Toolbox: Making sense of Centrelinks twin tests

The amount of Centrelink benefits paid to a pensioner is based on the assets and income tests. The rate of payment is calculated under both the income and assets test. The test that results in the lower rate (or nil rate) is the one that applies.

Assets test

The assets test assesses financial investments as well as personal assets such as home contents and motor vehicles. The principal home is not included in the assets test.

Assets are generally assessed at their market value. The market value is the amount a person would expect to receive if they sold the asset on the open market, less any debts or encumbrances secured against the asset. The amount of the assessable assets is subject to the assets test.

Examples of investments that are not assessed under the assets test include:

• superannuation savings for people under age pension age; and
• exempt funeral investments up to $10,250 per person or couple.

Complying income streams such as lifetime and life expectancy annuities or term allocated pensions may be treated as fully or partially exempt from the assets test, depending on the characteristics of the income stream and the date of purchase.

Under the assets test, pensioners with assets under the full pension threshold receive the full payment rate of $568.10 per fortnight for single people and $945 combined per fortnight for a couple, including the pharmaceutical allowance. There is a gradual decrease of entitlements where assets are between the lower and upper thresholds, with pensioners losing $1.50 per fortnight for every $1,000 of assets over the lower threshold.

Table 1 outlines the lower and upper assets test thresholds for single people and couples (for the period January 1 to March 19, 2009). The ‘upper threshold’ column highlights the level of assets at which pension eligibility ceases.

Income test

The income test assesses income received (including income streams, salary, and rental income) as well as the deemed income from financial assets.

For pensions and annuities, the assessable income is generally based on the actual income received less a deductible (exempt) amount.

Under the income test, pensioners with income under the full pension threshold receive the full payment rate of $568.10 per fortnight for single people and $945 per fortnight for a couple, including pharmaceutical allowance.

Fortnightly income over the full pension amount reduces pension entitlement by 40 cents in the dollar for singles, and 20 cents in the dollar each for members of a couple.

Table 2 outlines the income test thresholds for single people and couples.

Table 3 shows how financial assets are assessed using deeming rates and thresholds.

Assets that are not subject to the deeming rules include:

• investments in superannuation held by people under age pension age; and
• income streams other than certain short-term annuities.

Interaction between income and assets test

Age pension entitlements are determined separately using both of these tests. The test that results in the lower rate (or nil rate) is the one that applies.

The graphs show the interaction between the tests based on the pension rates and thresholds in effect as at January 1, 2009, for single and couple homeowners. It is assumed that clients hold non-income producing ‘lifestyle’ assets, such as furniture and motor vehicles of $20,000, with all remaining assets being financial assets subject to deeming.

The graphs show that at lower levels of asset holdings, it is the income test rather than the assets test that determines age pension entitlements.

Each dollar of income above the income test threshold reduces entitlements by 40 cents. Thus, assuming a deeming rate of 5 per cent per annum, each additional $1,000 of financial assets will reduce the age pension by $20 per annum ($1,000 x 5% x 40 cents).

At higher levels, it is the assets test that determines eligibility. For each $1,000 of assessable assets above the lower assets test threshold, entitlements reduce by $1.50 per fortnight ($39 per annum).

The ‘crossover point’ is the point at which a person switches from being impacted by the income test to being impacted by the assets test.

Below the ‘crossover’ point, it is possible to use ‘income-test friendly’ investments, such as allocated pensions, to increase age pension entitlements.

The ‘crossover’ points between the income and assets tests in the above graphs can be seen in Table 4.

Robert Thomas is AXA national manager, technical research and paraplanning.