To explain the changes and their impact some first things need to be appreciated.

In broad terms, entitlement to the age pension is based upon reaching a qualifying age (which is now 67 for males and moving to age 67 for females) and satisfying residency requirements. Surprisingly, there is no requirement that the individual be retired or remain retired once the pension has been granted.

However, the amount (if any) of the age pension provided depends on the application of two independent means tests: namely an income means test and an asset means test. Each means test is separately applied to the circumstances of the individual. The amount of the pension granted to the applicant is the amount determined by whichever means test is the most beneficial for the exchequer and least beneficial to the individual.

In short, each means test applies on the basis that the individual is entitled to the maximum amount of pension and then reduces that entitlement by reference to the individual’s income and assets.

The work bonus scheme is intended to encourage individuals receiving an age pension to top up their income by engaging in gainful employment. Under the scheme, the first $300 of gainful employment received in an instalment period (that is a fortnight) is disregarded when applying the income means test. This means that the first $300 of gainful employment income will not reduce the entitlement to the age pension determined by the income means test.

Further, any unused portion of the $300 limit can be carried forward to the next instalment period and be used to disregard any gainful employment income earned in that instalment period.

As the work bonus scheme only affects the income means test, the asset means test is not presently relevant.

The operation of the Work Bonus Scheme is best illustrated with an example.

The case of Bill:

Bill’s fortnightly income from all sources is $850 consisting of personal exertion income of $225 and his other income (including deemed income from financial investments) of $625.

The work bonus scheme operates so that the first $300 of personal exertion income is disregarded. For Bill, his income to be counted for the income means test is now $625. The unused portion of the work bonus - being $75 - is carried forward to the next instalment period. Carrying forward the $75 is referred to as $75 being credited to the “work bonus bank”. (This is not the term used in the legislation.)

The work bonus bank for the next instalment period will be $375 (being the $75 carried forward and the $300 which would apply even if there was no carry forward).

The income means test operates on the basis that the first $204 of the remaining income does not reduce his pension entitlement. This $204 is referred to as the “income free area” as this income does not reduce the pension amount. The remaining income is $421. This remaining income reduces Bill’s maximum pension entitlement by $210.50 per fortnight (as the reduction rate of each dollar of income reduces the maximum pension amount by 50c).

The $300 figure is not indexed (and will only change by statutory amendment). The income free area – currently $204 for single pensioners and $360 for couples (combined) is annually indexed by reference to CPI. It is most likely that the $204 and $360 thresholds will be indexed with effect from 1 July 2024.

If Bill’s personal exertion income had been $325 instead of $225 and his total income remained at $850, only $25 of the personal exertion income would remain after the application of the work bonus amount. As the work bonus amount of $300 has been completely used, there is no amount carried forward to the next instalment period. The income free area of $204 is then applied to the remaining income of $550 (which includes $25 of gainful employment income) so that the remaining income is now $341. This remaining income reduces Bill’s maximum pension entitlement by $173.00.

Bill’s case illustrates the application of both the work bonus amount and the income free area. The work bonus amount can only reduce the amount of personal exertion income which is counted for the income means test. The income free amount can apply to both personal exertion income and investment income.

If Bill had only gainful employment income for an instalment period – he could earn up to $504 (being $300 work bonus plus the income free area of $204) of gainful employment income without reduction in his age pension amount.

The first significant change – initial credit of $4,000 to the work bonus bank

The work bonus scheme has recently been amended to now allow new age pension recipients a once only $4,000 initial credit for the purposes of the work bonus scheme. This change applies from 1 January 2024 to age pension recipients whose entitlement to the age pension commences on or after 1 January 2024.

Having an initial credit in the work bonus bank will enable new age pension recipients to immediately benefit from the work bonus scheme rather than having to accrue excess amounts from each instalment period.

The effect of the new initial credit to the work bonus bank is again best illustrated by an example.

Emma has applied for and been granted an age pension the commencement date of which was 1 February 2024. Emma, a single pensioner, is employed on a regular part-time basis and earns $750 income per fortnight and has $100 per fortnight of investment income.

Without the benefit of the initial $4,000 work bonus credit

Emma will be treated as having $346 of counted income for the purposes of the incomes means test. This amount arises as the work bonus amount of $300 will first reduce her employment income from $750 to $450. The income free area of $204 will be applied to the remaining employment income of $450 to further reduce the employment income to $246. However, Emma still has $100 of investment income. Consequently, her counted income for the instalment period is $346. Her age pension will be reduced by $173. Emma has, by earning $750 per fortnight reduced her age pension by $173. Her net position is that by earning $750 per fortnight she is better off by $567 per fortnight. (This comparison does not take into account the additional income tax Emma has to pay on the $750 earnings per fortnight.) If Emma earned no employment income for the instalment period, her only counted income would be within the income free area and so there would be no reduction in the age pension.

With the benefit of the initial $4,000 work bonus credit.

As Emma has been granted the age pension, in respect of her first instalment period she will have a work bonus of $4,300 (being the initial credit of $4,000 and $300 which applies to each instalment period).

Her $750 of employment income is less than the work bonus credit of $4,300 – so the employment income is disregarded and it does not have an effect on her age pension. The remaining investment income of $100 is less than the income free area – so the investment income is also disregarded.

In respect of her first instalment period Emma has no reduction in the age pension amount – she is entitled to the full age pension. Additionally, she is able to carry forward the unused portion of the work bank credit which is $3,550.

While Emma has only partially used the income free area ($104 remains unused) this unused portion cannot be carried forward to subsequent instalment periods. Additionally, the unused portion of the income free area cannot be used to reduce the $750 of employment income. This is due to the relevant legislation (s1064 of the Social Security Act 1991) requiring the work bonus system to first apply to any gainful employment income and only after the work bonus system has been applied does the income free area apply.

In the next and following instalment periods – assuming Emma earns $750 of employment income and $100 of investment income in respect of each instalment – the outcome will be as follows

• 2nd instalment period – no reduction in the full age pension. The work bonus bank will be $3,550 (the carry forward from the first instalment period) plus $300 in respect of the second instalment period – in total $3,850. Consequently, the work bonus bank will reduce by $750 allowing the carry forward of $3,100. As the investment income is less than the income free area, the investment income does not affect the age pension.
• 3rd instalment period - again no reduction in the full age pension. The work bonus bank will now be $3,400 (carry forward plus $300). The work bonus back will be applied against the $750 of employment income – reducing it to $2,650 to be carried forward to the third instalment period. In relation to the investment income – as it is less than the income free area – the investment income does not reduce the age pension.
• 4th to 10th instalment periods – the work bonus bank will reduce by $450 per instalment period. Emma will be entitled to a full age pension.
• 11th instalment period – the work bonus bank carried forward to this instalment period will be $250. The reduction in the $750 employment income will be $550 ($250 carry forward plus $300). The counted employment income will be $200. The investment income is $100. The counted income will be $300. The income free area will reduce this to $96. Consequently, Emma’s age pension will be reduced by $48.
• 12th and subsequent instalment periods – The income means test will treat Emma as having income of $550 ($750 less $300 plus the investment income of $100). The income free area will reduce this to $346 ($550 less $204). Emma’s age pension will be reduced by $173.

The second significant change – increase in the maximum work bonus bank amount and no reset at the start of each financial year

The second significant change is that the maximum work bonus bank balance has been increased from $7,800 to $11,800 with any unused bank balance at the end of a financial year can (subject to the maximum cap) being carried forward to the next financial year.

Previously, the work bonus bank balance commenced with a nil balance and was then increased by each unused portion of the $300 limit. If the $300 limit was unused for 10 instalment periods, the balance would have accrued to a total of $3,000. The maximum the work bonus bank balance could accrue to is $7,800 (that is: 26 instalment periods at $300 per instalment period). Additionally, any unused work bank balance was reset to nil at the start of each new financial year.

Now the work bonus bank commences with a $4,000 balance. Further, the maximum balance which can accrue in the work bonus bank balance is now $11,800 ($4,000 initial balance plus 26 instalment periods of $300 per instalment period). Finally, there is now no longer a reset to nil of the work bonus balance bank at the start of each financial year.

Yes another example.

Consider Tarquin. He has applied for and been granted an age pension commencing on 1 March 2024 (which is assumed to be the first day of an instalment period).

Previously, Tarquin would have accrued $300 work bonus for each instalment period. If Tarquin had no employment income in the period 1 March 2024 to 30 June 2024, his work bonus bank balance would be $2,400 (assuming 8 instalment periods in the period to 30 June 2024). This balance would be reset to nil and Tarquin would have to recommence accruing the work bonus amounts.

Now, there is no reset at 30 June 2024. Consequently, Tarquin’s work bonus balance immediately before 1 July 2024 will be the accrued $2,400 (as well as the initial $4,000).

How do the changes affect individuals who first received an age pension before 1 January 2024?

Individuals in this position have had the benefit the initial credit to the work bonus balance. While this increase was an interim measure (which was intended to cease on 31 December 2023), affected individuals can carry forward the work bonus balance even if the then balance is greater than $7,800. However, they are still subject to the maximum balance rule that the work bonus balance cannot exceed $11,800.

Is the initial credit of $4,000 a once only event?

In general, yes. If an individual has received the benefit of an initial credit of $4,000 (when under the former arrangements which applied up to 31 December 2023 or under the new arrangements which apply from 1 January 2024, then they cannot receive the benefit of another $4,000 credit.

In very limited circumstances, an individual who has received one $4,000 credit to the work bank balance, may receive another increase. For this to occur, the entitlement to the pension must have ceased (including any notional continuation of pension entitlement for extended access to the health concession cards) for a period of 2 years or more and the entitlement to the pension must have recommenced on or after 1 July 2026.