Nick Bruining Q+A: Here’s how collecting rent can affect how much of the age pension you get from Centrelink

Question

I am retired, in my 70s and on the full rate of the age pension.

I live on a quarter-acre block, and at the back of my house I have a big shed. Someone has approached me and wants to rent the shed for $600 a month, or $7200 a year.

Will this payment affect my pension?

Answer

What seems like a simple arrangement can become quite complicated.

We will assume that the person who approached you is not a family member because — in most cases — payments made by a family member for board are not assessable under the income test.

The income you would receive from rent would definitely be assessable by Centrelink on a fortnightly basis. But you could probably apply a range of expenses as deductions against that income. These would include a portion of your local government rates, insurances, electricity, maintenance and other costs.

Centrelink prefers a mini profit-and-loss statement that sets out the income and expenses. But in the absence of such a statement, it will apply notional expenses to the income of 1/3rd. In other words, Centrelink will only count 66 per cent of the fortnightly rental income.

Depending on other income and financial assets, this may tip you over the single’s income test threshold of $204 a fortnight. If this happens, you will lose 50¢ of pension for each $1 you’re over the limit.

The income associated with financial assets will be calculated under the deeming system. If you have financial assets, which includes bank accounts, cash, superannuation, shares and bullion — or more than $77,000 in total — you will see a reduction in your pension.

Centrelink will also likely want to include the value of the shed under the asset test because the homeowner exemption only applies to that part of the home that is used for private purposes.

This can be complicated, but off the total value of the home, you will need to determine what portion of that value may be attributable to the shed. For example, if the total property is worth $800,000, you might argue that 5 per cent — or $40,000 — of the value can be applied to the shed.

Centrelink will probably have your valuation checked by valuers to determine if it is reasonable.

If your total assets exceed the single homeowner’s threshold of $301,750, your pension will be reduced by $3 a fortnight for each $1000 you are over that limit.

The last issue to consider is that there may be long-term tax consequences when the home is sold. The primary dwelling capital gains tax exemption only applies to that part of the home that is used for private purposes.

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