Many older Australians place a high value on their Commonwealth Seniors’ Health Card (CSHC). It is only available to people who meet a particular income test but there were some important changes to this test in late 2022.

Why does everyone love the CSHC?

The card gives holders access to cheaper prescription medications, greater access to bulk billing for medical appointments (depending on the doctor), and a full refund of medical costs for those who have met the Medicare Safety Net. In fact in some states and local government areas, holding the card can even mean lower electricity and gas bills, property and water rates, and public transport.

Sounds great, how do I get it?

It’s only available to people above age pension age (currently 66½ but increasing to 67 from 1 July 2023) who meet an income test in that their income is below a particular threshold. (Note that there is no assets test.)

It’s not necessary to be eligible to receive the age pension or any other benefits – many people who hold the CSHC aren’t eligible for any other government benefits.

And so.. what’s exciting?

There are two important things to know about the income test:

1. The threshold has recently increased. A lot.
2. There are some quirks in the way “income” is worked out for this purpose when it comes to superannuation.

In most cases, the CSHC income test threshold is now $90,000 per annum for single people and $144,000 for couples (they measure their combined income against this single threshold). But the thresholds have only been this high since November 2022. Before that they were around $61,000 and $98,000 respectively.

So for a start, a lot more people are likely to be eligible than was previously the case.

When it comes to how “income” is defined, there are broadly two components:

• an amount known as “adjusted taxable income”, plus
• an amount relating to superannuation pensions.

For most people “adjusted taxable income” is pretty much the taxable income shown on their income tax return plus some extra amounts such as certain superannuation contributions and losses made on investments.

The amount relating to superannuation in an SMSF is:

• Absolutely nothing for payments made from “accumulation accounts”,
• Absolutely nothing for certain old style pensions often referred to as market linked pensions, complying lifetime pensions, life expectancy pensions etc (although note that some people have to include some of the payments in their taxable income so it will be part of their adjusted taxable income),
• Absolutely nothing for account-based pensions that started before 1 January 2015 as long as the card holder has held the CSHC continuously since that time, and
• A calculated amount known as “deeming” for account-based pensions that started on or after that date.

When it comes to deeming amounts for account-based pensions, these are not the actual amounts paid from the pension or even the minimum pension required for the year. It’s a percentage of the account balance at the start of the year. The percentage is 0.25% up to a threshold ($56,400 for singles, $93,600 for couples) and then 2.25% thereafter.

In other words, a single person with a $1.7m account-based pension in a their SMSF would have a “deemed” income amount from that pension of:

0.25% x $56,400 + 2.25% x ($1.7m - $56,400) = $37,122

A couple with pensions of $1.7m each would have deemed income of $74,628.

Until November 2022, these amounts would have put them perilously close to the income test thresholds – so any meaningful income from non-superannuation sources would likely render them ineligible for the CSHC. But the position has changed markedly now – these amounts are $52,878 (singles) and $69,372 (couples) shy of the thresholds.

In fact, a single person with no taxable income (ie all their savings are in super) would need a pension of over $4m to use up the $90,000 threshold. Clearly, the fact that pensions are limited by the transfer balance cap makes this virtually impossible. The equivalent figure for couples is over $3m each (over $6m combined).

And remember, there is no assets test for the CSHC. That means:

• members could have enormous accumulation accounts with no impact on their CSHC,
• they could even be withdrawing substantial amounts from these accumulation accounts each year (or from their pensions),
• they could even have substantial other assets such as holiday homes etc that don’t produce income – there would be no impact on their CSHC.

The change in thresholds also has a subtle impact on those who are eligible for special treatment when it comes to their account-based pensions – ie the group who have had these in place since before 1 January 2015.

Remember these pensioners have their account-based pensions entirely excluded from the CSHC income test. Ever since the rules changed in 2015, anyone eligible for this special deal has focused on not losing it. That meant it was very important to leave a pre-2015 pension alone. That restricted what they could do with their pre-2015 pension. And perhaps even worse, if they lost the card for some other reason (say their taxable income was particularly high one year and so they exceeded the threshold), they also lost their special treatment. Forever.

Will that pressure be reduced now? For most people, the thresholds are now so high that it’s far less important to hang on to this special pre-2015 treatment. And not doing so may open up a range of possibilities. It might mean people who would love to do so are free to undertake strategies like “recontributions”, wind up their SMSF (and transfer their pre-2015 pension accounts to their new retail or industry fund) or set up an SMSF (and transfer their pre-2015 pension accounts that are currently in a retail or industry fund). Some may even wish to combine different pension accounts together or run down their pre-2015 pension with additional payments (but leave their post 2015 pensions in place) but have previously chosen not to because of the impact on their CSHC.

Finally there is one more important issue that’s not new but is perhaps highlighted by this change in thresholds. When it comes to the CSHC, having assets in superannuation (rather than invested personally) is incredibly beneficial even without the special pre-2015 treatment:

• As mentioned above, accumulation balances don’t impact income for this card at all. In contrast, exactly the same amount invested in (say) a personal share portfolio would result in taxable income being taken into account,
• Many couples focus only on the “couples” threshold, without remembering that once one of them dies, they will have the same asset base but with the singles income threshold. Again, it can be ideal to have as much as possible of those assets in superannuation to minimize income taken into account for the income test. In some cases, the death of a partner means the surviving spouse has no choice but to take money out of superannuation. Given the higher thresholds, it might still be possible to retain the CSHC.

For a change that was ushered in quietly right at the end of last year, this one is a gamechanger.

We keep our clients up to date on developments like these via our quarterly webinars. If you’re an adviser or accountant, attend these ones for timely and comprehensive updates and CPD hours. If you’re a trustee with your own SMSF, attend these ones for our quarterly education.