SMSF legacy pensions exempt from CSHC income test
Examining the implications of the Commonwealth Seniors Health Card income test for SMSF retirees.
You will have read in our recent article that the Commonwealth Seniors Health Card (CSHC) is an important consideration for many SMSF retiree households not currently entitled to receive the Age Pension.
In examining the implications of the CSHC income test for SMSF retirees we reviewed how interests in an SMSF would be treated under the CSHC deeming provisions.
The CSHC is income tested with the assessable income being a person’s adjusted taxable income (ATI) plus deemed income from account-based pensions, excluding pre-1 January 2015 grandfathered account-based pensions.
To be eligible for the CSHC the person must be at least Age Pension age (currently 66 years and 6 months old). Given this requirement and that superannuation benefit payments are tax-free from the age of 60, pension payments and lump sum payments from accumulation or pension interests in the SMSF will generally be tax free and consequently not included in a person’s ATI.
The provisions also mean that accumulation interests in the SMSF will not be deemed for CSHC purposes. Irrespective of the balance in accumulation phase in the SMSF it will not impact the retiree’s eligibility for the CSHC.
For SMSF retirees who have a pension, the type of pension will determine whether it will be assessed under the deeming provisions for the CSHC. Some SMSF pensions will be deemed for the CSHC income test, and others will not.
What pensions are deemed for the CSHC?
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.
This means that lifetime or life expectancy defined benefit pensions in an SMSF will not be subject to the income deeming rules for the CSHC income test. For example, an SMSF retiree could have $2million in a SISR 1.06(2) lifetime pension and none of that balance would be deemed for the CSHC income test. These defined benefit pensions in an SMSF will be capped defined benefit income streams, and so although they are not subject to deeming, could still impact a retiree’s CSHC entitlement if the defined benefit pension is subject to the defined benefit income cap.
The defined benefit income cap is defined as 1/16th of the general transfer balance cap, currently this is $1,700,000/16 = $106,250. If an SMSF retiree has income from capped defined benefit income streams then generally that would be income from a taxed fund and 50% of the pension payments which exceed the defined benefit income cap is taxable income, taxed at marginal tax rates. This income would be included in the person’s ATI for CSHC purposes.
Another type of pension which can be held in an SMSF is a market-linked pension (MLP) within the meaning of SISR 1994 1.06(8). The treatment of these income streams is less clear as the income stream is a complying non-commutable pension, many will also be capped defined benefit income streams (if commenced prior to 1 July 2017), but a MLP also has some characteristics of an account-based pension.
To determine whether a MLP is subject to the CSHC income test deeming provisions we need to look at the definition of an account-based pension for this purpose. Section 22.214.171.124 of the Social Security Guide identifies a 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 126.96.36.199, that is not subject to deeming.
We have sought advice from Services Australia to confirm the treatment of MLPs, and they have confirmed that a MLP, irrespective of whether it is assets test exempt (ATE) or not, is not deemed for the CSHC income test.
This means a MLP is treated like the defined benefit pensions discussed above:
- any balance in a MLP in the SMSF will not impact a member’s entitlement to the CSHC; and
- if the MLP in the SMSF is a capped defined benefit income stream, 50% of pension payments which exceed the defined benefit income cap would be included in ATI for CSHC purposes.
An additional caution for members with a MLP which commenced after 1 July 2017, and so is not a capped defined benefit income stream (CDBIS), is to be aware of the impact of a partial commutation to rectify an excess transfer balance.
If an SMSF member exceeds their transfer balance cap and they hold a non-CDBIS MLP, then a recent law change now allows for the partial commutation of these otherwise non-commutable income streams to resolve the excess transfer balance. Members can now commute the MLP to the extent of the excess amount notified in a commutation authority issued by the ATO. The commuted amount can be paid out of the fund as a lump sum benefit or retained in the member’s accumulation interest. If the commuted amount is retained in accumulation, it will have no impact on the person’s CSHC income test, however if at any time it is used to commence a new ABP for the member then that ABP would be subject to the CSHC deeming provisions.
The final type of income streams held in an SMSF are account-based pensions (ABP), and since 1 January 2015 ABPs have been included in the CSHC income test. This includes account-based pensions, allocated pensions, and transition to retirement income streams (TRIS) as defined under section 188.8.131.52 of the Social Security Guide. The balance of an ABP is assessed under the deeming provisions using the person's latest superannuation statement. Importantly, ABPs 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.
What it means for CSHC eligibility
The only SMSF income streams subject to the CSHC income test deeming provisions are ABPs and TRIS. Any MLP, defined benefit pensions or accumulation balances will not be subject to deeming.
For SMSF members with material balances in a MLP or defined benefit pension this may give pause to a consideration to restructure their income streams, however this should not be the case as the restructure of these pensions in an SMSF will generally involve the commutation of the income stream to commence a new non-CDBIS MLP, which will also be exempt from the CSHC deeming provisions.
The primary event in an SMSF with the potential to impact a member’s eligibility for CSHC would be the commencement of a new ABP, either from accumulation phase balances or from the commutation of another income stream in the fund, where assets are moving from interests which are not subject to the CSHC deeming provisions to an interest which would be subject to deeming. However, with deeming rates at a current all-time low, commencing an ABP in the SMSF may not have a material impact on their entitlement to the CSHC.
Based on the current deeming rates a single person with only ABP 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 CSHC limits will increase these allowable balances even further to just over $4million for singles and nearly $6.5million for couples.
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 House of Representatives. The new CSHC income limits will commence seven days after the Bill receives Royal Assent.