Aged Pension - Incomes Test

Pension Reduction Formula Applied

Under the Incomes Test, the amount of Aged Pension a person is entitled to, will be reduced by 50 cents for each dollar of income earned over the threshold (at present $3,796 pa for a single person and $6,656 pa jointly for a couple).

SMSF Benefit and the Incomes Test

Most retirees will generate the bulk (if not all) of their income from their SMSF Benefit. Under current rules the amount you earn on your SMSF benefit that is used to assess your Aged Pension eligibility under the Incomes test is discussed below.

Superannuation Benefit in Accumulation Mode

When you are still in Accumulation Mode (ie have not commenced a Simple Account Based Pension from your SMSF) your SMSF Benefit is tested under the Income Test using a system known as deeming. This simply means that you are deemed to earn an amount of income on your Super Benefit (even if you earn a completely different amount). The deeming rates are:

So if you have a Super Benefit of $500,000 (and are married) you are deemed to earn $21,450 in income (ie 3% on the first $70,000 ($2,100) and 4.5% on the balance ($19,350). Given this level of income is over the minimum threshold (of $6,656) by $14,794, the pension is reduced under the Incomes Test by $7,397 ($14,794 x 50 cents), leaving a pension total payable of $17,854 to the married couple (or $8,927 pa each).

It is noted that the deeming provisions apply to most financial assets like Bank Accounts, Managed Funds and Shares outside the Super environment. The actual rent from Rental Properties and other Real Estate owned outside the Super environment is assessed under the Incomes Test.

Superannuation Benefit in Pension Mode

When you are in Simple Account Based Pension Mode (ie you have commenced a Simple Account Based Pension from your SMSF) your SMSF Benefit is tested under the Incomes Test using a different process to deeming. In this case, the amount of Aged Pension Benefit is calculated using the following formula:

Pension Received less (Value of SMSF Benefit / Life Expectancy)

Assume you have a Super Benefit of $500,000 and draw a Simple Account Based Pension of $6% (ie $30,000). Under the above formula you are deemed to earn only $1,751 in income. That is:

$30,000 less ($500,000 / 17.70)

Given this level of income is under the minimum threshold (of $6,656), your Aged Pension Entitlement is not reduced under the Incomes Test. This is a significantly different result to that in the above example when a Simple Account Based Pension had not commenced.

Incomes Test and Assets Test in Practice

Remember both an Assets Test and Incomes Test is applied when determing your eligibility for the Aged Pension. It is the Test that produces the lowest Aged Pension Benefit that applies. In a strange way the Incomes Test is largely irrelevant for clients who have the bulk of their money in Superannuation and their family home and have started a Simple Account Based Pension. This is because this test does not significantly reduce your Aged Pension Benefit where an amount close to the minimum Simple Account Based Pension is drawn. In this situation it is the Assets Test that must be carefully assessed.

Centrelink

For further information about receiving an Aged Pension, including an application form contact your Centrelink Office

*The above rates are effective from 01 July 2010.

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