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Self Managed Super Fund (SMSF) Article
Better Super's Asset Test Treatment
By Tony Negline.
This article may be out of date.
7th March 2007
The most expensive part of the government’s super reforms is a more generous assets test for the age pension.
Over the next three financial years the government expects all its super changes to cost about $7.1b. One third of this amount – that is, over $2b –will be spent on the new age pension concessions.
These concessions are very attractive but you need to know what to do in order to get maximum benefit from them.
At present if an investor has total assets greater than a certain threshold (currently $161,500 for single homeowners and $229,000 for couple homeowners) the age pension will reduce by $3.00 per fortnight for every $1,000 of assets above the limit.
Effectively this means that single homeowners will not receive the age pension if their assets exceed $334,250. The corresponding figure for couple homeowners is $516,500.
From 20 September 2007 the $3 reduction will be cut to a $1.50 reduction for every $1,000 of assets. This has two very important impacts both of which are beneficial to retirees. Firstly it increases the amount of pension paid to those with assets between the two thresholds. For example, under the current system, a single homeowner with assets of $200,000 will receive about $400 per fortnight. Under the revised system they can expect to receive about $450 per fortnight.
Secondly the aged pension will no longer cut out at $334,250 for single homeowners but instead will not cut out until about $500,000 of assets. (The cut-out threshold for couple homeowners is expected to increase to about $800,000.) This means that many retirees who are currently ineligible for the aged pension will find themselves in a position to receive it. The number of people who have become ineligible for the aged pension because of the assets test has grown in recent years, firstly because of the boom in house prices and also the stellar share market returns of the last few years.
Sadly many of these people don’t seem to know how these rules work and for some bizarre reason don’t seem to want to know. Recent research has found that 47% of retirees had no idea if they would be better or worse off as a result of the government’s super reform package.
So how are assets counted against the assets test? Put simply, the market value of most assets is fully counted. For example, shares, interests in trusts, investment properties and some retirement income streams, like allocated pensions. The family home is fully exempt. Some retirement income streams, such as term allocated pensions are 50% exempt from the assets test.
To gain the most from this latest age pension reform a retiree could sell their family home and some of their other assets in order to buy a better house in a better suburb. At end of the day as long as their total assets counted under the assets test is less than their above thresholds they would get the aged pension. These people would be doing the same as quite a few current retirees who struggle to live year after year on the age pension in large and expensive to run houses either to get that government pension or to ensure their children live in the lap of luxury after Mum or Dad has died.
What about partially asset exempt retirement income streams? These offer the ability to get a 50% exemption on the assets test. Some of these income streams can only be purchased in a super fund.
For example take a couple who currently have $1 million of assets all of it currently outside super. Right now they can’t get the aged pension. Assume that one of them is able to make super contributions (some work might have to be done to affect this properly). They decide to sell $500,000 of their assets and pay any Capital Gains Tax upon their sale. They contribute the net proceeds into super and then commence a term allocated pension (TAP).
The final wash up would be that the couple would have $750,000 of assets for age pension assessment purposes - $500,000 outside super and $250,000 counted in the TAP. Under the government’s aged pension reforms they would be eligible for the aged pension from 20 September this year and would receive about $100 per fortnight plus a range of concession cards benefits that are worth up to $3,000 per annum. Now getting the age pension is only one small element in working out what is appropriate so seeking advice is often a wise move.
In a twist of fate, the Government has decided that term allocated pensions cannot commence after 20 September 2007 because from that date onwards super funds will only be able to offer a pension which does not receive the 50% asset test exemption. Retirees are therefore urged to look at their circumstances as quickly as possible to ensure they do not miss out.
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