An already emotionally and financially complex process getting a divorce is hard enough. Adding Centrelink complications into the mix can create even more concern, around how things are assessed, how soon they need to be resolved and what is fair during a separation process.
This blog will explore the initial impacts and broader considerations of Centrelink when you are getting divorced.
Centrelink Assessment
It’s important first to understand how Centrelink assesses your pension entitlements using two tests: the Asset Test and the Income Test. This is the same test for the Aged Pension, Disability Support Pension and Carers Payment.
Asset Test
The Asset Test evaluates your total assets, including:
Financial investments: shares, bank accounts, managed investments, and superannuation.
Home contents, personal effects, vehicles, and other personal assets.
Real estate.
Annuities, income streams, and superannuation pensions.
Gifting
Sole trader, partnerships, private trusts, and private companies (with specific rules around control and benefit).
Deceased estates providing benefit.
Assets not included in the test:
Your primary residence (up to 2 hectares).
Superannuation accounts for someone under Aged Pension age.
Granny flat interests (subject to special rules).
Centrelink totals your assessable assets and determines your pension:
If you have less than the Full Pension Limit, you receive a full pension.
If you have between the Full Pension Limit and the Part Pension Limit, you receive a calculated part pension.
If you have more than the Part Pension Limit, you receive no pension.
Income Test
The Income Test looks at your total income from two sources:
Actual Income: Employment income and rental income.
Deemed Income: Assets such as bank accounts, managed investments, shares, bonds, loans (including to family), and older income streams or defined benefits.
Deemed income is calculated at assumed rates:
The first $62,600 for singles and $103,800 for couples is assumed to earn 0.25%.
Anything over these amounts is assumed to earn 2.25%.
This means you could actually earn more on your investments than Centrelink assume you do, equally you could earn less.
Centrelink totals your assessable income and determines your pension:
If you have less than the free area, you receive a full pension.
If you have between the free area and the income test limit, you receive a calculated part pension.
If you have more than the income test limit, you receive no pension.
Assessment Outcome
Centrelink will pay you the lower of the two amounts calculated by the Income Test and the Asset Test.
Impact of Divorce on Your Centrelink Benefits
How the Divorce Impacts your Aged Pension really depends on what has occurred during separation and at what stage you are at.
These impacts all centre around
Whether or not you are assessed as Single or a Member of a Couple
Whether or not you are assessed as a Homeowner
How the changes to your situation change your assessment
Are you a couple?
When considering if you are a member of a couple Centrelink will assess a range of things when considering if you are still a couple. There is no hard or fast rule, and Centrelink take a ‘looks like a duck quacks like a duck’ approach, so its difficult to try and squeeze into a specific definition. Considerations they use include
your legal relationship status
the financial aspects of your relationship
the nature of your household/living arrangement
the social aspects of your relationship (including support)
any sexual relationship
the nature of your commitment to each other
if you are legally married and living apart, whether you are living apart on a permanent basis.
When considering this (and the AAT’s couples checklist) once you commence the process of becoming divorced can be enough to trigger the change of couples status, but also consider your living arrangements and how you pay for things like bills, food and social activities.
Once you make the declaration to Centrelink about your separation you should have evidence ready to provide to them, as the Single Person Pension is higher than the individual Couples Pension.
The Family Home
The Family home (your Primary Residence) is usually exempt from Centrelink assessment (up to 2 hectares of land, single title).
This property is considered your home where you as the single or couple income support recipient lives for the greatest amount of time each year (Or where you live in two homes equally, the most expensive one). You can only have one Primary residence that is exempt.
A common question I get is around whether the home is assessable or not if you are separated.
If you separate and both you and your partner still reside in the home:
This asset can be considered both of your Primary residences and be exempt subject to the normal rules.
You will need to provide Centrelink with evidence that you are separated as well as
Reasons why you continue living together, sharing the residence.
Evidence of how you have changed the home to accommodate living together separated (separate rooms, separate or arrangements for living areas etc)
Evidence of how your relationship is that of a Home Sharer and not of a couple (such as splitting bills, doing your own shopping, separating bank accounts etc)
Third party confirmation of the above
Importantly
Centrelinks assessment may not match your own view and may be subject to reviews based on timeframes and your circumstances.
You should be careful should you start to date again that you still spend the majority of your time in your Primary Residence, as this may impact your assessment.
If you separate and are still reside in the home, your former partner moves out:
This asset would be considered your Primary residence and be exempt subject to the normal rules.
You would be considered a homeowner for the Asset Test limits.
Importantly
You should be careful should you start to date again that you still spend the majority of your time in your Primary Residence, as this may impact your assessment.
If you separate and you move out, your partner resides in the home:
This asset would not be considered your primary residence and your share of the property would be considered an assessable asset.
You would be considered a non-homeowner, so your Assets test amount would increase however it is likely in today’s market, not by an equivalent amount to the value of asset now being assessed.
If the property is held in Joint tenancy, 50% of the value is assessable. If the property is tenants in common, your specific ownership is assessable.
Your share of any mortgage would offset your share of ownership in the property.
This is still the case if your former partner does not pay you any rental income.
As you can imagine this can have disastrous impacts on your Centerlink benefits.
Bank Accounts and Investments
Once you have been classified as a Single Person, Centrelink assess your assets based on what you own. This differs from being in a couple as they total all assets for both parties (ignoring who owns what) and split it in half.
This means while you are going through a separation, before financial settlement your entitlements may work for or against your situation depending on who owns which assets.
Case Study: Staged Payments in a Divorce
Combining the two areas above, I want to run a case study that may be helpful I understanding how these factors can result in a potentially poor outcome.
Meet Phil (64) and Helen (67) who are in the process of negotiating and finalising their asset split.
Their financial situation was as follows:
Home: $1m, with a $200,000 mortgage.
Hub account (Savings): $20,000
Phils Super: $850,000
Helens Account based: $200,000
Phils Income $80,000
Helen’s Part Pension: $6,500
Helen has been renting, while Phil remained in the home. Phils employment income has been going into their HUB account which is paying most of the bills, and the mortgage as well as his lifestyle.
Helen has been living off her Super and increased Aged Pension $25,202; which as you can imagine, is an enormous challenge causing a lot of financial stress on top of the divorce. She pays some of the bills of her personal credit card.
As part of the settlement process, Phil has suggested it would be easier to pay out Helen in stages as to not impact her Pension entitlements, and because he is not able to refinance to pay the full amount required based on his income and has not reached 65 to access his super yet (Phil does not understand the Centrelink rules or the splitting of Super in separation rules).
Centrelink assess her assets as
Contents | 5,000 |
Car | 10,000 |
Home | 500,000 |
Mortgage | -100,000 |
Super | 200,000 |
Total | 600,000 |
She receives an Aged Pension of $25,202 per year plus rent assistance.
If she Phil refinances the mortgage to pay her out in part (assume $100,000), there are a few issues
Either she takes herself off the title, but is not completely compensated for her share of assets
OR
She ends up losing Aged Pension because Centrelink would now assess her as having more assets
Contents | 5,000 | |
Car | 10,000 | |
Home | 500,000 | |
Mortgage | -150,000 | Helens share of the mortgage increased of 50% of $100,000 |
Cash | 100,000 | Helen received all the cash ($100,000) |
Super | 200,000 | |
Total | 650,000 |
This option would decrease her pension by to $21,302 ($3,900 decrease).
A clean break
In this instance a clean break would be best, which would likely be achieved by either selling the family home or transferring the agreed amount of Phil’s Pension Superannuation to Helen (Via a Family Law Payment) - all done under their FInanicial Agreement.
This would make Helens Centrelink assessment more accurate to her situation (and hopefully the amount of times she has to do a substantial update with them) but it also
Gives Helen control over all of her money
Provides them both a line in the sand to start her new life.
Allows them both to star to more accurately consider her financial future, and whether she purchases a home etc.
And of course, get advice on what path is best for each of them!
In Closing
A divorces impact on Centrelink assessment can be quite intricate, both from a technical standpoint such as whether you are regarded as a couple and how that changes assessments, but also from a day to day standpoint as it may impact your decisions of how you live while separating.
Ultimately like many things, being able to balance the short term needs of both parties, with getting through your separation safely and respectfully, and getting to an outcome that is fair so that you can move on with your lives, Centrelink benefits are only one aspect of the whole process.
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