The traps that can affect your eligibility for an age pension

Many pensioner couples make the mistake of leaving all their assets to each other. Picture: Shutterstock.
Many pensioner couples make the mistake of leaving all their assets to each other. Picture: Shutterstock.

Superannuation is an exempt asset for Centrelink purposes until the owner reaches pensionable age or until they start a pension from it.

If a member of a couple has not reached pensionable age it's prudent, if appropriate, to keep as much of the superannuation in the younger person's name because then it is exempt from assessment by Centrelink. However, the moment that fund is moved to pension mode, it's assessable irrespective of the age of the member.

A common trap is when a loan is used to purchase an investment property with the loan secured by a mortgage against the pensioner's own residence. The regulations say that a debt against an investment asset is not deducted from the asset value, unless the mortgage is held against the investment asset.

If the mortgage is secured against an asset other than the investment asset, the gross amount is counted for the assets test and the loan is not deducted. The effect on the pension could be horrendous.

Family trusts can cause problems with both income and assets tests for the age pension. Thanks to the information sharing and matching abilities between Centrelink and the ATO, you can bet that Centrelink will know if a family trust is involved in your affairs.

Even if you have a high risk child who makes mum the appointer or default beneficiary for asset protection and there is no "pattern of distribution," mum could be caught.

It's a complex topic. If there is a family trust somewhere in your financial affairs, I suggest you get expert advice long before you think about applying for the age pension. It may pay big dividends.

Bequests are another trap. There is a big difference between the asset cut-off point for a single person and that for a couple.

As at September 20, 2021, the single homeowner cut-off point was $593,000, whereas for a couple it was $891,500.

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Many pensioner couples make the mistake of leaving all their assets to each other, which can cause a lot of extra grief when the surviving partner finds they have lost their pension as well as their partner.

For example, Jack and Jill had assessable assets of $740,000 and were getting around $11,800 a year in pension. Jack died suddenly and left all his assets to Jill. This took her over the assets test limit for a single person and she lost the pension entirely. Had he left the bulk of his estate to their children she would have been able to claim the whole pension plus all the fringe benefits.

A wrong decision in the past can have a serious consequences in the future. Think about a couple aged 52 who wanted to help their daughter into her first home. Without taking advice they bought a 50% share of a house worth $400,000 so that the daughter could obtain a loan. Fast forward 15 years when the house is now worth $900,000 of which their half share is $450,000.

Their other financial assets were worth $600,000 so they believed they would be eligible for a part pension. To the horror they discover that their equity in the daughter's home of $450,000 took them over the assets test cut off point. If they transferred their share to the daughter the capital gains would be $125,000 after discount, on which capital gains tax could well be at least $50,000.

Furthermore, they would have to wait five years to qualify for the pension because Centrelink would treat the $450,000 as a deprived asset for the next five years. The total value of the CGT payable and the pension lost could be at least $150,000. If they had been aware of the trap, or taken advice, they could have gone guarantor for their daughter, possibly putting up their own home as part security and this would have had no effect on the future pension eligibility.

Noel answers your money questions 

Question

Because of Covid, my partner and I decided to put our super into pension phase, as we are both have immune deficiencies, and were not working at the time.

My partner reaches pension age in December 2022, with probably about $290,000 in super. I will have about $530,000 at that time, but I will not reach pension age until 2028. Can I revert my super back to accumulation mode so my partner is eligible to some sort of pension?

Answer

You can commute all or part of your superannuation from pension mode back to accumulation mode without causing any Centrelink or taxation problems.

It may be worthwhile getting advice because based on the figures you have provided your partner would be under the thresholds for both the assets and income test and a better outcome may be to commute the bulk of your super to accumulation mode but leave some in pension mode. Your adviser could crunch the numbers for you.

Question

I'm living in a house I bought almost nine years ago. I'm planning to upsize and buy another property to live in. If I rent out the current property and live in the new property (and use the new property as the primary residence for land tax purposes), do I have to pay capital gains tax when, say, I sell the old property in two years?

Answer

Julia Hartman of Ban Tacs says that regardless of what home you cover with your main residence exemption for CGT purposes, it will be the property that you live in that will be exempt from land tax. You are allowed to choose which property is subject to CGT and you don't need to make that choice until one is sold. The catch is the other one will be exposed to CGT.

If your current home has always been your main residence up until you rent it out and buy the new one, the old home's cost base will be reset to market value from when you first rent it out. When you take into account the costs of selling in two years you may find that the adjusted cost base might be nearly as much as the sale price.

Question

Over the Christmas holidays we were staying at the beach and thought about buying a holiday home. We are aware of all the work and costs that go with that and wonder how that would compare with paying $6000 each Christmas for two weeks holiday in a self-contained apartment in the same town.

The money we would save by not having a holiday home could go into our superannuation fund. We appreciate it may be an emotional decision but would welcome your input.

Answer

There are some serious issues to think about. The first consideration will be do you keep it for your own use or rent it out. If you don't rent it, you'll be tying up a large amount of capital and, if you have children, you'll find out that you won't be able to go there as often as you'd planned due to school commitments.

Next is deciding between leasing it out permanently and making it available for holiday letting. If you go for a permanent tenant, you will achieve a regular income, but the trade off is that you won't be able to use it for the odd weekend.

If you opt for casual letting you will need to provide everything from plates to a washing machine, and will have greatly increased wear and tear because of the constant turnover of tenants, few of whom will treat the property kindly.

If you borrow for it, you'll only be able to claim a tax deduction for the rates, maintenance, interest and other expenses if the property is income producing. This means you will have to rent it out.

If you decide to keep the peak periods such as school holidays for yourself, you'll be substantially reducing the income because the highest rents are charged in the holiday season. And if you do use the property yourself, you'll only be able to claim a percentage of the costs. I think renting is a much better strategy.

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email your money questions to noel@noelwhittaker.com.au
This story The traps that can affect your eligibility for an age pension first appeared on The Canberra Times.