Forgive debt to get Centrelink

Use a Deed of Debt Forgiveness to Qualify for Centrelink Benefits before you retire

Is being owed money an asset that is means-tested for Centrelink?

As you approach retirement, managing your financial affairs is crucial. This is to maximise government benefits such as the age pension. A common scenario involves shareholders in a company—such as a couple nearing pension age—where the company owes them money but is unlikely to repay due to poor financial health. This debt is considered an asset by Services Australia and impacts pension eligibility. One potential strategy to address this is using a Deed of Debt Forgiveness. This paper examines the forgiving of a debt well before you want to seek Centrelink benefits.

Does forgiving debt reduce the assets you own for means-testing?

You are close to retiring. You and your wife are shareholders in a company that owes you money. The company cannot pay this debt back because it does not make enough money and lacks assets. This debt is considered an asset when Services Australia checks if you can get a pension. Build on Legal Consolidated’s website a Deed of Debt Forgiveness to forgive this debt. Does this reduce the assets for Centrelink purposes?

Forgiving the debt reduces assets for Centrelink

Yes, building a Deed of Debt Forgiveness reduces your assets and makes it easier to get the pension:

1. Reduce Assessable Assets: Forgiving the debt through a formal Deed of Debt Forgiveness lowers your total assets, potentially qualifying you for a higher pension due to reduced assets under Centrelink’s assessment criteria.
2. Legal Framework: A Deed of Debt Forgiveness is a legally sound method that demonstrates to Services Australia and the Australian Taxation Office (ATO) that you are managing your financial affairs transparently and legally. The deed must explicitly state that the forgiveness is genuine and that no repayment is expected.
3. Simple and Informative Process: The building process of the Deed of Debt Forgiveness is free. As you build the Deed you can read free and educational hints. You pay only at the end if you want the document.
4. Full free sample: Before you start the free building process you can see at the top of this page a full sample. It includes the law firm’s cover letter.

A forgiven debt is still considered an asset under the Deprivation Rules.

Centrelink’s deprivation rules prevent people from ‘giving away’ their assets to increase their pension. You are forgiving a debt for ‘love and affection’. That is the very essence of giving something away. Centrelink’s deprivation rules then say that the amount of the loan that was forgiven is still yours. This is for some years after you sign the Deed of Debt Forgiveness. So you want to forgive the debt well before you want to apply for the pension. The rules specify that if you dispose of an asset and do not receive adequate consideration, Centrelink counts the asset’s value against you for a number of years. Therefore, forgiving a debt well before you apply for the pension ensures that the deprivation period expires before your pension assessment, effectively reducing your assessable assets without penalty.

On what date does the Deprivation Rules start to operate for Deeds of Debt Forgiveness?

Doing the forgiveness formally through a Deed of Debt Forgiveness and documenting that the forgiveness is irrevocable and unconditional helps prove to Centrelink that the debt is genuinely forgiven. This supports the legitimacy of your financial repositioning ahead of pension assessments. The deprivation time period starts on the date you sign the Deed of Debt Forgiveness.

Is forgiving a loan treated as a gift?

Yes, Centrelink treats the loan as still your asset for several years. This is under the deprivation rules. A gift is any money or property that you give away for which you do not receive adequate financial consideration. Forgiving money, to Centrelink, is a gift. Gifts affect your pension or payment because they either directly or indirectly reduce the assets available for your personal use. The maximum amount you can give away, regardless of whether you are a single person or a couple, is a very low amount of $10,000 per year, or $30,000 over a rolling five-year period. The rolling five-year period is the current financial year plus the previous four financial years. This is not indexed for inflation. Gifts over these amounts are assessable under the assets test. These amounts are called deprived assets. So forgive the debt well before you are going to apply for the pension.

Joanne forgives her son’s loan so that she can get Centrelink

Joanne, a school teacher, had always been prudent with her savings, planning carefully for a retirement that she hoped would be comfortable and secure. Some years ago, her son, Daniel, faced financial hardship. To help him start his small business, Joanne lent him $50,000 from her retirement savings, expecting that he could pay her back once the business took off. Despite Daniel’s best efforts, the business struggled to turn a profit, and repaying the loan became increasingly improbable. Joanne, seeing her son’s distress, decided she no longer wanted the money back. She reasoned that Daniel needed the financial relief more than she needed the repayment. The $50,000 is also an ‘asset’ for Centrelink purposes. While she is still a number of years off retirement, it would adversely affect her eligibility for the Centrelink Age Pension in the future.

Does Centrelink means test money that Joanne is owed?

Money people owe you is an asset. It has to be declared to Centrelink. Joanne’s asset test for Centrelink includes all her assets and income. This would have included the $50,000 loan even if Joanne does not consider it recoverable.

Can Joanne informally forgive the debt – on the back of an envelope?

By informally dismissing the debt—without a formal Deed of Debt Forgiveness—this amount could still be seen as an asset, as Centrelink might not view her verbal or information forgiveness as conclusive. A Deed of Debt Forgiveness requires a number of legal terms, acknowledgments and obligations. Without a formal Deed of Debt Forgiveness, built on Legal Consolidated’s website, Joanne’s decision remains legally ambiguous. Centrelink’s means testing for pension eligibility could still consider the $50,000 as part of her assets. This oversight could significantly impact her pension rate, as her declared assets remain above the threshold for maximum pension benefits. If Joanne were to formalise her forgiveness through a Deed of Debt Forgiveness, she would reduce her assessable assets, thus potentially increasing her Centrelink pension benefits. The deed provides a clear, irrevocable, and legal acknowledgment that Joanne has relinquished her claim to the debt, aligning her legal stance with her personal feelings. As she does this many years before her retirement there is no issue with deprivation.

Joanane’s Cautionary Tale

Joanne’s story is a cautionary tale about the intersection of personal generosity and financial regulations. For individuals approaching or in retirement, managing assets is not just about numbers; it is about understanding how decisions interact with legal and governmental frameworks. By neglecting to formalise her debt forgiveness, Joanne would have inadvertently jeopardised her financial stability in retirement.

But if debt is not recoverable why does Centrelink still treat it as an asset?

Centrelink’s strange Deprivation Rules for Loans that “No Longer Exist”

 

Centrelink’s approach to assets is rigorous. Loans, even those seemingly irrecoverable, are often counted as assets unless they meet specific criteria. The section titled “4.6.5.65 Loans that no longer exist” in the Centrelink policy guide sets out three limited circumstances where a loan may be excluded from asset calculations:

1. The loan is formally forgiven through a legal document, such as a Legal Consolidated Deed of Debt Forgiveness.
2. The debtor has declared bankruptcy.
3. The loan is deemed irrecoverable under particular legal conditions, including court decisions or statutory limitations.

Even though the loan cannot be recovered it still adversely impacts pension assessments. The Legal Consolidated Deed of Debt Forgiveness is a powerful tool to address this issue legally and effectively. Even bad debts need to be formally forgiven.

Debts go ‘stale’ every 6 years – do stale debts still need to be forgiven?

There is a statute of limitation on unsecured Loans that sit dormant for 6 years in all states. However, even stale loans should be expressly forgiven via a Deed of Debt Forgiveness.

Why is a formal Deed to Forgive the Debt crucial to comply with Centrelink?

Using a Deed of Debt Forgiveness protects you in three ways:

1. Legality: It provides a legal acknowledgment that the debt is irrevocably forgiven. This formalisation is important for Centrelink to remove the loan from asset calculations.
2. Clarity: It clarifies the financial position of the retiree, ensuring that only actual, recoverable assets are considered in means testing.
3. Protection: It protects the retiree from potential legal and financial repercussions associated with the deprivation provisions, which might otherwise assume the forgiver still holds the asset.

Speak with your accountant and financial planner about getting Centrelink benefits

Forgiving a debt through a Deed of Debt Forgiveness is a pivotal step in managing your financial affairs as you approach retirement. This strategy, when implemented early and compliantly, can significantly enhance your pension benefits. However, formally forgiving old debts is only one of many things that you may need to do before you are ready to move into retirement. Speak to your accountant and financial planner.