Nick Bruining Q+A: The seniors and pensioners tax offset claim self-funded retirees don’t know about

Question

My wife and I are in the process of doing our tax return online through myTax but we’re not sure whether we qualify for the seniors and pensioners tax offset?

We are both self-funded retirees aged 69.

The eligibility states: “You were age-pension age and eligible for an Australian Government age pension during the income year, but you didn’t receive it because you didn’t make a claim or because of the income test or assets test.”

Does this mean that even though we have too many assets to get the aged pension we can still claim the offset?

Answer

Yes, you will be eligible for SAPTO, provided your income is below the limits.

Income for the offset is called “rebate income”. Rebate income is the total sum of an individual’s taxable income, reportable superannuation contributions, total net investment loss and adjusted fringe benefits.

Taxable income includes wages, income from investments, foreign income, capital gains, some pension payments and all of that, less allowable deductions.

Net investment loss requires you to add back any losses associated with strategies like negative gearing, and reportable superannuation contributions are essentially those concessional contributions you may have made voluntarily whether through salary sacrifice or personally deducted contributions. Non-concessional contributions are ignored.

For 2024/25, the SAPTO for each member of a couple is $1602. When rebate income exceeds $30,994, the SAPTO begins to shade out at 12.5¢ per $1 until the rebate income reaches $52,759 where no SAPTO applies. Higher rates and thresholds apply if you are separated by illness.

Partnered senior Australians can transfer any unused portion of their tax offset to their partner.

For singles, the maximum SAPTO is $2230 and the lower shade-out threshold is $34,919.

The Medicare levy does not apply for taxable income below the shade-out thresholds. Fortunately, the tax application on myGov will normally detect your eligibility for offsets such as SAPTO and alert you.

Question

My husband and I have $1,173,000 in super, assets of $10,000 covered under home contents, $12,000 in vehicles, and $79,000 cash in the bank.

We have been told that to get to a level where we would qualify for a pension, we could move $600,000 from our super into an annuity.

Is this wise?

Answer

Based on the information provided, it appears your total assessable assets are about $1.274m, and assuming you are homeowners the current asset test upper limit is $1.031m, placing you about $243,000 above the cut-off amount.

An annuity may allow you to claim a part-pension. In order to qualify for the special Centrelink treatment, the annuity must comply with specific rules.

In essence, you will need to purchase a lifetime annuity where, in exchange for a lump sum payment, you each receive payments for the rest of your life.

You can tailor the payments to suit your circumstances. For example, you could build in indexation of the payment either to a fixed annual rate or to the consumer price index. You can include a reversionary option where on the death of the primary annuity owner, payments continue to the surviving partner until they die.

Once purchased, the invested capital is generally not available and this aspect is where the Centrelink benefits come into play.

Under the asset test, only 60 per cent of the invested capital is counted under the asset test, so moving $600,000 into an annuity would result in a reduction in your Centrelink-assessable assets by $240,000 — very close to the amount you will need to reduce your assets by in order to qualify for a Centrelink pension.

In addition to your annuity income, you would probably receive the minimum pension payable which, for a couple, would be $87.40 a fortnight.

Whether it is “wise” or not will depend on the total income and other benefits generated by following this strategy, weighed up by the loss of access to the capital sum invested.

Other benefits may follow.

Providing the annuity has been in place for at least five years, on your 84th birthday, Centrelink will further reduce the assessable amount by 30 per cent — or, in your case and based on $600,000, an additional $180,00.

If you are still being assessed under the asset test at that time, that will mean a significant increase to your age pension of $540 a fortnight.

One word of caution. If one of you passes away, the surviving partner will be reassessed under the single means test limits. It is likely that the surviving partner will exceed the limits and lose their Centrelink pension.

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