Nick Bruining Q+A: How tax is calculated if you’re working while claiming a Centrelink age pension
Q+A: The beauty of Australia’s welfare system means you can work and collect an age pension. But there’s a few things to consider first, including how the ATO works out your tax liability.
Question
In a recent Your Money article, you mentioned that a single senior over age pension age can earn up to $36,960.
My total gross income was a little more than $40,000, made up of my part-aged pension and wages. I ended up paying a little under $3000 in tax but still received a $1400 refund.
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By continuing you agree to our Terms and Privacy Policy.I am a bit confused as I thought the tax would only have been a few hundred dollars based on the 15 per cent tax rate?
Answer
The way your income tax liability is calculated can be confusing. The steps to calculate personal income tax are as follows:
Your tax “assessable income” includes your gross wages, investment income, capital gains and most of your age pension. Some supplements which form part of your pension are exempt.
From this grand total of assessable income, we apply allowable “tax deductions”. This reduced figure then provides us with our “taxable income”.
From this figure, and using the tax rate tables, we calculate the “tax liability”. At this point, we apply the various tax credits to determine your “tax payable” amount.
These include Australian share franking or imputation credits, private health insurance rebates — if not already received through discounted premiums — and the complicated income-tested “tax offsets” which include the low income tax offset and, for those aged 67 or older, the senior and pensioners tax offset.
Significantly, the amount of these offsets starts to reduce as your income increases. For example, the LITO reduces at different rates once taxable income exceeds $37,500 and shades out altogether at $66,667.
In essence, the existence of an offset does not reset the base level or the income tax–free thresholds.
The figure of $36,960 is the level where the full effect of the various tax offsets exactly matches the calculated tax liability, ending up with a tax-payable figure of nil.
Your tax refund is the extra Pay-As-You-Go tax your employer sent to the Australian Taxation Office. It can only be calculated at the end of the tax year.
Question
I am turning 75 later this year. My wife and I have around $280,000 invested in shares and I also have a GoldState superannuation fund valued at about $650,000.
We each have separate account-based pension funds which is what we live on.
We’re unlikely to receive a Centrelink pension for quite a while. Can you suggest what we should do with the shares?
Someone has suggested we sell them and deposit the proceeds into superannuation.
Answer
While there is an opportunity to sell the shares and contribute the proceeds into super, I would question the effectiveness of the strategy.
As a starting point, you need to objectively assess the make-up of your portfolio. If they are all “blue-chip” established companies paying regular franked dividends, you should be receiving a reasonable income from the portfolio.
Next, the sale of the shares will need to cover brokerage costs but, critically, a portfolio of that size would probably generate a capital gains tax liability. That means the amount after tax is paid is what you will have to generate a comparable return to your share portfolio. You may find yourself worse off overall, compared to where you are now.
While super is an option, you would not be automatically able to claim a tax deduction for a concessional contribution to super to mitigate the capital gains tax liability.
You would need to return to work for at least 40 hours in a 30-day period to be eligible to claim a tax deduction for up to $32,500 — less what your employers pays as compulsory 12 per cent super.
The GoldState fund will see tax deducted if you cash it in. While the tax is unavoidable, rolling over the money first should save you at least the 2 per cent Medicare levy.
However, it would be tax-free if paid as a death benefit and it is earning a respectable guaranteed return of Perth’s consumer price index, plus 2 per cent.
Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association
