Broken promise alters application of Centrelink income test
It has not taken long for the wheels to start falling off the Abbott campaign promise wagon. One of the major promises made was the ironclad guarantee that no adverse changes would be made to superannuation in the first term of the new government.
An adverse change in the way that superannuation pensions are treated by Centrelink is now being introduced by stealth.
Buried in a bill introduced into the House of Representatives on November 20 was legislation that will, among other things, change the way superannuation pensions are counted by Centrelink.
The current system for assessing a person's eligibility for the age pension is based on two tests. The first is the assets test. If the value of a person's total assets exceeds a low threshold, their pension entitlement reduces until it reaches an upper threshold, when it cuts out altogether.
Then there is the income test that reduces a person's entitlement to the age pension when their income exceeds a low threshold and cuts out when it reaches an upper threshold.
Under the current income test, superannuation account-based pensions are treated differently from other financial assets. For most financial assets, including such investments as shares, bank accounts, term deposits and managed investments, the actual income received is not counted but instead they are deemed to earn income. The deeming is applied at two rates. At present, the low rate is 2 per cent on financial assets up to $46,600 for singles and $77,400 for couples, and at 3.5 per cent on financial assets above these thresholds. This deeming of financial assets was introduced to ensure people could not artificially increase their eligibility for the age pension by holding large sums in non-interest-bearing investments.
Account-based pensions paid from a superannuation fund do not at present have all of the income received counted under the income test. The amount counted by Centrelink is the value of the pension received less a deduction for the purchase price of the pension. The purchase price is calculated by dividing the value of a person's superannuation account at the time they start the pension by their life expectancy.
This treatment was introduced - and has always been regarded as fair - because over the life of a superannuation pension a member is expected to be paid back the capital value of this investment. This is because everyone receiving an account-based pension must take a minimum amount each year.
The minimum amount required to be taken is a percentage of the value of their superannuation account at the start of each year. This starts out at a low payment rate of 4 per cent, for people aged under 65, and increases to 14 per cent as a member gets older. Unless a member has control of their superannuation, and is a better investor than Warren Buffett, they will definitely draw down on the capital at some point.
Where a person has any of the other financial investments, only the deemed income is counted and not withdrawals of capital. Under the new legislation introduced on November 20, account-based pensions will now have the deeming rates applied to them.
This change in the Centrelink income test will apply to account-based pensions that commence from January 1, 2014. This means any superannuation members who are entitled to take an account-based pension, and have been delaying this for one reason or another, have until December 31, 2013, to make sure they are covered by the original, fairer income test.
Max Newnham is the founder of the website smsfsurvivalcentre.com.au.