Nick Bruining Q+A: Want to keep your Centrelink part-pension when you inherit $650,000? Buy a fancier home!

Question

We live in a one-bedroom city unit which we own. We recently had it valued by a real estate agent who says it has a current value of about $700,000.

We currently receive about 50 per cent of the age pension because of the asset test. We are about to receive an inheritance of about $650,000, which will certainly result in us losing the pension completely.

One of my friends suggested we upgrade our residence by using the inheritance to purchase a more valuable home with a value of about $1.35 million.

Is this legal, and are there any issues we should consider?

Answer

When you receive the inheritance you are required to notify Centrelink within 14 days.

If you currently get a 50 per cent age pension because of the asset test, it tells me that your assessable assets are about $760,000. The additional $650,000 will lift your assets to $1.41m, which puts you well over the new asset test upper threshold of $1,047,500 for a home-owning couple.

Under the means-testing system, your primary residence is exempt from all means testing provided it is being used for private purposes and sits on a block of land not exceeding 2ha.

If you sold your existing home and combined it with the inheritance, you are effectively moving it from an assessed asset — the bank account — to an exempt asset — your home. In fact, you might look at spending even more on your new home. Each $10,000 reduction in your assessable assets increases your age pension by $30 a fortnight.

If you used $100,000 of your other savings towards your new home, your pension would increase by up to $300 a fortnight. Over the year, that’s effectively a 7.8 per cent “return” on your invested money, risk free.

Your loved ones will ultimately benefit from the increased value of your home.

Question

I am a 68-year-old on a full pension. I still do a little casual work as an in-home carer, doing about six to eight hours a week.

I used some of the modest amount in my superannuation to purchase a car not long ago. I have been paying money back into super for the past two months, using most of my earnings before tax to replenish it.

This means that I still receive my full pension. I understand I will be charged 15 per cent tax on the money I pay into super.

Other than that, am I doing anything wrong?

Answer

Congratulations on having a working financial plan, but you may be paying unnecessary tax and missing out on some free money.

As a senior, you benefit from a number of concessions, including special tax rebates.

Once you reach the age pension age of 67, you have access to the seniors and pensioners tax offset — abbreviated to SAPTO.

SAPTO is a tax credit and means that a single can earn $35,818 a year before they are liable for any income tax or Medicare levy. Most of the pension is taxable income, as is the income from your job. But if the grand total is less than $35,818, you pay no tax.

When you make a tax-deductible concessional contribution to super, the tax deduction is of no use because you pay no tax anyway.

The concessional contribution is subject to the 15 per cent contributions tax, irrespective of your personal tax obligations. Therefore, you are essentially paying contributions tax needlessly.

The good news is that it’s a simple fix. Simply change your contributions to non-concessional, which are not tax deductible and, in turn, don’t incur contributions tax.

As an added bonus, and because your taxable income is likely to be below $45,400 with 10 per cent or more of your income coming from employment, you can probably access the superannuation co-contribution payment.

This sees the government inject up to $500 into your super when you contribute at least $1000 of non-concessional money to your fund.

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