Those who wish to receive the age pension in Australia must first submit to both an income and assets test.
These tests determine the amount the applicant will receive, with the test that provides for the lowest pension amount preferred.
The income test will consider any income a person receives from employment, pensions, annuities, investments and salary packaging. The assets test is the market value of things such as investment properties, caravans, cars and boats, and business assets.
The family home is not counted as an asset of a person applying for the pension who lives in the house. But a pension entitlement can be affected if that person decides to sell the house.
On selling the home, the proceeds of the sale are exempt for up to 12 months if they are used to buy, build or renovate another home.
But the proceeds are ‘deemed’ in the income test and assessed as income from financial assets, which could affect a pension entitlement.
There are also rules regarding the addition of granny flats to a property, and retirement village costs, in terms of the pension.
What happens if you dispose of an asset
Disposing of an asset when you are receiving an age pension is governed by what is known as ‘gifting and deprivation’ rules.
These rules apply to prevent a person from reducing their assets or income to either qualify for or increase their age pension entitlements.
Some people may also want to reduce their assessable assets to qualify for a part pension.
The term gifting is used to describe the disposal (or deprivation) of assets or income where the person doing so receives no financial consideration in return.
Gifting might include selling a residential property to a child for a discounted value, providing money to a child for a wedding, paying a grandchild’s education costs, or repaying a loan for a child in the position of a guarantor.
Limits are imposed on this practice because Centrelink views it as a person owning combined assets before they were gifted that were worth more than what they are now.
As a result, a person is allowed to gift assets or income of $10,000 in one financial year, or $30,000 over five financial years (but not more than $10,000 in a single financial year).
Any amount over these amounts is considered a ‘deprived’ asset and counted as an asset in the assets test, and subject to deeming in the income test, for a period of five years after the excess gift was made.
If the gifter receives financial consideration for the asset during the five-year period, or it’s returned, its value is no longer assessed as a deprived asset.
What are the implications of disposing of an asset?
It’s important for a person who disposes of assets to qualify or increase their pension entitlement to pay proper consideration to their current and future needs.
Will they need the asset to pay for means-tested aged care in a retirement home in the future, for example?
A person’s assets and income are means-tested in working out what they need to pay for aged care accommodation and care costs, including gifted assets. If assessed as deprived, gifts given within five years of a resident moving into residential aged care can result in the resident having to pay more for aged and care costs.
Residing with children, including granny flats
A common situation is for an elderly person to transfer the title of their house to a child and come to an agreement with them about continuing to reside there, either in the house or a purpose-built ‘granny’ flat on the property.
The title transfer and/or the costs of building the flat are not generally assessed as a gift unless it could have been anticipated at the time of the transfer that the elderly parent would need aged care within five years. In this case, the arrangement could be assessed as a gift and then considered to be a deprived asset. If this is the case, the parent’s pension entitlement could be affected.
Centrelink maintains rules in this regard, including that the parent paid a ‘reasonable amount’ for the value of the asset transferred. If it appears the parent transferred more than the value of the granny flat right, the asset’s value may be considered deprived and their pension entitlement could be reduced.
- the parent being provided with accommodation and/or care cannot own the property;
- the home in which the accommodation is provided must be the parent’s principal home.
A problem can arise where the relationship of the adult child and their partner ends through divorce or separation, and the house needs to be sold. Can the person who originally gifted the property be left homeless?
Ideally, this situation is addressed in an enforceable written agreement before it comes to pass. Some options include:
- selling the property with the parent’s residential arrangement as a condition of sale;
- transfer the parent’s life tenancy or interest to another property, or;
- compensate the parent financially for losing the granny flat interest.
The final option may have ramifications for the parent’s age pension entitlement.
Consult specialists in this area, Felicio Law Firm
The issues addressed in this post can be complex. At Felicio Law Firm we have lots of experience interpreting gifting and deprivation rules for clients to conform with Centrelink’s rules.
Whether you’re approaching pension age, or are concerned about the effect on your pension of disposing of an asset, call us today for an initial consultation.