Social security assessment of the principal home FirstTech Strategic Update By Harry Rips, Technical Analyst The majority of Australians are homeowners, and the principal home is generally a client s most valuable asset. 1 For social security purposes the principal home (which includes certain adjacent land) is an exempt asset, regardless of its value. The social security legislation contains rules which define the principal home and how it should be assessed from acquisition to sale, during absences or transitions between homes, and when a part of the home is used for business purposes. Homeowner or non-homeowner The dwelling in which a client lives is used to determine whether they are a homeowner or non-homeowner. A client is a homeowner 2 if: 1 they (or their partner, or both) have a right or interest in the dwelling in which they live, and 2 the right or interest gives them reasonable security of tenure. 3 As such a homeowner can include 4 a client living in: a home that they own (or their partner owns), regardless of whether the home is owned outright or has a mortgage against it a home that they or their partner partly own (whether in a joint tenants or tenants in common arrangement) a home owned by a company or trust, in which they have an interest (eg, because they are a shareholder or director in the case of a company, or a trustee or beneficiary in the case of a trust). The home will be assessed as their principal home if they have reasonable security of tenure (which is established through a formal or written agreement or facts of the arrangement). a campervan, caravan, transportable home or boat that they own or partially own and reside in a special residence, such as a granny flat or retirement village interest, where the conditions for becoming a homeowner are met (for more information on special residences, please refer to the FirstTech Aged Care Guide). Where the conditions to be assessed as a homeowner are not satisfied, the recipient will be assessed as a non-homeowner. For example, a client who rents their home and does not have an ownership interest in the asset. Even where a client has contributed to the purchase of a principal home, they must have a right or interest in the home to be considered homeowners as illustrated in the example below: Justin receives free accommodation in the home of Theo. Justin contributed towards the cost of the property however he does not have a right or interest in the home (does not own or partly own the home) and does not have reasonable security of tenure. Justin is treated as a non-homeowner for social security purposes (also consider gifting implications in this example). 1 Australian Bureau of Statistics (2010) measures of Australia s progress. 2 Social Security Act (1991), Section 11(4). 3 Under s11a(10) of the Social Security Act (1991): If a person has a right or interest in the person s principal home, the person is to be taken to have a right or interest that gives the person reasonable security of tenure in the home unless the Secretary is satisfied that the right or interest does not give the person reasonable security of tenure in the home. 4 Guide to Social Security Law, s4.6.3.20, see useful examples for both homeowner and non-homeowner. http://guides.dss.gov.au/guide-social-security-law 1 of 6
Adjacent land, fixtures vs household items and renovations The amount of adjacent land considered to be part of a client s principal home depends on the usage of the adjacent land and is limited where used for domestic purposes. A generous exemption applies when an income support recipient satisfies the extended land use test (see below). Adjacent land and the private land use test The maximum adjacent land that can be considered part of a client s principal home under the private land use test is two hectares 5 (or five acres; the Department generously provides elasticity of 0.06 acres). The conditions are that the adjacent land is held on the same title document as the dwelling and the adjacent land is used primarily for private or domestic purposes. 6 Any land exceeding the two hectare threshold will not form part of the principal home and will be an assessable asset (unless the extended land use test is satisfied). Additionally any adjoining land on a separate title will generally be an assessable asset. It is important to note that the land immediately under a dwelling (ie, the area of the ground floor) is included when calculating the two hectare limit. Multiple titles and the private land use test The private land use test generally limits the exempt treatment of adjacent land up to two hectares to land falling on the same title document as the dwelling, meaning adjacent land on a separate title is generally assessable, even where the total adjacent land does not exceed two hectares. There are however three exceptions 7 to the single title rule. The exceptions are where: 1 The dwelling is located on both blocks of land. This exception does not extend to structures that are separate or not attached to the dwelling (eg, a second dwelling or a separate shed). 2 At least a part of the blocks of land are protected by law due to the land s natural, historic or indigenous heritage. 3 The alienation of one of the blocks of land without the other would seriously undermine the function of the dwelling. 8 The exception means that without the other block of land, the dwelling would be unable to perform: a. essential functions (eg, cooking, cleaning and sleeping), or b. essential housing related infrastructure functions without requiring connection to main water, power or sewerage services. 9 A mere loss of amenity, such as the loss of a swimming pool, garden, tennis court or view, would not seriously undermine the function of a house as a dwelling. Garage or storeroom associated with a flat or home unit If the client s dwelling is a flat or home unit, then a garage or storeroom will be included as part of the principal home and exempt if used primarily for private or domestic purposes in association with the flat or home unit. 10 Extended land use test All adjacent land on the same title document as a client s dwelling will be considered part of the principal home where the conditions of the extended land use test are satisfied. The extended land use test is designed to allow older Australians with a long-term attachment to farms and rural residential areas to avoid a forced sale and remain in their homes. A number of conditions 11 must be met to satisfy the extended land use test, this includes: The area of the land, together with the area of the ground floor of the dwelling is more than two hectares. The client (or their partner) must have reached age pension age and qualify for either Age Pension or Carer Payment (It does not apply for Disability Support Pension). The client lives in the dwelling (a temporary absence, usually up to 12 months is allowed). The client must have a 20 year continuous attachment to the land and dwelling. That is, they currently own the dwelling and land and have lived in the dwelling continuously for 20 years; or lived on the one property, in more than one dwelling, continuously for 20 years. The client is making effective use of the land. Centrelink weigh up a range of factors when considering whether a client is making effective use of the land including the location, the client s health and family situation, the current and potential use of the land, legal and environmental issues and whether titles have been amalgamated to gain an advantage (amalgamation of land after 9 May 2006, which does not improve the client s ability to support themselves, can result in the extended land use test being met). For a more detailed list of factors, refer to Appendix 1. Effective use of the land is not limited to the client (or their partner) working the land to its potential, and effective use of the land may be satisfied with a close family member working the land, where the land is leased and in certain circumstances where the land is not being worked if it has limited potential to generate an income. 12 5 Social Security Act (1991), s11a(3) 6 Ibid, s11a(1)(a). 7 Ibid, s11a(2)(a). 8 Social Security Act (1991), see note under s11a(2)(c) 9 Guide to Social Security Law, s4.6.8.20, definition of title document and examples of exceptions to one title rule. 10 Social Security Act (1991), s11a(1)(b). 11 Ibid, s11a(6). 12 Department of Social Services (2014), Older rural homeowners factsheet, https://www.dss.gov.au/our-responsibilities/seniors/programs-services/assets-test-changes-older-ruralhomeowners/older-rural-homeowners-factsheet#7. Guide to Social Security Law, s4.6.8.50. 2 of 6
Renovating the principal home Maintaining or improving the principal home can be a useful strategy to reduce assessable assets (which also generally produce assessable income) and thereby increase a client s social security benefits. This is achieved where the client uses assessable assets (eg, cash) to improve the principal home which is an exempt asset. Items within the home fixtures vs contents and personal effects Permanent fixtures are regarded as part of the home and would usually be exempt (unless assessed due to business use). Personal effects and home contents within the home are assessed separately; they include furniture, art, electrical appliances (though not fixtures such as stoves and built in items), clothes and jewellery. Personal effects and household items are assessed at $10,000 unless Centrelink are advised of a different value (or unless the value given is significantly understated). 13 Assessment of the principal home Listed below are a variety of home ownership arrangements and their social security assessment. More than one home Where a client has more than one home, their principal home will be the home in which they spend the greatest amount of time. If an equal amount of time is spent in each home, the most expensive home will be assessed as the principal home. The home which is not assessed as the principal home will be included in assessable assets (even while the client or their partner lives there 14 ). Separate self-contained living areas A self-contained living area is an area with private or separate sleeping, cooking and bathroom facilities (eg, a granny flat). If a self-contained living area is vacant or let to a near relative then it is assessed as part of the client s principal home (near relative includes a partner, parent, sibling, child and adopted child). However, if the self-contained living area is let to a person other than a near relative, it is not considered part of the client s principal home and is an assessable asset. 15 In this case income received from the arrangement will be assessed under the boarding and lodging rules, where a percentage of income received is assessable income for social security purposes depending on whether accommodation and meals are provided or accommodation only. 16 Dual occupancy homes A dual occupancy home 17 is defined as a detached dwelling constructed on the same title as an existing dwelling where the title of the land is not altered. The assessment of a dual occupancy home is dependent on who pays the construction costs, whether the person living in the second dwelling has a beneficial or equitable interest in the dwelling and whether it is let to a near relative. Where the client paid the construction or purchase costs and the dual occupancy dwelling is: Vacant or let to a near relative (see definition of near relative above) the dwelling is considered to be part of the client s principal home and an exempt asset. Let to a person other than a near relative, the dwelling is not considered to be part of the client s principal home and is included in the assets test. Income is assessable according to rental income rules (generally based on the client s tax return, where assessable income is net income after allowable deductions). Where a person other than the client or their partner paid the construction costs for the dual occupancy dwelling and they have a beneficial or equitable right in the second dwelling, the dwelling is not considered to be an asset of the client. An age pensioner pays for the construction of a second house on the same title as his home so he can receive a small income. The house is let to a friend. The value of the second house is included in the value of his assessable assets. Rental income is assessed under the income test. An age pensioner s son pays for the construction of a house on his elderly mother s farm so he can work the property to its full potential. The house is on the same title as his mother s principal home. The son has receipts and an agreement with his mother that the house belongs to him for life. The value of her son s house is disregarded when assessing her assets. 13 Social Security Act 1991, s1118(3), Guide to Social Security Law, s4.6.5.10, also see s1.1.p.235 for definitions. 14 Guide to Social Security Law, s4.6.3.30. 15 Ibid, s4.6.3.30, self-contained living areas. 16 Ibid, s4.3.8.40, income from Boarders or Lodgers. 17 Ibid, s4.6.3.50, Assessing dual occupancy homes. 3 of 6
Business operated out of principal home Where a business is operated out of a client s principal home, the treatment of that part of the home will depend on the details of the arrangement. 18 If part of the home is used for both business and domestic purposes then that part is exempt. However if a distinct part of the property is used for business purposes only then it will not form part of the principal home and will be an assessable asset (eg a property with a shop and a dwelling located behind the shop. If the shop is used only for business purposes then it will not form part of the client s principal home and will not be exempt). A home office is used for both domestic and business purposes and would be excluded from the assets test, whereas a room set aside for a doctor s surgery would not be part of the principal home. Land that is being farmed precluding any other use is assessable (this is a primary production asset, and does not fall under the private land use test as the land is not being used for domestic purposes) unless it falls under the extended land use test. On the other hand, grass where children play and on which farm animals graze can be an exempt part of the principal home. Campervan, mobile home, caravan or boat The principal home is not limited to a house or apartment. If an income support recipient resides in a campervan, mobile home, caravan or boat which they own and have reasonable security of tenure, they will be assessed as a homeowner. Holiday accommodation in caravan or mobile home Where an income support recipient has a principal home and decides to travel around Australia and live in a caravan or mobile home (for up to 12 months), they will be considered a homeowner and the principal home which they have temporarily vacated will be an exempt asset. Where the temporary absence exceeds 12 months, the former principal home becomes an assessable asset and the caravan or mobile home will be assessed as the recipients principal home (this could have significant social security implications, assuming the value of the former principal home exceeds the value of the caravan or mobile home). 19 Rent assistance and caravans or boats Rent assistance is generally not payable to homeowners, though there are limited exceptions. This includes a client who pays for the use of a site or structure, including rights to moor a vessel that is their principal home (eg, site fees for caravan or mooring fees for a boat). 20 Leaving the principal home Different implications arise between a permanent and temporary absence from a client s principal home. The social security legislation continues to exempt the principal home for a period of temporary absence but usually assesses the former principal home immediately on permanent absence. A concession also applies to exempt sale proceeds from the sale of a principal home for a period of time where the client intends to apply the proceeds to purchase another principal home. Temporary vacation of the home A client s home can continue to be treated as their principal home (ie, exempt) for up to 12 months where they are temporarily absent. This temporary vacation exemption can apply even where the planned temporary absence will exceed 12 months. After 12 months, the home will no longer be assessed as their principal home and will become an assessable asset (with higher non-homeowner assets test threshold applying). Any rent received by the client during their temporary absence is immediately assessable for income test purposes. Warning no temporary vacation exemption for permanent vacation The temporary vacation exemption only applies for temporary absences. The exemption does not apply for a recipient with a definite intention not to return to their principal home. Restarting the temporary absence Where a client has been temporarily absent from their home and then resumes occupancy (that is, they are living in the home, not just establishing residence to extend the exemption period), a new 12 month exemption period can begin upon subsequent temporary vacation of the home. 18 Ibid, s4.6.3.10, Operating a business from their principal home. 19 Ibid, s4.6.3.50, definition of homeowner; s3.8.1.90, Holiday Accommodation. 20 Ibid, s3.8.1.100, ineligible homeowners and RA, s3.8.1.90, Holiday Accommodation. 21 Social Security Act 1991, s11a(9a). s4.6.3.60 of the Social Security Guide define reasonable attempts, reasonable time and delays beyond their control, 4 of 6
Extension of the 12 month temporary vacation exemption period The exemption period can be extended from 12 months to 24 months if the absence is due to the principal home being lost or damaged (eg, by natural disaster). All these conditions 21 must be met to satisfy the extension: the loss or damage was not wilfully caused by the client the client has made reasonable attempts to rebuild, repair or sell the principal home or to purchase and build another principal home the attempts were made within a reasonable period after the loss or damage, and the client has experienced delays beyond their control in purchasing, building repairing, or renovating another principal home. Permanent vacation of home and sale proceeds exemption Where a client permanently vacates their principal home (eg, to move into another home they own) without selling their former home, their former home will no longer be assessed as their principal home and will be an assessable asset (assessed on the current market value, less any allowable encumbrances against that home). Their new home then becomes their principal home and is exempt. Where the client sells their principal home to purchase another principal home an asset test exemption 22 applies to the amount of sale proceeds to the extent that the client intends to use them to purchase, build, rebuild, repair or renovate their new principal home. Sale proceeds that are not intended to be used for the new principal residence do not qualify for this exemption and are immediately assessable under the assets test. Sale proceeds means not only payments that have been applied to this purpose, but also monies (eg held in financial investment) which the person intends to be applied for that purpose. The exemption applies only for the assets test, not the income test. Under the sale proceeds exemption, the proceeds intended for use on the new principal home can be exempt for up to 12 months starting from the date of settlement. However, the exemption ends immediately upon the purchase of a new principal home, or completion of rebuilding, repair or renovation, or where there is no longer an intention to use the proceeds to purchase a new principal home. 23 Julian sells his principal home for $600,000. He wants to purchase an apartment and advises Centrelink that he intends to use $400,000 of the proceeds for this purpose. Only $400,000 will be exempt under the assets test for up to 12 months (he does not qualify for the extension). However the amount will be subject to the income test, which in this case means deeming as all the proceeds are invested in cash. The remaining $200,000 proceeds are immediately assessed for both assets and income test purposes. Marcus has a block of land worth $200,000 (with a $100,000 mortgage). He also has a principal home worth $300,000 which he has recently sold. He intends to use the sale proceeds to pay off the mortgage and build a new home on his existing block of land. The sale proceeds of $300,000 are asset test exempt as the client intends to use the proceeds towards a new principal residence. However the existing equity in the block of land ($100,000) is not attributable to sale proceeds and is an assessable asset. Once the new home becomes the principal home (which is constructed within the 12 month period) then all $400,000 will be exempt. Sale proceeds exemption extension to 24 months The sales proceeds exemption can be extended from 12 months up to 24 months 24 in some cases. The exemption can be extended where the client is: making reasonable attempts to purchase, build, repair or renovate their new principal home, and has been making those attempts within a reasonable period after selling their former principal home, and has experienced delays beyond their control in purchasing, building, repairing or renovating their new principal home. s of delays out of a client s control which could allow the extension to be accessed include: delays in obtaining building approval from a local shire council which has in turn delayed entering an agreement with a builder caring for a close family member in a separate location to the place the client is to build their new principal home where the client is hospitalised for an extended period, or demands on the building industry are stretched in a particular area, for example due to a natural disaster like a flood or cyclone. Sale proceeds exemption during temporary absence If during a temporary absence (during which time the principal home is an exempt asset), the principal home is sold, then as much of the sale proceeds that the client intends to use for a new principal home will be exempt for a further 12 months (or extended up to 24 months where extension requirements are satisfied). 22 Ibid, s1118(1b) 23 Ibid, s1118(2). 24 Ibid, s1118(2b), Also see s4.6.3.80 of the Social Security Guide for broader explanation of making reasonable attempts. 5 of 6
Absence relating to care situation Where a person vacates their principal home to enter a care situation, the home may be exempt for a period of two years, or where certain conditions are met, for the period that the individual is in care. For more information on the social security treatment of the former home on entering a care situation please refer to the FirstTech Aged Care Guide. Appendix 1 Factors determining effective use of the land In determining whether a person is making effective use of the land, the Secretary is to take into account the following matters 25 : 1 where the land is located 2 the size of the block of land 3 the person s family situation 4 the person s health 5 whether the land contains a dwelling or house occupied by a family member of the person, or a child of a family member of the person, receiving an income support payment 6 whether the land is being used to support: i a family member of the person, or ii a child of a family member of the person 7 any current commercial use of the land 8 any potential commercial use of the land 9 whether the person s capacity to make commercial use of the land is diminished because the person, or the person s partner, has responsibility for the care of another person 10 whether the block of land is an amalgamation of two or more blocks and, if so: i when the amalgamation occurred, and ii whether the amalgamation reduced the potential for the land to produce personal income or to support the person 11 environmental issues relating to the land 12 any other matter that the Secretary considers relevant. How to contact us Adviser Services 13 18 36 firsttech@colonialfirststate.com.au 25 Social Security Act 1991, s11a(7), for a more detailed analysis of factors refer to section 4.6.8.70 of the Social Security Guide The information contained in this update is based on the understanding Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) has of the relevant Australian laws as at 13 January 2015. As these laws are subject to change you should refer to our website at colonialfirststate.com.au or talk to a professional adviser for the most up-to-date information. The information is for adviser use only and is not a substitute for investors seeking advice. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Colonial First State or any other member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. This update is not financial product advice and does not take into account any individual s objectives, financial situation or needs. Any examples are for illustrative purposes only and actual risks and benefits will vary depending on each investor s individual circumstances. You should form your own opinion and take your own legal, taxation and financial advice on the application of the information to your business and your clients. Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Colonial First State Investments Limited is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law. 21039/FS6147/0115 Adviser use only 6 of 6