Q: Could you please help with information about how annual deductible amounts are worked out by Centrelink for part Age Pension purposes. I have a defined benefit fund and an annual deductible amount. I gather Centrelink does not count this as income in assessing Age Pension amounts but I cannot find out how this is calculated. (I have heard it is different than how the ATO did it). My partner has an allocated pension but also has an annual deductible amount under the old rules. Attempts to get help from the Minister’s office were futile. We were sent a letter full of bureaucratic gobbledygook. Thank you.
Warning: This question and response is highly technical.
A: Yes, the old deductible amount used for tax purposes was calculated differently from the Age Pension deduction amount. This response is further complicated by the fact that anyone who applied, or applies, for the Age Pension on or after 1 January 2015 and/or starts a superannuation pension after that date, does not have access to a deduction amount for the purposes of the Age Pension income test (more on this later). Further, Australians with funded defined benefit pensions, who have retained a deduction amount for the purposes of the Age Pension income test, are now subject to a more restrictive rule (again, more on this later).
For the benefit of other readers and due to the highly technical nature of this question, I will explain the two rules that you are referring to in your question.
Deductible amount morphs into tax-free component
Before July 2007, pension income from super funds was counted in an individual’s taxable income less a deductible amount representing a return of after-tax contributions and other tax-free amounts. After the introduction of tax-free super for over-60s, generally, the annual deductible amount morphed into a proportion of a benefit’s tax-free component on a per payment basis. (For an income stream/pension already in existence, the deductible amount continued in its original form until a trigger event occurs, such as turning 60, or stopping the income stream. The tax-free component is then calculated using the undeducted purchase price and pre-July 1983 component). For income tax purposes, the tax-free component is generally only relevant for those individuals taking income streams (pensions) or lump sums, who are:
- under the age of 60, or
- receiving super benefits from some public sector funds, or
- hoping to pass on death benefits to non-dependants (typically independent adult children).
Age Pension and deduction amount
Individuals applying for the Age Pension must satisfy an income test and an assets test to be eligible for a full or part Age Pension. Before 1 January 2015, anyone receiving the Age Pension was, and still is, eligible for a deduction amount on their superannuation pension, and this amount was deducted from the assessable income for the Age Pension income test.
Note: Anyone claiming the Age Pension on or after 1 January 2015, or commencing a superannuation pension one or after 1 January 2015, is not eligible for a deduction amount when assessing against the Age Pension income test. Instead, the superannuation pension is subject to the deeming rules. See next section of this article for more information.
For Australians receiving the Age Pension and benefit payments from a super pension before January 2015, and this situation is continuing today, then the individual receiving a superannuation pension is eligible for an exempt amount, commonly known as a deduction amount, which reduces the income counted for the Age Pension income test.
The method used to calculate the deduction amount of an income stream depends on the type of income stream that you receive, but for account-based income streams, the calculation generally involves dividing the purchase price (that is, the starting account balance) by the recipient’s life expectancy at commencement of the income stream. The deduction amount for the purposes of Age Pension eligibility is calculated on the full account balance when the income stream starts, and does not change unless you withdraw a lump sum.
In relation to income streams paid from defined benefit funds, the Australian Government’s ‘Guide to Social Security Law’ details the history of the exempt amount for Age Pension purposes applicable to defined benefit funds, and how the deductible amount is calculated for the different types of income streams (the term used is ‘deductible amount’ for defined benefit pensions, and ‘deduction amount’ for the more popular account-based pensions). Click on the links below (from the Guide to Social Security Law) for information on these calculations.
- 188.8.131.52 General Provisions for Assessing Income Streams Summary
- 4.9.3 Asset-Tested Income Streams
- 4.9.2 Asset-Test Exempt (ATE) Income Streams
Note: The deductible amount for defined benefit funds only applies to defined benefit superannuation pensions that were being paid before January 2015, and the recipient was also receiving the Age Pension before January 2015. Further, since 1 January 2016, the category of Age Pensioner who is also receiving a funded defined benefit pension with a deductible amount, can only claim a maximum 10% deductible amount (for more information on this January 2016 change, see SuperGuide article Age Pension income test change hits funded defined benefit pensions).
Warning: This is technical stuff so I suggest that you chat with Centrelink if you have any further questions on this issue, or perhaps meet with the free information service run by Centrelink, known as the Financial Information Service (for more information on FIS, see SuperGuide article Free retirement planning assistance now available). If you have an adviser, then they should be able to take you through these calculations as well.
Deeming applies to super pensions for new Age Pensioners (since 1 January 2015)
For anyone receiving the Age Pension for the first time (or who has reapplied) on or after 1 January 2015, or for an existing Age Pensioner starting a super pension on or after 1 January 2015, the treatment of super pensions when assessing for the Age Pension income test has changed. Rather than a special calculation identifying an asset test exempt amount, and deducting this amount from the income received from the pension, super pensions falling under the new rules are subject to deeming.
Deeming of super pensions (in place since 1 January 2015 for new Age Pensioners, or existing Age Pensioners at that date but with new super pensions after that date) means that the pension payments you receive from your super pension are not relevant when assessing your eligibility for the Age Pension under the Age Pension income test. The ‘income’ counted for the Age Pension income test, is not the actual income received from the super pension as benefit payments, but rather Centrelink assumes a rate of return even when that rate isn’t necessarily what you actually earn on your investment. For information on this January 2015 change to the treatment of super pensions for new Age Pensioners, see SuperGuide article Income test changes (January 2015) mean less Age Pension.
Note: All products held by Age Pensioners before 1 January 2015 (and who were already Age Pensioners as at 31 December 2014), are grandfathered indefinitely (that means the old rules continue to apply indefinitely) and accordingly, continue to be assessed under the old rules for the life of the product so no current pensioner will be affected, unless they choose to change superannuation pension products. Superannuation pensions in place before 1 January 2015 will continue to be assessed under the old Age Pension income test rules for super pensions, rather than under the revised deeming rules.
For more information about the Age Pension income test, and the Age Pension rules generally, see the following SuperGuide articles:
- Less Age Pension, and paid to fewer Australians since January 2017
- Latest retirement deal! Lose Age Pension, receive Seniors Health Card
- Age Pension: September 2017 rates apply (until March 2018)
- Age Pension: More Australians entitled to payments from September 2017
- How do I apply for the Australian Age Pension?
- Age Pension: Assets test thresholds applicable from September 2017
- Age Pension: Income test thresholds applicable from September 2017
- Income test changes (January 2015) mean less Age Pension
- Age Pension income test: Deeming rates and deeming thresholds
- Age Pension income test change hits funded defined benefit pensions