Deeming of account-based pensions for the CSHC
Legislation to include deemed income from account-based pensions in the income test for eligibility for the Commonwealth Seniors Health Card (CSHC) has recently come into effect.
The CSHC is a concession card for self-funded retirees of age pension age who are not eligible for the age pension. It provides access to discounts on medical expenses and travel concessions, certain concessions provided by state and territory governments, as well as the Seniors Supplement - however (at the time of writing) a related 2014 Budget measure proposes to eliminate this payment to CSHC holders.
To be eligible for the CSHC an individual must have adjusted taxable income below certain thresholds:
- singles, $51,500
- couples, $82,400 combined
- couples (illness separated) $103,000 combined.
An additional $639.60 is added to the above thresholds per dependent child. Thresholds are indexed in line with the Consumer Price Index on 20 September each year.
Recent changes
Account-based pension (ABP) income from taxed superannuation funds paid to those aged 60 or over was, before 1 Janurary 2015, not included in the income test for CSHC eligibility, because this income is not included in taxable income.
The new legislation applies deeming to ABPs for those aged 60 or more from 1 January 2015 in the same way financial assets are deemed under the age pension income test, using the same thresholds and rates. The key difference is that only the value of the ABP will be used to determine the deemed income - no other assets are included in this calculation.
To prevent double counting, ABP income received by a spouse under age 60 will not be deemed, as some or all of this income may be included as adjusted taxable income.
Under grandfathering arrangements, existing ABPs remain exempt where both the ABP and CSHC were held prior to 1 January 2015 and both continue to be held.
Guidance from the Department of Social Services indicates that the grandfathering provisions will continue where a pension reverts automatically to a reversionary beneficiary, provided at the time of reversion the beneficiary holds a CSHC.
Impact of account-based pension values
Using current deeming rates, the maximum value that can be held in an ABP can be estimated, as well as the reduction in this value per dollar of adjusted taxable income. The following table shows, for someone earning no adjusted taxable income, that a significant amount of assets can be held in an ABP while still retaining CSHC eligibility.
If deeming rates were to increase, these values would reduce.
Strategies to obtain/retain the CSHC
Existing ABP and CSHC holders should monitor their income levels during the year to ensure they stay below the relevant threshold. Once eligibility for the CSHC is lost, the grandfathering of an ABP is lost permanently.
For new or existing cardholders in danger of breaching the thresholds, the following strategies may help to obtain/retain the CSHC:
Manage taxable income - consider restructuring investments that generate taxable income. Possible solutions could be to make contributions to super (if eligible), invest in an insurance bond or family trust, or gift assets that generate taxable income to family members.
Reduce non-grandfathered ABP value - in the legislation the expanded income test only includes deemed income received from ABPs for recipients aged 60 and over. It does not include super accumulation balances in this calculation. Moving pension funds back to accumulation phase may provide an opportunity to reduce deemed income.
Choose the income year - normally the previous year's notice of assessment is used to determine the adjusted taxable income of an applicant or cardholder. If this income exceeds the relevant threshold, there is the ability to apply to use an estimate of the current year's income. This is usually relevant where one-off events occur in the income year of application, such as retirement or the sale of an investment (in limited circumstances).
Of course, any change recommended would need to consider the client's overall needs and objectives.
Case study
Matthew will be 65 in January. He is single, retired and has accumulated the following assets:
- $700,000 in an account-based pension
- $400,000 investment property, earning $13,500 pa
- $500,000 in non-super assets, earning $17,000 pa.
While Matthew's ABP cannot be grandfathered, we have shown his position under both the old and new rules for comparison purposes.
Matthew will be negatively affected by the change.
However, to reduce the effect of deeming on his ABP balance, Matthew rolls $100,000 back into accumulation phase, so that only $600,000 of his pension is now subject to deeming.
This brings him under the income test limit. In future years, if it is likely the income test will be breached again (for example if deeming rates increased), Matthew could commute a further sum back into accumulation phase.
This strategy does come with a trade-off: the superannuation fund tax applicable to earnings generated in accumulation phase.
Let's compare this estimated tax with the estimated benefits received from the CSHC to see if this strategy is worthwhile.
Using return assumptions of 7.36 per cent for pension phase and 6.53 per cent for accumulation phase (both net of fees, taxes and inclusive of franking credits), we estimate Matthew's super accumulation investment earnings will be subject to additional tax of $830 in the first year. For this strategy to be beneficial, he would need to receive a benefit of at least this amount from the CSHC.
To determine this, let's look at two scenarios. In the first, Matthew is in good health - his medical expenses are relatively minor and he only obtains three PBS medicines. In the second scenario his health is somewhat worse, spending over $1500 on medical expenses (including doctors' visits and pathology tests). He also requires 20 PBS medicines over the year. If Matthew is eligible for the CSHC, he will receive the following benefits:
In Scenario 1 Matthew is worse off retaining his CSHC, whereas in Scenario 2 he receives a potential net benefit of approximately $649.
Conclusion
The tightening of the CSHC income test may initially seem to have a significant impact on self-funded retiree clients, but the impact will vary significantly based on the value a client may receive from their actual use of the CSHC. For those who enjoy a healthy retirement, the benefits from the CSHC may initially be relatively minor.
Our analysis shows that, for those with no adjusted taxable income, a considerable balance can be held in an ABP before access to the CSHC is lost.
For those who are initially assessed as ineligible, there are some options that can be considered, including restructuring assets to manage income and rolling a portion of non-grandfathered ABP back to accumulation phase.
Curtis Dowel is Technical Services Manager, MAStech, at Macquarie.
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