“We are a couple on the pension but have a shared asset with a third party and would like to sell this asset which means we would have $350,000 cash to place in the bank and use for renovations and personal expenses. We are currently not over the assets test, nor would we be with the cash from the sale, but would Centrelink reduce our pension payments anyway?"
-Question from Tony in Melbourne
Top answer provided by:
Paul Wratten
Hi Tony,
Thank you for your question.
The short answer to whether the sale will affect your pension is … probably not. If your total asset position doesn’t change (i.e. you’re swapping an unspecified investment asset for a cash asset of equal value) and you are not deriving significantly more income from other sources, then you should be okay. We’ll look at a few of the variables to help make sure.
The Assets Test
You believe you’re under the asset test threshold both now and once the cash arrives. As a quick refresher, the current limits on assets before your pension gets clipped are as follows[1]:
|
Your situation |
Homeowner |
Non-homeowner |
|
Single |
$270,500 |
$487,000 |
|
A couple, combined |
$405,000 |
$621,500 |
|
A couple, separated due to illness, combined |
$405,000 |
$621,500 |
|
A couple, one partner eligible, combined |
$405,000 |
$621,500 |
For every $1,000 above those limits, you’ll lose $3 per fortnight.
If you and your partner are homeowners then you have a threshold of $405,000, so the $350,000 cash may not leave much wiggle room once you also factor in other assessable assets like cars and furniture. But any spending on renovations to your primary residence will reduce the amount assessed by Services Australia, as will anything you spend on personal expenses.
I recommend you review your assets with Centrelink to ensure they are recorded correctly, and that you will not be over the threshold once the cash arrives.
The Income test (and deeming)
As a couple, you can earn $320 per fortnight (pf) before your pension is reduced (or $180pf for a single).
It is worth noting that Centrelink assumes your cash will earn a certain level of income, regardless of what it actually generates, and this will contribute towards your income test. This assumed rate of earning is called Deeming, and it affects many assets like bank accounts, shares, managed investments, etc.
Why is this important to consider? Depending on the type of asset you dispose of, converting to cash may represent an increase in your earnings under the income test, even if the asset value is roughly the same.
But how much income is cash deemed to earn? There are plenty of free deeming calculators online, but I’ve run some numbers for you here using the current rates from Services Australia (for a couple[2]).
- The first $89,000 at 0.25% = $222.50
- Balance to $350,000 at 2.25% = $5,872.50
So, a cash balance of $350,000 would be deemed to earn $6,095 per annum. That’s about $234pf. You’d still be under the $320pf limit but again, contact Centrelink to check for other sources of income recorded against your name.
Capital gains and CGT
A capital gain is ‘realised’ when you sell an asset for more than you paid for it. Any non-exempt or non-discounted capital gain is added to your personal income and you then pay your marginal rate of income tax. Selling a large asset often results in realising a large gain and an untimely tax bill.
Interestingly, a capital gain isn’t treated as income for Centrelink Income Test purposes. So even if you realise a decent gain on your investment and are liable to pay capital gains related-tax (CGT), your pension should continue uninterrupted[3].
But a large CGT bill can be just as costly as losing your pension for an extended period. You will need to assess your tax liability and make an allowance from the sale proceeds to pay any ATO bill. I don’t recommend the do-it-yourself route on this. Contact your Accountant for assistance in calculating (and possibly reducing) the gain.
The role of financial advice
I recommend you speak to a local financial adviser too. A good adviser will give you a strategy for reducing the CGT bill, can ensure your assets and income remain within the relevant (and ever-changing) thresholds over the long-term, and help you invest the unused portion of your funds in suitable assets over an appropriate timeframe.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.
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