Separate Net Income & Account-based Pensions

The ATO has recently issued an Interpretative Decision as to the treatment of account-based pensions for the purposes of calculating the dependants’ rebates of a taxpayer.

A resident taxpayer is entitled to claim a rebate of tax if the taxpayer maintains certain types of dependants (eg spouses).  The maximum rebate, which is $2,100 (for 2007/08 year), is progressively reduced as the “income” of the dependant increases.

There is no reduction if the “income” of the dependant is $282 or less.  However, if the “income” of the dependant is $8,682 or more, their rebate reduces to zero.

If the spouse of the taxpayer is receiving an account-based pension, is the pension treated as “income” of the spouse for the purposes of determining the rebate entitlement?

The ATO Decision has confirmed that the pension payments of the account-based pension will be counted as the income of the dependant for the purposes of determining the rebate entitlement and amount.  However, if the initial pension account balance includes a tax-free component, a portion of the pension payments will be excluded.

The portion will be equal to the tax free component divided by the life expectancy of the pensioner at the commencement of the pension.

Example
Mary, aged 60, has commenced an account-based pension with an initial pension account balance of $100,000, of which $30,000 was the tax free component.

Bill is claiming a spouse rebate in respect of Mary.  Bill will be entitled to a spouse rebate if Mary’s separate net income is less than $8,682.

Assuming Mary’s only income is from her pension, Mary’s income will be $4,000 (as Mary is drawing down on her pension at the minimum rate).

As Mary’s initial pension account balance included a tax free component, her “separate net income” will be reduced by a proportionate part of the tax free component (being $30,000 divided by her life expectancy at the time of pension commencement).

Assuming (for ease of calculation) that Mary’s life expectancy is 25 years, the excluded amount of the pension will be $1,200 ($30,000 divided by 25 years).

Consequently, Bill’s rebate entitlement will be based on Mary’s separate net income of $2,800 (ie $4,000 less $1,200) rather than $4,000.  Because of this, Bill’s rebate will be $300 greater.

If Bill’s rebate had been based on a separate net income of $4,000, the rebate entitlement would be $1,170.50.    However, as Bill’s rebate is based upon a separate net income of $2,800, his rebate will be $1,470.50.

The relevant ATO document is ATO ID 2008/137.