Centrelink Asset Testing: Winners and Losers

William Truong looks at how the Federal Government’s changes to Centrelink’s asset testing from 1 January 2017 will impact clients looking at a Centrelink allowance.

Following the recent Federal budget announcement, the Government has now passed law to give effect to changes to Centrelink's asset testing from 1 January 2017.

Changes to the asset test could mean certain Centrelink/DVA clients, by virtue of their assets, will receive a lower age pension entitlement or be cut off from the pension altogether.

In this article, we answer the following key questions:

• What are the changes?
• Does this impact clients targeting a Centrelink allowance?
• How will the changes impact clients that are receiving a Centrelink pension?
• What is the impact on grandfathered account based pensions (ABP)?
• What are some key considerations?

What are the changes?

From 1 January 2017 the asset test free areas and the taper rate will increase. The asset test free area is the amount of assets above which allowances are not paid and pensions are reduced.

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The asset test free areas are to increase to:

• $250,000 for a single homeowner
• $375,000 for a homeowner couple
• $450,000 for a single non-homeowner
• $575,000 for a non-homeowner couple

Clients will be subject to a new taper rate of $3 for every $1000 (currently the taper rate is $1.50 for every $1000) above the new asset test free areas.

The Government has stopped short of proposing any changes to the assessment of the family home.

Does this impact clients targeting a Centrelink allowance?

Clients that are targeting an allowance (e.g. Newstart) may benefit from the increase to the asset test free area (assuming their income test is not a concern).

This is because these clients will be afforded more breathing space under the ‘sudden death' assets test.

How will the changes impact clients that are receiving a Centrelink pension?

To answer this question, we need to draw a distinction between those clients with savings that are predominantly subject to Centrelink's income test rules (such as with those non-grandfathered ABPs) and those that are not.

Let us first consider the latter group of clients.

You might have age pensioner clients that have their savings primarily tied up in grandfathered ABP.

They were commenced prior to 1 January 2015 and therefore continue to be assessed in accordance with the deductible amount rule: no deeming applies.

Or perhaps your clients have rental properties or purchased annuities where the net income declared to Centrelink is very minimal after deducting allowable amounts.

Based on our analysis, the tipping point for these groups of clients is $470,000 (married homeowners).

For married homeowners, this means that those couples with:

• Combined savings of between $286,500 and $470,000 are better off under the announced reform;
• $375,000 in assets stand to benefit most with a $132 per fortnight (or $3432 per annum) increase to their current age pension entitlement; and
• Assets in excess of $470,000 are adversely impacted by the announced reforms and will have comparatively lower age pension entitlement.

The table below summarises these changes and the likely impacts:

Table 1: Asset test changes and impact on clients

* Calculations are based on pension rates as at 20 March 2015.

** H/O - homeowners

Affected clients need to spend less or become self-funded, by supplementing their pension with income from other sources.

At its most drastic level, married homeowners with savings in excess of $823,000 stand to lose $12,792 per annum.

They would have to drawdown on their capital at a rate of at least 1.6 per cent ($12,792/$823,000) to make up for the loss of the part age pension.

Clearly, the areas of portfolio construction, income stream selection and management of expenses will become even more important for retirement planning.

Further reform of the aged pension system is needed so that we stop penalising older Australians who want to move into smaller, more appropriate housing and use the equity in their family home to better support themselves.

Let's now consider the other groups of clients; those with savings that will primarily be subject to the income test (or deeming).

Perhaps these clients have their savings tied up in non-grandfathered ABP, or maybe they have retained their savings outside of super in managed funds or term deposits.

If we assume that all but $10,000 in assets are subject to the prevailing deeming rate (to cater for home contents, cars etc.) then Chart 1 shows that single home-owners:

• With savings in the range of $160,000 (point A) to $232,000 (point B) do not necessarily benefit from the uplift in the asset test free area. This is because at more modest asset levels the income test continues to be the more stringent test, producing a lower age pension entitlement when compared with the asset test;
• With assets between $232,000 (point B) and $275,000 (point C) will marginally benefit from these reforms as the current asset test is the more stringent test within this range;
• But for clients where the income test is not a concern (for instance those who may have grandfathered income streams), the new asset test will still benefit these clients with assets between $160,000 (point A) and $301,000 (point D), at which point the new asset test (with its heavier $3 taper rate) begins to become the more stringent test.

Chart 1: Single home-owners

Chart 2 illustrates the likely outcomes for married homeowners. It shows that:

• Those with savings in the range of $280,000 (point A) to $300,000 (point B) do not necessarily benefit from the uplift in the asset test free area. This is because at more modest asset levels the income test continues to be the more stringent test, producing a lower age pension entitlement when compared with the asset test;
• Those with assets between $300,000 (point B) and $403,000 (point C) will marginally benefit from these reforms as the current asset test is the more stringent test within this range;
• But for clients where the income test is not a concern, the new asset test will still benefit these clients with assets between $300,000 (point B) and $470,000 (point D), at which point the new asset test begins to become the more stringent test.

Chart 2: Couple home-owner

What happens if deeming rates double?

Chart 3 and 4 illustrates that as we double the deeming rates (as at March 2015) for the term of the income stream to 3.5 per cent and 6.5 per cent, the income test will impact single and married clients at even higher asset levels.

Hence, the new asset test changes will not benefit clients because it is the income test and then the new asset test which provides the lowest pension entitlement.

Chart 3: Single home-owner (double deeming rates)

Chart 4: Couple home-owner (double deeming rates)

What is the impact on grandfathered ABP?

Some clients may have locked in grandfathered ABP prior to 1 January 2015.

For these clients, any cancellation of their age pension entitlements will forego the grandfathered status of their ABP.

This means that should they reapply for the age pension at a later time the ABP will be deemed at the prevailing deeming rates.

At present, deeming rates are at all-time lows, but they are anticipated to increase over time.

These clients would therefore be vulnerable to rising deeming rates if their asset bases were to deplete to a level which placed them in the relevant income test zone (which is what they were originally protected from by virtue of their grandfathered ABP).

Similarly, a surviving spouse who expects to inherit a reversionary grandfathered ABP may be impacted by the lower single's cut-off asset limit, meaning the grandfathered status of the inherited ABP is foregone and potentially impacts on future eligibility of their single age pension.

What are some key considerations?

Reduction of assets (strategy)

As a result of the changes, for every $1000 reduction in assessable assets, clients may receive an additional $3 per fortnight of pension (currently $1.50 per fortnight of pension).

Consequently, any strategies for reducing assets become more important and should be considered in advance.

Some relevant assets test reduction strategies include: contributing to superannuation in the name of a spouse under age pension age, improving the principal home, gifting early or within allowable limits and long term annuities with a depleting asset value.

Commonwealth seniors health card (CSHC)

Fortunately, clients who lose their pension entitlement on 1 January 2017 as a result of the changes will be automatically issued with a CSHC, or a Health Care Card for those under age pension age.

They will be exempt from the usual income test requirements for these cards indefinitely.

The CSHC provides similar health and pharmaceutical benefits to the pensioner card and may also attract certain state-based concessions, depending on the government rules of the respective state based authority.

From 1 January 2017, while affected pensioners may have the indefinite exemption on the income test, this will not apply to everyone else (such as partners who subsequently apply for the card).

Consequently, clients and their partners who are yet to receive income support and who apply for the CSHC must qualify under the CSHC income test (based on taxable income concepts).

Recall that since 1 January 2015, the CSHC income test has been extended to include deeming on non-grandfathered ABP in addition to adjusted taxable income.

Pensioner bonus scheme (PBS)

From 1 January 2017, changes to the asset test could mean certain clients, by virtue of their assets, receive a lower age pension entitlement or be cut-off from the pension altogether.

Consequently, clients who have previously registered in time for the PBS and expect to claim for this payment should consider applying for their bonus (where eligible) sooner rather than later if their level of assets preclude them from the pension.

Payment of the PBS and its amount is dependent on the actual pension entitlement when claiming for the PBS.

Residential aged care members

For residents in residential/ home care, receiving lower or no age pension could translate to lower care fees. However, receiving less or no pension will put pressure on cashflow.

Further, to maintain their pension, affected members will have further incentive to maintain and rent out their home rather than sell it and have residual sale proceeds accumulating within a bank account.

Concessional Centrelink and Aged care treatment apply when members rent out their home, and if they pay their accommodation payments via instalments.

On the other hand, members with available assets could pay a lump sum refundable deposit (RAD) or increase their RAD, rather than paying periodic accommodation payments/contributions.

RADs are exempt from Centrelink asset testing but may increase the means tested fees.

Conclusion

With the asset test changes coming in on 1 January 2017, the importance and focus of this test becomes even more relevant for clients.

Any strategies or steps to reduce a client's assets should be considered earlier rather than later.

The Government has stopped short of proposing any changes to the assessment of the family home.

Further reform of the aged pension system is needed so that we stop penalising older Australians who want to move into smaller, more appropriate housing and use the equity in their family home to better support themselves.

William Truong is the technical services manager at IOOF.

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