Final Report: Detailed Analysis
F2. Means testing
The current approach to the means testing of income support payments is not as equitable as it could be, particularly in the assessment of assets and its effects on people with similar means. Some assets are assessed under both the assets and income test, while non-income-producing assets are only assessed under the former. For example, a holiday house is assessed only under the assets test, while financial assets, such as term deposits, are assessed under both tests (with the test that results in the least amount of payment applying).
Table F2-1 shows the reduction in pension payments due to an additional $1,000 of assets above the asset test free area, held in different forms, and assessed in different ways.
Table F2-1: Pension reduction due to an extra $1,000 of assets above the free area(a)
|Asset class||Means test treatment||Current pension reduction
($ per annum)
|Land (non-income producing)||Income test||0(b)|
|Term deposit||Income test — lower deeming rate(c)||10(d)|
|Term deposit||Income test — higher deeming rate(c)||15(d)|
|Term deposit||Asset test||39|
|Allocated pension||Income test||Varies(e)|
|Allocated pension||Asset test||39|
- Shows the pension reduction due to the income and assets test assessment of these assets. Free areas are set out in Table F2-2.
- Income from income producing land is assessed under the income test.
- Different deeming rates apply depending on the person's overall level of financial assets.
- Based on current deeming rate of 2 and 3 per cent. Deeming rates have varied in the past (see Chart F2-5).
- Actual amount can vary depending on factors such as when the pension was taken and a person's drawdown choices. These factors can lead to no income being included in the income test.
Source: Treasury estimates.
Because income from some, but not all, assets is included in the income test, people can receive different levels of government payments even though they have the same aggregate level of wealth. It can also result in people receiving the same level of payment even though they have considerably different aggregate levels of assets. For example, a person earning $3,000 a year (an amount marginally below the current income test free area) can have around $170,000 of non-financial assets and receive the same pension as someone earning the same amount without any assets. This is because non-financial assets that do not produce income are not counted under the income test.
Means testing as it applies in Australia is a strength of the transfer system because it targets government payments to those with the most need and assists in managing the system's sustainability.
The current means test for income support payments is not as equitable as it could be because it results in people with different assets of the same value receiving different rates of income support. This reduces the fairness of the system and creates incentives to hold wealth in particular types of assets.
This can affect a person's choice on how to hold their assets. For example, a person in the example above may choose to invest their $170,000 in land instead of term deposits because it would have less effect on their income support payments. This reduces the fairness of the means testing system and the allocation of resources in the economy. A more uniform treatment of assets in the means test would promote a more equitable outcome.
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