Your guide to Deeming information and changes Changes apply from 1 January 2015 YOUR GUIDE TO DEEMING INFORMATION AND CHANGES 1
ISBN 978-1-925007-67-1 With the exception of the Commonwealth Coat of Arms, Department of Social Services Logo, photographs, images, signatures and where otherwise noted, all material presented in this publication is provided under a Creative Commons BY Attribution 3.0 http://creativecommons.org/licenses/by/4.0/au/ The details of the relevant licence conditions are available on the Creative Commons website http://creativecommons.org/licenses/by/4.0/au/legalcode The document must be attributed as the Department of Social Services Your guide to Deeming information and changes. The Commonwealth accepts no responsibility for the accuracy, reliability or completeness of any material contained in this publication. The Commonwealth disclaims all liability to any person in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon any information presented in this publication. The situations and names appearing in this publication are used to illustrate realistic situations but do not refer to actual individuals. Any resemblance to real persons, living or dead, is purely coincidental. This material is intended for information purposes only and is not professional advice. Readers should not act upon this information without seeking appropriate professional advice. Contact us Enquiries regarding the licence and any use of this document are welcome at: Communication and Media Branch Department of Social Services PO Box 7576 Canberra BC 2610 Email: communications@dss.gov.au You can find this product at the DSS website 2 YOUR GUIDE TO DEEMING INFORMATION AND CHANGES
Contents Who is this booklet for?... 4 What is this booklet about?... 5 What is deeming?... 6 How does deeming work?... 7 The benefits of deeming... 8 What is changing?... 11 What are account-based income streams?...12 Why is the Australian Government introducing this change?...14 What if you already have superannuation account-based income streams?...15 Will reversionary beneficiaries continue to be assessed under the income test rules applying before 1 January 2015?... 17 What will it mean for my Age Pension if I drawdown more or less income from my superannuation account-based income stream?...18 Where to find more information...19 YOUR GUIDE TO DEEMING INFORMATION AND CHANGES 3
Who is this booklet for? This booklet provides older Australians, pensioners, people nearing pension age and their families information about the way in which income from their financial assets is assessed for social security and Veterans Affairs payments. 4 YOUR GUIDE TO DEEMING INFORMATION AND CHANGES
What is this booklet about? This booklet discusses the deeming rules and the changes to these rules that will come into effect on 1 January 2015. It explains: What deeming is How deeming works The benefits of deeming Changes starting 1 January 2015 What an account-based income stream is Why the Australian Government is making these changes Who the changes affect Where to find more information on deeming. This booklet is a guide only. You may want to seek financial advice about your circumstances and finances. It s a good idea to do some research to see what options work best for you. YOUR GUIDE TO DEEMING INFORMATION AND CHANGES 5
What is deeming? The deeming rules are the way in which income from financial investments is assessed for income support from the Departments of Human Services (Centrelink) and Veterans Affairs (DVA). Deeming works by assuming that your financial investments are earning a certain rate of income. Under the income test for your payment, the deemed income from your financial investments is added to any other assessable income to work out your total assessable income which is then used to calculate your pension, benefit or allowance.* Deeming applies to financial investments, including: bank, building society and credit union accounts and term deposits managed investments, loans and debentures listed shares and securities. * Note: many payments have an assets test which also applies. 6 YOUR GUIDE TO DEEMING INFORMATION AND CHANGES
How does deeming work? Deeming assumes that financial investments are earning a certain rate of income, regardless of the amount of income they are actually earning. Deeming rates reflect the returns you can expect to earn from financial investments. As at 20 September 2014, a lower deeming rate of 2 per cent applies to: the first $48,000 of a single customer s total financial investments the first $79,600 of a pensioner couple s total financial investments the first $39,800 of total financial investments for each member of a non-pensioner couple. A higher deeming rate of 3.5 per cent applies to financial investments above these amounts. The lower deeming rate reflects that many pensioners will choose to have some savings in investments with very high accessibility and safety, but which tend to provide relatively low returns. The higher deeming rate reflects that people with higher amounts of savings can seek higher returns on some of their savings, either by accepting relatively lower accessibility (for example, term deposits) or by accepting more risk (for example, shares). The deeming rates change from time to time to reflect returns on financial investments and are set by the Minister for Social Services. The deeming rules create incentives for you to earn more income from your savings. If you respond to the deeming rules by investing to get higher returns, your total income will increase. If your financial investments earn more than the deeming rates, the extra income is not assessed. Note: Australian banks and financial institutions, such as credit unions and building societies, set their interest rates; not the Australian Government. Conditions for accounts vary according to the financial institution offering them, so it is important that you talk to your financial institution when choosing these products. You should shop around for the account that best satisfies your needs. YOUR GUIDE TO DEEMING INFORMATION AND CHANGES 7
Example Deemed income calculation single pension recipient Mei is a single Age Pension recipient whose total financial investments are worth $80,000. (Mei has $25,000 in a savings account and $55,000 in shares.) The first $48,000 of Mei s investments would be deemed at the lower deeming rate. The lower deeming rate is currently 2 per cent: Below threshold amount = $48,000 x 2% = $960. The remaining $32,000 is above the deeming threshold and is deemed at the upper deeming rate. The upper deeming rate is currently 3.5 per cent: Above threshold amount = $32,000 x 3.5% = $1,120. Mei s total annual deemed income = $960 + $1,120 = $2,080. The total deemed income is added to any income Mei has from other sources to calculate how much pension she can be paid under the income test. The benefits of deeming Deeming is a simple and fair way to assess income from financial investments because: people with the same amount of money held in different financial investments receive a similar assessment it reduces the extent to which income support payments vary the deeming rate reflects returns that pensioners can get for their savings. By treating all financial investments in the same way, the deeming rules: encourage you to choose investments on their merit rather the effect the investment income may have on your pension entitlement help to simplify investment choices. Deeming encourages you to consider earning better returns on your investments. It increases incentives to earn higher returns on investments because returns above the deeming rate are not counted as income. 8 YOUR GUIDE TO DEEMING INFORMATION AND CHANGES
Example Deemed income calculation pensioner couple Mary and Stefan are both Age Pension recipients with a combined total of $90,000 in financial investments. (They have $25,000 in a term deposit, $10,000 in a credit union account and $55,000 worth of managed investments.) The first $79,600 of their investments would be deemed at lower deeming rate. The lower deeming rate is currently 2 per cent: Below threshold amount = $79,600 x 2% = $1,592 The remaining $10,400 is above the deeming threshold for a pensioner couple and is deemed at the upper deeming rate. The upper deeming rate is currently 3.5 per cent. Above threshold amount = $10,400 x 3.5% = $364 Mary and Stefan s total annual deemed income = $1,592 + $364 = $1,956 The total deemed income is added to any income Stefan and Mary have from other sources to calculate what rate of Aged Pension they receive under the income test. YOUR GUIDE TO DEEMING INFORMATION AND CHANGES 9
Example Deemed income calculation non-pensioner couple Barry receives a Newstart Allowance and his partner Ann receives a Parenting Payment. Barry has $5,000 in a bank account. Ann has $2,500 in another account and shares valued at $30,000. They have a further $20,000 in a joint account. Deemed income is calculated separately for Barry and Ann because separate allowance income tests apply for each person. Calculation for Barry Barry s total financial assets are $15,000 ($5,000 in a bank account plus his $10,000 share of the joint account). This is below the deeming threshold of $39,800 for each member of a non-pensioner couple, so the lower deeming rate applies to the full amount. The lower deeming rate is currently 2 per cent: Below threshold amount = $15,000 x 2% = $300 Barry s total annual deemed income = $300 Calculation for Ann Ann s total financial assets are $42,500 ($2,500 + $30,000 + her $10,000 share of the joint account). The first $39,800 of Ann s investments would be deemed at lower deeming rate of 2 per cent: Below threshold amount = $39,800 x 2% = $796 The remaining $2,700 is above the deeming threshold for each member of a non-pensioner couple and is deemed at the upper deeming rate. The upper deeming rate is currently 3.5 per cent: Above threshold amount = $2,700 x 3.5% = $94.50. Ann s total annual deemed income = $796 + $94.50 = $890.50 The total deemed income for each of them is added to other income they each may have from other sources. The total income for each of them is then used to calculate what rate of Newstart Allowance and Parenting Payment they receive under the allowance income test. 10 YOUR GUIDE TO DEEMING INFORMATION AND CHANGES
What is changing on 1 January 2015? From 1 January 2015, the deeming rules that apply to financial investments will be extended to account-based income streams (also known as allocated pensions and account-based pensions). This means the Australian Government is changing the social security income test treatment of superannuation account-based income streams for products assessed from 1 January 2015. If you are receiving an income support payment on 31 December 2014 and have a superannuation account-based income stream, this income stream will be grandfathered. Grandfathering Grandfathering is a provision in which an old rule continues to apply to existing situations while a new rule will apply to all future cases. Those exempt from the new rule are said to have been grandfathered. YOUR GUIDE TO DEEMING INFORMATION AND CHANGES 11
What are account-based income streams? An account-based income stream is a retirement income product purchased with superannuation money. Account-based income streams are tax-free from 60 years of age. They also include transition to retirement income streams. People with account-based income streams are required by superannuation rules to drawdown a minimum amount of their account balance every year. For example, a person aged 65 to 75 years is required to withdraw at least 5 per cent of their account balance annually. However, people can choose to withdraw more. Most investors have full access to their capital. 12 YOUR GUIDE TO DEEMING INFORMATION AND CHANGES
Why is the Australian Government introducing this change? To make the system fairer. This is a simple and common sense extension of the deeming rules that will ensure a more sustainable income support system. People with similar levels of financial assets will be treated equally under the income support system. It will also make the system easier. Income support recipients with superannuation account-based income streams under the new rules will have less to report to Centrelink. The current rules treat income from superannuation account-based income streams differently to how they treat income from other similar investments like shares or term deposits. The following case study shows the different Age Pension outcomes of two people with the same amount of financial assets, depending on whether or not they hold these assets in an account-based income stream. Comparison: Similar financial assets held outside of superannuation and inside an account-based income stream Assets outside of superannuation Mary is 65 years old and has never had access to superannuation. She has saved $190,000, which she holds in term deposits and shares. Under the income test assessable income from Mary s financial investments are determined by the deeming rules. Assessable income = ($48,000 x 2 per cent) + 3.5 per cent x ($190,000 - $48,000) = $5,930 Under the deeming rules before 1 January 2015, $5,930 of Mary s income is assessed by the income test. Mary would receive an Age Pension of $820.26 a fortnight ($21,326.80 a year). YOUR GUIDE TO DEEMING INFORMATION AND CHANGES 13
Assets in an account-based income stream Bob is 65 years old and has $190,000 in superannuation which he has used to purchase an account-based income stream with the underlying assets in term deposits and shares. Bob elects to receive an annual income of 5 per cent from his income stream ($9,500). Under the income test rules before 1 January 2015, an amount is deducted from this income to reflect the return of capital. This is calculated using the following formula: Assessable income = Annual payment (Purchase price/life expectancy) Assessable income = $9,500 ($190,000/18.54) = $9,500 - $10,248 = $0 (assessable income cannot be negative) Under the income stream rules before 1 January 2015, none of the income from Bob s account-based income stream is assessed. Bob would receive the maximum rate of Age Pension of $854.30 a fortnight ($22,211.80 a year). Bob receives $885 a year ($34.05 a fortnight) more Age Pension than Mary even though they have the same level of financial assets. Under the new rules (starting 1 January 2015) both Mary and Bob would get the same rate of Age Pension. These rates are valid as at 20 September 2014. Calculations assume no other assessable assets or income. 14 YOUR GUIDE TO DEEMING INFORMATION AND CHANGES
What if you already have superannuation account-based income streams? If you are an income support recipient on 31 December 2014 and have a superannuation account-based income stream that was established before 1 January 2015 your income stream will be grandfathered and will continue to be assessed under existing rules. If you choose to change an existing account-based income stream to a new product, or purchase a new product after 1 January 2015, the new product will be assessed under the deeming rules. If you think you would be better off under the new deeming rules you have the flexibility to change your product and be assessed under the new rules. Fact: If you are an income support recipient this means you are receiving a pension, benefit or allowance from the Australian Government. YOUR GUIDE TO DEEMING INFORMATION AND CHANGES 15
Grandfathering will not be affected if you: change the amount of money that you drawdown from grandfathered account-based income stream; or change the mix of investments within a grandfathered account-based income stream. You will lose grandfathering if you change to a new account-based income stream after 1 January 2015. If you have a grandfathered account-based income stream and you cease to be paid an income support payment such as a pension or an allowance on or after 1 January 2015, the grandfathering provisions will not apply. If you then start receiving income support again, your account-based income stream will be assessed under the deeming rules. If an income support recipient s partner directly holds an account-based income stream, but the partner is not receiving an income support payment, then the deeming rules will apply to the partner s income stream from 1 January 2015. In other words, it would not be grandfathered. This may affect the income support recipient s rate of income support payment. 16 YOUR GUIDE TO DEEMING INFORMATION AND CHANGES
Will reversionary beneficiaries continue to be assessed under the income test rules applying before 1 January 2015? Generally yes because the grandfathering provisions apply to the superannuation account-based income stream and not the individual who holds it. As long as the original product does not change to a new product, it will not affect the grandfathering arrangements. This applies where the superannuation account-based income stream automatically goes to the reversionary beneficiary on the death of the primary beneficiary, and the reversionary beneficiary is receiving an income support payment when the income stream reverts. What is a primary beneficiary? A primary beneficiary is the person who is holding the income stream. What is a reversionary beneficiary? A reversionary beneficiary is the person who will receive your pension as an income stream that is, your pension payments will revert to them once you die. Only spouses, certain children and dependants are eligible to become reversionary beneficiaries. YOUR GUIDE TO DEEMING INFORMATION AND CHANGES 17
What will it mean for my Age Pension if I drawdown more or less income from my superannuation account-based income stream? The deeming rules that come into effect on 1 January 2015 assume that your income stream is earning a certain rate of income, regardless of how much you drawdown. The current social security income test for superannuation account-based income streams advantages people who can afford to withdraw lower amounts of income. The 1 January 2015 changes will remove any incentive for people to tailor their withdrawal amounts as all funds held in an account-based income stream will be assessed under the deeming rules. 18 YOUR GUIDE TO DEEMING INFORMATION AND CHANGES
Where to find more information Centrelink s Financial Information Services officers are available to provide you with information regarding the deeming rules and other issues regarding social security pensions and allowances. You can access free information from Centrelink Financial Information Services by calling 132 300. You can also learn more about deeming rules, deeming exemptions and the evidence you need to provide on the Department of Human Services website (www.humanservices.gov.au). Recipients of Veterans Affairs payments can visit the Department of Veterans Affairs (DVA) website at www.dva.gov.au or call DVA on 133 254 or from regional Australia freecall 1800 555 254. Information about the deeming rules is also available from the Department of Social Services (DSS) website at www.dss.gov.au. Questions about this policy can also be sent to DSS by email deeming@dss.gov.au If you need to seek financial advice, the Australian Securities and Investments Commission (ASIC) SmartMoney website (www.moneysmart.gov.au) may be able to help you. YOUR GUIDE TO DEEMING INFORMATION AND CHANGES 19
Contact us Rates and Means Testing Policy Branch Department of Social Services PO Box 7576 Canberra BC 2610 Email: deeming@dss.gov.au You can find this product at the DSS website 20 YOUR GUIDE TO DEEMING INFORMATION AND CHANGES DSS1441.10.14