Letter From Roger Bucholtz Re: Defined Benefit Income


From: Roger Bucholtz [mailto:r.bucholtz@yahoo.com.au]
Sent: Friday, 8 January 2016 13:19
To: Bruce Johnson
Subject: RE: Form submission from website:


Bruce,
Could you please have this posted on to the website for the information of all Retired members. I am discussing the issue with my local Federal member and hope that others who have been affected by the recent changes also take up the matter with their local Federal member.

There was a Hansard document posted a few months ago on the website; the reply from the Labor opposition in the Senate, they were not happy with the lack of consultation around the legislation, but passed it anyway.

Thanks,
Roger.


Dear Roger

Thank you for taking the time to contact me in relation to the 2015-16 Budget measure to cap the deductible amount from defined benefit income streams.

By way of background it is useful to note some of the unique qualities of defined benefit income streams. A defined benefit income stream is, essentially, a pension paid from a public sector or other corporate defined benefit superannuation fund (e.g. NSW State Super, Public Sector Superannuation Scheme, Commonwealth Bank Officers Superannuation Fund); where the pension generally only reflects years of service and final salary. Because of this general quality, defined benefit income streams are not assessed under the assets test as they do not have an underlying asset value.

Income payments from a defined benefit scheme are set by the rules of the scheme, usually indexed and scheme members have no ability to access capital or lump sum payments from the scheme. In these schemes employers usually fund these income streams as liabilities arise. Generally employees do not provide any of their own contributions towards these income streams.

Where an employee does provide their own contribution, a proportion of a their defined benefit income stream can be excluded from the social security income test income test (i.e. the deductible amount) to reflect that it is a return of their own personal after-tax contributions.

The deductible amount is designed to reflect the return of personal after-tax contributions, if any, made by the employee to their defined benefit scheme.

In 2007, a number of superannuation measures were introduced as part of the Simpler Super changes to simplify the taxation of superannuation payments. The flow on to the means test assessment of some defined benefit schemes from the changes was an unintended consequence. It resulted in the deductible amount being overstated for some people, and consequently higher income support payments, even though nothing had changed for the defined benefit recipient.

A critical factor was the number of years of service prior to 1 July 1983. For example, a person with 8 years of service prior to 1 July 1983 and a deductible amount of 10 per cent prior to 2007 could have their social security deductible amount increase to 30 per cent from 1 July 2007.

As a result of the changes made in 2007, there were people receiving over $100,000 a year from a defined benefit income stream and also receiving the Age Pension. For example, a retired State government public servant currently in receipt of Age Pension can receive a defined benefit pension of $120,000 a year with a deductible amount of 50 per cent, so that only $60,000 is assessed under the income test. Under this measure, the individual’s deductible amount would reduce to $12,000, and $108,000 would be assessed under the income test and the individual would no longer be able to receive any Age Pension.

The cap to the deductible amount that can be excluded from the income test from defined benefit income streams is designed to address this anomaly. From 1 January 2016, the level of income from defined benefit income streams that can be excluded from the income test (the “deductible amount”) will be capped at 10 per cent. The change provides a fairer assessment of an individual’s personal contributions to their defined benefit income stream.

Defined benefit income streams held by service pensioners and defined benefit income streams from military defined benefit schemes will be exempt from the cap.

At a time when expenditure on the Age pension was projected to rise from $39.5 billion in 2013-14 to $72.3 billion in 2023-24 without any changes, the Government considered this to be a fair and reasonable measure designed to support the long term sustainability of Australia’s welfare system. Compared with almost 2.5 million recipients of the Age Pension, there are around 140,000 income support recipients with payments from a defined benefit scheme. The majority – 95 per cent – are former Commonwealth, State and Local Government employees, with only around 5 per cent from corporate organisations.

The measure to cap defined benefit income streams at 10 per cent will impact approximately 47,700 of the 140,000 income support recipients that have a defined benefit income stream. 46,000 recipients will have their income support reduced, and 1,700 recipient will have their payments cancelled.

Further information can be found at http://www.humanservices.gov.au/customer/news/changes-to-the-assessment-of-defined-benefit-income-streams or by contacting Centrelink on 132 300. You may find it useful to arrange an interview with a Centrelink Financial Information Service officer to discuss your individual circumstances. You can contact the local Financial Information Service officer by phoning Centrelink on this number.

Thank you again for taking the time to contact me on this issue. If I can be of any further assistance on this or any other matter, please do not hesitate to get in touch.

Yours sincerely,

Hon Alex Hawke MP
Federal Member for Mitchell
Assistant Minister to the Treasurer
Castle Hill (02) 9899 7211|Canberra (02) 6277 4430|Fax (02) 9899 7990|
www.alexhawke.com.au