Social Security exemption of farming properties
By Julie Steed, Senior Technical Services Manager
For Social Security purposes, a person’s principal home is an exempt asset under the assets test. A person’s principal home can include adjacent land of up to 2 hectares (approximately 5 acres). The value of any adjacent land in excess of 2 hectares is generally counted as an asset under the assets test. In addition, any income produced from adjacent land is counted towards the income test.
There is however a significant exemption for people who have a long term attachment to larger land parcels that are used to produce income. This exemption is called the ‘extended land use test’.
Many older Australians who have lived and worked on farms for long periods of time retain a deep attachment to the land. They generally remain keen to continue living on the farm even after they are no longer able to effectively work due to age.
Many retiree farmers will have plans to pass the farm to the next generation upon their death but wish to remain living in the family home until that time. In many instances, the next generation will have been involved in running the farm for long periods and may live in homes on the farm itself or nearby.
The extended land use test means that certain long term retiree farmers are not forced to sell their farms and move from their principal home in order to gain an adequate retirement income. However, they need to make effective use of productive land to generate an income, given their capacity.
Extended land use test
The area of land adjacent to the principal home that is more than 2 hectares and held on one title can be exempt from the assets test under the following circumstances:
- the person has reached pension age
- the person has qualified for the Age Pension or Carer Payment
- the home has been the person's principal home for 20 or more continuous years
- the person is making effective use of the land
20 year continuous attachment to land
The person must have a 20 year continuous attachment to their principal home and adjacent land. The person or their partner must currently own their principal home and the person must have lived in that principal home for 20 continuous years or more or have lived in various homes on the one property for 20 continuous years or more.
It is not necessary for a person to have owned the property for 20 years to qualify for the exemption, the 20 year continuous attachment may have commenced prior to them acquiring the property.
Bob and Margaret have lived in Briarwood cottage on Bob’s parent’s single title 500 acre farm since they were first married 40 years ago. Bob’s father died 4 years ago, and Bob inherited the farm. Bob will be eligible for the Age Pension in 6 years’ time. Although he and Margaret will only have owned the principal home and adjacent land for 10 years, they will have a 46 year continuous attachment to the land. This attachment would also continue if Bob and Margaret moved into Honeysuckle Homestead on the property where Bob’s parents previously lived.
Absences from the principal home
A continuous attachment to the land may not be impacted by certain temporary absences. These include temporary absences for a period of up to 12 months. Such temporary absences will allow the home to continue to be the principal home and for the resident to be considered a homeowner for up to 12 months.
If a person leaves their principal home to enter a care facility, the home can continue to be an exempt asset for up to two years. Likewise, vacation to enter a care facility for up to two years will not interrupt the 20 year continuous attachment to the land.
Other absences will break the continuous attachment period and the person will no longer be able to use the extended land use exemption.
The extended land use test is also available to partners of a person who qualifies under the extended land use test. The land can be owned by either member of the couple, or by both.
Where both members of a couple qualify for the Age Pension, one or both are required to have the 20 year continuous attachment to the land for both to be eligible for the assets test exemption.
Where one member of a couple qualifies for the Age Pension but the other does not, if the age pensioner has the 20 year continuous attachment to the land, both are eligible for the assets test exemption. However, if only the partner who does not qualify for the Age Pension has the 20 year continuous attachment to the land, then there is no assets test exemption.
Continuation after death
The assets test exemption can continue to apply to the partner who does not qualify for the Age Pension following the death of the age pensioner member of the couple. This requires the surviving person to continue to live in the same home and be making effective use of the land. Further, if the survivor re-partners, the assets test exemption can be extended to the new partner, again provided the they continue to live in the same home and make effective use of the land.
Effective use of the land
There are a range of factors that will be considered when determining if a person is making effective use of the land including:
- Where the land is located
- The size of the land
- The person's family situation
- The person's health
- Whether the land supports other family members
- Any commercial use of the land
- Any potential commercial use of the land
- Environmental issues relating to the land
- Whether the land combines two or more titles
The effective land use test can be satisfied where the land is being used to generate income which is commensurate with its ability to do so. Alternatively, the test may be met where the land is not being used because it has no ability to generate income.
In determining the land’s ability to produce income, Centrelink will consider issues such as the amount of land that could be used to produce income and past income generated from the land. Centrelink may also use professional valuations to estimate the potential of the land to generate an income.
Understanding the availability of an assets test exemption for retirees who have a long term attachment to land that is being used effectively to produce income may provide valuable Age Pension benefits.
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.