When calculating Age Pension eligible payments, we generally assume that the family home is an exempt asset but is it always?
If you are not sure how the Age Pension assessment works under Income and Assets Test, read the following posts: The Truth about Assets Test and Age Pension Income Test madness.
And as I said before, we assume that our family home is just about the only asset that Centrelink does not include within the Assets Test, but you better be prepared for some situations when this is not the case. And today I will give you some examples when your home might be included in the Assets Test, therefore you need to be well prepared for this eventuality and as I always say, plan in advance to be well prepared for any possible changes and don’t let the loss or reduction of Age Pension take you by surprise.
But first, let’s answer this question:
Who is a homeowner?
Centrelink explains this as: You can be regarded as a homeowner if you own or are paying off your home or have a right or interest in your home and that right or interest gives you reasonable security of tenancy.
What is considered a home?
In most cases this is a house or a unit, but it could be a caravan or a boat, if this is what you use as your main place of residence.
Please keep in mind that Granny Flats and Retirement Villages are under different rules, so we are not discussing those arrangements today.
What is included in your home value?
Items that are included as part of your home value are:
- the actual home itself (so as described before house, unit, boat, caravan),
- all permanent fixtures such as stoves, dishwashers, carpets, build-in heaters, light fittings etc.
- land around the home up to 2 hectares of private land that is on one title. It could be all land even if greater than 2 hectares, if certain conditions are met. but if not, the excess land is counted as an asset.
- any fixtures on the land, such as garage, shed, tennis court or swimming pool, that is used for private purpose only and on the same title that your home.
Is your family home an asset for calculating your Age Pension entitlement?
In most cases your home is not counted as an asset, but it impacts the way your Age Pension is being calculated under Assets Test.
As a homeowner your assets allowance is significantly reduced. For example, as a single homeowner you get full Age Pension if your assets are below $270,500, while a non-homeowner can have up to $487,000 and still receive the full Age Pension. For a couple homeowners the limit is $405,000 and non-homeowners $621,500.
So as you can see, the assets allowance is much greater if you are a non-homeowner.
Exactly the same logic applies to the assets value at Age Pension cut off point, as you can see the assets allowance is so much greater for non-homeowners than it is for homeowners.
To put it into context, as single homeowner pensioner with assets of $500,000 will receive $299.10pf of Age Pension, while a non-homeowner will get $881.87pf. I am really encouraging you to read: Should I rent or own my home in retirement? I think you might find it quite an eye opener.
So yes, home in most cases is excluded from Assets Test, but the fact if you own one or not, will impact the level of Age Pension payment dramatically.
Is home counted under Assets Test if you are away?
I get this question very often: I have a family overseas and I want to visit them for a prolong period of time. What will happen to my Age Pension if I am overseas for a long time? If you leave home, but with a clear intention to return to live in it, then it is not counted under Assets Test for a period of 12 months, but after that time, the value of your home may be included in calculations of your Age Pension entitlement under Assets Test.
There are similar rules in the situation when your home was damaged or destroyed. The lost or damaged home is not counted as an asset for a period of 12 months, or it could be even longer – subject to meeting specific conditions, and if you are forced to rent while rebuilding your home, you could be eligible for Rental Assistance.
I had this very strange questions once:
Considering that home is the exempt asset under Assets Test, what happens if you give it away to children?
For once, I don’t understand why anyone would do such a thing, what would be the purpose or a benefit, I cannot think of any reason to do so. But going back to the question, the fact that the home is exempt, does not mean that Centrelink will accept your giving such an assets away. It will most certainly be treated as assets depravation and Age Pension will be reduced or lost altogether for a period of 5 years. So I would discourage anyone to try to give the family home away. Not only a terrible Age Pension outcome, but you are giving away the asset that could be just about the only asset available to you, should you require Aged Care facility assistance.
What if you rent part of your home?
Renting part of your home can be complex and can vary in different situations, so before you jump into organising your home to earn extra income, make sure you get the full advice, as your Age Pension might be affected greatly. In many cases, Centrelink will not only ask you about the rental income paid and then adjust your Age Pension accordingly under Income Test, but it can also include the rented part of your home as an asset on proportional basis. Therefore, if you have a separate room with bathroom and a small kitchen for rent that occupies 30% of the total size of your home, and your family home is valued at $1Mil, that Centrelink will add $300,000 as your assessable asset, being 30% of 1Mil.
What happens when you need to enter care?
If you leave your home because you are entering an Aged Care situation, your home may continue to be regarded as your principal home for a period of up to two years and, for that period, is not counted as an asset.
Your home also remains exempt if your partner is living in the principal home. When your partner leaves the home to enter care, or if he/she passes away, the two-year exemption period will start from the day your partner leaves the home.
If your former home is sold during the two-year exemption period after entering care, your principal home exemption ceases and you will be considered a non-homeowner. This applies even if another house is purchased with the sale proceeds.
What happens when you care for another person?
If you are absent from your home because you are personally providing care for another person, your home continues to be regarded as your principal home for up to two years and is not counted as an asset.
What happens when you sell your home?
If you sell your home, you need to advise Centrelink what your intentions are and what you want to do with the money from the sale of your home.
If you intend to buy a new home, then the funds to purchase a new home will be exempt from Assets Test for a period of 12 months. However, money will be counted as deemed income and included in Income Test assessment.
If you don’t intend to buy a new home, then the total balance from the sale of your home will be treated like all other financial assets included in Income and Assets Test and you will become a non-homeowner.
This is most certainly not an exhaustive list of possibilities, but whatever your plans are please get advice before you start making such big changes in your life, as once done, it cannot be undone and impact on your Age Pension can be significant and for a quite prolong period of time.
So if all those “if situations” sound complex and uncertain, fell free to contact me for assessment and assistance.
“Retirement is a Journey, not a Destination, so be well prepared for the ride”
By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement