Nick Bruining: Centrelink, super, ABPs and investing! Can you pass the ultimate personal finance quiz?

It’s The Great Your Money Christmas Quiz! So grab a pen and paper, note down which of the following statements are true and which ones are false, then check your answers below the questions. Here we go ... Centrelink benefits 1. In order to claim the age pension, I will need to stop working. 2. If I am drawing down the minimum from my account-based pension at 68, that income counts towards the Centrelink income test and I lose 50¢ per dollar. 3. Under the Centrelink gifting rules, if I am asset-tested and give $200,000 to my children, my pension will go up. 4. If I am on an asset-tested pension, I could sell my home and combine it with most of my savings to buy a new home and get the full age pension. 5. Once I have been granted a pension and provided Centrelink with bank statements and copies of my investments, it will continue to track all of my investments. They will make sure I receive the correct amount each fortnight. 6. I have been on an aged pension since I stopped work in September. If I go back to work and earn $2800 for a week, I will lose my pension for the following fortnight after reporting the income to Centrelink. Super contributions 7. At 68, I spend 12 hours a week working for my son. In return, he fills our cars up with fuel but I receive no cash. I can still make a tax-deductible contribution to superannuation. 8. I am 68 and help out my neighbour informally as a cleaner and carer. While each day varies, I usually do about five hours a day and for that she gives me about $800 a week in cash. She should also be contributing to super for me. 9. A 58-year-old couple, in theory, could make a combined superannuation contribution of $1.525 million in a single day. 10. Debt-free and with income from my partner paying the household bills, salary sacrificing all of my income to super is a good strategy. 11. Superannuation is an individual investment which means I can’t transfer any money from the fund to my partner’s super. 12. If I have a terminal illness I can access all of the money in my super, plus the full value of insurance benefits, tax-free, even if I am under 60. 13. Earnings within a self-managed superannuation fund in accumulation phase are always taxed at a maximum rate of 15 per cent. 14. If I pay money into my partner’s super fund, I might receive a tax benefit. 15. If I earn less than $43,445 a year and I salary sacrifice $1000 to super, the Government will match it with a $500 payment. 16. Once I reach 65 and retire, I can leave my money in super for as long as I like. Account-based pensions 17. If I am aged over 65 and have $200,000 in a bank account, I can start an ABP with that money. 18. I have an ABP and need to take out extra money. If I request an extra payment and simply place the money into my bank account until I need it, my Centrelink benefit stays the same. 19. I operate an ABP in a self-managed super fund, am about to turn 85 and the current value of the total fund is $400,000, all tied up in a property paying rent of $20,000 a year. Next financial year, and assuming the value is the same, I will need to withdraw $36,000 a year. 20. I have directed in my will that the proceeds of my ABP are to be paid to my neighbours in recognition of the help they have given me and my disabled son over the years. I have provided for my son separately. My wishes will be followed. 21. Once I start an ABP, I cannot add any more money to it and my only option if I want to lower the monthly payment is to take out a lump-sum to force a recalculation. Investments 22. My balanced superannuation fund performed much better than my friend’s. Hers is low-fee fund and performed much better last year and I should simply change over. 23. A 23¢ share is much better value than a $23 share and is likely to go up more. 24. My $100,000 invested in an online bank account is just as safe as an investment in a term-deposit with one of the big four banks. 25. I have $500,000 worth of Australian shares that paid $20,000 in dividends and a $500,000 property that paid the same in rent. Both investments have generated income of 4 per cent for the year. 26. An Australian-share managed fund that reinvests all distributions back into the fund will still generate a tax liability for the owner. 27. If I make a $200,000 investment through an Australian financial services licensee and the investment goes sour, I might be able to get my money back. 28. An investment in a family home is still a valid way of making money. 29. Superannuation funds are always more risky than money in the bank. 30. An investment in a recently issued fixed rate bond will go down in value if interest rates start to go up. How did you do? Let’s find out ... 1. False. The rate of pension is simply determined by eligibility criteria such as residency, your age and the income and asset test. If you fail either means test, you won’t receive a payment. Employment status is not considered. 2. False. ABPs commenced after January 2015 are counted as a financial asset and included in deeming calculations for income test purposes. Payments and withdrawals are ignored. 3. True. Deprivation rules mean that the most your assets will reduce by is $10,000, and under the asset test this would result in an additional $30 a fortnight from Centrelink. You have lost the benefit of the money and the income that might have been generated by the $200,000. 4. True. Your primary dwelling when used for private purposes is specifically exempt from means testing and there are no rules that prevent you from spending your money any way you like. 5. False. While Centrelink has the power to investigate, its systems are not linked into financial institutions. They cannot access bank accounts or your investments. Therefore, you must tell Centrelink of a change in circumstances within 14 days. 6. False. Each age pensioner has a working bonus credit which accumulates at $300 a fortnight to a maximum of $7800 a year. Added to this is a $4000 bonus. This means you could earn $11,800 before you would lose any pension. You must still, however, notify Centrelink of the payment. 7. True. The over 67 work test requires you to work 40 hours in a 30-day period for gain or reward. The rules do not stipulate how you are paid or at what rate. 8. True. Superannuation guarantee payments are sometimes not payable for domestic arrangements of 30 hours a week or less. As you work 35 hours a week, the 11 per cent super guarantee should be paid. 9. True. Assuming no previous contributions to super and an account balance of less than $500,000. Each person could make use of the superannuation downsizer provision of $300,000 each, bring forward of non-concessional contributions of $330,000 and carry-forward concessional contributions of $132,500. 10. False. Concessional contributions are subject to a minimum contributions tax of 15 per cent. Non-senior Australian residents earning less than $21,884 a year pay no tax or Medicare, thanks to tax offsets. Therefore, salary sacrificing below this level means you are paying 15 per cent tax when you don’t need to. 11. False. You may be able to make use of spouse-splitting rules which allow you to transfer 85 per cent of the previous year’s concessional contribution to your partner’s super. 12. True. If diagnosed with a terminal illness with death likely to occur within 24 months, most insurers will pay the death benefit to the super fund when the evidence is provided. 13. False. If the fund is found to be non-compliant, the commissioner can impose tax up to the maximum marginal tax rate of 45 per cent. This applies not only to the earnings but to the total assets of the fund. 14. True. An 18 per cent spouse contribution offset is available for contributions of up to $3000 paid to a spouse’s super account. Adjusted taxable income of the spouse must be less than $37,000. The maximum rebate is up to $540. 15. False. The co-contribution only applies to non-concessional or after-tax contributions to super. Salary sacrifice contributions are concessional contributions and, therefore, are ineligible. 16. True. The compulsory cashing rules changed in 2006 and the money can be left in accumulation phase for as long as you like. 17. False. In order to start an ABP, the money must come via a superannuation fund. Your ability to start an ABP will depend on your ability to contribute to super. You will need to satisfy the contribution rules with respect to age and contribution caps. 18. True. Unless it is an ABP that was started prior to January 2015 and you were on a Centrelink pension at that time, the money in an ABP is now counted as a financial asset. Whether in super, the bank or in an investment portfolio, the grand total of financial assets is caught in the means testing system under the asset and income test. 19. True. While most of us focus on the early withdrawal rates of about 5 per cent at age 65, the minimums increase in bands. Self-managed super fund operators need to ensure that they have the liquidity to meet their minimum payment obligations at all stages of life. 20. False. Super funds including ABPs do not normally form part of your estate unless you direct so via, ideally, a non-lapsing binding death nomination. If you do not have a BDN, the trustees of the super fund are legally obliged to pay the proceeds to those classified as your interdependents. To ensure your wishes are followed, complete a BDN nominating your estate as beneficiary, 21. False. Once the money is in the superannuation system, all or part of it is completely interchangeable between accumulation and retirement (pension) phase at any time. To lower the payments, you could roll some of the ABP back to accumulation phase. 22. False. The main determinant of investment returns is asset allocation. Diversified funds such as a balanced fund all have different asset allocations. There is no rule that stipulates the allocation between shares, property and deposits for different labels. Understand the mix of your fund and then decide whether you want to make changes that might improve the performance within your existing fund. 23. False. The share price has no relationship to returns. It is the underlying assets of the company and number of shares on issue. Commonwealth Bank, for example, could hand out a nine-for-one free share issue. That would have Commonwealth Bank shares list the following day at around $10.60 a share instead of $106. 24. True. Under the Federal Government’s Financial Claims Scheme, deposits of up to $250,000 per account holder per authorised deposit-taking institution are guaranteed. All Australian credit unions are ADIs. 25. False. The dividends will almost certainly have franking or imputation credits valued at more than $8500 that can be used to reduce other tax liabilities or refunded. In effect, this is an additional 1.7 per cent in returns. The rent will be reduced by the costs associated with ownership such as insurance, rates and other charges. These will vary but will likely reduce the returns by about 0.8 per cent. 26. True. Distributions whether physically received or reinvested may still give rise to a tax liability. The distributions can include dividends with tax credits and capital gains generated by the buying and selling of shares by the fund manager. 27. True. Provided the advice was negligent or the investment did not match your stated circumstances or the risks were not adequately explained or the representations about the investment was false. All AFSLs must be part of a free complaint resolution scheme and have professional indemnity insurance cover. If you send your money off-shore or deal with a firm not in Australia, you have none of these protections. 28. True. Because your primary dwelling is exempt from capital gains tax, many retire and downsize to release funds in the family home. Nonetheless, be aware that in some cases, downsizing does not mean you will have to pay less for a smaller home. Change over costs can be considerable. 29. False. If you wish, you can have a superannuation fund that invests in just bank accounts or term deposits. The underlying asset allocation is what determines investment risk and if your fund does not offer the bank account option, you can move the funds to a manager that does. The primary risk of super is that the rules might change. 30. True. Most of the time. Bonds can be bought and sold on the open market and if rates rise or look likely to rise, the capital value of some bonds can decline. The reverse applies if rates appear likely to fall. Your score 26-30: You are probably ready to join the Your Money team 21-25: If you hand out tid-bits of financial information to your mates and family, they should probably listen to you. 16-20: Not too bad. It sounds like you’re a regular reader of Your Money and are keeping up to date with most things. 0-15: Perhaps you should get an annual subscription to The West Australian for Christmas and download all the back issues of Your Money. Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association