Tax with Max: The new pension rules

The new rules for account-based pensions, calculating the tax-free components in super, and the tax liabilities for non-resident Australians.

Summary: Two changes have been made relating to how account-based pensions will affect certain Centrelink benefits. One is that from January 1, 2015 account-based pensions will be included under the deeming rules. The second change, announced in the budget, affects how pensions will be treated to assess a person’s entitlement to the Commonwealth Seniors Health Card.

Key take-out: Anyone currently receiving an account-based pension and also the age pension should seek professional advice before taking any action.

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

How will the changes to account-based pensions impact Centrelink benefits?

In the budget, changes to deeming were announced. One change was the inclusion of income from a super fund pension account in assessing qualification for certain benefits including the Commonwealth Seniors Health Card. I understand that this change is due to start after December 31, but will not apply to current pension funds if there is no change to their status after that date.

1. Please advise whether this proposal requires passing by the Senate, or will it automatically come into effect without further ado.

2. Am I correct in thinking that if I transfer some money into the existing pension account from my accumulation account after December 31, then the pension fund will no longer have the exemption from assessment?

3. Also, what is the likelihood of super fund pension income being included as assessable income for tax?

Answer: There have been two changes relating to how account-based pensions will affect certain Centrelink benefits. The first was announced by the previous Labor government. This was passed by both Houses of Parliament in March this year and relates to how account-based pensions will affect a person’s entitlement to the age pension.

Under this change account-based pensions from January 1, 2015 will be included under the deeming rules. Anyone who is already receiving an account-based pension and also some form of income support from Centrelink, which for most people is the age pension, will have their account-based pension treated under the old rules. This means the account-based pension received is reduced by a purchase price.

If after January 1, 2015 a person contributes to their super fund, and combines this with their account-based pension, this would require the old pension ceasing and a new one would commence. A better option would be, if a person is going to be worse off under the new rules that will apply then, to start a second pension from the new contribution.

The change to the treatment of account-based pensions announced in this year’s budget relates to how they will be treated to assess a person’s entitlement to the health care card. Currently that test is based on a person’s taxable income. Because account-based pensions for people 60 and over are tax exempt income nothing is currently counted. If this legislation passes account-based pensions will have the deeming rules applied to them to assess a person’s eligibility for the health care card.

At present both major political parties have not announced a policy that would make superannuation pensions received by people 60 and over assessable for income tax purposes. In addition the Abbott Government has stated that it will be not be making any unannounced adverse changes to superannuation in this term of government.

Will pension changes after January 1, 2015 be caught by new deeming rules?

A person has an income stream from an account-based pension managed and administered by a well-known bank. If after January 1, 2015 he wants to roll over to another organisation, because of a perceived investment risk, does the new income stream have to be included in income tests without the deductible amount discount?

Answer: If someone currently receiving the age pension, who is also receiving an account-based pension, ceases that pension and rolls their super into a new lower-cost provider, and commences a new account-based pension after January 1, 2015, they would be caught by the new deeming rules that will apply.

This change in the treatment of account-based pensions to assess a person’s eligibility for the age pension should be taken as a wake-up call for all Australians receiving pensions from a super fund.

Anyone currently receiving an account-based pension and also the age pension should assess before the January 1 deadline how much they are paying in administration and investment fees. This is especially the case if their account-based pension was started before the new FOFA regulations, as an advisor probably has a hand in their superannuation pocket.

Before taking any action people should seek professional advice to make sure that they will be better off by changing superannuation funds before the deadline.

How are tax-free components in super calculated?

I retired from full-time employment in 2001 at the age of 61 but continued as a director of that firm. At that time I made a $200,000 “undeducted contribution” and started an allocated pension at the minimum rates allowed for that and subsequent years. In years 2011, 2012 and 2013, while satisfying the work test, I withdrew lump sums of $150,000 and recontributed $150,000 as a “non-concessional contribution”.

My new accountant and my former accountant have given me two different balances for my “tax-free” component in my SMSF. My former accountant stated that I had $650,000 in my “tax-free” component. The new accountant states that it is less than that amount. Could you please advise how “tax-free” components are calculated in an allocated pension where there has been a number of withdrawals and non-concessional contributions.

Answer: The calculation of the tax-free component of a person’s superannuation differs between a superannuation account in accumulation phase and one in pension phase. For accounts in accumulation phase the tax-free component of superannuation is expressed as a dollar value. In your example, if you had been in accumulation phase since 2001, that would result in your tax-free amount being $650,000.

Once a superannuation account is in pension phase the tax-free component is expressed as a percentage that remains the same while the account-based pension is in existence. For example, if after making the $200,000 undeducted contribution in 2001 this resulted in your total superannuation being worth $1 million, your tax-free percentage would have been 20%. This percentage of tax-free superannuation would have remained the same until you commenced taking lump sum payments and re-contributing them as non-concessional contributions.

The job of calculating the balance of your tax-free superannuation after the three lump sum payouts and recontributions is therefore quite an involved calculation. The actual value of your superannuation would have to be assessed just prior to the first $150,000 paid out.

The $150,000 would have to be split between taxable and tax-free components. Your account-based pension is then commuted back into accumulation phase at which point a dollar value would be placed on the remaining superannuation based on the previous tax-free percentage. To this tax-free amount would be added the $150,000 non-concessional contribution, arriving at a new dollar value of tax-free superannuation.

A new account-based pension would then have been commenced with a new tax-free percentage being calculated at that point. The same process would have to be applied for each following lump sum payout and recontribution made. The actual value of your tax-free superannuation will depend on what the value of your account-based pension account was just prior to the first $150,000 being deducted, and could be greater than $650,000.

Is there any tax liability for non-resident Australians?

I am an Aussie passport holder and have never lived in Australia but rather reside in Europe. Do I have any tax liability in Australia?

Answer: From what you have described it would sound as though your home is in Europe. This means that you would not be a resident for Australian income tax purposes. The only liability that you would have for Australian income tax would be on income derived or earned in Australia.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au

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