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.

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%.

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.

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

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Chris Strano

Chris Strano is a specialist independent superannuation author for SuperGuy.com.au - one of Australia's leading superannuation information resources.

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