Outcome on key reform proposals
07 Mar 2014
By Shadforth Financial Group
Previously we detailed some important proposed superannuation reforms. At the time of writing, the outcomes of these proposals were still pending. The Federal Government has now made the following decisions in relation to each of these reforms:
- Taxation of earnings on assets backing a superannuation pension: This proposal has been shelved and, as a result, earnings on assets being used to pay a superannuation income stream will continue to be tax-exempt.
- Penalties on trustees of Self-Managed Superannuation Funds (SMSF): The Federal Government plans to re-introduce legislation to enforce a range of penalties on trustees for breaches of SMSF rules.
- Deeming of Account-Based Pensions: The Federal Government plans to proceed with this reform. Legislation has been introduced in Parliament and a couple of important hurdles have been passed. This reform is explored further below.
Deeming of Account-Based Pensions
An Account-Based Pension is simply an income stream paid from accumulated superannuation savings which has a market-linked component. From a Centrelink perspective, the actual income paid is currently assessed to determine the amount of income support payment (such as the Age Pension) an individual may receive. However, the income received is reduced based on an individual's life expectancy and original capital used to purchase the pension.
Under the proposed rules, an Account-Based Pension set up from 1 January 2015 will be 'deemed'. This means that Centrelink will use pre-set rates of return to determine how much age pension an individual or couple will receive.
Currently, Centrelink deem that financial investments (such as bank accounts, shares and term deposits) earn 2% per annum on the first $46,600 for singles and $77,400 for couples, and 3.5% per annum on amounts above this.
The Federal Government has indicated that Account-Based Pensions established prior to 1 January 2015 where the individual is receiving an Age Pension, Disability Support Pension or other income support, payment will not be deemed and will continue to be assessed under the current rules.
What does this mean in practice?
In the main, it will mean that those eligible to receive an Age Pension from 1 January 2015 may receive a lower entitlement when they become eligible. This will ultimately depend upon whether the individual's Age Pension is determined under the Assets Test or the Income Test. If it is determined under the Assets Test, the rules will have no impact.
For example, let's consider Vikki, who is 65 and has just become eligible for an Age Pension. At the same time, she has transferred her superannuation of $500,000 to an Account-Based Pension. Under the current rules, the Income Test assessment on her Account-Based Pension would be $1,873, assuming she drew the minimum income. Under the new rules however, Vikki's Income Test assessment would be $17,500, assuming she has at least $46,600 in other financial investments.
This could impact her Age Pension entitlement by up to $7,813 in the first year. However, the actual impact will depend on her overall income and asset position.
For those individuals currently eligible for an income support payment, it may be worthwhile to establish an Account-Based Pension prior to 1 January 2015.
For those who already receive an income support payment and have established an Account-Based Pension, it may be worthwhile re-commencing your Account-Based Pension prior to 1 January 2015. In doing so you could be entitled to a higher Age Pension. It is important to note that re-commencing your Account-Based Pension on or after 1 January 2015 will mean that it will be assessed under the new rules.
The need for advice
While there are some strategic opportunities that may be available as a result of this reform, it is important you get financial advice prior to implementing any strategy.
At present, the legislation enacting the reform has not yet passed Parliament. Once the reform becomes law, it may be necessary to review your situation to ensure you optimise your income support entitlement. We intend to contact effected clients in due course.
In the meantime, please do not hesitate to contact us if you have any questions.