There's an anomaly when moving from pension to accumulation phase but watch out for longer-term consequences, writes John Wasiliev who seeks answers to your questions on superannuation.
Q: I have $1.5 million in pension phase in a self-managed superannuation fund (SMSF) and nothing in accumulation phase. I also hold a Commonwealth Seniors Health Card (CSHC). If I transfer the $1.5 million back to accumulation, will I lose the health card because of grandfathering arrangements for the CSHC? I have asked three financial advisers and been given three different answers. Geoff.
A: The entitlement to grandfather account-based super pensions (which means to exempt them from a new law) applies to those that existed as of December 31, 2014. From this date – in other words from January 1, 2015 – an account value of any new pension that was set up was included in what is called the adjusted taxable income test you must satisfy to qualify for the CSHC.
This highlights an anomaly in the super rules. Money in super accumulation is not counted in the CSHC income test.
This account value is determined according to social security deeming rules which calculate an income value for a wide range of financial investments by assuming they earn a certain rate of income, regardless of how much they actually earn. If pensioners earn more than these rates, the extra income is not assessed.
An example of how you could lose grandfathering of an existing pension is stopping the pension to add extra amounts and then starting a new pension with the combined value. Another is stopping an SMSF pension to transfer your super to an industry or retail fund and then starting a new pension from there.
Your question, however, refers to converting a pension to an SMSF accumulation account. According to Graeme Colley, an SMSF technical and private wealth manager with SuperConcepts, any amounts you retain in the super accumulation phase are not subject to deeming to work out your adjusted taxable income.
This highlights an anomaly in the super rules. While a pension loses its grandfathering if it is transferred an accumulation account, money in super accumulation is not counted in the CSHC income test.
However, should you wish to start a new account-based pension in super, says Colley, it will be subject to deeming and the deemed amount will be included in your adjusted taxable income test to work out whether you qualify for a CSHC.
Under the deeming rules that apply to the CSHC, the rates for singles and couples are different. For a single person the first $51,200 is deemed at a rate of 1.75 per cent and the balance at a rate of 3.25 per cent. If a single retiree uses the entire $1.5 million to start a new pension, the deemed value of $47,982 will be 88 per cent of the current $54,929 allowance. This doesn’t leave much for income from other sources.
For a couple the deeming on a $1.5 million new pension is 1.75 per cent on the first $85,000 and 3.25 per cent on amounts above this, in this instance $1.415 million. This would work out to be $1487.50 plus $45,987.50 or $47,475.
That is 54 per cent of the $87,884 CSHC allowance for a couple.
Q: I’m confused about the Labor Party’s proposed refusal of cash refunds of excess franking credits. I am 82 and have an SMSF with assets of $470,000. It’s a single-member fund with my wife as the second trustee. Last year the fund received a cash refund of excess credits from share investments of $11,600. This was 35 per cent of the $35,500 of income I was obliged to withdraw as a pension. I don’t have an age pension, although we may have had a right to a part pension because our combined income was below the threshold but we didn’t apply for this. I do have a Commonwealth Seniors Health Card. Will I lose the $11,600 if the ALP wins the election? Neville.
A: Unless you were receiving an Australian government pension or allowance (for example the age pension) as at March 28, 2018, if Labor wins the federal election and its tax proposals become law you will lose any future refund of excess franking credits, like the $11,600 refund you received last year.
This would appear to be the case based on the election policy Labor has announced, says Colin Lewis, head of technical services with Fitzpatricks Private Wealth.
The policy states that where an SMSF has at least one member receiving a pension or allowance as at March 28, 2018, they will continue to be entitled to cash refunds of excess dividend imputation credits.
According to Philip La Greca, an executive manager with SMSF administrator SuperConcepts, while there is no legislation to back up Labor’s policy it would seem that the pensioner guarantee only applies to government benefits that provide financial support and not those with other entitlements like a concession or subsidy.
This would seem to eliminate the Commonwealth Seniors Health Card, which is an entitlement to cheaper medicines under the Pharmaceutical Benefits Scheme, bulk-billed doctor visits and a bigger refund for medical costs when you reach the Medicare Safety Net.
As far as being eligible for a part age pension in the past and not applying for this, La Greca believes this would be difficult to prove.
How those who qualify for the pensioner guarantee are expected to be chosen is via the government looking up the recipients of the Centrelink and Department of Veterans Affairs pensions and allowances on March 28, 2018 and then sending the details to the Australian Taxation Office which would mark on their tax returns that excess franking credit refunds were allowed.
Also on the issue of age pension entitlements, Lewis says if you were entitled to this in the past, you may still be. You should therefore apply for it and even if you don’t qualify for the pensioner guarantee, you and your wife could start receiving the age pension. It could be compensation for any future lost franking credits.
And you never know, if Labor does win the election the pensioner guarantee rules may change again.
By John Wasiliev - John writes on Personal Finance specialising in Superannuation & SMSFs, Managed Funds, Trusts. Email Johnat firstname.lastname@example.org
17 April 2019