Tax with Max: Losing the age pension

How the proposed changes to the asset limits on the age pension work, the effect of possible tax changes on property sales, evening out members’ balances, and more.

Summary:  If the policy announced in the 2015 federal budget is passed, both asset limits will be changed. From January 1, 2017, the lower assets test limits for home owners would increase for single pensioners and couples and the upper assets test limits will fall due to an increase in the reduction factor from $1.50 per $1,000 in excess assets to $3 per $1,000 in excess assets.

Key take-out: While the upper limit will be reduced, any pensioner that loses their entitlement to the age pension will automoatically be issued with a Commonwealth Senior’s Health Card.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Asset limits and the age pension

If the Abbott government is able to have the reduction in the assets test limit passed, at which point do a couple lose their age pension, and how will this work?

Answer: If the policy announced in the 2015 federal budget is passed both asset limits will be changed. The lower asset limit – at which point the entitlement to the age pension begins reducing – will increase. From January 1, 2017 the lower assets test limits for homeowners would increase from $202,000 to $250,000 for single pensioners, and increase from $286,500 to $375,000 for couples.

The second asset limit – at which point the age pension is no longer received – will decrease due to the reduction factor increasing from $1.50 per $1,000 in excess assets to $3 per $1,000 in excess assets.

Currently if a couple have $10,000 in assets above the lower asset test limit their fortnightly pension is reduced by $15. After the change their fortnightly pension would be reduced by $30 a fortnight.

Because the reduction factor is increasing this will result in the upper assets test limits for homeowners (at which point entitlement to the age pension ceases) decreasing from $775,500 to $547,000 for single pensioners and from $1,151,500 down to $823,000 for couples.

One surprising aspect of the proposed changes to the assets test will be protection of the health concession card. Any pensioner that loses their entitlement to the age pension as a result of the asset test changes on January 1, 2017 will automatically be issued with a Commonwealth Senior’s Health Card.

Of even greater importance, anyone receiving a CSHC, as a result of the changes being introduced on January 1, 2017, will always receive an exemption from the income test for the card.

Possible tax changes to property sales

Assuming a possible change of government legislation is introduced which taxes at 15 per cent any SMSF pension account income over $75,000 in a financial year, would the sale of property in an SMSF be seen as income for that financial year or be treated differently given it is a one off lump sum for that year? 

Answer: There is currently very little detail as to how the proposed retrospective superannuation policy put forward by Bill Shorten will work. What is not clear is whether the income counted under the $75,000 limit will be taxable income that doesn’t include unrealised capital gains, or accounting income that does take account of increases in the value of investments not yet sold.

Hopefully this policy will never be introduced and, if it is, the $75,000 limit would apply to only realised income earned on a superannuation pension income account. If this is the case a large profit made on the sale of a property would count as income in that year and therefore could be liable to the 15 per cent tax.

Evening out members’ balances

I frequently see advice for trustees of an SMSF to even out members’ balances when one member’s account is considerably higher than another. When a couple are both aged in their late 70s this is not possible. In fact from when we commenced our SMSF in 1985 this has never been a possibility.

Answer: Unless you were 70 at the time you commenced a pension from your SMSF in 1985 you have always been able to, depending on whether you pass the work test or not, use a re-contribution strategy to even out balances between members in your fund.

As long as the members of an SMSF are under 65 and have met a condition of release, and the contribution limits are not exceeded, lump sums can be taken by a member with a higher balance and then the amount withdrawn can be re-contributed as a non-concessional contribution for the member with the lower balance.

Once members have turned 65 they can still use the re-contribution strategy as long as the 40 hour work test is passed by the member making the contribution. This re-contribution strategy may become even more important if the changes to the asset tests for the age pension are introduced, to make sure at least one member of the fund is receiving the age pension before January 1, 2017 and then loses it as a result of the decrease in the assets test limit. 

Changes to the work test?

Though we are over 65, we could meet the work test so we both withdrew and then recontributed the maximum amount each year for a number of years to increase the non-concessional portion of our superannuation. I have been told that this is now no longer available to people who travel overseas for two years. Does the current work test only apply to work actually done in Australia, and therefore work overseas does not qualify?

Answer: I have not seen anything about the superannuation contribution work test changing. In fact on checking the ATO website the work test is stated as being gainfully employed and “you must work for at least 40 hours during a consecutive 30-day period each financial year in which the contributions are made. Unpaid work does not meet the definition of gainfully employed”.

This means that as long as you are involved in paid work while overseas for at least 40 hours in 30 consecutive days you will pass the work test. My concern is not about the work test but, if you will be overseas for more than two years, your fund will fail the residency test and it could be made non-complying.

Deductible super contributions

Is it best to claim a $20,000 deductable contribution, which will be taxed at 15 per cent going in, or do I just make a non-concessional $20,000 contribution? Is there any value in a tax deductable super contribution in this situation when franking credits cover income tax payable?

Answer: Whether there is any benefit in making a tax-deductible self-employed super contribution depends entirely on what a person’s taxable income will reduce to after claiming the deduction. It does not make any sense in making a tax deductible super contribution if it reduces your taxable income below the taxable level.

After taking account of the low income tax offset, but not the seniors tax offset, the level at which no tax is payable is $19,779. Where the taxable income is reduced below this level by a super contribution it is taxed at 15 per cent with no reduction in personal income tax.

There is a major benefit in making a deductible super contribution when fully franked dividends are received, even if a tax refund would be received without making the contribution. For example if a person had taxable income of $40,000, made up of $10,000 in interest, $21,000 of fully franked dividends, and $9,000 in imputation credits, making a deductible super contribution makes a huge difference to income tax.

Despite a tax refund being received if nothing is done, by making the $20,000 contribution nearly all of the $9,000 in franking credits will be received as a tax refund, while only $3,000 in contributions tax will be paid.

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