’s account based pension is assessed as an asset under the Assets’ Test and this will continue.

Who is not affected by the changes?

The new rules will not affect you if you are receiving an account based pension and an Age Pension or receiving an account based pension and hold a CSHC prior to 1 January 2015.  You will continue to be assessed under the current rules as long as you continuously receive these benefits.  Allowing existing Age Pension recipients and CSHC holders the current concession is known as “grandfathering”.

If changes are made to your existing account based pension on or after 1 January 2015, then the new rules will affect you.  Even if you hold a CSHC prior to 1 January 2015, but start a new account based pension or make changes to your existing account based pension on or after 1 January 2015, then the new rules will apply to you.

What are the changes?

Age Pension:  Under the current law, when assessing your entitlement for the Age Pension, a life expectancy formula is used to determine how much of your account based pension is taken into account for the Income Test. This formula works out the “deductible amount” of your account based pension.  The deductible amount represents a return of your own contributions to fund your account based pension.  The deductible amount is excluded from your account based pension and the balance is counted towards your Age Pension Income Test.   In some cases, the amount of the account based pension counted is nil due to the pension being less than the deductible amount. The deductible amount is calculated by dividing the account based pension’s purchase price less any commutations by the recipient’s average life expectancy as determined by the Australian Government Actuary.

From 1 January 2015, the life expectancy formula (i.e. deductible amount) will be replaced with new deeming rules.  A deemed amount of income will be calculated based on your account based pension balance regardless of the investment income actually earned by your SMSF.  This means a deemed level of income from your account based pension based on your account balance will be include in your Age Pension Income Test. Deeming will not recognise the return of your contributions and the level of account based pension drawn becomes irrelevant in determining your eligibility for the age pension.

Commonwealth Senior Health Card (CSHC):  Individuals can apply for a CSHC if their adjusted taxable income is below a certain threshold.  From 20 September 2014, the thresholds are $51,500 (for a single person) and $82,400 (for a couple). The adjusted taxable income includes your taxable income, foreign income for which you have not paid Australian income tax, total net investment losses, employer provided benefits and reportable superannuation contributions (i.e. salary sacrifice and personal tax deductible contributions).

Currently, account based pensions enjoy an exemption from the CSHC Income Test. However, from 1 January 2015, account based pension accounts will be included in the means test for the card in the same way as other financial investments, such as shares and managed funds.  An individual starting new account based pension on or after 1 January 2015 will have deemed income from that pension account included in the CSHC income test. Deeming assumes a certain rate of return on your account based pension assets, rather than the actual earnings on your pension assets.

If you already hold a CSHC and are receiving an account based pension before 1 January 2015, then you will not need to include a deemed amount in your CSHC Income Test.  Your account based pension is ignored for the Income Test for the CSHC.  However, if you commence an account based pension on or after 1 January 2015, then the deemed income from your account based pension will be included in the Income Test for the CSHC.

If you stop or change your existing account based pension on or after 1 January 2015, or your CSHC ceases, the new rules will also affect you.

Deeming rates

The Age Pension is subject to the Income Test and Assets Test and uses the result of the tests that gives the lowest entitlement.  These tests determine your eligibility and the amount of pension you will receive.

In relation to the Income Test, financial assets such as bank accounts and shares are deemed to be providing you with an income. To measure this income, the Government uses “deeming rates” that measure the amount earned regardless of the actual investment return.

The table below gives the rates and thresholds effective as at August 2014:

Status          Asset Threshold           Rate of deemed income

Single                 $0 – $48,000                                    2%

Above $48,000                              3.5%


Couple                $0 – $48,000                                    2%

Above $48,000                              3.5%

If an individual has a CSHC and is receiving an account based pension as at 31 December 2014, their account based pension income will continue to be exempt from the eligibility test for the CSHC, if the account based pension continue pass 31 December 2014 uninterrupted.

Grandfathering provisions

Grandfathering provisions do not apply if the account based pension commenced prior to 1 January 2015 and an age pension is not paid to the member prior to this date. The recipient of the account based pension must also be receiving an age pension prior to 1 January 2015.

Anyone who is of Age Pension age and is unable to qualify for Centrelink benefits due to them exceeding the asset or income means test will not be able to access the grandfathering rules nor will anyone who is under the Age Pension age and commences an account based pension prior to reaching the age pension age.

Events that will trigger the new rules

If any of the following events occur on or after 1 January 2015, you will lose the grandfathering provisions and the new deeming rule will apply to you:

  • consolidating multiple account based pensions.
  • rolling an existing account based pension to an accumulation account, combining other money to the accumulation account and re-starting a new account based pension from your SMSF.
  • adding or removing a reversionary beneficiary to your account based pension. Grandfathering will apply to an existing account based pension that reverts to a reversionary beneficiary following the death of the pensioner if the reversionary beneficiary is in receipt of an aged pension at the time of reversion and they continue to receive an age pension.
  • ceasing to receive an Age Pension.
  • ceasing to hold a CSHC. Retirees who spend more than 19 weeks outside Australia may have their card cancelled.  Although you can get the card back when you get home, the exemptions on grandfathering provisions will be lost.
  • using a superannuation death benefit payment to commence a new account based pension for a non-reversionary beneficiary.

Why are the changes necessary?

Before the introduction of tax-free, superannuation pension benefits, for people aged 60 and over in 2007, superannuation pensions were included in the CSHC income test.  A tax-free amount (representing a return of an individual’s after tax contributions over a period of time) of a pension was not counted under the CHSC rules.  The pension that formed part of an individual’s taxable component was counted.

When the Government introduced tax-free superannuation pensions for people aged 60 and over in July 2007, an apparent unintended consequence was that thousands of Australians became eligible for the CSHC for the first time, because their pension no longer formed part of their taxable income.

To ensure people with similar incomes are treated consistently from 1 January 2015, superannuation will be treated for new recipients in the same way for the CSHC Income Test as it is for the Age Pension.

What you can do?

You should review your situation and put in place any changes necessary before 1 January 2015.  If you need to make a change to your existing account based pension, then do so before 31 December 2014 to avoid the new law affecting your entitlements. The deeming approach may mean more income counts for the Age Pension income test, which will result in lower Age Pension entitlements.  Some SMSF members with a CSHC who are in the accumulation phase may want to switch to a pension phase to lock in the grandfathering provisions beyond 1 January 2015.

Please note, however, for the Age Pension, grandfathering provisions may be useful in the early years but not necessarily indefinitely.  There will come a point when the deeming rules actually provide a better result than the current deductible amount treatment.  In fact, the current income test rules actually penalise those who start a pension with a reversionary beneficiary if they have a longer life expectancy than the primary pensioner.  Re-setting to a reversionary pension might also result in a lower Age Pension right now, in return for a potentially higher one Age Pension in future.

Disclaimer    

Monica Rule worked for the ATO for 28 years and is a Self-Managed Superannuation Specialist Advisor. Monica is the author of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English” . Her advice is general in nature and you should seek advice that relates to your specific circumstances before making any decisions. www.monicarule.com.au