Social security strategies during these difficult times

As a result of the economic fallout from COVID-19 there has been a large increase in the number of Australians who need to access the social security system, many for the first time. This includes those who no longer have a source of exertion income and are applying for JobSeeker Payment (if they are not eligible for JobKeeper Payment), and those of age pension age whose assets have fallen below the upper assets test threshold as a result of recent share market falls.

Incorporating the use of case studies, this article will outline four potential social security/Centrelink strategies. For some clients, one or more of these can be used to improve their eligibility and rate of payment.

It is common for clients of apparently similar means to a have a completely different Centrelink outcome because of how the assets/income tests are applied. This may be because some assets are exempt from assessment, including a recipient’s principal residence and superannuation account(s) in the accumulation phase where the account holder is below age pension age.

All case studies are based on Centrelink rates/thresholds as at 1 July 2020.

Case study 1 – Using financial investments to repay a principal residence home loan.

Paul is aged 42 and single with no dependants. He is a casual employee in a consultancy business, and his employer does not meet the eligibility criteria to receive JobKeeper Payment. As a result of the economic impact from COVID-19, Paul’s wage will reduce from $6,000 per fortnight to $700 per fortnight for the foreseeable future.

Paul owns his principal residence which has a market value of $800,000 with a loan attached to it of $300,000. He also has $500,000 invested in managed funds. The home loan/managed funds are part of a gearing/debt recycling strategy Paul established several years ago.

Whilst the assets test has been temporarily waived, Paul is not eligible for JobSeeker Payment as his total income for Centrelink purposes (including the deemed income on his managed funds) exceeds $1,088.50 (the fortnightly upper income test threshold for a single person with no dependants).

If Paul withdraws $300,000 from his managed funds and uses the proceeds to repay his home loan, he will be eligible for JobSeeker Payment. This is because his level of income for Centrelink purposes has reduced, as only $200,000 (rather than $500,000) of his assets will be subject to deeming for the income test. During the period for which the COVID-19 additional assistance is available, and assuming his income remains the same, Paul will receive a JobSeeker Payment of $703.72 per fortnight. This consists of $144.92 as the base rate of payment, an $8.80 Energy Supplement, plus $550 as a Coronavirus Supplement.

Prior to implementing the strategy Paul should enquire with his home loan provider as to whether there are any conditions they may impose if he wishes to redraw these funds at a later date. He should also consider any capital gains tax implications as a result of redeeming part of his managed fund portfolio, even though capital gains are disregarded for the JobSeeker income test. From an investment perspective, Paul should also consider whether now is an appropriate time to sell down his managed fund portfolio.

Please note, for this strategy to be effective, the funds withdrawn from the financial investment must be used to repay all or part of a home loan secured against the recipient’s principal residence. Placing the funds into an offset account will not be effective, as these are still subject to deeming for the JobSeeker income test.

Case study 2 – Improvements to a principal residence and assisting a family member.

Roberto and Angelina Rossi are a married couple in their early 60’s. Roberto is eligible for the Disability Support Pension. As Angelina provides Roberto with constant care and attention, she is eligible for both Carer Payment and Carer Allowance. Their total Centrelink payments (excluding Carer Supplement) are $960 per fortnight (combined).

Their principal residence is a 2 bedroom house, and they have cash investments of $600,000. Currently, Roberto and Angelina sleep in the master bedroom, and Isabella (Roberto’s elderly mother) sleeps in the 2^nd bedroom.

The Rossi’s wish to help their son Sergio who has fallen on hard times, and allow him to ‘move back home’. In the short term, Sergio will live in their second bedroom along with Isabella and will pay board of $400 per fortnight.

The board the Rossi’s will receive from Sergio adds to their disposable income without impacting their payments from Centrelink. This is because lodger and boarder payments received from an immediate family member are exempt from the income test.

So that Sergio can have his own bedroom, the Rossi’s wish to extend their house and add an additional bedroom, with an ensuite, at a cost of $150,000. Once the extension is complete, their assessable assets for Centrelink purposes will reduce to $450,000. This increases their total Centrelink payments to $1,410 per fortnight.

The Rossi’s will have assisted Sergio, and increased their total payments received from Centrelink by $450 ($1,410 - $960) per fortnight.

They will have also increased the value of their exempt principal residence and the $400 per fortnight board they receive from Sergio should easily make up for the income lost as a result of reducing their cash investments to fund the extension.

However, the Rossi’s should consider the fact that they have fewer liquid funds as a result.

Case study 3 – Superannuation in the accumulation phase where the account holder is below age pension age.

Roger (age 68) and Martha (age 62) are a retired married homeowner couple.

Previously Roger was unable to receive Age Pension as he and Martha’s combined assets exceeded the upper asset test threshold of $876,500.

However, due to the recent market downturn the couple’s total assets (excluding the exempt principal residence) have fallen to $900,000. This consists of an account-based pension (ABP) in Roger’s name with a current value of $800,000, and a joint savings account of $100,000.

Despite their combined assets’ reduced value, Roger is still not eligible for Age Pension due to slightly exceeding the upper asset test upper threshold.

However, if Roger makes a tax-free withdrawal of $300,000 from his ABP and Martha could then use these proceeds to make a non-concessional contribution into her superannuation account (and retain these funds in accumulation phase). Upon successful application, Roger will receive an Age Pension (including supplements) of $414.05 per fortnight. This is because superannuation in the accumulation phase in Martha’s name is exempt from the income and assets tests until she attains age 67 (her age pension age).

An additional benefit of Roger receiving a part Age Pension is that he and Martha will be entitled to hold the Pensioner Concession Card, whereas previously only Roger was eligible to hold the Commonwealth Seniors Health Card.

However, Roger and Martha should also consider that the future investment earnings from Martha’s superannuation in accumulation phase will be subject to tax of up to 15% rather than the 0% tax rate on earnings applicable to ABP’s. For example, this could be as much as $2,250 pa, based on an assumed earning rate of 5%.

Case study 4 – Increase to partners’ income threshold for JobSeeker Payment and additional benefits from receiving a small JobSeeker Payment.

Milan (age 28) and Koko (age 26) are a non-homeowner de facto couple without any dependants. They live ’pay cheque to pay cheque’ and have no savings or accrued leave entitlements.

As a result of the economic impact from COVID-19, Milan has been stood down from his employment, but his employer does not meet the eligibility criteria to receive JobKeeper Payment.

Koko remains employed as an executive personal assistant, however her working hours have been reduced by 20% and now earns $3,000 per fortnight.

Koko is not eligible for the JobSeeker Payment because even though her working hours have been reduced, she earns more than the upper income test upper threshold of $995.50 per fortnight for a member of a couple.

Milan was previously also not eligible for the JobSeeker Payment as Koko’s income exceeded the partner’s upper income upper threshold, however this threshold has temporarily increased to $3,070.80.

As a result, Milan is eligible for a small base rate JobSeeker payment of $9.68 per fortnight.

Given the low payment amount, Milan has decided that it is best to devote his entire time to seeking work online and is also wary of the increased risk of infection by standing for a lengthy period in a queue at Services Australia/Centrelink.

It would be wise for Milan to also consider the following:

• Despite the low base rate of payment, by receiving even a ‘part’ JobSeeker Payment, he also receives the Coronavirus Supplement of $550 per fortnight, plus an Energy Supplement of $7.90 per fortnight. During the period that the Coronavirus Supplement is paid, this will increase his total fortnightly payment to $567.58.
• The Ordinary Waiting Period and the Liquid Assets Waiting Period have been temporarily waived. Milan is not subject to the Income Maintenance Period as he has not received annual leave/redundancy etc. payments from his employer.
• Milan does not have to physically attend a Services Australia/Centrelink location to apply for JobSeeker Payment. As a result of recent changes, he can do so online (via MyGov) or over the phone.
• Milan can still seek employment, and if he does find work, he should then inform Centrelink of his change in circumstances.
• Whilst Milan is receiving the JobSeeker Payment, he is also eligible to hold Centrelink’s Health Care Card.

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