Unscrambling complex pension eligibility rules is no easy job

As explained last week, there's little to be gained from speculating on possible changes in next month's budget. There'll be time enough to react to changes when they are announced. Previous little can be done to lessen their future impact by actions taken before the budget is brought down.

This week's announcement that age pension asset test changes are off this year's hit list was totally predictable for several reasons. First, there was an election promise not to change pension entitlements. Second, and probably more important, is the difficulty of designing and implementing a complex change in the basic and long- standing procedures for determining pension eligibility.

More than 30 years ago, the question of counting the family home in the assets included in the age pension assets test was considered by an independent review.

For political and other reasons such as problems caused by forcing the sale of properties and even then, differences in the value of houses around Australia, it was decided to exclude the family home from the assets test.

This added to the other strong incentives for investing and over-investing in the family home, not least the savings of not having to pay rent and a complete exemption from capital gains tax. Now the challenges for the government in making changes to the assets test are much greater because of the much higher value of the family home and the large number of pensioner home-owners. After all, support for including the family home in the test couldn't be achieved when the assets test had just been introduced, as relatively few people were receiving the pension and homes were relatively low in value.

Unscrambling the eggs and changing the fundamental feature of our age pension system is likely to end up in the too hard basket along with other superficially attractive budgetary savings.

There will continue to be pressure for changes in the privileged position of the family home. For practical and other reasons, attention may focus on easier measures to implement, including subjecting capital gains tax on homes in excess of an exemption limit from tax.

Compared with applying an assets test on people living in the home, a capital gains tax would apply only when a house was sold and, following US practice, not be collected when the proceeds are used to purchase a replacement home. Future governments would also have the option of encouraging the sale of a family home by downsizing retirees by providing limited or even full protection of the surplus from the assets test.

Next week's Asset Check will explain why unscrambling the long history of taxation assistance to superannuation would also not be an easy solution to our budgetary problems.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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