Ask An Adviser - Will Selling My Shares At A Capital Gain Affect My Aged Pension?

Top answer provided by:

Hayden Shaw

Hi Aaron,

The answer to your question lies in how diligent you may be in complying with your reporting obligations to Centrelink.

Firstly, it’s important to understand what details Centrelink are after. There are two tests that Centrelink use when determining your rate of Age Pension – the Income Test and the Assets Test.

The Assets Test

Under the Assets Test, generally speaking, they want to know the current market value for any asset you own, including your car, caravan or boat. They also need to include your home contents, although the market value can be determined as if you were to put all your furniture on the street in fire-sale. You are permitted to use a figure of $10,000 if you don’t own any Monets or Picassos.

Yours, your partner’s, and joint assets are all pooled together and calculated to derive a rate of pension that you each may be entitled to it your combined assets fall under specific thresholds that are indexed twice annually.

As two means tests are used to determine the rate of age pension, Centrelink will apply the test that pays the lowest benefit. We find that most often, for part-pensioners, it is the Assets Test that catches them and serves to reduce their Centrelink Age Pension.

As with most things, Aaron, there are exceptions to the rules. Some retirement income streams are treated differently from both an income and assets testing point of view, depending on how they are structured, your age and when the account was opened. But we’ll infer from your question, that the shares in question are held outside of superannuation, in your own name.

The Income Test

From an income perspective, if you engage in part-time work, you would be required to notify Centrelink of your income. If you own an investment property, you would need to notify Centrelink of the rent you charge. Commissions, directors’ fees and private trust distributions all need to be reported as well.

Dividends, however, are by and large disregarded as income from a Centrelink point of view. Rather, Centrelink will deem assets to earn an (almost) uniform rate of income. Such assets include cash, shares, superannuation and common retirement income streams (such as all account-based pensions purchased after 2016).

Financial investments are deemed to earn 0.25% for the first $56,400 ($93,600 for couples) of the combined balance, and 2.25% for the remaining value.

So, Aaron whilst you do not have an obligation to report dividend income that you receive from your shares, you do have an obligation to notify Centrelink of any change that may affect the payment of your social security benefit within 14 days of the change.

What does this mean practically? Well, the Social Security (Administration) Act is nonspecific, but the response you often receive from Centrelink is around $1,000 - $2,000, or a ‘meaningful’ change.

This means that, as your shares have (hopefully) appreciated in value since you purchased them, you should have been updating Centrelink with their value on a semi-regular basis, as and when the price movement venture into ‘meaningful’ territory.

Similarly, if you buy or sell shares you should be updating Centrelink with the new value of the constituents of your portfolio, as well as where the funds have come from or gone to (i.e. updated bank account balance).

Capital Gains

You may have noticed, Aaron, that we have not discussed capital gains in either of the above tests. This is because capital gains are simply the difference between the current or sale price and the purchase price.

So, as part of your normal reporting obligations (to update Centrelink upon any meaningful change), the unrealized capital gains will have already being taken into account by Centrelink and have had a bearing on your age pension accordingly.

You may find that, if you have not been diligent in notifying Centrelink, when you report disposal of your shares and the commensurate increase to your bank balance, a sudden increase in net assets will reduce level of age pension to which you are entitled.

If there is a large difference between your net assets prior to reporting the share sale and afterwards, Centrelink may have a few questions as to where your new-found wealth came from. this can result in a significant overpayment debt notice, as Centrelink review non-disclosed appreciation in share value.

While your age pension is taxable income, given the tax-free thresholds and senior and pensioner tax offset, you may not be required to lodge a tax return if your capital gains do not significantly add to your taxable income. Best to speak to your accountant on this matter.

Conclusion

Whilst they may not be most amiable institution, it's best practice to keep on the good side of Centrelink. Regular and accurate reporting is the simplest method to ensure that you are receiving the correct rate of age pension and avoiding an overpayment notice.

For strategies to improve your rate of age pension, or maintaining an optimal rate into the future, consider speaking to a financial adviser.

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

Article by:

Hayden Shaw

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