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Factsheet IS87 - Income Test Overview

Purpose

This Factsheet explains what income is, and how the income test is applied when working out the rate of an income support pension — that is, service pension, income support supplement (ISS) or age pension.  This Factsheet is not exhaustive.  For more information about what is counted as income and for your obligations please refer to ‘You and Your Pension’.

What are income and assets tests?

The amount of income support pension you receive depends on your income and assets.  The pension is calculated under two separate tests — the income test and the assets test.  The test paying the lower rate of pension is the one that is applied.

If you are a member of a couple, your pension is calculated on your combined income and assets, regardless of which one of you actually receives the income or owns the assets.

Money in a superannuation fund which is in the accumulation phase and not paying a pension is not counted under the income or assets test until:

  • the owner reaches pension age (qualifying age for a war widow/widower); or
  • money is withdrawn from the superannuation fund; or
  • a pension commences to be paid from the superannuation fund.

For more information about the assessment of superannuation, please refer to Factsheets IS91 Managed Investments and IS96 Income Streams.

If you are considered to be blind, the pension is paid at the maximum rate.  Your income and assets will not affect your rate of pension.  Your partner’s pension will still be subject to the income and assets tests.  For further information please refer to Factsheet IS147 Blind Pensioners.

The income and assets tests only apply to income support pensions.  Disability pensions, war widow and widower pensions are not subject to the income and assets tests.

What is the income test?

To work out your correct rate of income support pension we need to know how much income you receive (before tax and charges), whether from within or outside Australia. This will include both deemed and actual income.

You can still receive the maximum rate of pension if you have income up to the income free area (the income limit before pension reduces), provided your assets do not exceed the assets value limit (the asset limit before pension reduces).

When your income exceeds the income free area, each one dollar of income over the limit reduces your pension by 50 cents per fortnight (25 cents each for couples).  The pension continues to reduce at the rate of 50 cents in the dollar (or 25 cents each for couples) until your income reaches or exceeds the income cut-off limits.  No pension is payable if your income is over these cut-off limits.

For information about the assets value limit and the assets test, refer to Factsheet IS88 Asset test overview.

Transitional arrangements

If you received pension before 20 September 2009 at less than the maximum rate, your pension may be paid under transitional rules.

If you are paid under transitional rules, you will remain under the pre 20 September 2009 rules, until you are better off under the new rules.  This means your pension will reduce at the rate of 40 cents in the dollar (or 20 cents each for couples).  Please refer to Factsheet IS86 Transition Arrangements.

The Income Free Areas — Service Pension and Age Pension

There are two income free areas for service pension and age pension:

  • the singles limit — currently $168.00 per fortnight
  • the couples limit — currently $300.00 per fortnight, combined.

This means you can have income up to $168.00 per fortnight (singles) or $300.00 per fortnight (couples) and still get the maximum rate of service pension or age pension, provided your assets do not exceed the assets value limit.

Example 1: A single pensioner receives income of $95.00 per fortnight.  Because their income is less than $168.00 per fortnight (the singles income free area), the maximum rate of pension will be paid.  Remember, your assets must be less than the assets value limit.

Example 2: A pensioner couple receives income of $374.00 per fortnight.  Because their income is more than $300.00 per fortnight (the couples income free area), their pension will be paid at a reduced rate.  Their income exceeds the limit by $74.00, which means the pension for each partner will be reduced from the maximum rate by $18.50 per fortnight ($74.00 X 0.25).

The income free areas, together with the assets value limits, are adjusted each July in line with movements in the cost of living.

The Income Free Area — Income Support Supplement for War Widows and Widowers

ISS is not paid at the same rate as the service pension so there are two higher income limits for the ISS:

  • the singles limit — currently $1,391.60 per fortnight
  • the couples limit — currently $1,880.40 per fortnight, combined.

The income limits for ISS include the war widow’s or widower’s pension, which is counted as income when working out the rate of ISS payable.  Any disability pension paid by other governments is also counted as income.

This means you can have income up to $1,391.60 per fortnight (singles) or $1,880.40 per fortnight (couples) and still get the ceiling rate (generally $268.50 per fortnight) of ISS, provided your assets do not exceed the assets value limit for ISS.

Example 3: A war widow receives income of $514.90 per fortnight from sources other than her DVA pensions.  For ISS purposes, her income per fortnight is $514.90 plus $894.90 (her war widow’s pension), which totals $1,395.60 per fortnight.  Because her income is more than $1,391.60 per fortnight (the singles income free area for ISS), her pension will be paid at a reduced rate.  Her income exceeds the limit by $4.00, which means her ISS will be reduced by $2.00 per fortnight, ($4.00 X 0.50).

The income free areas, together with the assets value limits, are adjusted each July in line with movements in the cost of living.

For Service Pensioners, Age Pensioners and Income Support Supplement Recipients

The following rules apply whether you receive the service pension, the age pension or the ISS:

  • The singles limit applies to income received by single pensioners;
  • The couples limit applies to income received by pensioners who are members of a couple, including couples separated because of ill health, and couples where only one partner receives an income support pension;
  • If a couple separates for reasons other than ill health, and both partners remain eligible for an income support pension, they are then considered single pensioners, and the singles limit applies to each of them.  Their rate of pension is based on the income and assets they each keep after the separation; and
  • If a couple needs to live apart due to ill health, both partners are paid pension at the single rate, but their pension is assessed using the couples limit.

What is income?

For pension purposes, income means any payment amount earned, derived or received by a person for their own use or benefit, from any means or source, whether within or outside Australia.  This includes money deemed to be earned from interest on investments, loans, bullion or deprived assets.  The amount that is used in the assessment is the gross amount, i.e. the amount before any tax or charges.

Income from paid employment also includes the monetary value of any non-cash benefits (such as superannuation, vehicles, accommodation etc) which are provided in lieu of salary or wages (commonly known as “salary sacrifice” arrangements).

Where income is one-off or received irregularly, each time it is received, it may be assessed under the income test over a 12 month period.  For example, if a person receives a cheque from their electricity provider for $260 for energy from solar power generation fed back into the electricity grid, then this will be counted as $10 income per fortnight for 26 fortnights.

What does DVA count as income?

The following are the common types of income that are counted as income for pension purposes:

  • deemed income from financial assets;
  • salaries and wages;
  • the monetary value of non-income benefits paid in lieu of salary and wages, including salary sacrifice amounts;
  • pension or disability payments paid from a defined benefit superannuation fund;
  • income from purchased superannuation pensions, annuities, allocated pensions, account-based pensions, transition to retirement pensions, market linked pensions and term allocated pensions;
  • income from purchased non-superannuation annuities;
  • income from overseas pensions and annuities;
  • payments in the form of cheques, cash or direct deposits into a bank account for energy from solar power generation fed back into the electricity grid;
  • profits from farms, private trusts, private companies and other businesses such as partnerships;
  • income from estates and life interests;
  • payments from the surrender, withdrawal or maturity of a conventional life insurance policy which exceed the total premiums paid towards the policy; and
  • distributions from private trusts and private companies.

*Note: - If a person entered residential aged care before 1 January 2017 and receives rental income from their principal home, the income is not counted provided the person is either paying a daily accommodation payment, a daily accommodation contribution, an accommodation charge, or an accommodation bond wholly or partly by periodic payments.  For information about how rental income from your home is assessed for aged care means testing purposes, please refer to Factsheet IS82 Aged Care and Your Finances.

If you receive income from a source other than those mentioned above, contact your nearest DVA Office for information about how it is counted as income for pension purposes.

Are the disability pension and war widow’s or widower’s pension counted as income?

If you receive a service pension, the disability pension and war widow’s or widower’s pension are not counted as income when working out your rate of pension.  However, disability pension may be counted as income when determining the amount of rent assistance that may be payable to you. Please refer to Factsheet IS74 Renting and Rent Assistance.

If you receive a social security age pension the disability pension and war widow’s or widower’s pension are counted as income when working out your rate of pension.

If you are receiving the income support supplement, disability pension from other governments and war widow’s or widower’s pension are counted as income when working out your rate of pension.

*Note: - Defence Force Income Support Allowance will be paid to people whose social security income support payment is reduced as a result of assessing DVAs disability pension, permanent impairment compensation payments or Special Rate Disability Pension as income.  Please refer to Factsheet IS19 Defence Force Income Support Allowance (DFISA).

What is deemed income?

Deemed rates of interest are used to work out how much income you receive from your financial assets.  Financial assets include money in accounts with banks, building societies and credit unions, loans to third parties, bonds, debentures, shares, managed investments, bullion and gift amounts you (or your partner) have made in excess of $10,000 in a financial year or in excess of $30,000 over a rolling five-year period.

Actual income from certain financial assets can be complex to calculate.  Deeming is a simple and fair way of assessing the amount of income from these assets.

To work out the deemed income, we look at the total balance of your financial assets.  There are two deeming interest rates, a low deeming rate and a high deeming rate.  The deeming rates that apply depends upon the amount of financial assets you have.  The low deeming rate applies up to the value of what is called the deeming threshold.  Everything above this threshold is deemed to earn the high deeming rate.  The deeming thresholds are different for singles and couples.

The current deeming interest rates and thresholds are as follows:

  Singles Couples
Low 1.75% interest up to the threshold of $50,200 1.75% interest up to the threshold of $83,400
High 3.25% interest for the remaining balance 3.25% interest for the remaining balance

Deeming rates of interest are set by the Minister for Social Services in line with market trends, and are monitored on an on-going basis.  Any future change in the rates will be timed to coincide with the March and September pension indexation increases and any other time if the financial market fluctuates significantly.  The deeming thresholds are adjusted each July in line with movements in the cost of living.

For more information about deeming and financial assets, please refer to Factsheet IS89 Deeming and Financial Assets.

What is deprived income?

If you choose not to receive income, or deprive yourself of income in order to keep your pension or get more pension, the amount of forgone income will be counted as income for pension purposes.  This income will be counted under the income test for an indefinite period.  For example, if you elect not to receive income from superannuation that you are entitled to receive, this income would be counted for pension purposes as if you were actually receiving it. If you receive income but give it away to someone else, this will also be counted as income for pension purposes.

What is the work bonus?

The work bonus is an incentive to encourage older pensioners who are able, to continue working.  Under the work bonus rules, the first $250 of employment income earned per fortnight is excluded from the income test.

Example 4: A work bonus eligible pensioner receives wages of $600 per fortnight.  When their income is calculated for the income test, the first $250 is disregarded, so the assessable wages income is $350.

Additionally a work bonus bank has been introduced to enable eligible pensioners to accrue any unused amounts of the $250 fortnightly exemption to a maximum of $6,500.  Any credit in this ‘bank’ can then be used to offset employment income that would otherwise be assessable in the future.

To be eligible you must be over qualifying age/pension age.  For more information on work bonus refer to Factsheet IS99 Work Bonus.

Are there any income exemptions?

Certain payments may not be counted as income when working out your rate of service pension, age pension or income support supplement.  For example, payments received from members of your immediate family, or allowance payments from an employer to meet expenses, are not assessable.  You should provide sufficient detail of payments received so that the excluded amounts can be recognised.  If a payment does not count as income, DVA will exclude that payment automatically.  For example, payments received for rooms rented to boarders or lodgers who are your father, mother, son, daughter, brother or sister are not treated as income for DVA purposes.

Also, payments received by a person for serving on a jury, or to meet the expenses incurred as a witness (other than as an expert witness) before a court or tribunal, are not treated as income for DVA purposes.

Discounts on power bills due to energy from solar power generation being fed back into the electricity grid are not assessable.  Likewise, credits on power bills due to energy being fed back into the electricity grid are not assessable.  This is because such credits and discounts do not fit the definition of income.

Financial support provided by governments for the household installation of solar panels is not counted as income for pension purposes.  This is because this support essentially provides a discount off the price of purchasing and installing the solar panels.

What are my obligations?

When you are granted an income support pension and periodically after that, you will be notified of your obligations.  You will be required to tell us within 14 days (28 days if you live overseas or receive remote area allowance) of changes to your circumstances that might affect the rate of income support pension you receive or your eligibility to receive that pension. These obligations apply equally to trustees.

In relation to the income test the sorts of things you would need to tell us about within 14 days (28 days if you live overseas or receive remote area allowance) are as follows:

  • you are receiving a reduced rate of pension and your total income from all sources increases by more than $2.00 for singles or $4.00 for couples per fortnight
  • you are receiving a maximum rate of pension and your total income from all sources exceeds the income free area by more than $2.00 for singles or $4.00 for couples per fortnight.

Usually an overpayment of pension will not occur when you have met your obligations.  However, sometimes even if you have met your obligations, an overpayment can occur because we have not been able to process the change before the next payday.  We do our best to prevent this occurring, but it is not always possible.  To provide you with your exact entitlement we are obliged to recover overpayments of pension where they do occur.

More Information

DVA General Enquiries

Metro Phone: 133 254 *

Regional Phone: 1800 555 254 *

Email: GeneralEnquiries@dva.gov.au

DVA Website: www.dva.gov.au

Factsheet Website: www.dva.gov.au/factsheets

* Calls from mobile phones and pay phones may incur additional charges.

Related Factsheets

Disclaimer

The information contained in this Factsheet is general in nature and does not take into account individual circumstances.  You should not make important decisions, such as those that affect your financial or lifestyle position on the basis of information contained in this Factsheet.  Where you are required to lodge a written claim for a benefit, you must take full responsibility for your decisions prior to the written claim being determined.  You should seek confirmation in writing of any oral advice you receive from DVA.

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20 September 2017