Tax with Max: The pension edition

Your questions on the assets test, entitlement ages and working after 70.

Summary: For those born after June 30, 1952, eligibility for the age pension increases in half-yearly increments every 1.5 years. From July 1, 2017, the lower limit of the assets test will increase, but the taper rate at which the pension is reduced for every $1000 over this limit will increase from $1.50 to $3.00.

Key take out: If you are weighing up whether to keep working past the age at which you are eligible for the pension, consider carefully whether the lost income will be more than the potential gain of some pension income.

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

Eligibility ages?

I am confused about what actually happens to those people who were born after July 1, 1952 and those who were born after 1 January 1957. What is the eligibility for the age pension, do they fit into the age 65 group, or does their age for entitlement increase by half-yearly increments to 67?

Answer: There are four tests that apply to determine whether someone is eligible to receive the age pension. They are:

·      the age test,

·      the residency test,

·      the assets test, and

·      the income test.

Given that when the age pension was first introduced for men in July 1909 and for women in 1910, the average life expectancy at birth was 55 for males and 59 for females, it is no wonder that there have been several changes made to the age test. Currently the average life expectancy at birth is 80.1 years for males and 84.3 years for females.

The first changes to the age test were made when the eligible age for women was increased from 60, for those born after June 30, 1935, up to the same as for males age of 65. The next lot of changes were applied equally to males and females with the eligible age increasing for people born after June 30, 1952 in half yearly increments every 1 ½ years.

This now means that the age test for people born after June 30, 1952 is as follows:

From 1 July 1952 to 31 December 1953

65.5

From 1 January 1954 to 30 June 1955

66.0

From 1 July 1955 to 31 December 1956

66.5

From 1 January 1957

67.0

If one of the measures announced in the 2014-15 Federal Budget is passed, the eligible age for the age pension will increase to age 70 by 2035. How the increases in the eligible age will actually work will not be known until legislation introducing the measure is passed.

What do the assets test changes mean for us?

I am 62 and still working part time, my wife is 66 and receives a part age pension, she has an account based pension that was started prior to January 2015 that is worth $600,000, and I have an accumulation account in the super fund that is worth $500,000.  In addition to our home we have a holiday house valued at $400,000, $30,000 in furniture, and $20,000 in a bank account. Can you tell us if we will be affected by the changes that will be commencing on January 1, 2017?

Answer: There are effectively two asset test limits. The first lower limit places a value on assets that, if it is not exceeded, the full age pension is received. The second higher limit, once it is exceeded, results in no further age pension being received. There are different asset limits for singles and couples, and different limits that apply to homeowners and non-homeowners.

The current asset test limits are as follows:

Lower Limit

Upper Limit

Family Situation

Homeowners

Non-Homeowners

Homeowners

Non-Homeowners

Single

$205,500

$354,500

$783,500

$932,500

Couple (combined)

$291,500

$440,500

$1,163,000

$1,312,000

The changes that you are talking about will increase the lower assets test limit, while at the same time increasing the multiple that is applied to calculate how much a person’s entitlement decreases when the lower limit is exceeded.

Under the current assets test, when the lower limit is exceeded a person’s fortnightly entitlement to the age pension is decreased by $1.50 for every $1000 their assets exceed the lower limit. This reduction factor from January 1, 2017 will increase to $3.00 for every $1000 that assets exceed the lower limit.

The new limits will be:

Lower Limit

Upper Limit

Family Situation

Homeowners

Non-Homeowners

Homeowners

Non-Homeowners

Single

$250,000

$450,000

$547,000

$747,000

Couple (combined)

$375,000

$575,000

$823,000

$1,023,000

On the basis of the value of the assets that you currently have, without taking any action between now and January 1, 2017, in this situation your wife would lose her entitlement to any age pension as your assets would exceed the $823,000 upper limit. If your wife did lose her age pension as a result of the changes to the assets test she would keep her health care card without the income test applying to it in the future.

There are a number of strategies that could be used to enable the age pension to be kept after the changes are introduced. The first would require the sale of the holiday home, having the proceeds contributed as a non-concessional contribution into an SMSF accumulation account.

The second strategy would require withdrawal of a lump sum amount from the account based pension so that your total assets will be below the upper limit. Once this amount has been withdrawn it would then be contributed as a non-concessional contribution into the SMSF accumulation account.

The strategies work because of you being under age pension age, and more than likely not being eligible until you turn 66 if you were born between January 1, 1954 and 30 June 1955. When a person has not reached age pension age amounts held in accumulation account in a super fund are not counted under the assets test.

Because there are a number of disadvantages related to each of the two strategies, including capital gains tax payable on the holiday house and not being able to get superannuation back into a partner’s  name, you should seek professional advice before taking any action.

Working vs. pension?

I turned 70 this year, am currently working 4 days per week, and as a result my husband and I are currently not eligible for the age pension under the income test. I have $445,000 in a super fund managed by a company that I am drawing down the minimum of $1800 per month. I have a further $80,000 in a bank account.

Because of the changes being introduced at the end of this year I am not sure what I should be doing with regard to either finishing work altogether or cutting back my hours so that the assets test will apply rather than the income test as it currently does. Is there anything else I should be doing or thinking about prior to December 31, 2016?

Answer: If you still want to keep working four days per week, and do not want to either retire fully or cut back your hours of work, calculations would need to be done to work out whether it is worthwhile gaining access to the age pension.

In general terms, the amount of the employment income that would be forgone to gain access to the age pension and the concessions that come with it,would be greater than the benefits received as a result of becoming eligible for the age pension.

You should seek professional advice from someone that specialises in retirement and tax planning so that the various strategies available to you can be considered, and the financial effect of each of the strategies estimated to work out which will provide you with the best result.


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.