Social security assessment of the principal home

David O'Connell explains the social security assessment of the principal home.

The most significant social security means test concession is the exemption of the principal home from the assets test.

In these cases, the claimant is assessed as a home-owner and their remaining assets are subject to a lower asset test threshold.

For most pensioners this exemption works in a straightforward manner; however, as is to be expected considering the diversity in people’s circumstances, it can work in a variety of ways.

The first point to note is the exemption is quite broad and applies to “the value of any right or interest” of the pensioner or their partner in their principal home which gives one or both “reasonable security of tenure”.

This allows for directly owned property to be exempt, as well as in cases where the claimant has an interest in a home they do not own, such as a life interest.

The home may be exempt from the assets test even though it is owned through a company or trust. For the exemption to apply, the resident must satisfy the “reasonable security of tenure” test.

It is not necessary for the claimant to be a director or a trustee of the owning entity; however, these factors may be taken into account.

A particular example of this is where the principal home of the beneficiary of a special disability trust is an asset of the trust.

The home would be an exempt asset and therefore the trust could have other assets of up to $500,000 before breaching the special disability trust threshold. 

Living in the property

Generally, the claimant must reside in the property for it to be considered their principal home. However, where they are temporarily absent from the property, it remains their principal home for up to 12 months even if the temporary absence is greater or less than 12 months.

This duration may be extended up to two years in certain circumstances, such as where the home has been damaged and there have been delays in making repairs which are outside the claimant’s control. An absence of two years is also allowed where the claimant provides substantial care to someone in another private residence.

In addition, a former home will retain its principal home status for an extended period where the claimant enters residential care. Irrespective of whether the former resident intends to ever again reside in the home, it will be considered their principal home for the first two years. Where their partner leaves the home or dies after the claimant has entered care, the two years start from when the partner left the home.

The property will continue to be exempt after this period if the residential care resident rents out their former home and is either paying an accommodation bond periodically or paying an accommodation charge. This exemption will continue indefinitely as long as these conditions are satisfied. Also, the rental income is exempt from the income test in this situation. 

Attached land

The allowable exemption applies to the dwelling and the land on the same title which satisfies the private land use test or the extended land use test.

To satisfy the private land use test, the attached land must be less than two hectares and used primarily for private purposes associated with the dwelling.

The examples given in the Department of Families, Housing, Community Services and Indigenous Affairs Social Security Guide state where a room in the home is used for business and domestic purposes this room will be exempt; however, where the home is located behind a shop and the shop is only used for business purposes, the shop would not be an exempt asset.

A further example in the guide involves a self-contained living area in the home.

Where this is vacant, or is let to a near relative, this portion of the property will not be assessed for the asset test; however, where it is let to another person the self-contained living area will be an assessable asset.

The extended land use test applies where there is more than two hectares of land attached to the principal home, the claimant is of Age Pension age and the dwelling has been their principal home for 20 years continuously.

The extended land use test allows for the value of this land to be non-assessable if the pensioner is making effective use of the land to generate income.

There are a number of factors to be taken into account when determining if effective use is being made of the land but ultimately, it is a determination which Centrelink would make.

Under the extended land use test, business assets are not eligible for the exemption. For example, if there were sheds used commercially on a property exempted under the extended land use test, the value of those sheds would remain an assessable asset for the claimant. 

Insurance and sale proceeds

The proceeds from the sale of the principal home are exempt for up to 12 months where they are to be used to purchase a new home. If only a portion of the proceeds is to be used, only that portion will be exempt.

Similarly, insurance proceeds received due to loss or damage to the principal home are also exempt for up to 12 months from when the payments were received. This period may be extended up to two years where there are delays in making repairs outside the claimant’s control. 

Special residences

A special residence is a residence in a retirement village, a granny flat or a residence subject to a sale-leaseback agreement.

In these situations, the resident makes an entry contribution in return for a right to accommodation. In general, where the entry contribution is greater than the extra allowable amount, the resident is deemed to have an interest in the residence and the value of that interest is exempt.

The extra allowable amount is the difference between the asset test threshold for homeowners and non-homeowners, currently $131,500.

Where the entry contribution is less than the extra allowable amount, they are deemed not to have an interest, are assessed as a non-homeowner and they will have an assessable asset equal in value to the entry contributions. Special rules apply where a member of an illness-separated couple is in a special residence. 

Summary

Given the wide variation in individual circumstances that can occur, the application of the different rules needs to be carefully assessed. Where eligibility for the principal home exemption is reduced or lost, it may result in a significant loss of benefits. 

David O’Connell is technical services officer at Fiducian Portfolio Services.