When is a house a home?

There has been much commentary in the media recently that the value of a person’s family home should be taken into account when applying for the Government age pension.

Currently the family home, even if it is worth millions, is not taken into account when determining a person’s age pension entitlements.

Before anyone becomes overly concerned, it is important to point out that neither the Government nor the Opposition have indicated that they believe this to be a good idea.

Let’s start by considering how your principal place of residence is defined under the current Social Security Act: “The principal home is generally the home in which the single income support recipient or couple lives for the greatest amount of time each year.

The principal home includes an area of adjacent land (5 acres) on the same title document”.

However it can be so much more. If you have retired and decide to sell your home and purchase a $300,000 yacht to sail around the world, or to just live on, this is your principal place of residence and therefore is an exempt asset.

The plus is that depending on the mooring fees, you may also be eligible for rent assistance.

The same principal applies to the $250,000 Winnebago you purchase after selling your home, if you want to become a “grey nomad”.

The motor home becomes your principal place of residence and is an exempt asset.

You may also be eligible for rent assistance depending on the site fees that you pay.

For those retirees who happen to own two properties and live in both at various times of the year, both homes cannot be classified as your ‘principal place of residence’ but you certainly can nominate the most expensive property as your home, therefore exempting it from the assets test.

If your home happens to sit on two blocks of land, in other words two titles, provided your home straddles both titles, the second block of land is not assessable.

The strangest example I have seen is where a person bought two older homes side by side in the same street and turned them into one house with an adjoining covered courtyard.

Not that I would recommend this as a strategy. Generally, up to a maximum of 5 acres (2 hectares) of land surrounding the home would also be an exempt asset.

However the ‘Extended Land Use Test’ will allow a person who has resided for over 20 years on a larger property, where the adjacent land is greater than 5 acres and they are making effective use of the land (e.g. farming it) to have the value of this land exempt from the assets test.

These arrangements can get quite complex.

The exemption of a person’s home under the assets test is an attractive strategy for some people who think why not upgrade my home to a more expensive abode and be entitled to more pension?”

Looks easy however the number of people who do take this road inevitably find that after a couple of years the costs associated with owning a larger more expensive home, including rates, energy and maintenance, are not sustainable on an age pension.

And really, who wants to spend all their time in retirement cleaning? Some people in retirement may contemplate living in a granny flat.

Most of us think of a granny flat as a small structure or extension built onto a current dwelling to accommodate someone’s mother, father or a grandparent.

But again a granny flat under the Social Security Act can be so much more! The Social Security Act definition of a granny flat recognises it as “family arrangements that provide support for elderly people”.

A very broad interpretation I am sure you would agree.

What does this mean? It means that if you want to turn your three bedroom house into a four bedroom home with an extra bathroom, living and dining area and have Gran pay for it, that is fine as long as Gran is going to live in it.

If Gran wants to give her house to you in exchange for a life interest, that is fine and if Gran wants to buy you a house in exchange for a life interest that is also fine.

But under the Social Security Act, isn’t Gran only allowed to give away a maximum of $10,000 per financial year, or a total of $30,000 over five years, before the excess is assessed as deprivation?

Under the general rules this is certainly true.

However, the following is a direct quote from the guide to the Social Security Act.

“The value of a granny flat interest is GENERALLY the same as the amount paid for the interest.

This means there is NO deprivation amount.”

Warning - before you go off and talk to Gran, or Gran decides she is going to give away the house, like all legislation which relates to a person’s entitlement to an age pension, it does come with an additional ‘test of reasonableness’.

This test looks at the value of the assets or assets which have been transferred in exchange for the life interest or the construction of the granny flat.

If you are contemplating such an arrangement within your family talk to someone who understands what you can and can’t do…remember, if you do it after the fact and Gran’s age pension is affected, it can be all too difficult and expensive to reverse it.

So as you can see, a person’s home under the “Social Security Act” can be a lot more than just a three bedroom brick veneer house on a 600 square metre block of land.

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Mark is manager of technical advice, at Centrepoint Alliance.

After working for the Department of Social Security and Centrelink as a financial information service officer and regional manager for over 20 years, he joined Professional Investment Services in 1999 and has since worked in various research, technical and paraplanning management roles at the dealer group.