I recently read a technical bulletin about a threat that the change to the assets test – which comes into effect from January 1, 2017 – could pose to clients with age pensions that have account-based pensions that commenced prior to January 1, 2015.
The threat comes from the fact that people who currently receive an age pension that commenced prior to January 1, 2015, who also have an account-based pension that was commenced prior to that date, have a grandfathered income test rather than the current one.
Under this old test, the full value of an account-based pension received is not counted as income. Instead, the value counted by Centrelink is a net value of the account-based pension received after allowing for an undeducted purchase price.
Prior to the introduction of the new superannuation system on July 1, 2007 this concept of an undeducted purchase price for superannuation pensions was also part of the Income Tax Assessment Act. Once superannuation pensions were tax-free for people aged 60 and over, this treatment of super pensions for tax purposes was dropped.
The treatment of an account-based pension by Centrelink under the income test however remained in place until December 31, 2014. The undeducted purchase price for an account-based pension was calculated by dividing the value of the member’s pension account by their life expectancy at the time the super pension was commenced.
Those still working most affected
The warning in the recent technical bulletin related to people who currently use the undeducted purchase price income test, who lose the age pension from January 1, 2017 as a result of the change in the assets test.
The grandfathering of the old income test for account-based pensions only applied to people receiving the age pension and an account-based pension at December 31, 2014. If someone loses the age pension under the new assets test, and they then requalify for the age pension, they will be subject to the current income test and their account-based pension will be counted under the deeming rules.
The warning in the technical bulletin, although interesting, may in actual fact not affect many clients. This is because the income at which a couple loses the age pension, when applying deeming rates to superannuation accounts, means the assets test will in most cases be what affects the amount of age pension received.
The current income test means the age pension ceases once a couple’s combined annual income exceeds $75,357. Under the deeming rates that currently apply, a couple whose only financial assets are superannuation, can have up to approximately $2.35 million in superannuation and still receive a small pension.
The clients who will be most affected by the current income test, rather than the grandfathered undeducted purchase price test, will be those that are still working. This is because the deemed income earned on their account-based pensions, when added to their employment income, could result in them exceeding the age pension maximum income level.
New deemed income test to benefit some
It is interesting to note that some superannuation fund members could actually be better off under the new deemed income test. This is especially the case where the amount of account-based pension received, either because of a high minimum pension that must be taken or a large lump sum, results in a higher net income than what would be counted under the deeming test.
This means clients that need a large lump sum in pension phase, who currently receive an age pension under the old undeducted purchase price income rules, may be better off if they commute the pension, take the lump sum, then commence a new account-based pension.
