Bonus changes for pensioners

In the 2009 Federal Budget, the Government announced a pension reform package that contained various changes to social security. Legislation implementing these changes has now been passed by Parliament. (The Bill containing changes to DVA pensions is currently in the Senate and is not contentious.)

As the major changes take effect from September 20 this year, it is worth taking some time to consider three of the main changes:

• closure of the Pension Bonus Scheme;
• introduction of the new Work Bonus; and
• the new transitional arrangements.

Closure of the Pension Bonus Scheme

The Pension Bonus Scheme (PBS) will effectively close to new entrants from September 20, 2009.

However, a person can register for the PBS 13 weeks either side of turning Age Pension age. That is, the period of registration includes the 13 weeks before and 13 weeks after turning Age Pension age.

As a result, people who reach Age Pension age prior to September 20, 2009, can still register as a member of the PBS on or after September 20, 2009, provided they do so within this 13-week period.

What happens to existing members of the PBS?

The scheme will continue to be available to existing members who will continue to accrue entitlements under existing rules.

However, some people are non-accruing members of the PBS as they await their partner’s registration, at which point their partner’s work could potentially be used to satisfy the work test.

Unfortunately, these people cannot continue as non-accruing members from September 20, 2009, as the scheme will close to new entrants from that date. This will mean that their (under Age Pension age) partner will never be able to satisfy the work test for the non-accruing member.

Consequently, the non-accruing member must become accruing in their own right — that is, they must start to meet the work test, or claim Age Pension, within 13 weeks.

Introduction of the Work Bonus

Favourable treatment of employment income

From September 20, 2009, the Work Bonus will be introduced allowing certain amounts of employment income to be disregarded from the income test provided the employed person has reached Age Pension age.

However, this bonus will not apply to those who are self-employed, such as sole traders or a partner in a partnership.

The maximum amount of employment income to be disregarded under the new Work Bonus is 50 per cent of the first $500 per fortnight of employment income received by a person of Age Pension age. This means a maximum amount of $250 per fortnight of employment income may be excluded.

Further, where part of a person’s employment income is excluded from the income test, it will also be excluded for any income test applied to their partner, regardless of their partner’s age.

Also, for members of a couple, provided that both of them have reached their respective Age Pension age, the Work Bonus will be available to each member individually.

People who are employees of their private company or trust

Due to the favourable treatment of employment income under the new Work Bonus, a pensioner who is employed by their own company or trust may wish to consider drawing more income from that entity in the form of a salary, director’s fees, or similar, and less in the form of dividends/distributions.

However, restructuring employment income and distributions from an entity can have tax implications for both the employee and the entity, so these issues will need to be considered.

What payments are affected?

The payments affected are the Centrelink Age Pension, Disability Support Pension, Wife Pension, Carer Payment, Bereavement Allowance, Widow B Pension and DVA service pensions.

Transitional arrangements from September 20, 2009

To ensure that existing pensioners are not adversely affected by the income test changes commencing September 20, 2009, transitional arrangements will be put in place to protect their current entitlements.

Essentially, under these arrangements, existing pensioners will be assessed under both the current means testing rules and the new income test rules.

If they are worse off under the calculation conducted using the new rules, they will be paid a transitional rate, rather than have their current pension amount reduced.

Single pensioners paid at the transitional rate will receive a pension increase of $20.20 per fortnight, while couples will receive a pension rate increase of $20.30 per fortnight combined.

In addition, this transitional rate will continue to be subject to the current CPI increases in March and September, which is likely to be slower than the new rate of indexation applicable to the post-September 20 base rate of pension.

Note: If a pensioner is governed under the assets test, the transitional arrangements will not be relevant to them.

New pension recipients from September 20, 2009, will be assessed under the new rules, including the new pension rates.

How long will a person be assessed under the transitional arrangements?

The transitional rules will only apply to an individual while their pension (calculated under the transitional arrangements) is higher than the pension they would otherwise be entitled to under the new post-September 20 calculations.

Once a person’s pension entitlement is the same, or higher under the new rules, their pension will be calculated according to the new rules permanently.

In addition to these changes, a number of other new rules come into effect on September 20, 2009, including an increase in the Age Pension for singles, a new pension and seniors supplement, new indexation and benchmarking of pensions, an increase in the income test taper rate and some amendments to aged care.

Note: To take advantage of the new Work Bonus, a person’s Age Pension must be calculated under the new rules, not the transitional rules. This means that for income test

purposes, it is the new 50 per cent taper rate that will be applied to the amount of employment income that is not disregarded.

John Perri is technical services manager at AMP TapIn.