Nick Bruining: Qualify for just $1 of Centrelink age pension or JobSeeker and 30 per cent CGT disappears

As the stark reality of changed capital gains tax rules sink in, one significant carve-out is grabbing the attention of those Australians likely to be affected — get just $1 of an income support payment from Centrelink and you’ll avoid the new 30 per cent minimum tax rate.

Many people approaching retirement will have to revisit exit strategies that have been in place for years. One of the more popular and common tricks is to time the sale of assets to reduce the CGT effects.

Let’s say you are planning to retire, and as part of that plan you sell off a negatively geared property that’s grown in value over the past few years.

Negative gearing will no longer stack up because you won’t have employment income to apply the gearing losses against.

Most advisers will suggest retiring on or before June 30, and then selling the investment property in the financial year to follow, will set you up for the best tax outcome.

In effect, you are deferring the sale so the profit is assessed by the taxman in the new financial year, when you no longer have employment income. The first $18,200 is tax-free, and so on.

All that made sense — until Budget night.

From July next year, capital growth under the new calculation method will be subject to a minimum 30 per cent tax rate.

Assuming you’ve held the asset for 12 months or more, 50 per cent of the capital growth up until June next year will be added and taxed under the current rules — that is, added to your other income and taxed at your marginal tax rate.

The growth above inflation from July 1, 2027 until you sell the asset, however, is subject to a minimum 30 per cent tax. Unless, that is, you receive any form of income support payment from Centrelink.

Qualify for $1 of age pension or JobSeeker and the 30 per cent tax disappears.

Needless to say, that’s set off a scramble, with people investigating ways to qualify for a partial Centrelink payment.

For starters, you’ll need to be over 67 to qualify for an age pension, and for a couple, both would need to be eligible for you both to receive the tax exemption.

Assuming you’ve ticked that box, the next challenge will be the means-testing system. Means tests apply to pensions but also to allowances such as JobSeeker.

The means-testing system looks at your total assets and Centrelink-assessable income, which is completely different from Australian Taxation Office-assessable income. Whichever test produces the lowest payment is the one it will latch on to.

Using current figures for the age pension, a couple — excluding the family home — will need to have assets under $1.085 million. For a single homeowner, that figure is less than $722,000.

For recipients of an allowance like JobSeeker, those thresholds are much less — at $481,500 for home-owning couples and $321,500 for singles. Non-homeowners, whether couples or singles, are allowed an additional $258,000. The “family home” usually includes the land and buildings up to 2ha.

Assets include all of your personal effects, contents and vehicles at their second-hand values, and Centrelink will often accept $10,000 as a total value for contents.

Added to that would be any investment real estate assets you hold. Financial assets are also included, with the list comprising bank accounts, shares, managed investments, account-based pensions, and accumulation superannuation funds if you are over age pension age.

That’s an important clue for those on an allowance who are usually under age pension age. Money in superannuation accumulation phase is ignored by Centrelink until you reach 67.

The other test used is an income test. Centrelink income includes pre-tax employment income, net rental receipts, foreign pensions, and special superannuation pension income. Importantly, actual income and payments from financial assets is ignored. Instead, Centrelink applies the complicated deeming system.

For singles, the first $64,200 of all financial assets is deemed to be earning 1.25 per cent a year; and the balance 3.25 per cent. For couples, the 1.25 per cent rate applies to the first $162,200, and then 3.25 per cent for the rest. These figures are converted back to a fortnightly amount.

Single pensioners can receive income up to $2619.80 a fortnight and still qualify for a part-pension. The combined upper fortnightly limit for couples is $4000.80.

Single allowance recipients with no dependants can receive Centrelink-assessable income up to a maximum $1530 a fortnight, and couples $1415 each, to qualify for an allowance.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association