PART TWO Your home, your retirement:
1 January changes to deeming and downsizing
Last week we covered the new 1 January rules for downsizing and super.
This week we are looking at the way downsizing is treated within the Centrelink means test.
This is a very different scenario as whilst generous super concessions can apply to a downsizing surplus or profit, Centrelink will still take such funds into account.
The good news is that whilst you previously had just 12-months’ grace before this money was viewed as an asset, things have changed. As of 1 January, the exemption for downsizing funds is now two years. Put simply, you can ‘park’ this money in an appropriate account and it will not be included in any assets assessment for your Age Pension eligibility.
Income test assessment on the proceeds of downsizing has also changed. As of 1 January this year, the deeming rate on this portion of your savings will be the lower rate, 0.25%. As with other useage of deeming rates, these rates are frozen until June 30, 2024. So with savings accounts and term deposits now paying 5% interest (and sometimes more), the deemed income assessment for downsizing funds is very favourable compared to what you might actually have earned.
Minister for Social Services, Amanda Rishworth, noted at the time that the bill was passed that these measures will give retirees more time to buy, build, repair or renovate their new primary residence. Given delays in construction since the Covid pandemic first hit in early 2020, the legislation will hopefully release pressure on those dependent upon the building trades.
The 1 January change is not entirely altruistic. Policymakers see one of the ways of easing the severe shortage of housing stock is to encourage older homeowners to downsize and free up larger homes for younger families, cutting the waiting times for new builds.
Perhaps this legislation is that rare beast – a win-win solution for all generations?
What do you think?
Are initiatives such as these likely to make you view downsizing more favourably? Or are you like many retirees who proudly declare, ‘They’ll carry me out in a box!’
Do you need support to do the sums on whether downsizing will work for you?
One of our advisers can help step you through the specific rules and forecast how well such a strategy might work for you.
If the Government is serious about wanting older Australians on the aged pension to downsize, then any surplus funds that become available after downsizing, should be expempt for life not just 2 years.
The home that provided the surplus was exempt for life and thus why not the surplus? The gross value is the same.
The rules re the aged pension have been changed, added to and argued about since day one. They are complex, extensive and on many occassions do not pass the “Pub Test” Like making the pension subject to income tax if one person or a couple work. The funds earned are subject to income tax as well as the amount of pension paid.
The culture at Centrelink is such that persons applying for a benfit are treated as cheats, including those applying for the aged pension. The vast majority of these Australians have worked all their lives, paid their taxes and have in general contributed to the Australia we have now.
Centrelink also in general do not help when applying for the aged pension and in fact do the opposite and make life as difficult as possible.
The Commonwealth Government set up the AAT (a suposely independant review body to review decisions made by Commonwealth Government Departments – like Centrelink) 30 years ago and now the Labour Government has decided to replace this body, as it has too many recently non qualified appointed Liberial minded appointees.
Apparently the AAT is so far behind in deciding claims that another 70 persons are required to settle the backlog of claims. Surely this must tell the Commonwealth Government that departments such as Centrelink are out of control and or the rules are far too complex and that if there is a need to replace the AAT, then there is a far greater need to replace Centrelink.
A universial aged pension with one simple asset test would mean a lean and mean Centrelink and AAT.
Hence the Government would save Billions of Dollars in the cost of running Centrelink and the AAT.
The one asset test:
Any person or couple with assets exceeding 3 million dollars (net) after liabilities cannot claim the aged pension. (A fine of $250,000.00 is applicable for those who claim for the aged pension with assets that exceed 3 million dollars net and is also appliciable to anyone that attempts to reduce the value of their assets by gifting within 10 years of appling for the aged pension)(Assets to mean any asset that has a value exceeding $1,000.00)
Centrelink to accept all claims (subject to age etc)
Regular and random inquiries to be made by the ATO to ensure compliance alongside those inquiries conducted by the ATO for tax purposes.
How does one cope when on a disability pension and no other means of incoming finance? For example, I have a few thousand dollars to my name now (an awful lot has been consumed by my medical bills) and each month that goes by I’m using up several hundred dollars of that, over my DSP. When this money comes to an end it will be off to a state ‘old aged home for me. And, as I recall, they take all of the DSP, leaving me with nothing.
I downsized & bought an apartment then discovered that i would not get any pension & also lost my NZ pension too
I should have bought a more expensive home
hi just wondering how that happened to you please?
I personally won’t be down sizing as why should I pay the cost of stamp duty to purchase a smaller home.
If the government wants my family home for younger families, then
there has to be some benefit to me
Well said Lyn
I agree no perks for us!
I’m from the baby boomer generation and our children have left our home.
My wife and I are on pensions (DSP and carer’s pension).
I could make part of our property available for rent – create some income and reduce the bill for Centrelink.
However, Centrelink rules are that if I use my home for income creation part of it becomes an asset. Given Sydney Northern Beaches property prices which often are in no relation to the cash flow of the owners, this would exclude my wife and myself completely from any pension payments due to the asset test – and we cannot afford that.
So, as long as Centrelink continues with that rule I will simply not be able to generate income from renting – so Centrelink pays more pension, I pay no tax, and a beautiful room is remaining empty. A lose – lose – lose situation, and a sad one.
I moved to an Anglicare Village, Rooty Hill NSW after I sold my house. When I went to Centrelink and cut pension off on that day.
I cannot believe that I am not the owner of my Unit at Anglicare, still they told me that I do not qualify as a non-home owner.
Follow it up with more questions find out who is appropriate to speak with. I heard this scenario just today. Where does it leave us? Who is responsible?
Hi Concerned
I have a question about Defined Benefit Pension. How does Centrelink assess the defined benefit pension and is the tax-free component of the included or excluded as part of the assessment?
Hi Ben, thanks for seeking assistance! As per Centrelink’s WEBSITE, they assess “the gross payment less the deductible amount.” whereby deductible amount means tax-free component, however “There is a 10% cap of the income stream’s gross payments for the deductible amount for defined benefits.” so some of the tax-free component may be included as part of the assessment but not all.
Is it correct that if I sell my house and invest the money for 2 years that centrelink will not use that for the income test or asset test. But I will have to add the interest earned to my pension and submit a tax return for that year. at the moment I do not pay tax.
Hi David, thank you for seeking our assistance! If you sell your house with the intention to buy/build a new one then the portion of sale proceeds you intend to use for the new purchase/build is exempt from the asset test for 2 years to allow you time to buy/build. Although the balance is exempt from the assets test it will still be deemed to earn you income for that 2 year period. You can read more about how deeming works HERE.
Did you have to live in your house for 10 years to qualify, as in the previous downsizing rules to add to super.? Do you have to prove you are going to buy another house before the 2 years are up or can you wait until the last minute.? Can you invest all the money and buy on the 24th month and none of the money will be counted on either test.
Hi David, Thank you for taking such avid interest in our article! You do not have to have lived in the house for 10 years prior to selling for the exemption to apply. Nor do you have to provide proof/evidence from the outset either. It may legitimately take 2 or more years to find the right house or wait for it to be built so you can invest the money in the interim and if it takes longer than 24 months then the exemption will simply cease at that time.
Thankyou Steven for your reply. Just one more question. At the moment we do not pay tax. The interest earned on the amount of approx. $800,000 from the sale of the house would be added to my pension plus any other assetts we have for income purposes. I have no super. How much each can we earn before paying tax, allowing for all the deductions pensioners are allowed.
Thankyou, David.
Hi David, sorry but we cannot assist with tax advice, you may want to speak with an accountant or tax agent. THIS LINK may be of help.
I plan to downsize soon. After buying my smaller property I may have an excess of $300000. Will this remaining amount he exempt from asset test for 24 months from the date of sale of my house?
Secondly, If this excess is invested, is the income exempt from income test for pension. If so, for 24 months? If not, is the deeming rate fixed at 0.25% for 24 months.
Thank you
Hi Siva, thank you for sharing your query! The proceeds from the sale of your previous home are only exempt until the purchase of your new home. Once you have bought your new home the exception ends and any remaining surplus will then become an assessable asset and have deeming applied to it the same as all other financial assets.
Hi Steven, This answer is confusing, as the above article states you have 24 months to BUY, build, renovate, or repair your new home.
If you are Renovating, and repairing… aren’t these funds then exempt?
Thanks.
Hi Tracy, thanks for keeping us honest! Yes the cost for renovations/repairs can also be exempt along with the purchase price if it is all declared to Centrelink from the outset. In Siva’s scenario above though there is no mention of renovations, only excess funds above the purchase price. The exemption is only applied to the amount that is going toward the purchase/renovations and only until the transaction(s) is completed.