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How The Self Employed Are Disadvantaged By The Income Test

4 Sep 2015 | ,

The income test for the age pension seriously disadvantages those s who are self-employed. A self-employed person earning $10,000 a year receives $3250 less in pension than a person that is employed. There are however ways that the impact of test can be reduced. The income test is made up of two thresholds that change each quarter. Income counted by Centrelink below the lower limit results in the full age pension being received; once income exceeds the upper limit no age pension is received. The current thresholds applying from July 1, 2015 are as follows:

Family Situation

Lower Threshold

Upper Threshold

Single

up to $162 p/f $4,212 pa

$1,882.40 p/f $47,382 pa

Couple (combined)

up to $288 p/f $7,488 pa

$2,881.60 p/f $74,921 pa

Illness separated Couple (combined)

up to $288 p/f $7,488 pa

$3,728.80 p/f $96,949 pa

Where a person’s income exceeds the lower threshold their fortnightly pension is decreased by 50 cents in the dollar of the excess income earned for a single person, and 25 cents in the dollar each for both members of a couple. The deeming rates applying now are as follows:

Family Situation

Rate Per Annum

Financial Assets

On Excess Rate

Single

1.75%

first $48,000

3.25%

Couple (where at least one person is getting a pension)

1.75%

first $79,600

3.25%

The adjusted actual income test that disadvantages the self-employed came into existence on September 20, 2009. This occurred as a result of the old work bonus system ceasing and a new work bonus being introduced. Under this new Work Bonus system a person does not actually have to work to receive the benefit of the bonus. The bonus amount is $250 per fortnight. Under the new system the $250 per fortnight is deducted from a person’s salary or wages. If a person does not work the Work Bonus accumulates until it reaches a maximum of $6,500. If a person is working the fortnightly amount they earn is decreased by the $250 allowance amount. Where the amount earned is less than $250, the difference between the amount earned and the $250 bonus amount is added to the work bonus balance. Where the amount earned is more than $250 the income earned is reduced by the $250, and is further reduced by any work bonus balance that has accumulated. The work bonus scheme severely disadvantages people who are self-employed as the income that they receive does not count for the work bonus. Where a person is self-employed either as a sole trader or through a partnership it makes a great deal of sense of becoming employed by either their partnership or by setting up a family discretionary trust. For example someone who is employed working part time, is 65 and earned $10,000, would only have $3500 counted under the income test due to the maximum work bonus of $6500. For a self-employed person all of the $10,000 is counted that can result in a $5000 a year decrease in the age pension received. Rather than operating as a sole trader it therefore makes sense to change to a structure where a person over age 65 can become an employee of their own business. In the example given above this effectively results in an increase in their age pension received of $3250 a year.


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