Damian Hearn
Technical

Are the 20 September 2009 income test changes favourable for existing income tested clients? Only time will tell…

By Damian Hearn

Only time will tell of whether or not the 20 September 2009 income test taper rate increases will be favourable for your clients. With asset values improving and the interest rates on the rise, your income tested clients may be worse off.

In this article we will investigate how an increase in the value of financial assets and increase in the deeming rate will impact your income test clients receiving an age pension at 20 September 2009.

To recap, the Centrelink changes from 20 September 2009 included a new income test taper rate. Please refer to the article titled ‘20 September 2009 Centrelink changes: a positive outcome for the moment’ in the October edition of @dviser magazine.

Only existing single and couples receiving the age pension at 20 September 2009 who were assessed under the income tested should not be worse off with the introduction of the new income test taper rate. In fact, most couples will retain the transitional income test taper rate along with single pensioners with fortnightly assessable income around $625 and above.

For clients who have not retained the transitional income test taper rate, the following examples demonstrate how your single clients will be impacted by a change in market conditions.

Example 1 – Income tested client named Joan

An increase in financial assets

Joan (age 66) is a single age pensioner with $144,000 of financial assets such as shares and managed funds. Joan was receiving a part rate entitlement calculated under the income test of $547.101 per fortnight (p.f.) before the 20 September 2009 changes.

Since Joan’s assessable income under the income test was $150 p.f., she was not worse off when applying the new income test taper rate. Consequently, the changes to her age pension are summarised as follows:

  • the new income test taper rate of 50 cents will apply into the future; and
  • an increase in her part rate entitlement to $667.90 p.f. (including the new pension supplement of $56.10 p.f.).

As a result of the improvement of the share market, Joan’s financial assets have increased to $187,000 which has resulted in her part rate age pension entitlement reducing to $643.09 p.f. (including the new pension supplement) or a further reduction of $29 p.f. (as shown in summary table 1).

An increase in deeming rates and in financial assets

With an increase in the share market and interest rates within the economy, the Government will most likely increase the deeming rates used to determine the amount of assessable income from financial assets.

If the deeming rates rise to the levels experienced in the past (for example 4 per cent and 6 per cent as at 1 July 2008), Joan will see a further reduction of $100 p.f in her part rate age pension entitlement of $543.28 p.f. (including the new pension supplement) under the income test.

Summary table 1: Joan’s situation

        Reduction in
age pension p.f.
Example Asset
value		 Deeming rates Assessable income
p.f. 		Income test – transitional Income test – new
Pre 20 September position $144,000 2% & 3% $150 Pre-change
N/A		 $4
Increased in financial assets $187,000 2% & 3% $200 N/A $29
Increase in financial asset and deeming rate increases $187,000 4% & 6% $399 N/A $129

Important: Joan is still not worse off under the new income test taper rate since her assessable income (as shown in the summary table) is less than $625 p.f.

Example 2 – Increased assets for Joan

Let’s revisit the example of Joan. Her financial assets have changed to $300,000 and again have modestly increased to $325,000. Prior to the 20 September 2009 changes, her part rate age pension entitlement and reduction would have been calculated under the assets test (as shown in summary table 2).

Since Joan’s part rate age pension entitlement was calculated under the assets test, she will not have access to the transitional income test. Combining the improved value of her financial assets with increased deeming rates, Joan will see a reduction in her part rate age pension entitlement of $288 p.f. under the new income test taper rate.

Summary table 2: Joan’s altered situation

          Reduction in
age pension p.f.
Example Asset
value 		Deeming rates Excess assessable assets Assessable income
p.f. 		Asset
test 		Income test – transitional Income test – new
Pre 20 September position $300,000 2% & 3% $122,000 $330 $183 $75.20 $94.00
Increase in financial asset and deeming rate increases $325,000 4% & 6% $147,000 $718 $221 N/A $288

Important: If Joan had access to the transitional income test taper rate of 40 cents, the reduction in her part rate age pension entitlement would be $230 p.f. This equates to $67 p.f. (i.e. $288 - $221) or $1,742 p.a. less in age pension due to the introduction of the new income test taper rate.

 

What strategies are available to reduce financial assets and deemed income?

The strategies available are summarised as follows.

  • Superannuation pensions – Making a personal non-concessional contribution into superannuation in order to commence a pension can be worthwhile. Your client will be eligible for an exempt amount, which is commonly known as a Centrelink deduction amount. The Centrelink deduction amount reduces the income counted for the age pension income test. Obviously, contribution limits and eligibility rules apply when using this strategy.
  • Sheltering assets in super - Superannuation owned by a member of a couple under age pension age is an exempt asset and is excluded from deeming under the income test.
  • Using the Gifting Rules - Single pensioners and pensioner couples can gift up to $10,000 p.a. However, there is a limit of $30,000 in any rolling five year period, and the measurement of a year is the financial year ending 30 June.
Summary

Strategies exist for these clients to reduce the income counted under the income test and combat the introduction of the new income test taper rate. You should be taking particular interest in single and couple clients who are income tested and their financial assets are recovering the past losses.

1Age Pension rate payable from 1 July to 30 September 2009. Age pension entitlement includes the pharmaceutical allowance but excluding the GST supplement of $19.50 p.f. No other allowances or supplements have been included.