Income – not always what it appears to be

A person’s age pension entitlement is based on several factors.

Their age this is the obvious factor. Are they single or a member of a couple? Do they own their home or are they are renting?

However, the overriding consideration in determining a person’s correct entitlement is the application of the assets and income means test.

The complexities of the means test are well known and we have discussed several of the more convoluted issues in this blog previously.  In this article, I would like to discuss one of the ‘simple’ processes in establishing a pensioner’s correct entitlement ‘deeming’.

What is deeming?

The following is a direct quote from the Guide to the Social Security Act

The deeming rules are a central part of the social security income test. They are used to assess income from financial investments for social security and Veterans’ Affairs pension/allowance purposes. Deeming assumes that financial investments are earning a certain rate of income, regardless of the amount of income they are earning. If income support recipients earn more than these rates, the extra income is not assessed.

The deeming rates reflect the returns available in the market to pensioners for a range of financial investments. By treating all financial investments in the same way, the deeming rules encourage people to choose investments on their merit rather than on the effect the investment income may have on the person’s pension entitlement.

To calculate the income assessed, deeming rates are applied to the total market value of an income support recipient’s financial investments. The actual returns from the income support recipient’s investments, whether in the form of capital growth, dividends or interest, are not used for income assessment, even if the investment returns are above the deeming rates.”

Like all good pieces of government legislation, it is easy to understand. I make this statement quite sarcastically, as for most people who are applying age pension, the concept of deeming can be very confusing.

What does it all mean in simple terms?

In the current environment with the Reserve Bank of Australia, holding interest rates at historic lows of 1.5%, the average return on a 12-month term deposit is approximately 2.35%.

Australian shares over a ten-year period to December 2016 have returned an average 4.3% per annum.

If you have money invested in a balance portfolio of investments, you can generally expect an average return of 5.7% per annum over a 5 year period.

These percentage returns mean nothing when it comes to Centrelink assessing your entitlement to the age pension under the income test.

Centrelink will add all the balances of your term deposits, bank accounts, share portfolio, managed investment and other financial investments that you hold and apply the current deeming percentage to this total amount of money.

For example, a couple who have a total of $250,000 invested in term deposits bank accounts and shares, Centrelink will assess the first $85,000 of this amount as earning 1.75% and the balance of $165,000 at 3.25%.  Meaning the amount of income to be assessed (if my math is correct) is $6,849.50 per annum – what the investments are actually returning means nothing.

Except, of course, from a tax perspective where the actual income is the amount assessed for taxation purposes.

The current deeming thresholds and interest rates are:

Lower Threshold Higher Threshold
Single person $51,200 at 1.75% Balance > $51,200 at 3.25%
Couple $85,000 at 1.75% Balance > $85,000 at 3.25%

 

I should note that the interest rates do change to reflect the current returns available in the market across a range of financial investments and the lower thresholds change every year on the 1st of July.

So, after all those years of understanding how the ATO assessed income, remember that Social Security or Centrelink do not assess income in the same way.

If you are still a little confused, please do talk to someone who knows how “deeming” works.

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