Nick Bruining: Use the Centrelink and super system to boost your age pension and get grandkids into first home
There’s a nifty way for grandparents to help their grandchildren save a deposit towards their first home ... but also boost their age pension at the same time. Here’s what to do ...
It’s not often that the “system” provides a win-win scenario for two generations of the one family.
A nifty way for grandparents to help their grandchildren save a deposit towards their first home can also boost their age pension at the same time.
The grandies can effectively receive a 6 per cent-plus return on their money, while Grandma and Grandad can “earn” up to 7.8 per cent themselves.
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By continuing you agree to our Terms and Privacy Policy.The strategy combines special concessions within the superannuation system with means-testing rules in Centrelink’s age pension system.
It starts by understanding the gifting rules applied by Centrelink to a person who receives a government income support payment like the age pension.
Under those rules, an individual — or a couple combined — can gift up to $10,000 a year, with a maximum of $30,000 over a rolling five-year period. If the person is already in receipt of a full age pension, these gifts are unlikely to affect their benefit.
When a person is receiving a reduced Centrelink pension because of the asset test, the reduction in assets by $10,000 a year means the effects of the asset test are reduced, resulting in an increase in the pension.
Each $1000 reduction in this case boosts the fortnightly pension by $3. Over a year, that adds up to $78. In effect, the reduction in assets and the associated boost in pension translates to a 7.8 per cent “return” on the gifted money, courtesy of Centrelink.
If Grandma and Grandad don’t receive a Centrelink benefit, there’s no restriction to the amount gifted.
The total sum might be given to one child or spread among your brood to avoid any “political issues”.
For the grandchild, the benefit comes from working the superannuation system and taking advantage of the little-used First Home Super Saver Scheme.
A person of any age can have a superannuation account, but if under 18, a parent or guardian must sign the application. Ideally, the grandie will also have a tax file number to avoid unnecessary tax being deducted.
For simplicity, the grandparent’s gift is made to the grandchild and then contributed to the superannuation fund by the grandchild. This then becomes a personal voluntary non-concessional contribution to super.
Importantly, it becomes an eligible contribution for the FHSSS.
The saver scheme allows people to make voluntary contributions of up to $15,000 a year, up to a maximum of $50,000.
The contributions can either be the tax-deductible, concessional contribution type; or a non-tax deductible, non-concessional contribution.
Concessional contributions can be used to boost Junior’s tax refund if they’re already paying tax, but the types of contributions are also subject to at least a 15 per cent contributions tax.
Also be aware that the amount after tax — or 85 per cent of the concessional contribution — is the maximum that can be accessed under the FHSS scheme when the time comes to withdraw the money.
The money in the fund earmarked for the FHSS scheme earns a notional rate of interest tied to the Australian Taxation Office’s Shortfall Interest Charge. The rate is currently 6.65 per cent a year and is set quarterly. Importantly, the Government does not contribute these earnings. It is expected that the fund’s investment returns will cover and hopefully exceed the SIC.
Once the child turns 18 and decides to buy their first home, they can apply to the ATO to release the money before settlement. It is important to follow the rules exactly, or they may not be able to access the money.
The ATO will determine how much can be accessed, which will include the eligible FHSSS contributions made, plus the compound earnings on the money.
Any non-concessional contributions will be returned completely tax-free, and concessional contributions along with the notional earnings are taxable.
However, the taxable part also comes with a 30 per cent tax credit. That means a person earning up to $135,000 a year should only end up paying the 2 per cent Medicare levy on the taxable part.
The ATO takes all that into account when authorising the release of the FHSSS money.
If the rules aren’t followed or the grandchild never buys a home, the money stays in the superannuation system until other conditions of release are satisfied, typically at retirement.
Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association
