Michael Forer
Technical

Centrelink Deeming Rates fall yet again

By Michael Forer, Technical Services Consultant

Last week Centrelink updated managed investment and shares prices for the purpose of calculating benefit eligibility. In addition, a further cut in the Centrelink deeming rates was implemented.

From 20 March 2009, the lower limit deeming rate will decrease from 3 per cent to 2 per cent for balances up to $41,000 for single pensioners, or $68,200 for a couple. The upper deeming rate will decrease from 4 per cent to 3 per cent for the balance of financial investments over these amounts.

This is a 50 per cent reduction on the deeming rates in place at the commencement of this financial year.

 
Rates at 1 July 2008
Rates at 20 March 2009
  Lower Limit Balance Lower Limit Balance
Single 4% 6% 2% 3%
Couple 4% 6% 2% 3%

Income Test versus Asset Test

The crossover point of where the Asset or Income Test applies is affected by the deeming rate. Whilst a client may have assets that are within the Asset Test threshold, if these assets are deemed assets, the Income Test may apply and reduce your clients’ Centrelink entitlements.

This is demonstrated in the table below which shows that the level of deemed assets allowed, before Centrelink entitlements are reduced, is less than the level of Total Assets (which includes non deemed assets such as car and contents) allowed before entitlements are reduced under the Asset Test.

 
Single
Couple
Asset Level before Age Pension is reduced $171,750 $243,500
Income level before Age Pension is reduced $138 p.f. $240 p.f. (combined)
     
Deemed Assets required before Income Test is exceeded $133,267 $203,533
 
Single
Couple
Asset Level before Newstart Allowance is reduced $171,750 $243,500
Income level before Newstart Allowance is reduced $62 p.f. $62 p.f. (each)
     
Deemed Assets required before Income Test is exceeded $67,400 $134,800

The lower deeming rates from 20 March 2009 mean that a client can have significantly more deemed assets before their Centrelink entitlements will be reduced under the Income Test. The level of deemed assets allowed under the Income Test as at 1 July 2008 compared to 20 March 2009 is as follows:

Age Pension

Deemed Assets required before Income Test is exceeded
Single
Couple
As at 1 July 2008 $73,467 $99,533
As at 20 March 2009 $133,267 $203,533

Newstart Allowance

Deemed Assets required before Income Test is exceeded
Single
Couple
As at 1 July 2008 $40,300 $80,600
As at 20 March 2009 $67,400 $134,800

So what do these changes to the deeming rates mean?

1 - Maintaining funds outside of superannuation

With the lower deeming levels, it may be appropriate for clients to retain higher levels of investments in the non-super environment particularly where preservation may be a problem.

2 - Super pension or lump sum withdrawals

Over the age of 65, a client’s super accumulation account balance is deemed. Alternatively a super pension is treated concessionally by Centrelink as some of the pension will be exempt from the Income Test.

Given the lower deeming rates, it may now be more favourable under the Income Test for some clients to take super lump sum withdrawals rather than a super pension. This is probably only appropriate in limited circumstances where a client is taking large pension payments. It is also important to consider the tax implications because earnings within super accumulation are taxable whereas they are tax-free within a pension.

3 - Gifting Strategies

Gifting above $10,000 p.a. or $30,000 p.a. over a 5 year period is caught under the deeming rules. Clients may now consider gifting larger amounts as they may no longer be caught by the Income Test as a result of the lower deeming rates. It may therefore be an appropriate time to reconsider gifting strategies however it is important to remember that the gifting is deemed for 5 years so the consequences of deeming rates rising again needs to be considered.

In Summary

Lower deeming rates mean that clients can hold more deemed assets without losing Centrelink entitlements under the Income Test. This may provide short term strategy opportunities for Centrelink clients who are currently impacted by the Income Test. However, care should be taken with medium and long term strategies as the deeming rates may rise again in the future.