Michael Forer
Technical

The New Centrelink Work Bonus Scheme

By Michael Forer

Among the numerous Centrelink changes announced in the May 2009 Budget, with many effective from 20 September , was the introduction of the Work Bonus Scheme to replace the Pension Bonus Scheme.

The Pension Bonus Scheme (PBS) was introduced in 1998 as a way to entice people to work past their Age Pension age. However the take up for the PBS never quite met what was initially anticipated and the Government deemed the Scheme to be an insufficient incentive. As a result the PBS has now been abolished and replaced by the Work Bonus Scheme.

Importantly, members of the PBS can remain in the scheme while they continue to meet the work requirements.

Under the PBS, people who continued to work past age pension age can accrue a lump sum for a maximum of 5 years. The maximum PBS lump sums are as follows;

Years in scheme
Single –
maximum rate
Partnered (each) -maximum rate
Year 1
$1,552.90
$1,174.60
Year 2
$6,211.70
$4,698.30
Year 3
$13,976.30
$10,571.30
Year 4
$24,846.70
$18,793.40
Year 5
$38,822.90
$29,364.70

Under the new Work Bonus Scheme (WBS), half of the first $500 of fortnightly employment income is disregarded from the income test for pensioners over Age Pension age. This means the maximum that can be disregarded is $250. This may result in up to an extra $125 of Age Pension a fortnight (approximately $3,250 a year) for single pensioners and for each member of a pensioner couple.

Disregarded income of $250 p.f. x 26 fortnights = $6,500 p.a.
x Income Test Taper rate (50 cents) = $3,250 p.a.
/ 26 fortnights $125 p.f. extra pension

Important: The new WBS applies only to:

  • clients who are income tested under the new income test taper rate rules. Clients who are income tested under the transitional income test rules cannot access the WBS; and
  • employment income such as wages and director's fees. It does not apply to other income such as investments, superannuation, or payments to a principal from a sole trader or partnership.

Once the employment income has received the 50% discount, it is added to the rest of the age pensioner’s income and the normal allowable income threshold applies. Any employment earnings over $500 gross a fortnight and any other income will be counted as usual.

As a result of the concessional treatment given to employment income compared to non-employment income, age pensioners need to consider:

  • structuring of Small to Medium Enterprises (SME) – comparing the benefit of a company structure versus structuring as a sole trader or partnership; and
  • nature of remuneration – comparing salary income versus drawings and trust distributions.

It is important to consider the Centrelink implications of a SME structure and the nature of any remuneration received. Many accountants will only look at the tax consequences and ignore Centrelink benefits which may ultimately cost a client significant amount of pension entitlement each year.

Whilst employment income is concessionally treated under the WBS, re-structuring from a sole trader to a company may not always be the best option even if additional Centrelink Age Pension entitlements result. Other costs and administration requirements including establishment costs, payroll tax, and accounting and lodgement fees may exceed any Age Pension benefit received from re-structuring.

There is no time limit on how long somebody can benefit from the WBS unlike the PBS which accrues for a maximum of 5 years. Therefore the ongoing concessional treatment of employment income needs to be considered when determining the most appropriate business structure for an SME for any clients over age pension age. Generally the longer somebody plans to continue working past age pension age, the greater the benefit that the WBS may deliver from re-structuring an SME and the nature of any income received.

Sam Rubin’s article works through a case study to demonstrate the benefit that a financial adviser can deliver to SME clients by taking advantage of the new Work Bonus Scheme rules.