Legal Tip 402: Selling a Home and Waiting to reBuy and its Effect on the Pension

Pensions worry about losing the pension when they are trying to change house and want to sell before they buy a new one. They think this make take them over the assets test threshold so that they will lose the pension.

To qualify for an Australian Government Pension a person has to meet the assets test and the income test. The main residence is not counted as an asset for the assets test but cash in the bank and investment assets are.

Currently the assets test to qualify for the full pension, for a single person, is just

$280,000 for people who have a main residence, or

$504,500 for those without a remain residence – renters or people living with family etc.

https://www.servicesaustralia.gov.au/assets-test-for-pensions?context=22526

So, what happens if a pensioner wants to sell their main residence and thinks it might take them 6 months to find a new one. Will they lose the pension potentially?


Example

Homer is a single pensioner. His only asset is $200,000 cash and his $2mil main residence which still has a $1mil loan secured by it.

Homer realises that although he gets the full pension it is costing him a lot of money to maintain the home, plus the ghost of his deceased wife is haunting him, so he is reluctant to bring ‘chicks over’. He therefore decides to downgrade.

He hears that Sydney is at the peak and expects prices to drop soon so he wants to sell now and move into his son’s place for 6 months. *

But if he did this he would no longer be a home owner and would have $1.2mil in cash in the bank and be over the assets test.

* it took me 3 months to post this!

Luckily Section 1118(1B) of the Social Security Act comes to his rescue

SOCIAL SECURITY ACT 1991 - SECT 1118 Certain assets to be disregarded in calculating the value of a person's assets


This allows the sale proceeds of the principal home to be disregarded if Homer intends to use that $1mil for a new ‘principal residence’. Up to 12 months after the sale is the general limit for this. It may be extended up to 24 months in some instances.

 

Is there a risk that Homer would be impacted by the pension income test and the deemed income on his 1.2M cash?

 

Yes they would be I believe. This might become an increasing issue as rates rise

 

s1118 will generally need to demonstrate that another property HAS been acquired and is yet to settle.

You indicated s1118(1)(b) which isnt the exemption for the former home. Its the one which gives and shares an existing home exemption. (1)(r) is the one I believe you mean. It is limited to an actual purchase settlement due AND ALSO the amount that remains to be paid. You cant plan to buy and get the asset and income exemption until the contract is made. There is also another for a destroyed residence. Common to bushfire etc Often does take 2+ years for those. Centrelink are pretty good with that.

 

Yes it should be ss s1118(1)(r) together with s1118(1B)
There is no need for a contract to purchase to be in place, all you need is the intention to apply the funds to a new principal home.

 

With interest rates rising this strategy is more likely to affect the pension due to the income test. If the sale proceeds are $1mil and you put it into the bank and get 5% interest then you would be earning $50,000 pa.
Even if you put it in an account that had no interest the deeming provisions might apply

 

There are some concessions to the asset and incomes test for sale of a home but Human Services should be consulted when the hold IS sold and pending settlement. Agree with terry on deeming v real rates. Many think robodebt is gone but its untrue. There is still a form of robodebt if you estimate incorrectly or dont advise changed facts

 

The law has been changed it seems

It is now 24 Months. s1118 SS Act now says:

Application of proceeds of sale of principal home

(1B) Subsection (2) applies if:

(a) a person sells the person's principal home; and

(b) either:

(i) the person does not have a right or interest in a principal home; or

(ii) the person has a right or interest in a principal home that the Secretary is satisfied does not give the person reasonable security of tenure in the home; and

(c) before the end of 24 months, or any longer period determined under subsection (2B), after the sale, one or more of the following applies:

(i) the person intends to apply the whole or a part of the proceeds of the sale to build, rebuild, repair or renovate another residence that is to be the person's principal home;

(ii) the person applies the whole or a part of the proceeds of the sale to build, rebuild, repair or renovate another residence that is to be the person's principal home;

(iii) the person intends to apply the whole or a part of the proceeds of the sale to purchase another residence that is to be the person's principal home.

 

Human Services / Centrelink expect each pensioner update all changes to income and assets as they arise (Its 14 days or something close) . This should be done ONLINE and not by paper. NEVER by phone. Delays will otherwise complicate a complicated issue. This prevents real robodebts and overclaiming of benefits to be repaid. A sale where a new purchase is expected is different to one where the sale occurs and no new home is acquired. Sometimes there is tolerance for a excepted asset (cash) where a purchase is contracted but not settled (OTP for example) and arrears of benefits can be paid later or in some cases no effect on benefits. We have a aged care service (not me) that assists such issues. Its very common for parents moving to aged care etc. The aged care advisers get linked to Centrelink much like tax agents assist tax issues and have ATO access.

 

The changes were introduced by the former government in the 2022 budget to improve housing supply and then were brought into law by the current government in late 2022.

Also of benefit to note that the sale proceeds intended to be used for a new principal residence are assessed at the lower level of deeming rate for the period instead of the higher rate. This is only 0.25% compared to 2.25%. With access to rent assistance, Age Pension, and higher interest rates, it could potentially result in a cashflow gain depending on rent paid etc.

Will be interesting to see if these rules change when deeming rates are no longer frozen at current levels.