- 28 January, 2015
To be deemed or not to be deemedâ€¦
Realise your Dream
The Realise Your Dream blogs are written by Peter Kelly and Mark Teale. More information about the authors can be found here
New Year’s Day 2015 heralded the dawn of a new era when it comes to the assessment of account based pensions (sometimes also referred to as allocated pensions) under the income test for pensions and allowances paid by Centrelink.
When a person applies for a pension or allowance through Centrelink, their entitlement to such payments is assessed under an assets test and an income test. The test that results in the lower amount of pension or allowance is the test that is applied. Pensions include the age pension and disability support pension, while allowances may include Newstart allowance, sickness allowance and the like.
When determining a person’s level of income to be included under the income test, a number of different methods are applied, depending on the source of the income.
The income derived from “financial investments” is calculated on a “deemed” basis. That is, income is determined by applying a deemed rate of income, rather that assessing the actual amount of income received. The deemed income may be more, or less than the actual income received.
What is a financial investment?
Financial investments comprise of a range of different types of investments, including:
- Deposits – in banks, building societies, credit unions and other financial institutions. Deposits include money held in cheque accounts, at-call deposits, and term deposits;
- Managed funds – which includes money invested in public and private trusts and insurance bonds;
- Shares – both listed on the stock exchange and unlisted shares;
- The value of any outstanding loans made to others, including family members;
- Superannuation balances held in an accumulation account where the person has reached age pension age;
- Short term income streams – generally annuities taken out for a period of less than five years;
- Gold, silver and platinum bullion; and
- Account based pensions.
This is not an exhaustive list but it does address the main types of financial investment.
How does deeming work?
When applying deeming, the first step is to calculate the total value of all financial investments. The first $48,000 of financial investments held by a single person, or $79,600 held by a couple, are deemed to be earning income at a rate of 2%, while that portion of financial investments that exceed the low threshold are assumed to be earning 3½%. The low rate threshold is set as at 1 July each year, and the deeming rates change from time to time, in line with movements in interest rates in the broader financial community.
As already mentioned, the actual amount of income received from a financial investment does not influence the amount directly assessed under the income test. Therefore, there is an incentive to invest in such a way as to maximise the return, knowing that the actual return received will not have a direct impact on the level of pension or allowance being received. However, where the income is added to the investment, rather than being spent, any increase in the value of the financial investment will be counted under the assets test, and the increased value of the financial investment will result in more income being deemed.
Deeming – an example:
Let’s assume we have a couple that has the following financial investments:
|Bank account – at call||$ 10,000|
|Bank account – term deposit||$ 30,000|
|Managed funds||$ 20,000|
|Loan to family member – no interest||$ 30,000|
|Account based pension||$200,000|
The deemed income for Centrelink income testing purposes is therefore:
|Amount||Deeming rate||Deemed income|
The deemed income thereby equates to $344.46 per fortnight. This level of deemed income would have the effect of reducing the age pension for the couple in question.
Grandfathering of account based pensions
The inclusion of an account based pension as a financial investment only applies from 1 January 2015.
Where a person had an account based pension in place before 1 January, the income assessment of that account based pension was potentially more favourable.
Account based pensions that were in place as at 31 December 2014, held by people who were also receiving a pension or allowance from Centrelink at that time, will have the former income test treatment of their account based pension preserved (grandfathered). That is, they won’t be subject to deeming.
However, if either their Centrelink benefit ceases and is subsequently reinstated, or the original account based pension ceases and is recommenced (perhaps as a result of adding additional superannuation savings), the new account based pension will be included as a financial investment and subject to deeming.
For people who currently have an account based pension that is subject to the grandfathered income testing, care should be exercised to ensure:
- They retain continuity of their Centrelink benefit; and
- They retain their grandfathered account based pension.
Specific financial planning advice should be sought before:
- Commuting (ceasing) an existing account based pension;
- Consolidating superannuation benefits for the purpose of recommencing a new account based pension;
- Changing account based pension providers; or
- Winding up a self-managed superannuation fund that is paying an account based pension and rolling the balance over to another superannuation fund.
The benefits of the grandfathered treatment of an account based pension can be extremely valuable. Advice should always be sought before taking any action that might jeopardise the current income testing of an account based pension. Inadvertent action could result in the loss of a significant portion of a Centrelink pension or allowance.