Tax with Max: Tax returns for pensioners

Working out Centrelink’s effect on tax returns, taking out a personal loan, starting a TTR pension and more.

Summary: Anyone receiving income below the taxable level can declare to the ATO that they do not need to lodge further income tax returns. But earned income will have an effect on eligibility for Centrelink benefits. Someone eligible for the age pension can receive up to $250 a fortnight in salary or wages that is not counted under the income test, while if the income is earned through a business then all the income is counted by Centrelink.

Key take-out: In situations where a business operated through partnership is affecting Centrelink eligibility, it might make sense for the partnership to pay a salary rather than to distribute a share of the profits.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Tax returns for pensioners

I am 67 years old, receiving the age pension and still self-employed part time. My wife is 64 and receives the disability support pension. Until I turned 65 I was receiving the disability support pension as well at the couple rate, with property investment and investment assets other than our principal dwelling properly declared.

I recently stopped my GST registration but still lodge a partnership return each year. The Australian Taxation Office advised that once my wife reaches the age of 65 she does not have to relinquish her Centrelink disability status, and for tax purposes can elect to still be assessed as a disability support pensioner instead of transferring to the age pension.

I have been told that disability support pensioners are not required to lodge tax returns, while age pensioners are still required to lodge returns. As we have the partnership I am not sure how its income will affect my wife’s disability pension, and what effect that will have on her having to lodge a tax return?

Answer: I don’t know of any special dispensation that disability pensioners get with regard to not having to lodge income tax returns. The only pension that gets advantaged tax treatment is the blind pension, which is not assessable for income tax purposes.

As a general rule anyone receiving income that is below the taxable level, whether that includes a pension from Centrelink and/or investment income, can lodge a form with the ATO stating that they do not need to lodge further tax returns. As long as their income does not change people in this situation are effectively exempt from lodging any further income tax returns.

Income that is earned through a business operated through a partnership will have an effect on eligibility for Centrelink benefits. If the profits of the partnership have been split equally in the past this will result in any profit being counted as income by Centrelink for both partners.

There have been many anomalies over the years in relation to people who are self-employed. The current treatment of employment income by Centrelink is a good example. A person eligible for the age pension is able to receive $250 per fortnight in salary or wages that is not be counted under the income test.

But if the income is earned through conducting a business all of the income earned is counted by Centrelink. In a situation such as this, it might make sense for a partnership to register as an employer and pay a salary, rather than distributing a share of the profits.

From Centrelink’s point of view, if a partnership paid a salary, only the excess over $250 a fortnight would be counted as income. Technically the partner of a business cannot be employed by the partnership. In practical terms I do not know of the ATO refusing a partnership registering as an employer to employ a partner. Before taking any action you should seek professional advice.

Taking out a personal loan

I am new to property investing and have a few questions. I am looking into building 3 by 2 attached duplexes on separate titles. The plan is to live in one and rent out the other. I have the deposit for one as well as the first home owner grant but am short by $20,000 for the deposit on the second. If I take out a $20,000 personal loan would it be tax deductible? Would this change if it were interest only?

Answer: The interest charged on the personal loan used to purchase the second unit that will be rented out will be tax deductible. This will not change if it is an interest only loan.

As long as you plan to rent out the investment property for at least five years you should not be caught by the GST system. Where a new residential property is owned for less than five years, and sold as part of an enterprise or investment activity, GST must be included in the purchase price.

Before finalising your plans to build the two properties you should seek professional advice from an accountant who specialises in this area. They will be able to assist you in maximising your tax benefits for what you are planning to do, and also make sure that you can minimise the chance of being caught up in the GST system.

Starting a TTR pension

We are returning to live in Australia after working overseas. We have an SMSF and we will become “active members” again on our return. My wife, age 57, has left her overseas corporate job. She may or may not find suitable work on our return. Is she entitled to start a transition to retirement (TTR) pension if she cannot find suitable work?

Answer: There are two main criteria to qualify for a TTR pension. The first is that the person is working part time, and the second is that the pension received must be a non-commutable pension that cannot be converted into a lump sum payout.

As no definition was included in the TTR pension legislation, anyone that has reached retirement age, which in your wife’s case is 55, can commence a TTR pension despite still working full time. If there is a high expectation that your wife will not be working upon your return to Australia she could qualify under the retirement condition of release and commence an account-based pension.

For someone aged under 60 to meet the retirement condition of release, they only need to sign a declaration stating that they do not intend to work for more than 10 hours a week. This means if your wife will not be working after returning to Australia, documentation could be prepared so that she can start an account-based pension.

As your wife will be under 60 when commencing either a TTR pension or account-based pension the amount received will be taxable. The actual tax payable on this super pension while she is under 60 will be decreased by the 15% pension offset.

Applying CGT to a discretionary trust

The primary residential property of my mother who lived in New Zealand is in a discretionary trust. She lived in the house and owned it for 50 plus years. I am resident in Australia and one of five beneficiaries of the trust. Several beneficiaries are Australian citizens resident in Australia.

The property will be sold on her death and the funds distributed according to the trust deed. The New Zealand citizens and residents will not pay capital gains tax as there is none in NZ. Will the funds received from the trust be subject to tax in Australia beneficiaries or will it be CGT-free as it is an inheritance?

Answer: As the discretionary trust has its tax residency in New Zealand I believe the New Zealand tax law will apply to the distributions made as a result of selling your mother’s home. For this to be the case the tax return prepared for the discretionary trust in the year that the property is sold should not result in any taxable distributions to the beneficiaries.

Interestingly in Australia if the property had been owned in a family trust it could not be classed as your mother’s principal residence. This would have resulted in any profit made upon the sale of the property being subject to Australian income tax.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au