Deductible Amount Definition

The deductible amount definition for Centrelink and DVA purposes refers to the amount of income received from an account based pension, allocated pension or defined benefit pension that is not assessed under the ‘Income Test

When completing documentation to receive social security benefits, or even when being assessed for aged care fees, the form may ask for the deductible amount associated with your income stream.

The deductible amount definition and calculation is important because it will determine your Age Pension or Service Pension entitlements and/or your aged care fees.
 

Deductible Amount Definition: Account Based Pension

 
The deductible amount definition for an account based pension (formerly Allocated Pension) is only relevant where you have an account based pension that started prior to 1 January 2015 and you were also in receipt of social security income support payments on 31 December 2014.

If these two conditions are not met, the Deductible Amount is not relevant to your account based pension. Instead, your account based pension is deemed to earn an income under the Centrelink deeming provisions and the actual income you receive from your pension is not assessed.

Further to this, if you do meet the two conditions above but, at any time since 1 January 2015, you have stopped receiving income support payments (permanently or temporarily) or you have closed down your ‘pre 1 January 2015’ account based pension and commenced a new one (including a pension refresh); then your account based pension will no longer have a Deductible Amount associated and it will instead be deemed.
 

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Calculation of the Deductible Amount for Account Based Pensions

Provided you have had your account based pension/ allocated pension in place since before 1 January 2015, were in receipt of social security income support payments on 31 December 2014, have continued to receive income support payments since 1 January 2015 and still have the original account based pension in place from pre-1 January 2015; then you are able to use the following formula to calculate the deductible amount associated with your pension for Centrelink assessment purposes.

Deductible Amount = (Original Pension Purchase Price – Lump Sum Commutations Since Commencement) / Relevant Number at Commencement

Where:

Original Purchase Price = The amount of superannuation savings you used to start the pension with
Lump Sum Commutations = Lump sum withdrawals (commutations) from the capital base of the pension (i.e. not one-off increased income payments)
Relevant Number = Your life expectancy value at the age you commenced the pension. This can be found using the social security life expectancy tables found here. Make sure you use the year relevant to when you started your pension.

If you log in to your superannuation pension account portal, or contact your superannuation provider, you will have access to your account based pension Centrelink Schedule. Your Centrelink Schedule will include all of the information that you require to complete the Deductible Amount formula above.
 

Centrelink Deductible Amount Calculator

You can use this Centrelink Deductible Amount Formula calculator I have built if you prefer.

Once you have calculated your Deductible Amount using the formula above, you reduce the ‘actual’ allocated pension payments you are receiving by the Deducible Amount and whatever is left is the amount assessed for Centrelink ‘Income Test’ purposes. If the Deductible Amount is greater than the payments you are receiving, then the assessable pension payments is $0.

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Example Calculation of the Deductible Amount for Account Based Pensions

If Joe started an account based pension on 1 July 2014 with $500,000 at the age of 66 drawing an income of $2,500 per month (plus a one-off $10,000 commutation in 2016), and was in receipt of Age Pension payments as at 31 December 2014 (and has been ever since), his deductible amount would be as follows:

Deductible Amount = ($500,000 – $10,000) / 17.76

Deductible Amount = $27,590 p.a.

Given that Joe draws an income of $30,000 per year ($2,500 per month) and has a Deductible Amount of $27,590; then his assessable Allocated Pension income for Centrelink assessment purposes is only $2,410 p.a.
 

Deductible Amount Definition: Defined Benefit Income Stream

 
The Deductible Amount Definition of defined benefit income streams for Centrelink assessment purposes is the same as account based pensions. That is, the definition of the Deductible Amount is the amount of income received from the defined benefit pension that is not assessed for Centrelink ‘Income Test’ assessment purposes.

Common defined benefit income streams include Commonwealth Superannuation Scheme (CSS), State Superannuation Scheme (SSS) and Emergency Services Superannuation Scheme (ESSS).

However, the calculation of the Deductible Amount for defined benefit income streams is different to that of account based pensions / allocated pensions.
 

Calculation of the Deductible Amount for Defined Benefit Income Streams

 
Your defined benefit income stream schedule, which can be obtained from your defined benefit income stream provider, will detail the ‘tax-free’ portion of your income stream.

This tax-free portion is the Deducible Amount for Centrelink assessment purposes. In saying this, new rules from 1 January 2016, capped the Deductible Amount of defined benefit income streams to 10% of the income being received.

Deductible Amount = Tax Free Component (capped at 10% of Income Payment)

Importantly, the Deductible Amount is not equal to 10% of the Income Payments; it is capped at 10% of the Income Payments. Therefore, if the tax-free component of your defined benefit pension is less than 10% of your total income payments, then the Deductible Amount will be less than 10%.

A defined benefit pension is usually exempt for Centrelink asset test purposes.
 

Example Calculation of the Deductible Amount for Defined Benefit Income Streams

Barbara receives a defined pension pension equal to $52,000 p.a. She contacts her defined benefit pension provider and finds that the tax-free component of the pension is $9,500 p.a.

Prior to 1 January 2016, her Deductible Amount would have been $9,500 p.a. But, based on new super rules, her Deductible Amount is now calculated as follows:

Deductible Amount = $9,500 (capped at $52,000 x 10%)

Deductible Amount = $5,200 p.a.

Given that Barbara receives an income of $52,000 per year and has a Deductible Amount of $5,200; then her assessable defined benefit pension income for Centrelink assessment purposes is only $46,800 p.a.

Note: If Barbara contacted her defined benefit provider and found that she only had a tax free component of, say, $4,000; then her Deductible Amount would remain at $4,000.

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Deductible Amount Definition: Conclusion

As you can see, the Deductible Amount definition for Account Based Pensions and Defined Benefit Income Streams is identical, but the actual calculation of each is different.

A Centrelink schedule generated by the income stream provider will include all of the information required to calculate the deductible amount. See an example of a Centrelink Schedule here.

Feel free to post any questions relating to the Deductible Amount definition below.

Chris Strano

Chris Strano created SuperGuy to help the average punter navigate through the complex and ever-changing super rules. It has since become one of Australia's leading digital super resources. Subscribe to SuperGuy's YouTube channel for the latest strategies to boost your super savings. https://www.youtube.com/c/superguyau

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6 Comments

  1. Ray Brown

    Hi Chris, great article but I have a curve ball question.

    Most defined benefit pensions comprise three components being; (a) Tax Free, (b)Taxable taxed and (c) Untaxed.

    When a defined benefit member passes age 60 the tax free component remains tax free and the taxable taxed component then becomes tax free as well.

    In this case, does the deductible amount being accessed for an aged pension become:

    1. Just (a) the tax free component, or;

    2. (a) The tax free component, plus (b) the taxable taxed (which is now also tax free)

    Regards,

    Ray

    Reply
    • Chris Strano

      Hi Ray,
      Great question!
      The Centrelink assessment of defined benefit pensions is different from that of account based pensions.
      The deductible amount of a defined benefit pension is simply the tax-free component, capped at 10% of the gross pension payments. Read here for more.
      My understanding is that the deductible amount of a defined benefit pension would be whatever the tax-free component is at any given time (capped at 10% – with some exclusions).
      Keep in mind that the qualifying age for Age Pension eligibility doesn’t begin until after age 65 – well past age 60.
      Ultimately, the Centrelink schedule provided by a defined benefit pension provider will be what Centrelink/DVA use to determine the deductible amount.

      Reply
  2. 55

    Hi Chris,
    I gather that means ‘both’ the Tax free ‘and’ Taxable taxed component as at the time the person becomes eligible for either the DVA service pension or the Centrelink aged pension is classed as the entire tax free component? What a mess!

    It should be noted that military members with ‘qualifying’ service are eligible for the DVA service pension from exactly age 60 (and their partners) irrespective of the Centrelink aged pension from age 65 to 67 years (depending on age). Military members are not advised of their ‘possible’ entitlement to the DVA service pension up to 7 years earlier which is a Govt disgrace as it’s not backdated in the event that they are not made aware and apply later.

    Ray

    Reply
    • Chris Strano

      Hi Ray,
      I haven’t had much experience with defined benefit pensions for DVA assessment. Does the taxable component ‘convert’ to a tax-free component at age 60, or is the taxable component simply ‘received’ tax free from age 60? If it does convert, then that may suggest a potentially higher deductible amount for assessment purposes, but if it doesn’t convert, it would just be based on the tax-free component. It would be worth double checking this with the defined benefit pension provider.

      Reply
  3. Sarawan Vagel

    Hi Chris,

    I have a query that is bugging me regarding the ‘Deduction Amount’ (DA) when you withdraw a large sum to pay for something like RAD for Aged Accommodation.
    Say you withdraw $300K of your initial amount of $400K and draw the same income, the DA will be based on $100K, This will get you much less pension than if you were being deemed as the RAD is exempted.

    How does Centrelink handle this

    Reply
    • Chris Strano

      Hi Sarawan,
      Correct. The Deductible Amount formula is the original purchase price, minus any lump sum commutations (since inception), divided by the relevant number at commencement (life expectancy).
      In this case the $400,000 is the original purchase price and the $300,000 is a commutation (presumably – if not drawn as ‘increased pension payment’)
      Therefore, the deductible amount is calculated on $100,000 divided by relevant number at commencement – meaning a higher level of the account based pension income will be assessed if the same level of income continues to be drawn.
      An updated ‘Centrelink Schedule’ produced by the pension provider will need to be provided to Centrelink by you, which will include all the necessary information for them to calculate the assessable income.
      This all assumes that the account based pension is assessed under the grandfathering rules.
      If the pension income recipient requires the same level of income, it may be worth considering rolling the grandfathered pension back to accumulation and commencing a new pension (non-grandfathered pension). In this case, the new pension will be deemed, rather than assessed under the deductible amount method, potentially reducing assessable income. There may be other consequences though, so be careful.

      Reply

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