![The concept of deeming gave pensioners a strong incentive to improve their financial literacy. Photo Shutterstock The concept of deeming gave pensioners a strong incentive to improve their financial literacy. Photo Shutterstock](/images/transform/v1/crop/frm/K5E4qWjbHGabfQuRuq4ELE/86894bc4-58c3-423b-b93c-3e2224d07aae.jpg/r0_0_5372_3684_w1200_h678_fmax.jpg)
Deeming rates are shaping up as a big issue as we approach the May budget. Life expectancies are rising, the number of retirees is growing, and deeming rates affect almost every one of them. They affect the rate of pension paid to income-tested pensioners, aged care fees for everybody, including self-funded retirees, and eligibility for the Commonwealth Seniors Health Card.
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The concept of deeming goes back to August 1990. Pensioners were keeping large sums of money in interest-free bank accounts to bypass the then income test. Naturally, this was encouraged by the banks. Initially, deeming rules put a notional income on bank accounts only, but from July 1 1996 it was extended to other financial investments, such as managed funds, shares and superannuation (from age pension age only), though it was never applied to property assets. Deeming was welcomed by the industry generally, as the rates brought some consistency and certainty into the age pension assessment system and gave pensioners a strong incentive to improve their financial literacy by seeking out products that gave a better return than the deeming rates.
They are supposed to rise and fall in line with market interest rates, but governments have been slow to make changes. In 2010, when the cash rate was 4 per cent, the deeming rates were 3 per cent on the first $42,000 for singles (the first $72,000 for couples) and 4.5 per cent on the balance.
When the cash rate was 1 per cent in 2019, deeming rates were 1 per cent and 3 per cent respectively. A year later when the cash rate was 0.25 per cent, they fell again to 0.25 per cent and 2.25 per cent, where they still sit - because during the pandemic the rates were frozen until 30 June 2024. The big dilemma for the government is what to do in the May budget.
Obviously, deeming rates should go up. The trouble is that the effect could be huge. Think about a pensioner couple who have $460,000 assessable assets. Under the present rates their income is deemed to be $321 a fortnight. They would therefore be assessed under the assets test, and receive a pension of $814 a fortnight each.
If the deeming rates were increased by just 1 per cent - way below the market - their deemed income would increase to $498 a fortnight, moving them from the assets test to the income test, and their pension would reduce to $792 a fortnight each. It's not a huge loss, just $22 a fortnight, but it comes to $572 a year. If they are tight for funds, that could be significant. This may well be the last budget before the next federal election, so anything that negatively affects a significant voting group, like retirees, will be under close scrutiny.
For those in aged care, whether pensioners or self-funded retirees, deeming is used to calculate the means-tested contribution. An increase of 1 per cent to the deeming rates could see pensioners living in aged care cop a double whammy: it would be possible to both receive less pension and pay a higher means-tested care fee.
Under the aged care means test, singles may earn $32,331 a year, while members of a couple may each earn $31,707. Once income exceeds these thresholds, the means-tested care fee payable rises steeply: 50c per dollar of extra income.
A single self-funded retiree living in aged care with $2 million of investments would currently be deemed to earn $43,792 year. A change in the deeming rate of 1 per cent would increase that nominal income by $20,000 to $63,792 a year, but their means-tested care fees would increase by $10,000 a year.
In a cost-of-living crisis, it's a hard call for any government to make. The deeming rates should undoubtably rise - but how far? Wherever they rise to, it's not going to be popular with a large group of voters.
Q&A
Question
My wife and I are retired - she receives an income stream from Hesta of $650 a fortnight, a part pension of $564 a fortnight and an annuity income of $500 a month. She has shares worth about $25,000 which she has had since 1995 and which have built up because all dividends have been reinvested. Will she have to pay tax on them if she chooses to sell them?
Answer
In a reinvestment scheme, there is tax to pay on the dividend whenever they are paid and shares under the scheme are part of the base cost. I imagine the CGT would be minimal given the size of her portfolio and the type of income she is receiving, but her first job should be to contact the share registry and find out the cost of all the shares. Then she could time the sale and amount of any shares to minimise CGT.
Question
In 2013 my husband and I bought a property with the intention of making it our primary residence. At the time we were living in our family home for 12 months to prepare it for sale. The new property was rented out for the first 12 months. We have owned the new house for 11 years and lived in it as our main residence for 10 of those years. Now we are planning to sell this property in early 2024 to make a sea change. Are we liable for CGT because we rented the house out for 12 months while selling our old home? I am concerned because information on the internet suggests that the ATO will apply CGT to the entire 11 years of ownership. Such a tax burden would mean we will not be able to make the move away from the city.
Answer
The gain is pro-rated for the days it was used as an income producing property and the days it was your main residence. Based on the information supplied, it would be exempt for 10 out of 11 years which means 91 per cent of the gain should be exempt. Furthermore, you're entitled to a 50 per cent discount because it was held for over a year. Just make sure you involve your accountant before any contracts are signed.
Question
Is the 15 per cent tax paid by superannuation funds on behalf of members, from their accumulation account earnings, redeemable for people over 60 years of age and who live off their savings and are under the income tax-free threshold?
Answer
Funds themselves pay the tax of 15 per cent on earnings and the cost of this is reflected in the total amount is credited with the member's account each year. This is a tax paid by super funds and not related to your personal income tax in anyway, therefore, there is no refund.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: noel@noelwhittaker.com.au
- This advice is general in nature and readers should seek their own professional advice before making any financial decisions.