Winning the Lottery and Centrelink: What You Need to Know

There is a critical distinction that almost nobody talks about when discussing Australian lottery wins: the difference between being tax-free and being Centrelink-free. Lottery winnings are not subject to income tax. They are, however, assessable assets under Centrelink means testing. If you receive any government benefit, those two facts together have real consequences.

Why lottery winnings affect Centrelink

Australian tax law and Centrelink means-testing law operate under different frameworks. The Australian Taxation Office does not treat lottery winnings as income because they are not earned through work or investment activity. That is why there is no income tax on a lottery prize.

The assets test

Most Centrelink payments have an assets test that reduces or cuts off payments above certain thresholds. For the full Age Pension (single), the assets threshold was $314,000 for homeowners and $566,000 for non-homeowners as of early 2024 (these figures are indexed and change regularly).

If you win $500,000 and it sits in a bank account, that amount is added to your assessable assets. If it pushes you over the relevant threshold, your payment reduces or stops. The reduction rate is $3 per fortnight for every $1,000 over the lower assets threshold.

For larger wins, the impact is almost always immediate and significant. A $10 million win will end most government payments for the foreseeable future.

The income test and deeming

The income test works differently. Lottery winnings themselves are not assessed as income. But once you hold financial assets (savings, shares, managed funds), those assets are subject to deeming.

Deeming means Services Australia assumes your financial assets earn a certain rate of return, regardless of what they actually earn. The deemed income is then counted in your income test. As of early 2024, deeming rates were 0.25 percent on the first $56,400 (for singles) and 2.25 percent on amounts above that (these rates and thresholds change; check the current rates at servicesaustralia.gov.au).

So if you win $1 million and deposit it in a savings account, Services Australia will deem it to earn income at the deeming rate, and that deemed income counts against your income test.

Payments affected

• Age Pension: subject to both assets test and deeming income test. A significant win will reduce or end payments.
• JobSeeker: also means-tested. A large win will typically end JobSeeker payments immediately.
• Disability Support Pension (DSP): means-tested for many recipients, though disability pension rules have some differences.
• Family Tax Benefit: different rules, but assessable income including deemed income can affect Part A rates.
• Commonwealth Seniors Health Card: assessed on adjusted taxable income, including deemed income from assets.
• Pensioner Concession Card: linked to the pension, so losing the pension can affect this.

Your notification obligation

You are legally required to notify Services Australia of changes in your financial circumstances within 14 days. Receiving a lottery win that materially changes your asset position is a notifiable event.

Failing to notify can result in an overpayment debt. Services Australia can recover overpaid amounts and may apply penalties in cases of deliberate non-disclosure.

What people consider doing (and what the rules say)

Some people think about gifting money to family members to reduce their assessable assets and preserve their pension. Services Australia has specific gifting rules that address this directly.

Under deprivation rules, you can gift up to $10,000 per financial year and up to $30,000 over five years without affecting your assessment. Gifts above these limits are treated as if you still hold the assets for five years.

Some people also consider spending down assets on personal use items (home improvements, a car, travel). Items like a primary residence, personal vehicles, and household contents are generally exempt from the assets test. However, the rules around what qualifies as exempt and what counts as gifting versus spending are nuanced.

The Set for Life case

Set for Life is a particularly interesting case because the prize is paid as $20,000 per month rather than a lump sum. Each monthly payment arrives as a new cash asset. You are not assessed on 20 years of future payments at once because you have not received them yet.

But once each $20,000 payment arrives, it becomes part of your assessable assets. For a pensioner receiving the full Age Pension, the first $20,000 payment alone may not push them over the threshold. But the accumulation of several payments certainly will, unless those funds are spent on exempt items.

Where to get proper help

Services Australia operates a free Financial Information Service (FIS). FIS officers are not financial advisers, but they can explain how your specific payments are assessed and what the rules say about your situation. Call 132 300 (Centrelink).

For more complex situations involving larger wins, consider engaging a financial adviser who specialises in social security law and Centrelink planning.