Michael Hallinan

Now that the 2023/24 financial year is coming to a close, it will be necessary for individuals receiving pensions from their SMSFs, to ensure that the minimum pension requirement in relation to each of their pensions has been satisfied by 30 June 2024.

For individuals receiving transition to retirement pensions where they have not yet retired for superannuation purposes or attained age 65, it is also necessary to ensure that total pension payments do not exceed the 10% ceiling applying to transition to retirement pensions.

The minimum pension requirement is satisfied, if the total pension payments received by the individual during the 2023/24 financial year equals or exceeds a calculated minimum based upon a percentage of the pension balance at 1 July 2023, where the percentage is related to the attained age of the individual as at 1 July 2023.

The percentage factors are listed below:

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Michael Hallinan

The income free areas applying for 2024/25 financial year are $212 (single – previously $204) and $372 (couple combined – previously $360).

The income free area is the amount of income which can be received in respect of each fortnight without adversely affecting entitlement to the age pension under the Income Means Test.

Any amount in excess of the free income area will reduce the age pension by 50 cents per fortnight for each $1 above the income free area.

Example – single self-funded retiree

John’s only income earning asset is his SMSF pension balance of $400,000 (as at 1 July 2024). The SMSF pension is a financial asset so the deeming test will apply. Under the deeming test John will be assessed as receiving $298 per fortnight. The first $212 has no impact on his age pension. The balance above the income free area is $86. His pension entitlement per fortnight will be reduced from $1,116.30 (maximum pension entitlement before reduction due to means tests) by $43.

Whether John draws down $20,000 or $35,000 from his pension is irrelevant. Entitlement to the age pension is based on the deemed income from the pension account and not the amount of the pension payment.

The $400,000 pension balance will be treated as producing $156.50 on the first $62,600 (ie at 0.25%) and $7,591.50 on the balance (being $337,400 at 2.25%). This total of $7,748.00 is converted to a fortnightly rate which is $298 ($7,748/26). The first $212 of the $298 is within the income free area and so has no effect on John’s age pension entitlement. However, the balance – being $86 – will reduce his age pension entitlement by $43 (given the reduction rate of 50 cents in the dollar).

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Michael Hallinan

This article considers the application of the “catch-up” contribution provisions:

• When they can be made?
• How much can be made?
• What happens if an excess of “catch up” contributions are made?

Making “catch-up” contributions is an effective strategy to increase your superannuation savings.

Finally, the article considers the interaction between catch-up contributions, bring forward contributions and downsizer contributions.

What are “concessional contributions”?

Well, there is a bit of explaining required. In broad terms, all employer contributions made for you and all of your own contributions in respect of which you have received a tax deduction are treated as concessional contributions. The term “concessional” refers to the tax treatment given to the maker of the contribution. (And not to the tax treatment they receive in the hands of the super fund.)

In respect of each financial year, the ATO will determine the aggregate of all of your concessional contributions. If the aggregate does not exceed a specified limit (called the concessional contributions cap) these contributions will be taxed at 15% by being included in the assessable income of the superannuation fund.

To the extent the aggregate exceeds the specified limit, the economic benefit of the tax deduction claimed in respect of the contributions will, effectively, be reversed and the excess amount will be counted as a non-concessional contribution.

This reversal is achieved by the following process. The amount of the excess will automatically be included in your assessable income for the financial year in which the excess arose. You will be liable for tax at your marginal tax rate on the excess amount, but will be allowed a tax credit of 15% of the amount of the excess (as these contributions have already been subject to tax at 15% by being included in the assessable income of the superannuation fund). By these actions the tax benefit of making excess concessional contributions has been reversed. The excess amount is then treated as a non-concessional contribution.

The concessional contribution cap is currently $27,500 for the 2023/24 financial year and will be $30,000 for the 2024/25 financial year. The cap is not an absolute limit on the amount of concessional contributions which can be made in a financial year, but a dividing line between separating contributions which have one tax treatment as against those contributions which have a different (less favourable) tax treatment.

Well that’s fine, but what are “catch-up contributions”?

Well to know catch-up contributions you must first know concessional contributions. And that life goal has now been achieved (almost).

The current version of the concessional contribution cap first applied from 1 July 2017 when it was set at $25,000. Indexation since 1 July 2017 has increased the cap to the current rate of $27,500. A flat dollar universal cap suffers from two significant defects. First, the cap makes no allowance for a taxpayer’s age related ability to make superannuation contributions. Second, if the cap for a financial year is not fully used, the unused portion is lost.

To place the first defect in perspective, the concessional contribution cap for 2007/08 financial year was $50,000 if under age 50 and $100,000 if aged 50 or more!! This defect remains.

The second defect has been partially ameliorated. It is now possible to carry forward the unused portion of the concessional contribution cap for 5 tax years. If the unused portion of the cap for 2022/23 tax year was $9,500 then this amount could be carried forward to the 2023/24 tax year. Consequently the concessional contribution cap for 2023/24 would be $37,000 – that is $27,500 plus the carry forward of $9,500.

Catch-up contributions are additional concessional contributions made to take advantage of previous tax years’ unused concessional contributions cap.

If your actual concessional contribution cap was $39,000 for the 2023/24 tax year (due to the carry forward of $9,500) then you could make $36,000 of concessional contributions and the entire $36,000 would be treated as concessional contributions. Without the carry forward, only the first $27,500 would be treated as concessional contributions with the balance of $8,500 treated as excess concessional contributions.

In which situations can I use “catch-up contributions”?

Catch-up contributions could be used in the following situations:

• If you are the in position where your employer can make a significant salary sacrifice contribution.
• If you have recently sold your family home and have funds to invest in superannuation from the sale proceeds. If the sale occurred on or after you had attained age 55 then you may be able to make both catch-up contributions and a downsizer contribution.
• If you have recently sold an investment property – then the sale proceeds could be applied in the making of catch-up contributions.
• If you are over age 60 and are entitled to withdraw your superannuation benefit – you could gift an amount to your spouse for your spouse to make their own catch up contributions.

What are the conditions for making catch-up contributions?

There are three conditions which must be satisfied before you can make catch-up contributions.

The first is that your total superannuation balance (essentially the total amount you have in the superannuation system) must be less than $500,000 just before the start of the tax year in which you propose to make the catch up contribution. In fact, the total superannuation balance could be $499,999 and you would still be entitled to make catch up contributions.

The second condition is that to make catch up contributions in respect of a tax year you must first fully exhaust the normal concessional contributions cap applying to that tax year. So, to make catch-up contributions in respect of the 2023/24 tax year, you must make concessional contributions equal to $27,500. It is not possible to first exhaust the unused carry forward before exhausting the current cap.

The third restriction is imposed by the SIS Contribution Acceptance Rules. As a general statement, contributions cannot be made after age 75 (or more correctly before the end of a grace period being the 28 days after the month in which age 75 is attained). There are exceptions for super guarantee contributions and contributions required to be made by an employer by reason of an industrial award as well as downsizer contributions.

When can they be made?

Taking 2023/24 as the year in which you propose to make a catch up contribution, in 2023/24 you must:

• have a total superannuation balance as at 30 June 2023 of less than $500,000;
• already exhausted your concessional contribution cap for 2023/24 by having concessional contributions (employer and your own) of $27,500 made by you or for you;
• have unused concession contribution cap space from any of the following tax years – 2018/19, 2019/20, 2020/21, 2021/22 or 2022/23.

How much can be made?

Don’t worry, the ATO can tell you the total unused catch up contribution amount – go to the MyGov site and login. Then go to the linked ATO site.

What happens if there is an excess of “catch up contributions”

There is no real issue. The excess will be identified by the ATO and the excess amount will be notified to you. The tax deduction for the excess amount will be reversed by including the excess in your tax return for 2024/25 and you will have to pay tax (less 15% tax offset) on the excess amount.

You can lease the excess amount in the super system or take out the excess amount (and attributed earnings) by giving the ATO a release authority. The excess amount (after first paying any tax debt) will eventually be paid to you.

What happens if I want to use the “bring forward” of non-concessional contributions in 2024/25 tax year?

You must ensure that you do not trigger “the bring forward” in 2024/25 by exceeding the $110,000 non-concessional contributions cap applying to the 2023/24 tax year.

The “bring forward” will be triggered in 2023/24 if you make excess catch up contributions.

So, if you do make excess catch up contributions in 2023/24 –simply use the release authority to release the excess amount from the super system. If the excess amount is released, it will not be counted as non-concessional contributions in respect of the 2023/24 tax year and you will not exceed the $110,000 non-concessional contributions cap which applies to the 2023/24 financial year.

By Michael Hallinan, Special Counsel – Superannuation

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Michael Hallinan

What are they?

Death bed benefit withdrawals is a poignant description of the situation where a member of a superannuation fund makes a request to withdrawal their superannuation benefit as a lump sum before they die.

Typically, this is done as the member has no dependants who could receive the benefit tax free.  If a superannuation death benefit is paid to the independent adult children of the member, the benefit will generally be taxed at 16.5% (including Medicare).

Consider Tom, a widower, who has adult children, Terrence and Fiona.  His benefit in his self managed superannuation fund is $900,000 which consists of a $50,000 tax free component and $850,000 taxable component.  As Tom is now aged 85, he could withdraw his entire superannuation benefit of $900,000 tax free.  However, if Tom dies before withdrawing his entire superannuation benefit, the benefit, if paid to Terrence and Fiona (in equal proportions), will attract a tax bill of $140,250 (that is 16.5% of $850,000 – there is no tax on the $50,000 tax free component).  Thus, by acting quickly, he could “save” or more correctly, preclude his children from incurring this tax.

This different treatment of the superannuation benefit arises merely because, on one hand, the benefit is paid to Tom and on the other hand, the benefit is paid to his children (or his estate).

The natural desire of any parent to assist their children by not incurring unnecessary tax on their superannuation benefit is the reason for the timely withdrawal of superannuation benefits otherwise known as “death bed benefit withdrawals.”

Are they effective?

If a member has a right to request payment of their superannuation benefit say, because they have an attained age of 65 or more or are retired for superannuation purposes, and they exercise that right and the trustee of the superannuation fund authorises payment of the benefit request, then the death bed benefit withdrawal should be treated for taxation purposes as a superannuation member benefit (and therefore tax free) rather than a superannuation death benefit (and possibly be subject to 16.5% on the taxable component of the death benefit).

The critical issues are whether the member has a right to immediate benefit payment, whether that right has been exercised and finally whether the trustee/s have authorised payment of the benefit request.  If all these issues are satisfied, then the mere fact that the payment is made after the death of the member would not, by itself, cause the payment to be treated as a superannuation death benefit.

A member will have a right to immediate benefit payment if the trust deed (or governing rules) of the superannuation fund provide that the benefit can be paid to the member and payment to the member will not be inconsistent with the benefit payment standards applying to regulated superannuation funds.

A member will have exercised their right to immediate benefit payment if they have completed the relevant benefit payment request (signed, dated, provided bank account details for the payment and any other requirements).

The trustee will have authorised payment of the benefit if the completed benefit payment request form has been provided to the trustee and the trustee has resolved to authorise payment of the benefit and to authorise the taking of any administrative steps necessary to effect payment.

Once the trustee authorisation has occurred the relationship between the member and the trustee will have changed from a beneficiary/trustee relationship to a creditor/debtor relationship.  The payment of the benefit will then discharge the debt owed by the trustee to the member.

If the member has died after trustee authorisation has occurred but before payment has been made the payment will be a superannuation member benefit and will form part of the estate of the member:  trustee authorisation of the benefit request means that the trustee is now a debtor to the member and the subsequent payment is the satisfaction of the debt.

If the member had died before trustee authorisation of the request has occurred and the death of the member is not known to the trustee (this would typically be the case in respect of APRA regulated superannuation funds – such as industry funds or retail funds but not SMSFs) then the authorisation post death by the trustee the subsequent payment pursuant to that authorisation would not cause the payment to be a superannuation death benefit.

However, if the member died before trustee authorisation of the request has occurred and the death of the member is either known to the trustee or the death of the member precludes the trustee from acting (because the member was a trustee or a director of the corporate trustee) – it is likely that any subsequent payment of the benefit would be a superannuation death benefit.

What about the ATO?

The ATO has raised concerns earlier this year about undated but signed benefit withdrawal forms being used to argue that a benefit payment made after the death of the member should be treated as a member benefit rather than a death benefit.   The view of the ATO is that the signed but undated requests are not, of themselves, sufficient to make a subsequent benefit payments tax free member benefit.  This is because the signed and undated benefit withdrawal request has not been authorised by the member before their death.

If the member has authorised the benefit withdrawal before their death (by both signing and dating the request) and trustee authorisation has been obtained then the subsequent payment of the benefit after the death of the member but pursuant to that trustee authorisation should not cause the benefit payment to be treated as a death benefit.

Powers of Attorney issues

Given that the member may be in no fit state to exercise their role as trustee in respect of the payment immediately before their death, it is likely that this will have to be done by their attorney. The power of attorney should specifically give the attorney the right to request the payment and in SMSFs ensure that the attorney is empowered to become a trustee of the fund or trustee/director so that the payment can be authorised.

In conclusion

If Tom has completed the benefit withdrawal request and the benefit withdrawal request is approved by the trustee (including Tom if he is either trustee or director of the corporate trustee), then merely paying the benefit after the death of Tom will not cause the benefit payment to be taxed as a death benefit if the other trustees had no notice of the death before trustee authorisation.  The benefit payment will be tax free but form part of his estate.

The post Death bed benefit withdrawals appeared first on AdviserVoice.

Michael Hallinan

1. Concessional Contribution Cap – $30,000 (previously 23/24 financial year was $27,500)

Concessional contributions are superannuation contributions in respect of which a tax deduction has been claimed whether those contributions are made by the employer (or a related company of the employer) of the member or by the member themself. These contributions are subject to tax in the super fund at 15%.

The cap applies to the aggregate of all concessional contributions made by or in respect of the member during the financial year. If the aggregate of the concessional contributions exceeds the cap, the excess amount will be taxed as assessable income of the member’s tax return at the member’s marginal tax rate for the financial year in which the contributions were made (with a tax offset of 15% of the amount of the excess). The 15% offset is provided as the excess amount has already been taxed at 15% when received by the super fund.

The member will also have to pay an excess concessional contribution charge on the excess amount – this charge is to reverse any timing advantage gained by the claiming of a tax deduction in respect of the excess amount.

The member has a choice as to whether the excess amount remains in the super fund or be returned. The former election will result in the excess amount being treated as a non-concessional contribution for the financial year in relation to which the excess amount arose. One consequence of this election is the member will have to pay the tax liability arising from the inclusion of the excess amount from non-super money. Another consequence is that member may have triggered the application of the bring forward of non-concessional contributions.

The latter election will entail 85% of the excess amount being paid to the ATO, used by the ATO to pay the tax liability and excess concessional contribution charge with the balance being paid to the member. The amount paid to the member does not give rise to a tax liability in the hands of the member. This election results in the excess concessional contributions amount being removed from the super system.

2. Non-Concessional Contribution Cap – $120,000 (previous 2023/24 financial year was $110,000)

Non-Concessional Contributions are superannuation contributions in respect of which no tax deduction has been claimed or cannot be claimed. Typically, such contributions are made by members for themselves. Additionally, excess concessional contributions which are retained in the super system are counted as non-concessional contributions. These contributions are not subject to tax in the super fund.

Unlike concessional contributions, eligibility to make non-concessional contributions depends on the attained age of the member and their total superannuation balance. To make non-concessional contributions the total superannuation balance of the member immediately before the financial year in which the contribution is made must be less than the general transfer balance cap (which for 2024/25 financial year is $1,900,000). Additionally, the member must not have attained age of 75 or more. If either of these requirements are not satisfied, the member cannot make non-concessional contributions.

However, certain types of superannuation contributions which would otherwise be non-concessional contributions are expressly excluded as being non-concessional contributions. These special types of non-concessional contributions include downsizer contributions, CGT contributions, personal injury contributions and Government co-contributions.

The cap applies to the aggregate of all non-concessional contributions made by or in respect of the member during the financial year. If the aggregate of the non-concessional contributions exceeds the cap, the excess amount will be taxed at 47%. This tax is a tax liability of the member, treated as excess non-concessional contributions and taxed at 47%.

The member can avoid the 47% tax liability on the excess amount in one of two methods.

1. The first method is for the “bring forward” of non-concessional contributions to apply to the member. However, there are certain restrictions as to when a bring forward will apply. The bring forward of non-concessional contributions is set out in detail below.
2. The other method for a member to avoid the 47% on their excess non-concessional contribution is by electing to withdraw the excess amount plus 85% of the associated earnings from the super system. In this case, the excess amount is reduced to nil (so there is no 47% tax) and 100% of the associated earnings are included in the member assessable income for the financial year in which the excess amount arose with a 15% tax offset of the associated earnings. Associated earnings are the investment earnings which have deemed to arise in respect of the excess amount and the associated earnings are determined by a statutory rate of return. The statutory rate of return for 2023/24 financial year is 11.19% pa.

3. Bring forward (non-concessional contribution) Cap – $360,000 (previous 2023/24 financial year was $330,000)

In brief outline, the bring forward permits a member to make up to three years’ worth of non-concessional contributions in one or two financial years. However, whether the Bring Forward Cap applies depends on the total superannuation balance of the member immediately before the start of the current financial year and, also, depends on the attained age of the member at the start of the financial year in which the contribution is made.

In general, Non-Concessional Contributions cannot be made after the member attains age 75.

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Michael Hallinan

This very issue was the subject of a recent private binding ruling (released 25 March 2024). The taxpayer had for a number of years (actual number was redacted in the published ruling) made personal superannuation contributions for which the taxpayer claimed a tax deduction. The actual amount of each of these contributions was not provided in the published ruling.

The particular concern of the taxpayer was whether, in the relation to the financial year in which the taxpayer retired, could the taxpayer still make a personal superannuation contribution and claim a tax deduction for the contribution and then cash out part of his superannuation balance. Possibly a more general concern of the taxpayer was whether the general anti-tax avoidance provision (“Part IVA”) would apply given the taxpayer was obtaining a tax benefit (being the tax deduction for the personal contribution) then after the contribution has been made and in the same tax year – cashing out the superannuation benefit (which included the contribution) tax free? It should be noted that the taxpayer had not previously been entitled to cash out his superannuation.

The published ruling was that the taxpayer would be entitled to claim a tax deduction for the personal superannuation contribution so long as the notice of intent to claim a tax deduction (“deduction notice”) was lodged with the trustee of the relevant superannuation fund and that trustee issued an acknowledgment notice to the taxpayer before the super benefit was cashed out. If the cashing out was effected before the acknowledgement notice was issued, the deduction notice would be invalid and, so, a pre-condition for the deduction would not have been satisfied. The reason for the invalidity of the deduction notice in this situation is that once the cashing out has occurred, the trustee must have treated the superannuation contribution as being a non-concessional contribution and the trustee cannot retrospectively change that treatment.

The published ruling also noted that Part IVA did not apply to the circumstances of the taxpayer. This was because the taxpayer had established practice of making deductible superannuation contributions and the superannuation contribution made in the financial year in which he retired was entirely consistent with that established practice.

Unfortunately, the published ruling did not provide any details as to the previous superannuation deductions – whether those contributions were identical (or roughly identical) in amount is not known or whether the contribution was the maximum which could be contributed for that year is not known. However, the ATO was of the view that the taxpayer had clearly established a practice and the contribution made in the financial year of this retirement was consistent with this practice. It is the consistency of the practice which established that the sole or dominant purpose (being the key issues for the application of Part IVA) was not the obtaining of a tax benefit.

The reason the Part IVA was considered is shown in the following example. Consider, Reg, who is thinking of making a personal superannuation contribution to his fund in the 2023/24 financial year. Reg will be retiring on 1 June 2024 and proposes to make a $18,000 personal superannuation contribution in the first week of June 2024 and two weeks later, once he has attained age 60 on 15 June 2024, to cash out the contribution. Reg has not previously made personal contributions to super.

Reg will have $18,000 tax deduction (when he lodges his tax return) which will reduce his tax by $6,000 (assuming 30% marginal tax rate). Additionally, he will receive a $15,300 tax free super lump sum ($18,000 less 15% tax imposed on the super fund). On this basis, he has obtained tax benefit of $3,300 ($6,000 less $2,700 tax paid by the fund) by making the deductible super contribution and then very shortly afterwards, cashing out the contribution.

There are other conditions which must be satisfied before a valid deduction can be claimed for a personal superannuation contribution (such as the fund being a complying superannuation fund; satisfaction of the work test if the contributor has attained age 67 and the contributor having sufficient taxable income against which to offset the deduction). The Ruling Reference Number is 791 016 107 7376.

By Michael Hallinan, Special Counsel – Superannuation

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Michael Hallinan

Two significant changes have been made to the Work Bonus scheme. These changes apply from 1 January 2024. The first change is that an initial credit of $4,000 will be granted to the “work bonus bank” of each new age pension recipient. The second is that the maximum balance of the “work bonus bank” has been increased to $11,800 (previously the maximum balance was $7,800).

But first! What is the Work Bonus scheme? And how does it operate with the income free area? There is free income!!

To explain the changes and their impact some first things need to be appreciated.

In broad terms, entitlement to the age pension is based upon reaching a qualifying age (which is now 67 for males and moving to age 67 for females) and satisfying residency requirements. Surprisingly, there is no requirement that the individual be retired or remain retired once the pension has been granted.

However, the amount (if any) of the age pension provided depends on the application of two independent means tests: namely an income means test and an asset means test. Each means test is separately applied to the circumstances of the individual. The amount of the pension granted to the applicant is the amount determined by whichever means test is the most beneficial for the exchequer and least beneficial to the individual.

In short, each means test applies on the basis that the individual is entitled to the maximum amount of pension and then reduces that entitlement by reference to the individual’s income and assets.

The work bonus scheme is intended to encourage individuals receiving an age pension to top up their income by engaging in gainful employment. Under the scheme, the first $300 of gainful employment received in an instalment period (that is a fortnight) is disregarded when applying the income means test. This means that the first $300 of gainful employment income will not reduce the entitlement to the age pension determined by the income means test.

Further, any unused portion of the $300 limit can be carried forward to the next instalment period and be used to disregard any gainful employment income earned in that instalment period.

As the work bonus scheme only affects the income means test, the asset means test is not presently relevant.

The operation of the Work Bonus Scheme is best illustrated with an example.

The case of Bill

Bill’s fortnightly income from all sources is $850 consisting of personal exertion income of $225 and his other income (including deemed income from financial investments) of $625.

The work bonus scheme operates so that the first $300 of personal exertion income is disregarded.  For Bill, his income to be counted for the income means test is now $625.  The unused portion of the work bonus – being $75 – is carried forward to the next instalment period.  Carrying forward the $75 is referred to as $75 being credited to the “work bonus bank”.  (This is not the term used in the legislation.)

The work bonus bank for the next instalment period will be $375 (being the $75 carried forward and the $300 which would apply even if there was no carry forward).

The income means test operates on the basis that the first $204 of the remaining income does not reduce his pension entitlement.  This $204 is referred to as the “income free area” as this income does not reduce the pension amount.  The remaining income is $421.  This remaining income reduces Bill’s maximum pension entitlement by $210.50 per fortnight (as the reduction rate of each dollar of income reduces the maximum pension amount by 50c).

The $300 figure is not indexed (and will only change by statutory amendment).  The income free area – currently $204 for single pensioners and $360 for couples (combined) is annually indexed by reference to CPI.  It is most likely that the $204 and $360 thresholds will be indexed with effect from 1 July 2024.

If Bill’s personal exertion income had been $325 instead of $225 and his total income remained at $850, only $25 of the personal exertion income would remain after the application of the work bonus amount.  As the work bonus amount of $300 has been completely used, there is no amount carried forward to the next instalment period.   The income free area of $204 is then applied to the remaining income of $550 (which includes $25 of gainful employment income) so that the remaining income is now $341.  This remaining income reduces Bill’s maximum pension entitlement by $173.00.

Bill’s case illustrates the application of both the work bonus amount and the income free area.  The work bonus amount can only reduce the amount of personal exertion income which is counted for the income means test.  The income free amount can apply to both personal exertion income and investment income.

If Bill had only gainful employment income for an instalment period – he could earn up to $504 (being $300 work bonus plus the income free area of $204) of gainful employment income without reduction in his age pension amount.

The first significant change – initial credit of $4,000 to the work bonus bank

The work bonus scheme has recently been amended to now allow new age pension recipients a once only $4,000 initial credit for the purposes of the work bonus scheme.  This change applies from 1 January 2024 to age pension recipients whose entitlement to the age pension commences on or after 1 January 2024.

Having an initial credit in the work bonus bank will enable new age pension recipients to immediately benefit from the work bonus scheme rather than having to accrue excess amounts from each instalment period.

The effect of the new initial credit to the work bonus bank is again best illustrated by an example.

Emma has applied for and been granted an age pension the commencement date of which was 1 February 2024.  Emma, a single pensioner, is employed on a regular part-time basis and earns $750 income per fortnight and has $100 per fortnight of investment income.

Without the benefit of the initial $4,000 work bonus credit

Emma will be treated as having $346 of counted income for the purposes of the incomes means test.  This amount arises as the work bonus amount of $300 will first reduce her employment income from $750 to $450.  The income free area of $204 will be applied to the remaining employment income of $450 to further reduce the employment income to $246.  However, Emma still has $100 of investment income.  Consequently, her counted income for the instalment period is $346.  Her age pension will be reduced by $173.   Emma has, by earning $750 per fortnight reduced her age pension by $173.  Her net position is that by earning $750 per fortnight she is better off by $567 per fortnight.  (This comparison does not take into account the additional income tax Emma has to pay on the $750 earnings per fortnight.)  If Emma earned no employment income for the instalment period, her only counted income would be within the income free area and so there would be no reduction in the age pension.

With the benefit of the initial $4,000 work bonus credit.

As Emma has been granted the age pension, in respect of her first instalment period she will have a work bonus of $4,300 (being the initial credit of $4,000 and $300 which applies to each instalment period).

Her $750 of employment income is less than the work bonus credit of $4,300 – so the employment income is disregarded and it does not have an effect on her age pension.  The remaining investment income of $100 is less than the income free area – so the investment income is also disregarded.

In respect of her first instalment period Emma has no reduction in the age pension amount – she is entitled to the full age pension.  Additionally, she is able to carry forward the unused portion of the work bank credit which is $3,550.

While Emma has only partially used the income free area ($104 remains unused) this unused portion cannot be carried forward to subsequent instalment periods.  Additionally, the unused portion of the income free area cannot be used to reduce the $750 of employment income.  This is due to the relevant legislation (s1064 of the Social Security Act 1991) requiring the work bonus system to first apply to any gainful employment income and only after the work bonus system has been applied does the income free area apply.

In the next and following instalment periods – assuming Emma earns $750 of employment income and $100 of investment income in respect of each instalment – the outcome will be as follows:

• 2^nd instalment period – no reduction in the full age pension.  The work bonus bank will be $3,550 (the carry forward from the first instalment period) plus $300 in respect of the second instalment period – in total $3,850.  Consequently, the work bonus bank will reduce by $750 allowing the carry forward of $3,100.  As the investment income is less than the income free area, the investment income does not affect the age pension.

• 3^rd instalment period – again no reduction in the full age pension.  The work bonus bank will now be $3,400 (carry forward plus $300).  The work bonus back will be applied against the $750 of employment income – reducing it to $2,650 to be carried forward to the third instalment period.  In relation to the investment income – as it is less than the income free area – the investment income does not reduce the age pension.
• 4^th to 10^th instalment periods – the work bonus bank will reduce by $450 per instalment period. Emma will be entitled to a full age pension.
• 11^th instalment period – the work bonus bank carried forward to this instalment period will be $250.  The reduction in the $750 employment income will be $550 ($250 carry forward plus $300).  The counted employment income will be $200.  The investment income is $100.  The counted income will be $300.  The income free area will reduce this to $96.  Consequently, Emma’s age pension will be reduced by $48.
• 12^th and subsequent instalment periods – The income means test will treat Emma as having income of $550 ($750 less $300 plus the investment income of $100).  The income free area will reduce this to $346 ($550 less $204).  Emma’s age pension will be reduced by $173.

The second significant change – increase in the maximum work bonus bank amount and no reset at the start of each financial year

The second significant change is that the maximum work bonus bank balance has been increased from $7,800 to $11,800 with any unused bank balance at the end of a financial year can (subject to the maximum cap) being carried forward to the next financial year.

Previously, the work bonus bank balance commenced with a nil balance and was then increased by each unused portion of the $300 limit.  If the $300 limit was unused for 10 instalment periods, the balance would have accrued to a total of $3,000.  The maximum the work bonus bank balance could accrue to is $7,800 (that is: 26 instalment periods at $300 per instalment period).  Additionally, any unused work bank balance was reset to nil at the start of each new financial year.

Now the work bonus bank commences with a $4,000 balance.  Further, the maximum balance which can accrue in the work bonus bank balance is now $11,800 ($4,000 initial balance plus

26 instalment periods of $300 per instalment period).  Finally, there is now no longer a reset to nil of the work bonus balance bank at the start of each financial year.

Yes another example.

Consider Tarquin.  He has applied for and been granted an age pension commencing on 1 March 2024 (which is assumed to be the first day of an instalment period).

Previously, Tarquin would have accrued $300 work bonus for each instalment period.  If Tarquin had no employment income in the period 1 March 2024 to 30 June 2024, his work bonus bank balance would be $2,400 (assuming 8 instalment periods in the period to 30 June 2024).  This balance would be reset to nil and Tarquin would have to recommence accruing the work bonus amounts.

Now, there is no reset at 30 June 2024.  Consequently, Tarquin’s work bonus balance immediately before 1 July 2024 will be the accrued $2,400 (as well as the initial $4,000).

How do the changes affect individuals who first received an age pension before 1 January 2024?

Individuals in this position have had the benefit the initial credit to the work bonus balance.  While this increase was an interim measure (which was intended to cease on 31 December 2023), affected individuals can carry forward the work bonus balance even if the then balance is greater than $7,800.  However, they are still subject to the maximum balance rule that the work bonus balance cannot exceed $11,800.

Is the initial credit of $4,000 a once only event?

In general, yes.  If an individual has received the benefit of an initial credit of $4,000 (when under the former arrangements which applied up to 31 December 2023 or under the new arrangements which apply from 1 January 2024, then they cannot receive the benefit of another $4,000 credit.

In very limited circumstances, an individual who has received one $4,000 credit to the work bank balance, may receive another increase.  For this to occur, the entitlement to the pension must have ceased (including any notional continuation of pension entitlement for extended access to the health concession cards) for a period of 2 years or more and the entitlement to the pension must have recommenced on or after 1 July 2026.

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Michael Hallinan

With an increasing number of elderly parents living with their adult children, is it possible that an adult child of a deceased parent could, on the death of the parent, receive their parent’s superannuation tax free?

For an adult child to receive their deceased parent’s superannuation benefit, the adult child must either be a “financial dependent” of the parent or have an interdependency relationship with their parent at the time of death of the parent.

This article will consider whether an adult child can have an interdependency relationship with their parent.  It is presumed that the adult child is legally and financially independent of the parent.

Interdependency relationship  –  a poor choice of a name

The name “interdependency relationship” is simply the term used in the statutory definition.  Unfortunately, the term suggests that each individual in the relationship is in some way dependant on the other with the consequence that the understanding of the elements of the definition are distorted by viewing each requirement through the lens of mutual dependency which is both financial and non-financial in scope.

Elements of the relationship

For the relationship to exist between two individuals, four elements must be satisfied:

• they must have a close personal relationship;
• they must live together;
• one or each of them provides the other with financial support;
• one or each of them provides the other with domestic support and personal care.

Close personal relationship

This element does not require a sexual or romantic relationship to exist between the two individuals.  A relationship can be close and personal without being sexual or romantic.  There is no requirement that the relationship be marriage-like.  Though a marriage-like relationship will qualify as a close personal relationship.

Living together

This element only requires that the two individuals share the same residence.  This element imports no romantic or sexual requirement.

Financial support

This element does not require financial dependency of one on the other.  Financial support is less onerous threshold than financial dependency.  Further there is no requirement that each individual must provide the other with financial support.  It is sufficient that only one individual provides financial support to the other.

Domestic support and personal care

This element does not require that each individual must provide the other with domestic support or personal care.  It is sufficient that one individual provides the other with domestic support and personal care.  It would also be sufficient if one individual provides the other domestic support while the other provides the first with personal care.

How to establish each element?

In building a case that an interdependency relationship exists between two individuals, each of the four elements must be satisfied.  This general statement is subject to exceptions.

As to the “close personal relationship” – this will exist if there is a demonstrated and ongoing commitment to the emotional support and well-being between two individuals.  A shared life will satisfy this requirement.  The absence of a shared life does not negative the existence of a close personal relationship.  If there is no shared life (which would typically be the case between a parent and an adult child), the element could be established by details of the daily or weekly interactions between the parent and the adult child – such as telephone calls, outings, the subject of the conversations between the two.  In the case of a parent and adult child, interactions would have to be above the normal interactions – both in frequency and in the content of the interactions.

As to “living together” – this element will be satisfied if the individuals share the same accommodation and the arrangement is not short term only or for a particular purpose (such as moving in while a house is being built).  If the living arrangement is of indefinite duration and there are elements of a shared life – such as eating together, sharing cleaning and cooking and entertaining together – the element will be satisfied.  The element will not be satisfied if the arrangement is one of pure economic convenience.

As to financial support – this element will be satisfied if either or both of them contribute on a regular basis to the financial support of the other.  For example, each contributes to the running costs of the residence (electricity, council rates, water rates, broadband, repairs, maintenance, food and so on).  This element could be satisfied even if both individuals are financially independent.  The critical issue is the recognition of joint expenses and the sharing of the joint expenses on an indefinite basis.

As to “Domestic Support and Personal Care” – this element will be satisfied if either or both of them provide support as such shopping, house cleaning and laundry and ironing (domestic support) or attend to their mobility needs, medical appointments, dressing and emotional support (personal care).

As with any case, specific instances and documentary evidence are vital.  Under each element, details should be provided of the instances relevant to the element.  For example if there are medical appointments – dates and nature of the appointment, who arranged the appointment and who provided the transport.  If meals are taken together – how often.  If expenses are shared – evidence of payment.  Mere assertions in the absence of specific details will not establish the existence of the relationship.

Who decides whether there is a special relationship?

In the first instance it will be the trustee of the super fund paying the benefit.  Where the super fund is an SMSF, the trustee should provide quite detailed documentary justification of the existence of the relationship.  The trustee should take the approach as if the trustee were submitting a request for a Private Binding Ruling as to whether the adult child and the deceased member were in an interdependency relationship.

The decision of the trustee of an SMSF, however, does not bind the Commissioner of Taxation.  The Commissioner could form his own different view as to whether there was an interdependency relationship.  For this reason, the trustee (and/or the beneficiary) may first seek a Private Binding Ruling from the Commissioner.

Alternatively, the trustee could pay the death benefit to the beneficiary on the basis that there was no interdependency relationship and allow the beneficiary to lodge their personal tax return on that basis with the beneficiary then lodging an objection to the return on the basis that the death benefit is in fact not taxable on the basis that there was an interdependency relationship.

There are many Private Binding Rulings which have been published (on an anonymous basis) which have held that an adult child and their parent were in fact in an interdependency relationship.  The common feature of the Binding Rulings which have been favourable to the beneficiary is the detail which has been provided as to each element of the interdependency relationship.

Note:  This article was prepared as at March 2024.  The article has not been updated in light of subsequent developments.

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Michael Hallinan

A couple sold their home and the net proceeds were not entirely used for a new home:

• The Tribunal held that any amount of the net sale proceeds not used to acquire the replacement home ceased to be the subject of special rules.
• The used proceeds would be counted as an asset and while, for income means test purposes, the unused sale proceeds would be included in the pool of financial assets to which the normal deeming rates would apply.

This case^[1] illustrates the consequence where the net sale proceeds were not entirely applied in the application of the replacement home. Mr and Mrs Parton, rather like Bill and Wilma (see the article: “Downsizing and the Age Pension”^[2]), sold their home and did not immediately acquire a replacement home. Once they acquired the replacement home, they did not use up all of the sale proceeds.  They intended that a portion of the net sale proceeds would be used in repairing and modifying their replacement home.

The issue to be resolved was how the retained net sale proceeds affected their entitlement to the age pension.

The Tribunal held that once they acquired their replacement home, any amount of the net sale proceeds which was not used to acquire the replacement home ceased to be subject to the special rules applying to the sale proceeds of the family home.  The used proceeds would be counted as an asset and while, for income means test purposes, the unused sale proceeds would be included in the pool of financial assets to which the normal deeming rates would apply.

The Tribunal did note that if the Partons then applied the unused portion of the sale proceeds in the repair and modification of the replacement home, the amount used in this way would become part of the replacement home and therefore be disregarded for the purpose of the assets means test and cease to exist as a financial asset for the income means test.

As the relevant events of the Parton’s situation occurred before 1 January 2023, the sale proceeds would only be excluded from the assets means test for 52 weeks and not 104 weeks.

Additionally, the balance of the sale proceeds would form part of the ordinary pool of financial assets to which the 0.25% and 2.25% rates apply.

Note: This article was prepared as at August 2023.  The article has not been updated in light of subsequent developments.

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Michael Hallinan

Any super fund member who has commenced an account-based pension since 1 July 2017 (even if the pension has been entirely rolled back to accumulation phase or cashed out) can now view their updated personal transfer balance cap by using the MyGov website^[1] to access ATO online services.

With the increase in the general transfer balance cap from $1.7m to $1.9m (which took effect on 1 July 2023), super fund members personal transfer balance cap will be increased in proportion to their unused transfer balance cap (also known as “transfer balance cap space”).

If a super fund member has exhausted their transfer balance cap space (that is, they have nil transfer balance cap space as at 1 July 2023), they are not entitled to any increase.

If a super fund member has exhausted 80% of the personal transfer balance cap space, then their personal transfer balance cap will be increased by 20% (the proportion of the unused space) of the $200,000 increase in the general cap.  Consequently, they will have an increase of $40,000 in their transfer balance cap space.

For super members who are yet to commence an account-based pension – the world of transfer balance accounts, transfer balance caps and unused cap spaces does not, as yet apply to them.

For super members who have previously commenced an account-based pension but have either entirely rolled back the pension to accumulation phase or entirely cashed out the pension, the wonderful world of transfer balance accounts (and all that jazz) still applies to them.  In this situation, the transfer balance account remains open, your personal transfer balance cap is unchanged and your balance cap space is determined by the highest balance of the transfer balance account.

A transfer balance account is an account that is established and maintained by the ATO to record how much super you transfer to retirement phase (and into earnings tax exemption).  The ATO will open a transfer balance account when you first commence a pension which is entitled to the earnings tax exemption (typically, account-based pensions).  Your personal transfer balance cap will be the general transfer balance cap applying at the date the transfer balance account is opened by the ATO as increased by the portion (if any) of the dollar increase in the general cap to which you are entitled.

When you commence an account-based pension, a credit is made to your transfer balance account (equal to the opening balance of the pension account) and when you commute a pension a debit is made to your transfer balance account (equal to the amount of the commutation payment).  Movements in asset values and pension payments (other than commutations) do not affect the transfer account balance.

If you had commenced an account-based pension on or before 1 July 2017, the pension account balance immediately before 1 July 2017, is treated as the credit to the transfer account balance.

While transition to retirement pensions are a type of account pensions, only the pension account as at the time the pension becomes a retirement phase pension (i.e. entitled to the earnings tax exemption) is treated as a credit to the transfer balance account.  Typically, retirement phase pensions become retirement phase pensions when the pensioner member attains age 65 or is taken, for super purposes, to have retired, whichever is the earlier.

Special rules apply for pensions which are not account-based pensions, such as defined benefit pensions and non-commutable pensions.

Note: This article was prepared as at August 2023. The article has not been updated in light of subsequent developments.

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