More self-funded retirees to become eligible for cheaper healthcare
Recent legislation introduced into Parliament will increase the Commonwealth Seniors Health Card (CSHC) income test. SMSF professionals play an important role in informing clients of the changes.
In good news for SMSF retirees, legislation was recently introduced into Parliament1 to increase the Commonwealth Seniors Health Card (CSHC) income test limits to $90,000 a year for a single person and $144,000 a year for couples.
The CSHC is a concession card that provides access to cheaper healthcare and other discounts and can be valuable in reducing the cost of living for self-funded retirees. Generally, the CSHC is accessible by persons of Age Pension age but who are not eligible for the Age Pension due to either the assets test or income test.
The eligibility test for the CSHC is different to the Age pension in that it does not have an assets test. The Services Australia webpage identifies that to get the CHSC card a person must:
- Be Age Pension age or older
- Meet residence rules
- Not be getting a payment from Centrelink or the Department of Veterans’ Affairs
- Provide a Tax File Number or be exempt from doing so
- Meet identity requirements
- Meet the income test.
Persons who have a partner must provide details of their partner's income in the application as they will be assessed as a couple.
The CSHC is valid for 12 months and is reissued on 1 August each year provided eligibility requirements continue to be met.
To meet the CSHC income test a retiree must currently earn no more than the following:
- $61,284 a year for a single person
- $98,054 a year for couples (combined)
The incoming increase in income test thresholds to $90,000 for a single and $144,000 for a couple (combined) is a material increase which the Government expect will lead to more than 44,000 additional self-funded retirees being able to access the CHSC card in the first year, increasing to 50,000 by 2026-27.
What income counts?
This CSHC income test is based on adjusted taxable income (ATI), usually evidenced by the tax notice of assessment plus any other income documents required to determine the person's ATI. The reference tax year used is usually the tax year immediately preceding the current tax year, except if the person has not received their notice of assessment for that year, then the tax year immediately preceding will be used. If the person is a member of a couple, then both persons must use the same tax year.
Consider John and Judy who have an SMSF and own their home. John has just retired and is aged 67. He has $1.5million in an account-based pension in the SMSF. John is married to Judy, aged 66, who is still working, she has $500,000 in accumulation phase in the SMSF. They also have $150,000 in cash and shares outside the SMSF.
John is of Age Pension age but will not be entitled to the Age Pension as he and Judy have assessable assets exceeding $935,000 which is the Age Pension cut off for couple homeowners. He instead applies for a CSHC. The current tax year is 2022-23 and so John must provide a tax notice of assessment from the 2021-22 tax year for himself and Judy, as he will be assessed as a couple even though Judy is not yet of Age Pension age. If this is not available, then he must provide notice of assessments from the 2020-21 tax year.
Services Australia note that a person's ATI includes:
- Taxable income, disregarding the individual's assessable First Home Super Savers scheme released amount (within the meaning of the Income Tax Assessment Act 1997)
- Total net investment loss
- Target foreign income
- Employer provided fringe benefits for the applicable tax year, and
- Reportable superannuation contributions, including income that is salary sacrificed to superannuation.
In addition to the ATI calculated above, from 1 January 2015, account-based pensions were included in the income test using the deeming provisions and balance based on the person's latest superannuation statement.
Importantly, account-based pensions commenced prior to 1 January 2015 where the pensioner held a CSHC on 31 December 2014 will be grandfathered and not deemed for the income test if the person:
- Continues to hold a CSHC, and
- Retains the same account-based pension.
If the person ceases to hold their CSHC for any period of time, then in the future their account-based pension would be subject to deeming. Similarly, if the person commences a new ABP from 1 January 2015, including if they roll over a grandfathered ABP into a new ABP, then that new ABP would be subject to deeming.
Tip: Be careful when implementing a strategy that involves a stop and restart of a pre-1 January 2015 pension. If the pension has been grandfathered for the Centrelink income test, such a strategy could result in the new pension being assessed for the income test using the deeming rules. This could have a detrimental effect on Age Pension or concession card entitlements.
Interestingly, our view is these provisions mean that any accumulation interest, market-linked2 pension, or lifetime and life expectancy defined benefit pensions, in an SMSF will not be subject to the income deeming rules for the CSHC income test. Pension payments and lump sum payments from the SMSF will generally be tax free and not included in taxable income.
John and Judy earned around $9,000 in taxable income on their investments in 2021-22, and Judy earned $59,000 in taxable income and reportable super contributions. John’s tax-free pension payments from his ABP are not assessed as part of ATI. Judy and John therefore have a total ATI of $68,000 for 2021-22. John also has an ABP with a balance of $1.5million. Based on the current deeming rules he will be deemed to have income of $31,878. This brings their total assessable income for the CSHC income test to $99,878. This is just above the current 20 Sept 2022 couple income test threshold of $98,054 for the CSHC and John would not be eligible for the card.
However, John waits a month and the new limits for the income test pass Parliament and come into law. Under the new limits John and Judy’s income of $99,878 will be below the couple threshold of $144,000 and he would be entitled to the CSHC and the cost savings it brings.
For SMSF retirees who are of Age Pension age, but at least one of them are still working, the increase in income test thresholds will be extremely beneficial in increasing the likelihood they will be eligible for the CSHC.
For SMSF retirees who are no longer working with majority of savings in their SMSF, and so a relatively low amount of ATI, they will likely already be eligible for the CSHC as the deemed income on ABPs will likely drive their eligibility for the CSHC. With deeming rates at a current all time low of 0.25% below threshold rate and 2.25% rate above threshold rate, a single person with only account-based pension assets could have a balance up to nearly $2.8million and be eligible for the CSHC, for couples combined they could have balances up to $4.4million and remain eligible. The proposed rise in the limits will increase these allowable balances even further to just over $4million for singles and nearly $6.5million for couples. It is surprising that only 420,0003 of Australia’s millions of self-funded retirees currently hold a CSHC!
What are the benefits?
The main benefit of the CSHC is that it provides access to the following valuable health concessions:
- cheaper medicine under the Pharmaceutical Benefits Scheme (PBS)
- bulk billed doctor visits
- a refund for medical costs when the Medicare Safety Net is reached
The value of these CSHC’s health concessions to a retiree will depend on their individual use of Medicare and PBS Medicines.
For example, under the PBS4 the maximum cost for a pharmaceutical benefit item at a pharmacy is $42.50 for general patients but only $6.80 for concession card holders (plus any applicable special patient contribution, brand premium or therapeutic group premium). Further, concession card holders are eligible for a much lower safety net threshold after which PBS medicines will be free of charge. From 1 July 2022 the PBS safety net threshold for concession card holders is $244.80 meaning that once the cost of PBS medicines exceeds this amount any subsequent PBS medicines will be free of charge for the remainder of the calendar year. This is significant compared to the safety net for general patients of $1,457.10 who pay for PBS medicines at the concessional rate once this threshold is exceeded in the calendar year.
If John requires 5 PBS medications a month to manage his health, he may currently be paying around $1,658 per year. As a CSHC holder he would only pay $244.80, a saving of $1,413 per year.
Further, concession card holders will receive a lower Medicare Safety Net, currently $717.90 for 2022, compared to $2,249.80 for general patients. Once a person’s out of pocket costs reach the threshold the Government will provide higher Medicare benefits, meaning more money back earlier with the CSHC.
State or territory governments and local council may also offer additional discounts to other expenses such as utility bills, rates and public transport, for example in NSW a CSHC holder is currently eligible for a Seniors Energy Rebate of $200 per year to help with the cost of living. However, these other discounts offered for CSHC holders are not as widespread or significant as those for the Pensioner Concession Card (PCC) which is provided to persons who receive an Age Pension.
Accessing the CSHC for SMSF retirees
The increase in CSHC thresholds brings an important opportunity for SMSF professionals to identify and inform retiree clients who may now be eligible for this concession card.
For SMSF professionals with retiree clients who are currently entitled to the CSHC card, the increase in thresholds also presents an opportunity to discuss the ability to earn more in income and still receive the CSHC. This may be valuable for those clients who wish to increase their income but have been hesitant to do so due to wishing to retain their CSHC.
In general, social security rules are seen as complex and many SMSF retirees may believe they will never be entitled to an Age Pension or concession card due to their level of assets and income. An expectation of receiving only a minimal benefit, not knowing how to apply or if they are eligible, not wanting to be ‘a concession card holder’, or simply avoiding the potential hassle of the 18-page application process, could all be other reasons they may have decided not to apply for the CSHC when they might be entitled to it.
SMSF professionals play an important role in informing retiree clients about changes which may impact their Age Pension or other concession card eligibility and helping them seek further information or advice about accessing these valuable entitlements and concessions. With the incoming changes to the CSHC income test thresholds it is a good time for SMSF professionals to have a discussion about the Age Pension and concession cards with their clients.
The CSHC can be applied for through Services Australia here: https://www.servicesaustralia.gov.au/how-to-claim-commonwealth-seniors-health-card
By Melanie Dunn, SMSF technical services manager, Accurium
1. Social Services and Other Legislation Amendment (Lifting the Income Limit for the Commonwealth Seniors Health Card) Bill 2022 is currently before the Senate. The new CSHC income limits will commence seven days after the Bill receives Royal Assent.
2. A financial investment which is an asset-tested income stream (long term) that is an account-based pension within the meaning of SISR 1994 1.06(9A) is subject to the CSHC income test deeming provisions. Section 220.127.116.11 of the Social Security Guide identifies a market-linked pension (MLP) which is not asset-test exempt as an asset-tested income stream (long term), however also notes that the income test for a MLP is the annual payment less the deduction amount under section 18.104.22.168 not deeming. We are seeking confirmation from DSS that MLPs are not subject to the CSHC income test deeming provisions.