3.9.3.31 Account-based Income Streams

Introduction

From 1 January 2015, and in line with Age, account-based income streams come under the income test for the CSHC. Account-based income streams include account-based pensions and account-based annuities.

The balance of an account-based income stream is assessed under the deeming provisions using the person's latest superannuation statement (see 4.4.1.20).

Act reference: SSAct section 1071-13 Long-term financial asset, section 9(1) Financial assets and income streams definitions

What is an account-based pension?

An account-based pension (also known as an allocated pension or transition to retirement pension):

  • is a flexible retirement income stream product purchased with superannuation money,
  • requires the person to draw a minimum pension payment amount each year or elect to draw an amount of pension payment above the required minimum amount,
  • gives a person access to withdraw some or all of the account balance,
  • may be purchased from a financial provider or paid from an SMSF or SAF,
  • is tax free from age 60.

Act reference: SSAct section 1071-13 Long-term financial asset, section 9(1) Financial assets and income streams definitions,

Superannuation Industry (Supervision) Regulations 1994

What is an account-based annuity?

Certain annuity products may also be included in the CSHC income test if it is an equivalent product to an account-based pension and meets the standards in an instrument under SSAct subparagraph 1099DAA(1)(b)(ii).

Act reference: SSAct section 1071-13 Long-term financial asset, section 9(1) Financial assets and income streams definitions

Grandfathering provisions

A person who is an owner of an account-based pension purchased before 1 January 2015 and the holder of a CSHC on 31 December 2014, will not have their account-based pension included in the income test for as long as they:

  • continue to hold a CSHC, and
  • retain the same account-based pension.

If the person ceases to be the holder of a CSHC for any period of time, their account-based pension will be subject to the income test if they become a CSHC holder again.

If they purchase a new account-based pension after 31 December 2014, or roll over an existing account-based pension into a new account-based pension after 31 December 2014, their new account-based pension will be subject to the income test (see examples below).

Example 1: Irene is the holder of a CSHC on 31 December 2014. Her account-based income stream was purchased prior to 1 January 2015.

Irene is 75 years old, married, and the holder of a CSHC on 31 December 2014. Irene and her husband have a combined annual adjusted income of $75,000 per year. Irene also has $1 million in a tax-free account-based income stream, which was purchased before 1 January 2015. Because of the grandfathering provisions, Irene will NOT be affected by the changes to the treatment of account-based income streams in the CSHC income test, which comes into effect from 1 January 2015.

Result: Irene will continue to be eligible for the CSHC and have access to the range of benefits provided by the card.

Example 2: Jasmin claims CSHC on or after 1 January 2015.

Jasmin is single, aged 64, and turns 65 on 15 January 2015. Jasmin is a self-funded retiree and is drawing down on her account-based income stream account balance of $2 million. She also receives $5,000 per annum from a term deposit. Jasmin lodges a claim for the CSHC on 15 January 2015. Under the CSHC income test beginning from 1 January 2015, Jasmin's account-based income stream is assessed under the deeming rules as earning $68,462 per year. Combined with her taxable income, her total assessable income would be $73,462, which is above the annual CSHC income test limit for singles.

Result: Jasmin's claim for a CSHC is rejected.

Example 3: Sachin changes his account-based income stream after 1 January 2015.

Sachin is 80 years old, single and the holder of a CSHC. Sachin has an annual adjusted income of $47,000 per year from investments. Sachin is also drawing down on his account-based income stream, which he purchased in 2008. Because of the grandfathering provisions, there is no income assessed against this product. However, on 20 February 2015 Sachin decides to change his existing account-based income stream to another account-based income stream product. As a result he loses his grandfathering status for this product, and deemed income of $10,000 is assessed against the account balance of his new account-based income stream.

Result: Because Sachin's adjusted taxable income is now $57,000 he loses eligibility to his CSHC, as only account-based income streams purchased prior to 1 January 2015 are grandfathered.

Example 4: David is a member of a couple. Both own an account-based income stream.

David is aged 68 and the holder of a CSHC on 31 December 2014. David has a balance of $500,000 in an account-based income stream, which he is deemed to receive $15,962 per year. He also receives $45,000 taxable income per year from property investments. Under the CSHC income test beginning from 1 January 2015, David's tax-free income stream payment of $15,962 per year is NOT assessed and is grandfathered. However his partner Deb, who is 64 years old (turning 65 in February 2015), has an account-based income stream deemed to earn $30,000 per annum. The combined annual income of David and Deb is assessed to be $75,000 p.a. ($45,000 + $30,000), which is still below the CSHC income threshold for couples.

Result: David would retain his CSHC.

Note: If Deb applies for a CSHC when she turns 65 in February 2015, she would also meet the combined couple income test as David's grandfathered account-based income stream, which is deemed to be worth $15,962 per annum, is not included in her assessment.

Example 5: Ron has an account-based income stream with a reversionary provision.

Ron is aged 85 and is the holder of a CSHC on 31 December 2014. Ron has a balance of $1.2 million in a tax-free account-based income stream, which is deemed to earn $40,806 per year. His partner Julie is a former public servant and receives a public service pension which is taxed. Julie's pension is worth $52,000 per annum. As Ron's account-based income stream is grandfathered and not included in the CSHC income test, the total combined couple income for Ron and Julie is assessed as $52,000 per annum.

Ron's account-based income stream has a reversionary provision, which means his account-based income stream will revert to Julie on his death. If Julie is a CSHC holder at the date of reversion, the account-based income stream will continue to be excluded from the CSHC income test.

Result: When Ron passes away, his account-based income stream retains its grandfathered status and will not be counted in the CSHC income test for Julie.

Act reference: Social Services and Other Legislation Amendment (2014 Budget Measures No. 6) Act 2014 Schedule 7 item 5 Application provisions

Last reviewed: 2 January 2015