Asset test changes hit middle-income earners

Changes to the asset test rules for the age pension have had “significantly adverse and presumably unintended consequences” and dissuade middle-income wage earners from saving, according to the SMSF Association.

Chief executive John Maroney said changes to the means test taper rate and thresholds, which decrease the entitlement to the age pension as a person or couple’s assets increase and which took effect from 1 January, were not appropriately aligned with the larger retirement income system.

“We believe having the superannuation and social security systems properly integrated is a key facet to achieve an efficient and sustainable retirement income system, and that the current siloed approach to policy-making in these areas is creating perverse outcomes for individuals and couples,” Maroney said.

He added changes to the taper rate for the age pension assets means test hit middle-income earners who had moderate superannuation balances and benefited from a part age pension payment that supplemented their superannuation income.

“For home-owning couples who have a superannuation balance between $500,000 and $800,000, the increased taper rate creates a ‘black hole’ where their assets above the asset test free amount cause them to be worse off in terms of income,” he said.

“This is caused by the taper rate of the equivalent of 7.8 per cent a year, reducing their pension entitlement at a rate exceeding the income they earn from their superannuation balance above the asset-free area. This is especially so in a low interest rate and investment return environment.”

This leads to harmful behavioural effects, including encouraging middle-income earners to move investments from assets that are included in the means test, such as superannuation, to those that are excluded, such as the family home.

A simpler method to integrate superannuation and the age pension means test would be to shift to a single means test that applies a deeming rate to financial and non-financial assets, removing the assets test.

“The Australia’s Future Tax System Review recommended that a single comprehensive means test should be pursued to ensure that assets are fairly accounted for to remove distortions based on the form of savings and to ensure that appropriate incentives to save and use savings effectively remain, and the association concurs,” Maroney said.

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