Super changes to hit pension eligibility

The superannuation proposals recently unveiled by the federal government attracted a great deal of attention, the main focus being on the plan to tax larger account-based pensions.

In particular, while the first $100,000 of annual earnings on the investments backing a super pension will remain tax free, every dollar above this will be taxed at 15%.

The changes may not survive the forthcoming election. But this proposal triggered a lot of criticism, even though very few people will ever be affected.

Graeme Colley, national technical director for the SMSF Professionals' Association of Australia, says that, while the concern about any attempt to tax super pensions is understandable, one of the government's other proposed changes has the potential to adversely affect a lot more people, including many with a self-managed fund.

This is the proposal to subject account-based pensions to a tougher income test when determining a person's eligibility for the age pension. How the change would work is demonstrated by an example provided by Colley that compares the current system with the proposed new one.

Colley takes the case of Ben, aged 68, who started an account-based pension on July 1, 2012, with $500,000 and draws out the minimum pension for 2012-13 of $18,750 (that is, 3.75% of $500,000).

Under the present Centrelink rules the amount that is counted for income test purposes is the actual pension payment minus the initial so-called purchase price ($500,000) divided by his life expectancy.

For Ben the calculation is $18,750 - ($500,000 divided by 16.24) = $18,750 - $30,788 = nil income for the purpose of the income test. This calculation shows that Ben could draw an annual income of up to $30,788 and not have any of his income included in the income test.

But under the proposed change, the amount of income to be included would be calculated by applying the standard deeming rates to Ben's $500,000 initial account balance. This means the first $45,400 would be deemed to earn 2.5% ($1135) while the remaining $454,600 would be deemed at 4% ($18,184), a total of $19,319.

The end result is that, whereas at present the income test would not affect his eligibility for the age pension, if the rules are implemented his eligibility under the income test would be slashed.

In this example, eligibility for the pension probably would be determined by the operation of the assets test. This is applied to the pension account balance, which is recalculated either six-monthly or at the start of each financial year. The key point, however, is that the proposed change has the potential to make the income test a more potent factor for many retirees.

Given that the proposed changes include an exemption for super pensions started by June 2015, some people may benefit by starting their pension before then.

Super tip

Self-employed business people can get the super co-contribution, worth up to $500 a year, but sometimes fail to apply due to misunderstanding the income tests that apply.

The first test stipulates that you have to earn less than $46,920 to get any co-contribution, while the second states that at least 10% of your income has to come from employment, including self-employment.

Whereas you can deduct business costs when working out whether you are below the $46,920 threshold, the 10% test is based on your gross business income, including costs. It is likely more self-employed Australians would take advantage of the co-contribution if they were aware of these concessions.

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