Centrelink planning and the principal home

By Mark Gleeson, Senior Technical Services Manager

When providing advice on Centrelink benefits to your clients, it is important to understand how the principal home can impact assessment. 

A client's homeowner status can materially impact the amount of Centrelink benefits received. The social security assets test thresholds are different for homeowners and non-homeowners. 

In this article, we guide you through the Centrelink rules relating to the principal home so that you can provide effective advice to your clients.

We cover:

  1. Defining the principal home
  2. Special residences
  3. Mobile homes
  4. Sale of principal home to purchase a new home
  5. 12 months temporary vacation rule
  6. 24 months vacation rule - care situations
  7. Loans against the principal home
  8. Asset test exemption for rural properties

1.  Defining the principal home

A client's homeowner status must be determined to apply the correct social security assets test thresholds. Where a client is classified as a homeowner, a lower assets test threshold applies and their principal home is exempt from the asset test. For a non-homeowner, the assets test threshold is higher and rent assistance may be payable.

If your client or their partner has a right or interest in a principal home and that right or interest provides reasonable security of tenure, your client (and their partner) is considered to be a homeowner. For example, if a client or partner partially or fully own a home, either as tenants-in-common or joint tenants, they are a homeowner.

The home does not have to be your client's name. The property can be in the name of a company or trust. Similarly, the home does not have to be a permanent fixture on land. A person living in a boathouse with reasonable security of tenure can be a homeowner. Centrelink determines reasonable security of tenure.

The principal home is generally the dwelling where a client or couple lives for the greatest amount of time each year. If a person, or their partner, has more than one home, their principal home is the one in which they spend the greatest amount of time. If they spend the same amount of time in each of them, the most expensive home is assumed to be the principal home.

The value of a person's home, including curtilage, is an exempt asset for social security purposes. Curtilage is the land surrounding the principal home used primarily for private or domestic purposes. The maximum amount of land that can be regarded as curtilage is two hectares. However, if a person's principal home is on a rural or farming property and the land exceeds two hectares, the excess land may be exempt if specific criteria is met.

Non-homeowner

Your client is considered a non-homeowner if they do not have a right or interest in a home (or if they have a right or interest in a home, they do not have reasonable security of tenure). Examples include where a client (or couple):

  • sold their principal home and does not intend to use the proceeds to purchase or build a new home within 12 months (more on the 12 month rule later)
  • lives in a caravan, mobile home or boat they do not own
  • receives free accommodation in someone else's private home.

The table below summaries the homeowner and non-homeowner implications.

Status Definition  Asset thresholds  Home assessment  More than one home?
Homeowner Client (or partner) has a right or interest in a home, and the right or interest provides reasonable security of tenure The lower asset threshold and upper asset thresholds are $216,500 lower (FY 2021/22)  Home is exempt Home where they live the longest time each year is the principal home.

If equal time is spent in two homes, the more expensive home is the principal home.
Non-homeowner Client (or partner) do not have a right or interest in a home (or if they have a right or interest, they do not have reasonable security of tenure) The lower asset threshold and upper asset thresholds are $216,500 higher (FY 2021/22) Not applicable 

Granny flat rights and retirement villages are discussed under 'Special residences' below
Not applicable 

2.  Special residences

Unique rules apply for 'special residences' including granny flat arrangements and retirement village interests. For social security purposes, the amount your client spends to create or purchase their special residence determines their home ownership status. The homeowner status is assessed upon entry and is not subsequently re-assessed.

The value of property or funds transferred to establish the special residence is the 'entry contribution'. Homeownership status is determined by comparing the entry contribution with the extra allowable amount, which is $216,500 for FY 2021/22. This figure represents the difference in the assets test thresholds between homeowners and non-homeowners. 

The following table summarises a client's homeowner status, assessment of entry contribution and whether rent assistance is available, depending on the entry contribution paid to a special residence. 

Entry contribution Homeowner status Assessment of entry contribution  Rent assistance
Less than or equal to $216,500 (2021/22)  Non-homeowner Assessable asset but not income tested Payable if amount of rent paid meets the minimum criteria
 

More than $216,500 (2021/22) Homeowner Not assessable Not payable

If your client lives in a lifestyle village or manufactured home park, the rules for 'mobile homes' applies and is discussed next. In these cases, your client is assessed as a homeowner, regardless of amount paid or transferred. That is, the special residences rules do not apply. 

If your client moves into a residential aged care facility, different rules apply. Refer to Strategy Guide 13 - Residential age care on our Fast Fact Finder website.

Case study: retirement village

Doris, age 67 and single, sells her home for $600,000 and uses $180,000 to purchase an interest in a retirement village. 

Centrelink assess her as a non-homeowner because the entry contribution is below the extra allowable amount of $216,500 (financial year 2021/22). The amount paid ($180,000), is assets tested but not deemed. If Doris incurs ongoing costs in respect of her ownership interest in the retirement village, she may receive rent assistance.

From a financial planning perspective, you can develop an investment strategy with the surplus cash of $420,000. For example, the downsizer contribution (up to $300,000) may be available to invest her home proceeds. You can estimate her age pension entitlement based on her status as a non-homeowner. Our age pension calculator is available to assist you on the Fast Fact Finder website.

Case study: lifestyle village

Using the same case study of Doris, but assume she uses $180,000 of her sale proceeds to purchase a manufactured home in a lifestyle village. In this case, Centrelink will assess Doris as a homeowner, regardless of the amount paid.

Accordingly, the $180,000 paid is not means tested. Rent assistance may be paid as Doris does not own the land on which the home is situated.

3.  Mobile homes

A campervan, caravan, transportable home or boat in which a person lives, is considered a permanent home (or principal home) for social security assets test purposes. Therefore, if the person who is being assessed owns this 'home':

  • the person is classed as a homeowner, and
  • the value of the campervan, caravan, transportable home, or boat is an exempt asset.

Even though the person is classified as a homeowner, rent assistance can be received for fees payable on a regular basis as a condition of occupying the site on which the home is situated. This can include fees for the use of a caravan site either in a caravan park or through a private arrangement, which may permit the application for rent assistance.

Transportable homes situated in lifestyle villages will fall under these rules and so will the land on which the transportable home sits if leased by the client.

If a campervan, caravan or transportable home is situated on land owned by the person, the normal conditions relating to private land apply. Any land over the normal two hectares threshold is generally an assessable asset.

Tech tip: As retirement and lifestyle villages look similar but have different Centrelink outcomes, you may wish to confirm the status directly with the facility.

4.  Sale of principal home to purchase a new home

If your client or their partner sells their principal home and intends to use the proceeds within 12 months to purchase another home, the portion of the proceeds intended to be used to acquire another home is exempt from the assets test for up to 12 months from the date of sale. Your client will continue to be assessed as a homeowner during this period. If the sale proceeds are held in a financial investment such as a bank account, deeming applies under the income test. In certain cases, the exemption may be extended to 24 months. 

If the sale proceeds are used to purchase assets used to construct a home, for example land and building materials, these amounts are also exempt from the assets test. If a client already owns land that they intend to build another home on, the land is exempt once the sale proceeds from the former home are received. 

The asset test exemption may be extended to 24 months where your client:

  • continues to intend to use the proceeds for the purchase, building, rebuilding, repair or renovation of a new principal home; 
  • has made reasonable attempts (for example, signing a contract) within a reasonable period after selling the principal home; and
  • has experienced delays beyond their control.

Case study

Ameera and Ahmed are both age pensioners and own their principal home worth $1 million in the city. They intend to sell their home and purchase a $700,000 coastal home but will rent while searching for the right home. They plan to keep $700,000 in cash for their next home purchase and have a remaining $300,000 available to invest.

The couple want to understand the impact of the proposed arrangement on their age pension. The downsizer contribution could be explored with the couple.

The table below outlines the social security implications of the existing and proposed situations.

  Existing situation Proposed situation - Renting up to 12 months
Home $1 million (exempt) Home sold, $700,000 proceeds is exempt 
Deemed investments $350,000 $1.35m ($350,000 existing plus $1m proceeds in financial investments)
Personal effects $20,000 $20,000
Total assessable assets $370,000 $670,000 ($370,000 existing plus $300,000 not used to purchase new home)
Assessable income Deeming on $350,000 Deeming on $1.35m
Age pension entitlement (each) $718 pf ($18,671 pa) $321 pf ($8,336 pa)
Rent assistance Not applicable Up to $133 pf ($3,453 pa)

The couple are still considered homeowners, but their age pension has reduced from $718 per fortnight each to $321 per fortnight each for the period that they look for a new home (up to 12 months unless extended). Rent assistance is payable, based on the amount of rent incurred, up to a maximum of $132.80 per fortnight.

5.  12 months temporary vacation rule

If your client temporarily vacates their principal home with the intention to return, the home remains an exempt asset for up to 12 months. An absence is generally regarded as temporary unless they state a definite intention not to return to their principal home. The temporary vacation rule allows grey nomads to travel around Australia and retain their homeowner status for a maximum of 12 months.

After a 12 month temporary absence, the home is no longer considered the principal home and becomes an assessable asset. If a person does not intend to return to the principal home, they become a non-homeowner immediately. 

If a person resumes occupancy of the home within 12 months and subsequently vacates the home, a new 12 month exemption period begins. However, Centrelink will take care to ensure that the client has resumed living in the home and is not merely establishing a brief period of residence to extend the exemption period.

Case study

Virat and Anushka live in their home they own for eight months each year and spend the rest of the year in holiday rental accommodation. Although a considerable amount of time is spent in a rented property, the home they own is still the principal home and they remain homeowners under Centrelink assessment.

6.  24 months vacation rule - care situations

If your client vacates their principal home to enter a care situation, they continue to be treated as a homeowner and their principal home is exempt for up to 24 months. There is no need to intend to return home for this exemption to apply. The 24 month period continues even if your client temporarily leaves their care situation and returns to lives at home.

This provision applies where a client:

  • receives a substantial level of care in a care situation in a private home for at least 14 consecutive days, or
  • provides a substantial level of care to a person in a private home for at least 14 consecutive days, or
  • moves into an aged care facility, or
  • remains in long-term hospital care.

Case study

Maggie, age 78 and single, receives age pension and lives in her own home. As her physical health is deteriorating, she plans to move in with her son, Arthur, until her situation improves. Arthur will provide a substantial level of care and receive Carer Allowance. Under this arrangement, Maggie remains a homeowner and her home is exempt for up to 24 months.

7.  Loans against a principal home

The social security rules for loans are different to the tax deductibility rules and often create confusion. From a tax perspective, the purpose of the loan determines whether the interest expense is deductible. If the loan is used for income producing purposes, the interest expense is generally deductible and if the loan is used to buy the principal home, the interest expense is not generally deductible. The social security rules work differently. 

If the asset used as security for a loan is an exempt asset like the principal home, the loan is disregarded for Centrelink purposes. That is, the loan does not reduce any asset value. The market value of an asset can only be reduced if there is a charge or encumbrance secured against it. For example, if a loan is secured against an investment property, the market value of the asset is reduced by the loan.

If the charge or encumbrance is secured against an asset which is both exempt asset such as the principal home and an assessable asset, the value of the charge or encumbrance is apportioned using a formula.

If you identify that a social security client owns an investment property and the loan that is secured against the principal home, you can explore the benefits of arranging with their loan provider to have the investment property used as security and check for transactions costs.

The table below summaries the social security assessment of loans and property.

Loan secured against Used to fund Social security assessment of loan
Principal home Principal home Loan is disregarded
Principal home Investment property (residential or commercial) Loan is disregarded
Investment property Investment property Loan reduces asset value
Principal home and investment property Investment property Portion of loan secured against the home is disregarded

Unsecured loans reduce an asset value if your client can provide evidence that the loan was used to purchase a specific asset.

Case study

Angela and Sergio are age pensioners and homeowners. Their $900,000 home is used as security to fund a $200,000 debt on a $650,000 investment property. The rental income is $25,000 per annum net and they have $150,000 deemed investments. 

As part of your advice, you recommend that they contact their loan provider and arrange to have the investment property used as security, rather than their principal home. The lender charges a nominal fee for the re-arrangement. The table below illustrates the significant increase in age pension entitlement following the recommendation, as both Angela and Sergio each receive $300 per fortnight more. The couple have boosted their cashflow in the first year by over $16,000.

  Existing situation New loan arrangement
Home   $900,000 $900,000
Deemed investments $150,000 $150,000
Personal effects $15,000 $15,000
Centrelink value of investment property $650,000 $450,000 ($650,000 less $200,000 loan)
Centrelink income Deeming on $150k plus $25k rental Deeming on $150k plus $25k rental
Age pension entitlement (each) $103 per fortnight ($2,681 pa) $403 per fortnight ($10,481 pa)

8.  Asset test exemption for rural properties 

Clients residing on rural properties may apply for the principal home exemption for properties larger than the two hectare limit provided that certain criteria are met:

  • your client is an age pensioner, carer payment recipient of age pension age or qualifying service pensioner living on farms and rural residential blocks of more than two hectares. There is no upper limit on the size or value of the property. The concession also applies to the spouse and
    • your client is excluded or receives a reduced pension because of the assessable asset value of the land; and
    • the adjacent land is on the same title as the principal home (some exceptions apply) and
    • the residence has been your client's principal home for at least 20 years continuously and
    • your client is making 'effective use of the land'.

Meaning of 'effective use of the land'

Your client is taken to satisfy the effective use of land criteria where: 

  • they or a close family member (i.e. partner, parent, child, sibling of the pensioner or child of the family member) works the land to its potential; or
  • the land is leased to generate income; or
  • the land is not worked because it has limited potential to generate income.

Generally, a client is not required to subdivide land in rural farming areas to satisfy the effective use of land test. However, in some cases where the size of the land is large for the area and subdivision is encouraged by local government, so your client may be required to subdivide (although the pensioner's capacity to subdivide will be considered by Centrelink).

Case study

Fulvinder and Amandeep have both recently turned age pension age. They have owned and resided on a 200 hectare farm for more than 20 continuous years. Half of the farm is not suitable for any purpose but includes the principal home. The remaining 100 hectares is leased to a third party, so the couple satisfy the effective use of land requirement. From a social security perspective, the whole 200 hectares is exempt under the assets test. However, the income derived from leasing the land is assessable under the income test less allowable expenses.

Conclusion

Understanding the social security rules for your client's principal home allows you to estimate entitlements in a range of planning scenarios. Generally, your client is a homeowner if they have a right or interest in a principal home that provides reasonable security of tenure. Extra consideration should be given to special residences including granny flat and retirement or lifestyle villages, temporary absences from main residence, loan arrangements and rural properties. 

Our age pension calculator is available to assist you estimate your client's entitlements on our Fast Fact Finder website. The calculator estimates entitlements for the age pension, carer payment and disability support pension.


More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

Disclaimer
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.