Centrelink and SMSFs

What SMSF trustees should know around retirement.

For some trustees of SMSFs there will possibly come a day when they are eligible for the Age pension from Centrelink. In addition to the obvious financial assistance, whatever the small amount of Age pension that would be received, there is the added benefit of the discounts and the health care card that will apply.

For a person to be eligible to receive the Age pension they must first pass three sets of tests. Those tests are the age test, the assets test and the income test. When the age test is passed the least amount of pension payable arrived at by using the other two tests is what a person receives.

Read these sections below:

Centrelink Benefits

Eligibility for virtually every Centrelink benefit is based on passing various tests or meeting certain criteria. In addition to the Age pension these benefits include disability support pensions, carer's payments, Youth and Newstart allowances.

In many cases the tests used to assess eligibility for each of the different benefits can be the same or very similar. However as far as SMSF trustees are concerned I will only be concentrating on the tests and criteria for receiving the Age Pension.

In trying to explain these requirements I will be trying to give you the vibe of the law rather than the letter of the law. As a result what follows should be used as a guide. If you have a particular tax, superannuation or Centrelink problem you should seek professional advice.

The eligibility for the Age pension plays an important part in ensuring a person's retirement income is supplemented so that their retirement investments last for as long as possible.

What follows is a brief summary of the major tests that relate to a person's eligibility for a Centrelink pension. This is a complicated area of law and before taking any action professional advice should be sort.

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The Age Test

The first hurdle someone must get over to become eligible for the Age pension is to reach Age pension age. When the Age pension was first introduced men had to wait until they were 65 while women became eligible at Age 60.

In the ever continuing search to balance the Nation's budget major changes have occurred over the years to increase the eligible age for a pension. The initial change increased the eligible age for females from 60 to 65 so they matched males.

The second change, which will apply from July 1, 2017, will gradually increase the eligibility age from 65 to 67. Both of the increases in the eligible age are reflected in the following table.

Born

Women eligible for Age Pension
Men eligible for Age Pension

Before 1 July 1935

60.0

65.0

From 1 July 1935 and 31 December 1936

60.5

65.0

From 1 January 1937 and 30 June 1938

61.0

65.0

From 1 July 1938 and 31 December 1939

61.5

65.0

From 1 January 1940 and 30 June 1941

62.0

65.0

From 1 July 1941 and 31 December 1942

62.5

65.0

From 1 January 1943 and 30 June 1944

63.0

65.0

From 1 July 1944 and 31 December 1945

63.5

65.0

From 1 January 1946 and 30 June 1947

64.0

65.0

From 1 July 1947 and 31 December 1948

64.5

65.0

From 1 January 1949 to 30 June 1952

65.0

65.0

From 1 July 1952 to 31 December 1953

65.5

65.5

From 1 January 1954 to 30 June 1955

66.0

66.0

From 1 July 1955 to 31 December 1956

66.5

66.5

From 1 January 1957

67.0

67.0

If a measure announced previously becomes legislation the eligible age for the Age pension will increase to 70 for those born after January 1, 1966. The eligible age will start to increase for people born between July 1, 1958 and December 31, 1959 so that they will have a qualifying age of 67.5. The eligible age increases by half a year for every 1.5 years after December 31 1959.

Once the age eligibility hurdle has been cleared the next hurdles to clear are the assets test and income test.

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The Assets Test

Under the assets test the total value of an individual or a couples assets is calculated. When the total value of these assets is below a low asset threshold there is no reduction in the Age pension. Where the total value exceeds the threshold the pension is reduced until no pension is received.

There are in fact several asset test limits that apply to individuals and couples. One applies to home owners, another applies to non-home owners, while yet there is also an assets test that applies to a couple separated due to illness. This last one has the same lower limit that applies to a couple, but has a much higher upper limit before they lose the pension. In addition where only one member of a couple is eligible for the age pension the couple assets tests limits apply.

The following are the asset test limits that apply from March 20, 2017:

Lower Limit

Upper Limit

Family Situation
Homeowners
Non-Homeowners
Homeowners
Non-Homeowners

Single

$250,000

$450,000

$546,250

$746,250

Couple (combined)

$375,000

$575,000

$821,500

$1,021,500

Couple(separated due to illness)

$375,000

$575,000

$967,500

$1,167,500

The lower assets test limit, which results in a person receiving the full age pension, increases each year on July 1 mainly in line with CPI increases.  The upper assets test limit, the limit where once it is exceeded a person becomes ineligible for the age pension, increases three times during the year in July, September and March.

For every $1,000 in total assets that exceeds the lower asset limit the fortnightly pension is reduced by $3.00 until the upper limit is reached, at which point no pension is receivable.

Assets counted in this test are virtually everything a person owns including household contents, cars, caravans, investments including superannuation and cash. The value that must be placed on all of these assets is the current market value.

For assets such as cars and household contents the value for Centrelink asset test purposes is often a lot less than what they cost. For example Centrelink allows people to value household contents at a lower amount than what they are insured for. For these it is acceptable to value them at what you would get if you had a garage sale. Where a person is receiving an income stream from a lifetime pension a complicated valuation method is used to place a value on this asset.

Some assets are not counted in the assets test, the prime example of this is a person's home. Where a home is on more than two hectares of land the exemption only applies to the two hectares, with the excess land being counted as an asset. Other assets not counted in the assets test include:

  • an interest in a granny flat where the amount paid is greater than the difference between the homeowner and non-homeowner allowable assets levels
  • any interest in a deceased's estate before the estate is finalised
  • any medal or decoration for valour as long as you do not have it for investment or hobby purposes
  • aids for disabled people
  • a gift car provided by the Department of Veterans' Affairs
  • if you have sold your home, and you are planning to use the proceeds to buy another home, the proceeds of the sale will be exempt for up to 12 months. Where delays are experienced that are beyond a person's control this exemption can be extended for up to an additional 12 months.
  • the value of any accommodation bonds for hostels
  • the value of all superannuation or amounts in rollover funds if you are under Age pension Age
  • the value of a cemetery plot for you or your partner, and
  • prepaid funeral expenses or up to two funeral investment/bonds that cost up to $11,000 in total.

The assets test also includes assets held overseas converted to an equivalent value in Australian dollars. The assets test cannot be escaped by giving away assets or cash as gifts unless they are below a prescribed value.

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Gifting

There are two value thresholds placed on gifts. The first relates to the value of a gift in a year made by either a single person or couple, which is $10,000. The second is a maximum value placed on gifts that can be made over a rolling five year period that also cannot be exceeded, which is $30,000. Gifts include assets and money transferred to anybody for no value or for less than their market value.

Gifts made that exceed these two thresholds, in other words anything above $10,000 in a single year or above $30,000 in a five-year period, will be counted as an asset under the assets test and possibly counted by the deeming rules under the income test. These excess gifts will continue to be counted under these tests until the fifth anniversary of the date of the gift.

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The Income Test

In addition to the assets test a person must also pass the income test. As was the case for the assets test there are two levels of income that apply depending on a person's personal situation.

The income thresholds applying from March 20, 2016 are as follows:

Family Situation

Lower Threshold

Upper Threshold

Single

up to $164 p/f

$1,940.60 p/f

Couple (combined)

up to $292 p/f

$2,970.40 p/f

Illness separated (couple combined)

up to $292 p/f

$3,845.20 p/f

Where a person's income exceeds the lower threshold their fortnightly pension is decreased by 50 cents in the dollar of the excess income earned for a single person, and 25 cents in the dollar each for both members of a couple. Once a person's income from other than the Age pension exceeds the upper threshold no Age pension is payable.

This current income test was introduced on 20 September 2009. Transitional arrangements were introduced at that time to ensure no existing pensioner would be worse off as a result of the changes. These transitional rules use the old reduction factor, of 40 cents in the dollar for a single people and 20 cents in the dollar for couples, to calculate the effect on a pension under the income test.

The income test can also have an effect on the various allowance rates paid to Age pensioners. Another of the changes introduced on September 20, 2009 was the replacement of various allowances, including the GST supplement and the telephone utilities and pharmaceutical allowances, by a new pension supplement.

There are in effect three different types of income counted under the income test. These are:

  1. Actual income received
  2. Deemed income, and
  3. Adjusted actual income received

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Actual income received

Included in the first category are such things as employment income, employment related fringe benefits, net business income, income distributed from trusts and private companies, amounts of salary sacrificed as super contributions, net rental income and income received from boarders and lodgers.

Along with other Centrelink changes introduced from September 20, 2009 a new work bonus system was also introduced that affects the way employment income is treated under the income test. Originally if a person chose to work past Age pension retirement age only half of the first $500 per fortnight of gross employment income was counted. Income earned from employment in excess of the $500 was treated as ordinary income.

Under the current Work Bonus system a person does not actually have to work to receive the benefit of the bonus. The bonus amount is $250 per fortnight. Under the new system the $250 per fortnight is deducted from a person's salary or wages. If a person does not work the Work Bonus accumulates until it reaches a maximum of $6,500.

If a person is working the fortnightly amount they earn is decreased by the $250 allowance amount. Where the amount earned is less than $250, the difference between the amount earned and the $250 bonus amount is added to the work bonus balance. Where the amount earned is more than $250 the income earned is reduced by the $250, and is further reduced by any work bonus balance that has accumulated.

An example of this is Steve Gates who has been working as a computer repair technician for many years and retired at the age of 65. For three months he does not work and, as he is receiving the age pension, he accumulates a work bonus balance of $1,750.

Getting bored with retirement Steve takes up part-time work and earns $1,000 a fortnight. The employment income he is earning will not be counted by Centrelink until he has been working for three fortnights.

By the third fortnight Steve will have used up his work bonus balance of $1,750, and after taking account of each fortnight's $250 work bonus, $500 of the $1,000 he earns in the third fortnight will be counted as income by Centrelink. After that third fortnight, and the deduction of the $250 work bonus, $750 a fortnight will be counted by Centrelink as income.

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Deemed income

The second category of deemed income was introduced many years ago to stop people artificially decreasing their income from financial investments/assets. Rather than counting the actual income received from financial assets an income is deemed to be earned. Where a pensioner earns less than the deemed income they are worse off, where they earn more they are better off.

From January 1, 2015 the deeming rules apply to account based pension balances. Prior to this the income counted was the net pension received after deducting the purchase price of the pension. Those people who were receiving the age pension and account based pension at January 1, 2015 are still assessed under the old income test.

Investments included as financial assets include the following:

  • Bank, building Society and credit union accounts
  • term deposits and debentures
  • friendly society bonds
  • managed investments
  • listed shares and securities
  • gold and other bullion
  • superannuation account balances when the member is of pension Age
  • loans to people and other entities such as trusts and companies
  • proceeds from the sale of a home not counted under the assets test
  • amounts gifted above the gifting limits

Once a total value for all financial investments is arrived at there are two levels of deeming rates applied for singles and another set for couples.

The deeming rates applying from July 1 2016 are as follows:

Family Situation

Rate Per Annum

Financial Assets

On Excess Rate

Single

1.75%

first $49,200

3.25%

Couple (where at least one person is getting a pension)

1.75%

first $81,600

3.25%

If a coalition policy announced in the 2014-2015 budget is passed the limit at which the lower deeming rate applies will reduce to $30,000 for singles and $50,000 for couples from July 1, 2017.

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Adjusted actual income

The third category of income did not count the actual income received but instead reduced this by what was called the purchase price. The most common example is a superannuation account based pension.

A reduction for this purchase price was allowed because over the life of the pension it was expected thatsome of its original capital value will be received. This is definitely the case with superannuation pensions due to the minimum pension payment rates increasing as a person gets older.

The amount of annual the deductible purchase price was calculated by dividing the value of the superannuation account, at the time the pension started, by a person's life expectancy at that time. In some cases where someone is drawing a minimum level of superannuation pension, after allowing for the purchase price of that pension, no income is counted by Centrelink.

Those people who were receiving an age pension and an account based pension at December 31, 2014 continue to have the adjusted income treatment of the account based pension applied to them.

Anyone not covered by these grandfathering provisions have the deeming rules applied to the value of their pension account to calculate the income counted under the income test.

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How all of the tests work

A person's eligibility to receive an Age pension is affected by whichever of the tests produces the greatest reduction. This means if the assets test results in a small amount of Age pension being received, while the income test results in no Age pension being received, the income test will apply.

How these tests work is best illustrated by the example of Steve a computer technician. He is single, just turned 65, and has the following investments and income from those investments.

ASSET

VALUE

ANNUAL INCOME

 

$
$

Exempt assets

 

 

Home

450,000

0

Financial Assets

 

 

Listed Shares

50,000

2,500

Fixed Interest Investment

50,000

3,000

Superannuation

250,000

12,500

Other Assets

 

 

Car

10,000

 

Household contents

7,000

 

 

367,000

18,000

Employment Income for nine months

 

19,000

 

 

37,000

ASSETS TEST

 

 

Value Counted

 

367,000

Lower Limit

 

250,000

Excess

 

117,000

Asset Test Reduction at $3.00 per $1,000

 

      351

INCOME TEST

 

 

Financial Assets counted

 

100,000

Deemed Income at 1.75% on $49,200

 

861

Deemed Income at 3.25% on excess

 

9,726

 

 

10,637

Employment Income

19,000

 

Less Work bonus reduction

6,500

 

 

 

12,500

 

 

23,137

Deemed and actual income per fortnight

 

    890

Less Lower Threshold

 

     164

Excess Income

 

      726

Income Test Reduction at 50% of excess

 

      363

* As Steve is eligible for the work bonus the actual amount he has earned is reduced by the $1,750 accumulated work bonus, for the three months he was not working, and the $250 work bonus for the remaining 19 fortnights.

In Steve's case as the income test produces the biggest reduction this will apply.

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Eligibility For A Health Care Card

There are a number of circumstances in which people will become eligible for a Commonwealth Seniors Health Card. Where they are receiving a payment from Centrelink, such as the Age pension or any of the other allowances, they automatically receive a Commonwealth Seniors Health Card.

From January 1, 2017, there are two types of Commonwealth Seniors Health Cards. The first has no income test and was issued to those people who had previously qualified for the age pension but lost it as a result of a change in the assets test that applied from January 1, 2017. These Commonwealth Seniors Health Card will effectively be retained by those that receive them for life, unless some future government decides to change the rules again.

Individuals can also qualify for the second type of health care card if they meet the Commonwealth Seniors Health Card income test. Under this test a person's income that they have received for the previous 8 week period, on the day that they lodge their claim, is assessed. To be eligible person's income must be below the following thresholds:

Status

Weekly Income

Income in an eight week period

Single, no children

$1,015

$8,122

Couple (combined), no children

$1,624

$12,996

Single, one dependent child

$1,027

$8,221

For each additional child, add

$12

$98

Income included under this test for a Commonwealth Seniors Health Card includes the following

  • taxable income
  • target foreign income
  • total net investment losses
  • employer provided benefits, and
  • reportable superannuation contributions

As is the case currently for the Age pension income test if an account based pension was started before January 1, 2015 no income is counted. For account based pensions commenced after this date the amount counted is the deemed income as calculated under the deeming rules.

Each time that your Commonwealth Seniors Health Card needs to be renewed you will be required to requalify under the income test.

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