Q & As of the month

Find out what your peers are asking – based on real-life questions submitted to TechConnect.

How will accrued leave be taxed when paid to an estate?

By William Truong, Technical Services Manager

Q: My client’s spouse has passed away while employed with BHP. While working for BHP he accrued long service and annual leave which will be paid by BHP as a lump sum to his estate. How will these amounts be taxed?

A: If the lump sum was paid to the deceased employee, your client’s spouse while he was still alive, in consequence of a genuine redundancy, the lump sum would be assessable income to him. A tax offset would be available to cap the amount of tax payable on the lump sum.

However, in this case, as it is paid upon death of an employee to their estate, the payments are not assessable to the estate and are tax-free to the beneficiary, as per section 101A(2) of the Income Tax Assessment Act 1936. The employer is not required to withhold tax from the leave payment and they are not included on the employee’s PAYG withholding summary.

Can an asset be exempt under financial hardship?

By Janet Manzanero-Caruana, Senior Technical Manager

Q: My client is age 79 and was receiving the full Age Pension before he separated from his spouse. His ex-spouse lives in their jointly owned property, which is worth $1.5 million. His ex-spouse will not allow my client to sell the property or borrow against it.

The client has minimal funds in his bank account and lives with a relative. As the client has permanently left his former home, his interest in the property, valued at $750,000, is assessed as an asset for the pension means test, substantially reducing his Age Pension to the extent that it cannot meet his reasonable living expenses. Can the client apply to Centrelink to disregard his interest in the home?

A: Yes, your client may apply to have his interest in the former home disregarded for the assets test.

If the client applies to have his interest in the property disregarded Centrelink will consider whether the client can meet reasonable living costs if the property is assessed under the assets test.

Background

A person’s assets, except the principal home, are expected to be used to create income to support the person and their family. When a person is ‘asset rich’ but ‘income poor’, Centrelink expects a person to attempt to restructure their financial affairs before depending on Centrelink income support.

However, in some situations a person cannot restructure their financial affairs. Hardship provisions allow an eligible person to apply to have certain assets disregarded when calculating their Centrelink pension or benefit. Assets that are disregarded for hardship purposes are called 'unrealisable assets.’

A person who receives a social security pension or benefit may ask Centrelink to disregard a particular asset if they meet all the following conditions:

  • In severe financial hardship.
  • Cannot sell or borrow against an asset.
  • Their pension or benefit is calculated under the assets test.

A person is in severe financial hardship if their available funds are equal to, or less than, the maximum fortnightly rate they would receive from Centrelink and they’re unable to meet reasonable living costs. Financial hardship must not be a direct result of giving away substantial assets and/or income, therefore a person cannot generally apply under hardship rules if they gave away substantial (deprived) assets.

Centrelink may consider an asset cannot be sold or borrowed against if any of the below apply:

  • The asset has been advertised for sale for no more than 10% of its assessed asset test value.
  • The person is eligible for the Farm Household Allowance.
  • A legal restriction/court order/property settlement prevents the asset from being sold or used for borrowing.
  • The asset is jointly owned, or owned as tenants-in-common, with another person and the other person refuses to sell or allow it to be borrowed against.

More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

Disclaimer
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.