At 1 January 2015 a significant change came into effect to the way that income streams are assessed under Centrelink’s ‘income test’. Income streams are now treated in the same way as other financial investments and are subject to ‘deeming’ provisions when determining age pension benefits through the income test.
In most cases, this change will increase the amount of your assessable income under the income test, and could reduce your income support benefits from Centrelink or the Department of Veteran Affairs.
Note: To be eligible for the age pension a means test is used which is made up of two tests: an ‘income’ and ‘assets’ test. The test that results in the lower age pension benefit is the one that applies.
An example
The following example is based on Maria, a 65 year old single woman who owns her own home and is considering setting up an income stream. Maria has no other assets.
The following table compares the impact on income support benefits for Maria using the current deeming rules against the new deeming rules from 1 January 2015.
| Example 1 – $200,000 income stream | Example 2 – $500,000 income stream |
| Date income stream started | 31 December 2014 | 1 January 2015 | 31 December 2014 | 1 January 2015 |
| Minimum annual payment | $10,000 | $10,000 | $25,000 | $25,000 |
| Annual deemed income | N/A | $6,280 | N/A | $16,780 |
| Annual income tested amount | $750 (pension less deductible amount) | $6,280 | $1,873 (pension less deductible amount) | $16,780 |
| Income test age pension reduction | Nil | $40.77 per fortnight | Nil | $242.69 per fortnight |
| Asset test age pension reduction | Nil | Nil | $447.00 per fortnight | $477.00 per fortnight |
| Effect of change | Age pension would be reduced by $40.77 per fortnight due to the new deeming changes to the income test | Age pension would continue to be assesses using the asset test and would not be affected by the income test | ||
Source: Financial Planning Association of Australia (adjusted for changed thresholds on 20 September 2014). This example is illustrative only and based on the figures used. The outcome may be different depending on your personal circumstances.
On a $200,000 income stream, Maria can expect to receive $40.77 less per fortnight from the age pension as at 1 January 2015. This example also demonstrates that the new deeming rules will have greater effect on those with smaller balances.
At the current Social Security thresholds a single homeowner with approximately $251,000, or more, of financial assets would start to be affected by the asset test. Therefore, someone with less than this amount of assets is likely to have the income test affecting their age pension benefit.
What is deeming?
Most income support payments like pensions, allowances and concession cards have income or asset limits, or both. These limits determine if your income or assets affect the amount of pension you receive.
Deeming rules are used to calculate income for income support payments. The rules assume your financial assets are earning a certain amount of income, regardless of the income they actually earn.
If you are single and are receiving either a pension or allowance, the first $48,000 of your financial investments is deemed to earn income at 2% per annum and any amount over that is deemed to earn income at 3.5% per annum. For a couple the first $79,600 is deemed to earn 2% per annum, thereafter 3.5% per annum.
After deemed income from investments is worked out, the deemed income is added to any income you have from other sources such as income from employment. Your total income is then used to work out how much pension, benefit or allowance can be paid to you, under the ‘income test’. Remember, there is also the ‘asset test’ to consider and it will be the test that provides to lowest pension that determines your income support payment.
Deductable Amount Rule
Gross income stream payment less a Social Security deductible amount is assessed for the ‘income test’. The deductible amount is determined at the commencement of the income stream by dividing the purchase price by life expectancy, determined with reference to the Australian Life Expectancy tables 2005-2007. The deductible amount remains constant throughout the life of the income stream and will only reduce if capital drawings are made from the income stream.
In our example below John’s life expectancy, according to the Life expectancy tables is 18.54 years. If he commenced an income stream for $280,000, prior to 1 January 2015, his social security deductible amount would be $280,000 divided by 18.54, which equals $15,102 per annum. If he was to take the minimum pension for his age of 5% ($14,000 per annum) none of his income stream would be counted under the ‘income test’.
This is the existing method of assessing how much income is assessed from an income stream and will continue for income streams that are grandfathered.
Help is available
Where to go for help depends on how complicated your situation is and the level of advice you require.
- Centrelink FIS (Financial Information Service) Officers are able to answer many question regarding income support payments and rules.
- First State Super offers comprehensive advice if your situation requires broader consideration of your financial circumstances, such as a Centrelink or Age pension analysis.
Article provided by First State Super (www.firststatesuper.com.au)