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In the past year or so, deeming rates shifted from being an arcane concept few people knew or cared about, to a hot button issue for Australian retirees struggling to make ends meet at a time of historically low interest rates.
The reason is this.
Under the deeming rules, you are ‘deemed’ to earn a certain annual rate of return on your financial assets, regardless of the rate of return you actually earn. Your returns could be higher or lower than the deeming rates. In the case of bank deposits, the returns you are currently earning are likely to be lower than the current deeming rates. Why does this matter? Because it could affect the amount of Age Pension you receive.
Age Pension eligibility
Deeming is a key consideration in the Age Pension income test, which you must pass as one of the requirements to access this government payment. The other requirements are passing the assets test, being age-eligible, and qualifying as an Australian resident.
Deeming rules are used by the Department of Social Services (via Centrelink) for income test calculation purposes. Centrelink also applies the same deeming rates and thresholds when assessing eligibility for the Commonwealth Seniors Health Card (CSHC).
Common types of investment assets that deeming rates apply to are:
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- Account-based superannuation income streams or pensions
- Savings accounts and term deposits
- Managed investment such as managed funds and insurance bonds
Why does the Australian government use deeming?
The Department of Social Services published a booklet in 2015 that listed what they see as some of the benefits of deeming:
Deeming is a simple and fair way to assess income from financial investments because:
• people with the same amount of money held in different financial investments receive a similar assessment
• it reduces the extent to which income support payments vary
• the deeming rate reflects returns that pensioners can get for their savings.
By treating all financial investments in the same way, the deeming rules:
• encourage you to choose investments on their merit rather the effect the investment income may have on your pension entitlement
• help to simplify investment choices.
Deeming encourages you to consider earning better returns on your investments. It increases incentives to earn higher returns on investments because returns above the deeming rate are not counted as income.
It’s this last point that has many retirees hot under the collar. While returns from assets such as shares and property have indeed been higher than deeming rates in recent years, there is no guarantee this will continue. By their very nature, higher investment returns also come with a higher risk of price fluctuations and years of negative returns. That’s why many risk averse retirees prefer the safety of capital guaranteed bank deposits to cover their income needs in the short to medium term.
How deemed income is calculated
The deemed income from your investments is determined by multiplying their current value by the relevant deeming rates. Different deeming rates apply depending on:
- Your living arrangements (i.e. whether you live alone or with a partner),
- The value of your investment assets
- Whether or not you (or your partner) currently gets the Age Pension.
Once your deemed income is calculated, the amount is then added to any other actual income that you’ve earned from all other sources as part of the Age Pension income test. If your income exceeds the income test thresholds, your Age Pension entitlement will progressively reduce until it cuts off completely.
What are the current deeming rates?
Under pressure from retirees who faced the double whammy of historically low returns from their bank deposits, and a reduction in their Age Pension entitlements due to deeming rates that were higher than they were actually earning, the federal government cut deeming rates in mid-2019 for the first time in four years.
Due to the effect of the Coronavirus on the economy and investment returns cuts to the deeming rates were announced on 12 and 22 March 2020.
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The deeming rates from 1 May 2020 are listed in the table below.
|Single||Lower rate: 0.25% on the first $51,800 of your investment assets, plus|
Upper rate: 2.25% on your investment assets over the amount of $51,800
|Couple||Lower rate: 0.25% on the first $86,200 of your combined investment assets, plus|
Upper rate: 2.25% on your investment assets over the amount of $86,200
Deeming rates are set by the Minister for Social Services. The Department of Social Services monitors the rate to ensure that it is appropriate for market conditions. Any future changes to the deeming rate will coincide with changes to Age Pension rates, which are regularly adjusted based on the consumer price index (CPI), or at any other time if the financial markets fluctuate significantly. The CPI is calculated by the Australian Bureau of Statistics. Any changes to the deeming thresholds are made in July each year in line with changes in the CPI.
Why does the deeming rate increase if you have more investment assets?
The lower deeming rate is applied to the value of your investment assets up to a threshold amount to reflect the fact that you’ll need a range of low-risk, accessible investments (like savings accounts) to meet your day-to-day living expenses. These types of investments provide lower levels of return.
The higher deeming rate is applied to investment asset values above the threshold amounts to reflect the fact that you can diversify your investment portfolio by chasing higher returns on higher-risk assets (like shares).
Under the deeming rates from 1 May 2020, if you’re single and have no other income sources, you can have investment assets worth approximately $247,000 (a deemed income of just below $4,524) and still be entitled to receive the full Age Pension (provided that you also pass the assets test, are age-eligible and you’re an Australian resident).
If you’re living with your partner and neither of you have other income sources, you can have combined investment assets worth approximately $432,000 (a deemed income of just below $8,008) and still both be entitled to receive the full Age Pension (again, provided that you both also pass the assets test, are age-eligible and you’re an Australian resident).
Example deeming calculations
To illustrate how deeming works, below are single and couple deeming tables that show the deeming amount that will apply at a range of different investment asset values at current deeming rates.
Click each deeming table example name to view.
Deeming table examples – Single
|Investment value||Deemed income at 0.25%||Deemed income at 2.25%||Deemed income total|
Deeming table examples – Couple
|Investment value||Deemed income at 0.25%||Deemed income at 2.25%||Deemed income total|
Below we have also included some example calculations to help illustrate how deeming is calculated:
January 2015 changes
A major deeming rule change was introduced on 1 January 2015 when the investment balance of all new account-based superannuation income streams or pensions were first included in the Age Pension income test. As a result, the deeming rate now applies to these super pensions that retirees can receive tax free, provided they are over 60 years of age and meet a superannuation condition of release.
However, the old rules were ‘grandfathered’ for people who were already receiving account-based super pensions and the Age Pension prior to 1 January 2015, which means their super balances will be forever excluded from the Age Pension income test.
Below is an example of how the rule worked before 1 January 2015:
Bob is 65 years old and has $190,000 in superannuation which he has used to purchase an account-based income stream with the underlying assets in term deposits and shares. Bob elects to receive an annual income of 5 per cent from his income stream ($9,500).
Under the income test rules before 1 January 2015, an amount is deducted from this income to reflect the ‘return of capital’. This is calculated using the following formula:
Assessable income = Annual payment – (Purchase price/Life expectancy)
Assessable income = $9,500 – ($190,000/18.54)
= $9,500 – $10,248
= $0 (assessable income cannot be negative)
Under the income stream rules before 1 January 2015, none of the income from Bob’s account-based income stream is assessed.
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