27 July 2012

DSP - to tax or not to tax; that is the question.

A couple of weeks ago, Don Arthur (a regular ClubTroppo blogger) mentioned via Twitter this CIS article about the way blind people are treated for the purposes of disability support pension (DSP) and age pension.  Blind recipients of those payments are not subject to the same means testing arrangements as non-blind folk - for the most part the payments are made free of any means test at all, something the article's author saw as somewhat inequitable. 

It reminded me of another difference between some DSP recipients and the rest of the pensioner population - DSP paid to people under age-pension age is not assessable income for income tax purposes - it's a tax free payment.  This has been the rule for as long as I can remember (I'm too slack to chase up the detailed dates). 

It's a rule that is intended to advantage DSP recipients.  After all, getting a swag of money, tax-free, must be a plus.  Indeed, it used to be.  But not anymore.

The thing is that taxable pensioners - which is most of them - also get a special deal compared to the general population.  They attract a tax offset, or rebate, known as the senior Australian and pensioner tax offset (SAPTO).  The SAPTO has grown in value over the years to the point where the benefit it provides is actually greater than the benefit of having a tax-free pension.

The chart below shows how this has changed via a snapshot of three different years - 2005, 2009 and 2012.  The lines trace the the difference between the disposable income of taxable versus non-taxable pensions, in this case for a single person in each of those years.  If being taxable gives a better result, this shows as a positive amount (and vice versa).

(click to enlarge)

You can see that in 2005 over most of the income range the (green) line is in negative territory, meaning taxable pensions gave a lower disposable income.  In July 2009 (blue) this had evened up somewhat, but by July 2012 (red) things had really swung the other way.  Now there's quite a long range of private income where a non-taxable DSP is about $800 a year worse off than if it were a taxable pension, with a peak of a little over $1000.

There's been quite a bit of emphasis of late in trying to encourage DSP recipients to take up what work they can, including a relaxation of the number of hours they can work without risking disqualification out to 30 hours a week.   Even at the National Minimum Wage this means working DSP recipients could find themselves worse off than if they'd been taxable.

It's not just employment income either.  If the DSP recipient is getting some other source of taxable private income (eg, superannuation on account of disability) that takes them into the positive regions charted by the red 2012 line, they are worse off than if they'd been getting a taxable DSP.

It's a similar story for partnered DSP recipients.

So, maybe it's time for DSP to join the rest of the pensioner world and have their payments made taxable so they too can experience the joy of SAPTO!

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