From 1 January 2015, tax and superannuation advisers for self-funded retirees need to be careful not to implement superannuation pension strategies that could inadvertently impact their clients' entitlements to the Age Pension or Commonwealth Seniors Health Card (CSHC). Specifically, advisers need to consider the implications of disrupting established pre-1 January 2015 superannuation account-based pensions after 31 December 2014 and potentially triggering the new social security deeming rules.
The Social Services and Other Legislation Amendment (2014 Budget Measures No 6) Act 2014 is now law having received Royal Assent on 26 November 2014. Among other changes, the amendments specifically include untaxed superannuation income streams in the income test for the CSHC from 1 January 2015 (with pensions in place before 1 January 2015 for existing cardholders exempt from the new arrangements).Stuart Jones, Thomson Reuters
Essentially, the CSHC income test changes align with the social security deeming rules from 1 January 2015. This follows earlier amendments which extended the social security deeming rules for the Age Pension (and DVA service pension) to include untaxed superannuation account-based income streams in the pension income test. The amendments, made by the Social Services and Other Legislation Amendment Act 2014 seek to ensure that all financial assets are assessed under the same rules from 1 January 2015. There is no change to the assets test.
While account-based pensions in place before 1 January 2015 will continue to be assessed under the former income test rules for the Age Pension, the pensioner must actually be receiving income support immediately before 1 January 2015, and this must continue uninterrupted from that date. Otherwise, the new rules will be triggered if income support is temporarily suspended for a period after 31 December 2014.
To qualify for the Commonwealth Seniors Health Card (CSHC) a person's annual adjusted taxable income (ATI) is subject to a threshold income test (but there is no asset test). Following amendments by the Social Services and Other Legislation Amendment (Seniors Health Card and Other Measures) Act 2014, the ATI thresholds are indexed each year, starting from 20 September 2014 with:
Previously, an account-based pension amount received by a self-funded retiree aged 60 or over is not counted towards the CSHC income test as it is non-assessable non-exempt income and not included in the income test. The Social Services and Other Legislation Amendment (2014 Budget Measures No 6) Act 2014 specifically includes superannuation account-based pensions in the deeming rules for the CSHC from 1 January 2015. However, account-based pensions and annuities in place before 1 January 2015 for existing CSHC cardholders are grandfathered under the existing rules.
Self-funded retirees with large superannuation balances (that exclude them from Age Pension eligibility) often view their CSHC as a precious "entitlement". Indeed, Government costings suggest that a CSHC is worth, on average, $2,045.00 per annum for each of the 283,591 cardholders at June 2013. Accordingly, advisers will need to be careful not to implement strategies after 31 December 2014 that could result in a person becoming ineligible for the grandfathering exemption (and potentially losing their CSHC). For example, stopping and starting a pre-1 January 2015 pension as part of a re-contribution strategy or rolling over a pension to another fund.
To qualify for the CSHC income test exemption under the grandfathering rules, an individual must have continuously held a CSHC from before 1 January 2015 and continue to hold it uninterrupted from that date. If the person ceases to hold a pre-1 January 2015 CSHC, then the new deeming rules apply to the income test for any new card they later hold after 1 January 2015. Likewise, the account-based pension must be in place before 1 January 2015 and continue uninterrupted. If a cardholder has a partner who does not hold a seniors health card, then their partner's income from a superannuation product is counted from 1 January 2015.
The portability period for CSHC cardholders has also been extended from 6 to 19 weeks. As a result, a temporary absence from Australia for more than 19 weeks could result in the loss of the CSHC if the cardholder was relying on the income test exemption under the grandfathering rules.
Source: This article was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, please:
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Andrew is a lawyer in the Maddocks Tax & Revenue team.
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His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Andrew was a tax consultant at a Big 4 Chartered Accounting Firm.
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