Note: This article is no longer current. In the 2009 Federal Budget, the Government announced that super pension income from a taxed source would not be counted for the Seniors Health Card income test. You can find out about this change in the article Super pension income excluded from health card test.
Q: I am confused as to the definition of “taxed source” in the coming changes to Commonwealth Seniors Health Card (CSHC) eligibility. The principal in my SMSF (Allocated Pension) has a large proportion of “further contributions” (in other words, my own money). Will such be included in the income eligibility calculation? Thank you I enjoy your articles.
A benefit from a taxed source is a super benefit paid from a fund that deducts ‘contributions’ tax from concessional (before tax) contributions and is liable for earnings tax on fund earnings. In other words, self-managed super funds plus 90% of large super funds (excluding certain public sector funds) are considered a taxed source.
Before I answer the second part of your question, I need to clarify one point. I am assuming that when you mention “further contributions” and “own money” that you’re talking about contributions that you made before you started the pension, and that those contributions were after-tax, that is non-concessional contributions. If that is correct, then I have reworded your question as set out below:
Will the tax-free component (sourced from my own after-tax contributions) of my tax-free pension income be included in the CSHC income test calculation?
Tech alert: I use a lot of terminology in this response because the income test for the CSHC involves a lot of terminology. As much as possible I try to explain each term as it appears.
The short answer is yes: from 1 July 2009, the income definition used for CSHC eligibility will include all pension income from all superannuation funds, and salary sacrificed contributions when making contributions to a super fund.
Before July 2007, a tax-free amount (representing a return of an individual’s after-tax contributions over a period of time) of an income stream from a pension was not counted under the CSHC rules. The pension income that formed part of an individual’s taxable benefit, or what we now call the taxable component, has been counted.
When the Government introduced tax-free super for over-60s in July 2007, an apparent unintended consequence was that thousands of Australians became eligible for the CSHC for the first time. Under the tax-free super changes pension income from a taxed source paid to over-60s was not part of a person’s taxable income.
An individual can apply for a CSHC if they earn an “adjusted taxable income” of less than $50,000, or $80,000 for a couple Until June 30, 2009, adjusted taxable income is an individual’s taxable income plus net rental property loss, foreign income not normally taxed in Australia, and employer-provided fringe benefits (if worth more than $1000). Pension income from a taxed source is not counted.
In effect, the Government relaxed the rules for two years. For the 2008/09 (and 2007/08) years, pension income from a taxed source is (was) not counted when applying for a CSHC.
Fast-forward to July 2009, and the tax-free component of an income stream now counts when assessing a person’s eligibility, which means the CSHC rules are stricter than the rules that applied before 2007. From July 2009, the definition of ‘adjusted taxable income’ for the purposes of the CSHC, will include all pension income from all superannuation funds, notwithstanding that pension income from a taxed source for over-60s is not part of an individual’s taxable income.
From July 2009, the definition of income will also include salary sacrificed contributions.
Background: Super benefits are now made up of taxable and tax-free components. The tax-free component is always tax-free when paid as a benefit, and the tax on the taxable component depends on the member’s age and whether the benefit comes from a ‘taxed’ source or an ‘untaxed source’. If an individual is aged 60 or over and receives a benefit from a taxed source, then the total benefit is tax-free @md both the tax-free and taxable components.
In mid-July 2008, I wrote to the minister responsible for the CSHC, the Minister for Families, Housing, Community Services and Indigenous Affairs, Jenny Macklin. I asked her to confirm whether both the taxable and the tax-free component of pension income from a taxed source will be counted against the CSHC income threshold from 1 July 2009. (Pension income from an untaxed source, that is, from certain public sector funds, has always counted for the CSHC income test).
In short the tax-free component and taxable component of pension income from all super funds will count for the CSHC income test.
An extract from her response is set out below.
“From 1 July 2009, subject to passage of legislation, the CSHC income test will include:
- Income from a superannuation income stream with a taxed source, including withdrawals
- Income that is salary sacrificed to superannuation, and
- Net financial investment losses.
The proposed changes to the CSHC eligibility from 1 July 2009 will ensure that CSHC holders with similar levels of income, but who derive income from different sources, will have the income test applied to them in a similar way.
This means that all amounts paid from a taxed superannuation fund, regardless of whether they are taken as an income stream or as a [lump sum] withdrawal, will be treated as income for the CSHC income test. This includes both taxable and tax-free components of the benefit paid to the member (the tax-free component would include any amounts of undeducted contributions).
…Any taxation implications are entirely separate to the CSHC income test. In this context, a person still benefits from having accumulated their superannuation savings in a concessional tax environment, and from the tax-free treatment of their superannuation pension payments after age 60….”
You can find more information on the CSHC in my SuperGuide article, Are you eligible for a Commonwealth Seniors Health Card?
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Copyright Trish Power
Hi - I'm Trish Power and I am the author of 
Very impressed with your articles on CSHC. Consider the major worry for Self Funded Retirees is the costs on medical expenses in later life. Although private health insurance covers some of these expenses, if one goes to hospital under specialist with MRI and Cat Scans Blood tests etc the aged are being held to ransom by the medical profession. With the proposed loss of CSHC by many Self Funded Retirees is eating in to their nest eggs especially after the collapse of the share market is enough to bring forward their journey to the pearly gates by either natural events or jumping off a cliff.
the gov.are considering some/changes to smsf including abolisment of a tax free pension for persons over 60. can you reiterate what these changes might be?
we had an RBL based scheme which included rebates, tax on income,etc, etc for which we planned for during the accumulation phase resulting in a satisfactory pension outcome. Then costello in his wisdom gave us tax free
pension but removed the ability to pass on any residuals as death benefits to non-dependant chilren. Now they want to remove this benefit.
It appears non-sensical to invest in any scheme where the outcome is so unpredictable ( many people will not invest their money into supper under this senario)& the gov.may have to pay their pension.
Under the no tax senario we pay 10% GST tax anyhow. If the gov do away with income tax in favour of a consumer tax all superannuants get*******.
My kids wont touch super due to the uncertainty-I would have been better doing the same.
It suggested that in future the following might be legislated-
1. No tax on concessional contributions
2. No tax on income in the accumulation phase
3. Tax on pensions
I have paid tax on concessional contributions
I have paid tax on income in the accumulation phase
The gov now want me to pay tax on pension to encourage the youth ( who have too much money to waste)to contribute to an accumulation fund
The definition of adjusted taxable income to included return of undeducted contributions through the super fund is as unfair as could be imagined.
We poor people who upon needing large costs for health purposes will lose the Commonwealth Seniors Health Card when accessing funds that have already been taxed once before being deposited into the fund.
This is double taxation in its cruelest and most unfair form. we’d be better holding our savings in our own name where they can be used without penalty
The concessionaly taxed and undeducted components in funds are accounted…there is no need for this.