Insurance payouts and gifting

Mavis is expecting an insurance payout and would like to know if she can give some of it to her children without breaching Centrelink’s gifting rules. 

Q. Mavis
We are expecting an insurance payout of $150,000 very soon. I understand that this is exempt from the Centrelink income and asset tests in its pure form, i.e. before any income is derived from it, or assets purchased with it, but is it exempt from the gifting rules if I wished to give some to my children? How are insurance payments, windfalls and inheritances assessed for Government Income Support (GIS) purposes?

A question that has come up recently referred to the Age Pension assessment for an insurance payout. The Government Income Support (GIS) treatment for insurance payouts is the same as it is for inheritances and windfalls.  In this article we will look at the assessment upon receipt of these lump sums, as well as look at the treatment when holding and disposing of the funds.

The Age Pension assessment is made up of two tests, an assets test and an income test. Both tests are conducted and whichever pays the least amount of Age Pension is the one that applies. These tests are reviewed from time to time and on an ongoing basis. It is also the responsibility of the pension recipient to advise the Department of Human Services (DHS) within 14 days of any change in circumstances that may impact on the eligibility of those payments, such as receiving a lump sum. This may also trigger a re-assessment by DHS.

So how are the abovementioned lump sums assessed? Firstly the receipt of these lump sums is not counted as income. Once the money has been received it is counted as an asset and is then also assessed under the income test using the ‘deeming’ provisions, along with any other financial assets. If the recipient then invested the money in products such as shares or term deposits, it would continue to be assessed this way.

So what if the recipient gave it (or some of it) away to friends, family or a charity? In this circumstance the gift or donation would come under the ‘gifting’ rules. A recipient of GIS payments can give away as much as they like but if they exceed certain thresholds, the excess is assessed as though they still have the funds for five years. The gifting thresholds are currently $10,000 per financial year, but not more than $30,000 over a rolling five-year period. 

What if they put the money into superannuation? Assuming the work test was satisfied and both partners were over Age Pension age, the money put into the accumulation phase of superannuation would also be assessed as per other financial assets held. If it were converted to an income stream, such as an Account Based Income Stream (allocated pension) or a lifetime/life expectancy annuity, it would be assessed as an asset, but under the income test the annual payment less a deductible amount representing a capital component is assessed. 

What if they were to hide the money under the bed? Cash held, whether it be around the house or buried in a hole in the ground in the backyard is still treated as a financial asset (see above) and assessed as an asset and deemed under the income test. The recipient also has an obligation to advise DHS of all cash held along with any other assessable assets and income. It should also be pointed out that holding large sums of cash around the home could expose it to theft or even damage by fire, flood or pests.

OK, so what if they just spent the money? Depending on what the money was spent on will determine the way it is assessed. If, for example, the money was spent on maintenance or capital work around the family home it would not be assessed as the family home is exempt from means testing. If it was spent on travel, again it would not be assessed as travel expenses are not assessed. Other non-assessable items include the purchase of a prepaid funeral or investing in funeral bonds up to a value of $12,750. If the funds were spent on assets such as cars, boats, caravans and furniture for personal use, they would be assessed under the assets test but would not under the income test as they generally do not produce income. Asset values are reviewed periodically to reflect appreciation or depreciation.

It is important to note that prior to any course of action you look at all the options available and their potential outcomes. For example; if you wish to dispose of the money because your GIS payment will be reduced, look at the returns the lump sum may offer, as it may be that the earnings the money will generate is greater than any loss of GIS. Therefore a healthier financial position may be achieved.

If you wish to discuss the various potential GIS outcomes that apply to your situation, the Department of Human Services’ Financial Information Service (FIS) has staff who offer unbiased information. 

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