Defined Benefit Income Stream Schedule For Centrelink Assessment Purposes

The defined benefit income stream schedule for Centrelink assessment purposes is determined by the tax free component of the income stream.

Unlike other types of retirement income streams, a defined benefit pension does not use a formula to calculate the deductible amount of the income stream.

In fact, even account based pensions don’t use the deductible amount formula anymore, unless the pension was commenced prior to 1 January 2015 and the recipient was eligible for income support payments at that time. Account based pensions commenced after 1 January 2015 are deemed for Centrelink income assessment purposes.

Providers of non-defined benefit income streams make available a Centrelink Schedule which includes the purchase price of the pension, any commutations made since it commenced, the pension income being paid and the relevant number (effective life expectancy of the member) at commencement of the income stream. All of these factors are used to calculate the ‘deductible amount’ of the non-defined benefit income stream, using a formula, which reflects the return of the purchase price.

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Defined benefit income streams are different.
 

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Defined Benefit Income Stream Centrelink Assessment

 
From 1 July 2007, the deductible amount for defined benefit income streams is based on the ‘tax free component’ of the income stream.

The definition of the deductible amount is the amount of the income received that is not assessed for Centrelink assessment purposes.

The provider of the defined benefit pension will be able to provide the pension recipient with a schedule or statement that details the tax free component portion of the income being received.
 

Defined Benefit Assessment: Changes after 1 January 2016

 
What should be noted is that, from 1 January 2016, the deductible amount of a defined benefit income stream for Centrelink purposes was limited and capped to 10% of the gross income being received. The result of this, for many defined benefit pension recipients, is that more of the income received is assessed for Centrelink purposes.

The table below shows an example of the how the changes affect the assessment of a defined benefit income stream for Centrelink purposes. For this example, a gross payment of $50,000 p.a. and a tax-free component of $15,000 p.a. is assumed.

Gross Payment Tax-Free Component Centrelink Deductible Amount Assessable Income
Pre-1 Jan 2016 $50 000 p.a. $15 000 p.a. $15 000 p.a. $35 000 p.a.
Post-1 Jan 2016 $50 000 p.a. $15 000 p.a. $5 000 p.a. (capped at 10%) $45 000 p.a.

The 10% cap of the deductible amount does not mean that a defined benefit income stream with a tax-free component of less than 10% will increase to 10% from 1 January 2016. In this case (assuming a tax free component of $3,000 p.a.) it will remain the same, as shown in the table below:

Gross Payment Tax-Free Component Centrelink Deductible Amount Assessable Income
Pre-1 Jan 2016 $50 000 p.a. $3 000 p.a. $3 000 p.a. $47 000 p.a.
Post-1 Jan 2016 $50 000 p.a. $3 000 p.a. $3 000 p.a. $47 000 p.a.

Defined-Benefit-Income-Stream-Schedule-For-Centrelink-Assessment-Purposes
 

Defined Benefit Assessment: Changes from 1 January 2016 (Exclusions)

 
Some defined benefit income streams are excluded from the 1 January 2016 changes and will not have the deductible amount of the income stream capped at 10% p.a. The following types of defined benefit income streams will continue to have the full tax-free component exempt from Centrelink/Deparment of Veteran Affairs (DVA) Assessment:

– Defence Force Retirement & Death Benefits Scheme (DFRDB)

– Military Superannuation & Benefits Scheme (MilitarySuper); and

– Defence Force Retirement Benefits Scheme (DFRB)

The provider of a defined benefit income stream will be able to provide a defined benefit income stream schedule for Centrelink assessment purposes, which will include the tax-free component of the income stream, allowing the deductible amount to be calculated.

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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. If you’re looking for more personalised advice, have a chat with one of our experts at www.superguy.com.au/need-advice

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16 Comments

  1. Alan L Hobson

    I purchased my DB Pension on 1 July 2005 using just over half of my DB Lump Sum benefit, ie a capital sum. Can you explain how Centrelink deems this capital sum to be income, minus the standard 10%, for the age pension income test?

    Reply
    • Chris Strano

      Hi Alan, I’ll admit DB pensions aren’t my strong point. The defined benefit pension provider should provide you with information on how the income stream is assessed for Centrelink, based on the income and a deductible amount. As far as the remaining lump sum goes, it may depend on your age and would likely be assessed under the ‘deeming provisions’ https://www.humanservices.gov.au/individuals/enablers/deeming

      Reply
  2. Peter Riley

    Hi Chris,
    My defined benefit pension commenced on retirement in August 2007. Up until 1/1/2016 my taxable income was assessed at approximately 38%, now it is 90%. Due to illness my wife is about to enter permanent residential aged care. CentreLink advise that we are required to pay a “daily means test fee” based on the now 90% income in lieu of the post 1/1/2016 component. Due you think this is a fair action where upon only receiving part aged pension we are also required to pay a RAD?
    Peter

    Reply
    • Chris Strano

      Hi Peter
      Changes to the Centrelink deductible amount from 1 Jan 2016 meant that a the deductible amount for defined benefit pensions will be capped at 10% of the gross income – therefore 90% assessable.
      Unless assessed as low-means, all aged care residents are required to pay a RAD (and/or DAP on any unpaid RAD). In addition to this, a means tested care fee may be payable based on income and assets.
      It is not uncommon at all to be asked to pay a RAD and means tested care fee. In fact, the more assets/income you have, the higher your means tested care fee will be (and the lower your Age Pension will be).
      Here are some frequently asked questions and answers regarding aged care https://agedcare.health.gov.au/aged-care-reform/residential-care-and-home-care-frequently-asked-questions
      Aged care can be a complex area and there are many strategies that can be employed to reduce the means tested fee and increase Age Pension payments. While structuring assets favourably can be done after moving into care, getting it right prior to moving into aged care will often provide greater benefits.
      Please let me know if you are considering seeking specialist aged care advice and I may be able to put you in touch with a respected adviser in this field.
      Hope this helps
      Chris

      Reply
  3. John

    Aged care assessments require both an income and assets test. I understand how the income component of a Defined Benefit Superannuation is assessed, (the tax free pension I currently receive), but is it also assessed in the asset component. If so, how? It is currently in pension stream, so I can no longer contribute or withdraw lump sums.
    Your guidance would be appreciated.

    Reply
    • Chris Strano

      Hi John, a defined benefit income stream does not have a capital component and is therefore not assessed under the assets test.

      Reply
  4. Ken Jones

    Hi Chris,
    I realise I need to see a financial counsellor about this, however was curious in the short term how my Defined benefit will impact on my age care claim this year. (65.5 yrs 27/10/18) I receive $733.00 DF each fortnight or around $19,058.00 per year, a small pension as I was only working with the Government for 11 yrs. I retired back in 2014, some tell me I am fortunate as it will have no impact, others say my income for claim purposes with be significantly reduced. Can you please advise me of what the likely AGE Pension would be, I fall well within all other Income/Assets test limits.

    Reply
    • Chris Strano

      Hi Ken, it all depends on the components of the defined benefit pension as to how much you will be assessable and whether you are a single or member of a couple and homeowner or non-owner. Use this calculator for an estimate of your Age Pension benefits http://www.yourpension.com.au/APCalc/. For a worst case scenario, assume that all of your DB pension is assessable.

      Reply
  5. abdul Hakim

    Hi Chris, We sometimes advise our clients to move their entire tax free component to an allocated pension (to save on exit taxes) and start a DB pension with just the taxable components. If i am understanding this right, then there will be no deductible amount in these cases. Can you confirm if my understanding is right? thanks. Abdul

    Reply
    • Chris Strano

      Hi Abdul.
      Thanks for the question.
      I have never seen this type of strategy.
      Firstly, how do you separate the taxable and tax-free components? If you start an allocated pension, it must be commenced proportionately with taxable and tax-free components within the accumulation account.
      Secondly, are you sure you mean defined benefit pension? This is an old style pension plan, with income payments usually based on employment income and years of service, etc. I wouldn’t have thought it could be commenced with accumulation account savings.
      The deductible amount of a defined benefit is calculated by the product provider and capped at 10% of the income received.
      Interested to hear more.
      Chris

      Reply
      • abdul Hakim

        Hi Chris, This is for PSS pensions where the employee is given options to take a certain amount as lumpsum (to withdraw or rollover to an eligible super fund) and a certain amount as a defined benefit income.

        We have requested cases with the PSS to start a DB pension using 100% of the taxable untaxed element while moving the tax free and taxable taxed elements lumpsum to an eligible fund. This means 100% of the DB pension is taxable (with not tax free component). based on this my earlier question still stands.

        Reply
        • Chris Strano

          Ahh okay. I wasn’t aware you could separate out the tax elements. I believe that the tax-free element is used to calculate the Centrelink deductible amount portion of a defined benefit income stream. Therefore, if the total balance is made up of only taxable elements, then there would be no deductible amount.

          Reply
  6. Phil Kelly

    Hi, My mother is in receipt of an Aged Pension, and she also receives a pension from Defence Force Retirement and Death Benefits (DFRDB) Scheme as my father (deceased) was a member of the RAAF for 33 years.
    Mum has just gone into Permanent Aged Care and I now have to do a Combined Assets and Income Assessment Form SA 457. I have been told that when calculating Mum’s assets, she does not have to declare her DFRDB Income, just her Aged Care pension, however, I have also been told that she does have to declare the income she receives from DFRDB. Do you know the correct answer?

    Reply
  7. Brad Read

    I have an existing ABP. It should be calculated on the balance at 1 July each year. Where can I find the regulation that says this? Having a little dispute with the company which is why I need the govt regs on this. Google is not helpful!

    Reply

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