The " Pensioner " Income Tax !

Most age pensioners do not need to lodge an annual income tax return because their income falls below the tax threshold.  Instead, the government applies what is termed " the deeming rate " to the assets they hold and applies a formulae that " deems " those assets are returning money to the pensioner by way of interest or dividends.

The deeming rate presently applicable is based on assets of $51,800 for single pensioners and $86,200 for pensioner couples to be assessed as earning a return of 1.75 percent annually.  In fact term deposits for savings under fifty thousand dollars are much lower and in many cases pay no interest at all.

When pensioner assets are above that $ 51,800 rate an even higher deeming rate cuts in and 3.25% return is applied.  The interest on amounts above fifty thousand dollars has been steadily falling in  recent years and is now a little over 2%, depending on the term.   As a consequence, pensioners are getting a smaller pension because an unrealistic return is being applied to their assets.

The government is promising relief and these deeming rates will be cut when the next pension review comes into effect from September 30.   That 1.75% deeming rate will be lowered to 1 %, and the 3.25% will drop to just 3%.   Neither is realistic when compared to the interest rate presently offering in the money market.

The pension structure is complex and depends on whether the pensioner is married or single, a home owner or a renter and this new structure will mean a little more pension payment each fortnight, ranging from eighteen to forty extra dollars each fortnight.

The problem is that " pension " covers a wide spectrum from age to disability and a host of other allowances.  To bring the deeming rate into reality would deliver a big hit on the bottom line and put a surplus in jeopardy.  Either the government would need to go into deficit or there would need to be cutbacks in other areas which the public might find unacceptable.

The government has taken an incremental approach.  Partially  improving the deeming rate to give most pensioners a pension increase but limiting that increase to the interest applicable in the money market where savings are invested.  In some cases, pensioner assets are held in the share market or in superannuation where returns of 4% are not uncommon.  This adjustment to the deeming rate fails the " fairness " test, but it is an improvement on the status quo.

In some respects, it could be seen as a form of income tax applicable to pensioners.   The pensioners with no assets pay no income tax, but those with varying amounts are taxed by virtue of the deeming rate, similar to wage earners who face bracket creep as their income increases.

Of course, that is an argument that pensioners will be quick to bring to government attention when inevitably interest rates are on the increase.   If deeming rates are on hold when rates are low, the same should apply when the rate is rising.