Centrelink are there to help – But they can be a strange beast

Centrelink as an organization is genuinely trying to help people get the benefits to which they are entitled. They are generally helpful, and while you may get frustrated at the amount of paperwork and the questions that they ask, you can usually wade your way through the administration and come to a predictable conclusion. But sometimes, you can't help but be reminded that they are a huge bureaucracy and as such they can be a very strange beast.

Take as an example, the situation where a couple are receiving a pension each from their SMSF. At the beginning of the year they are sent a form to complete notifying Centrelink of their account balance at the 1st of July and the pension they expect to take from this pension. Centrelink take this information and use it for their asset test assessment, and in terms of pension apply the deductible amount and assess the residual against the income test.

Example: Lets assume that we have Mr Smith who has $680,000 in his member pension account (but started the pension with only $500,000 and the relevant number of the pension is 20). So the first $25,000 of his pension is not counted against the income test. He takes $35,000pa pension. So his asset test counts $600,000 toward his limits and so only $10,000 is assessable income.

This is pretty straight forward and provided no changes take place Mr and Mrs Smith should have a fairly predictable Centrelink experience. The trouble can start if you make changes to your pensions throughout the year, because this seems to cause some very strange assumptions on the part of Centrelink. There's no logic to it, and unless you know what to do, you can find yourself getting a nasty letter demanding repayment of benefits received and a reduction or cessation of your pension. This is for no reason really, other than you assumed that a reasonable, logical eye would be caste over the details of your submissions at the other end.

If we continue our example, now let's assume that Mr Smith's benefits are all concessional component and that he wants to convert this to non-concessional component through a withdrawal and re-contribution strategy. Mrs Smith is only 61 and so has no work test and access to the 3 year rule for non-concessional contributions. Mr Smith is still working and while he is 67 he can still contribute $150,000pa non-concessionally. They withdraw $600,000 from the fund as a commutation of Mr Smith's pension. They then place $450,000 back for the benefit of Mrs Smith and start a pension. They place $150,000 back for Mr Smith and start a second pension with this amount. The member pensions are as follows:

So the asset position of the fund remains unchanged, and while the money will come from different member accounts, the couple will continue to draw the same total pension of $35,000pa.

As a consequence of making these changes you need to fill out a detail of income stream form for each of the new pensions, report the commutation against the original pension and send this information to Centrelink.

So What Happens Next

We would suggest that you very clearly state in a covering letter that the new pensions are not new money. Yes you have said it in the forms, but our experience tells us that more than half the time your pension will be cut because suddenly they say you have $1.28 million dollars. A cover letter makes this slightly less likely.

The problems with a partial commutation really start if the income test is likely to be the dominant test for you. Because you have already reported that your original pension was to pay $35,000 during the year, Centrelink will continue with this assumption even though you have reported that 85% of the pension has been commuted. To make matters worse, the small residual pension is adjusted for the deductible amount. While you used to have a deductible amount of $25,000 that is now reduced to say $4,000. So now $31,000 counts toward your income test rather than the original $10,000.

They then look at the new pensions you have commenced, add this income and suddenly your income has basically doubled. Your Centrelink assessments go through the roof and you end up with no pension and a debt to be paid back.

How do you avoid this?

In order to avoid this rather silly situation it is important to leave no residual pension behind. You may only be commuting $600,000 to start new pensions in reality, but you must then also commute the rest of the original pension. Once this is done, you can report that you have started another new pension with a much smaller annual payment. So the benefits in the fund will look like this:

So while Centrelink are there to help in your retirement funding, its important not to make assumptions that things you feel are logical given what you have reported will be adjusted for in Centrelink records. Spell it out, ask the question and sometimes, just expect to be unpleasantly surprised.