Sale of principal home: extension of exemption

In a bid to support pensioners and in conjunction with the announcement to reduce the eligibility age for downsizer super contributions, the government has introduced a measure to extend the existing assets test exemption under social security for principal home sale proceeds that a person intends to use to purchase a new principal home.

Under the social security system, individuals' income support level depends on their income and assets. For example, to receive the age pension, Services Australia (Centrelink) will assess an individual and their partner’s income from all sources including financial assets such as superannuation using deeming. Deeming assumes that a financial asset earns a set rate of income regardless of the actual revenue generated. Applicants for the age pension will also need to pass the assets test, the limits of which change depending on whether they own their own home, are single, or are in a couple.

Currently, when an age pensioner or other eligible income support recipient sells their principal home to either purchase or build another home, those proceeds are exempt from the assets test for up to 12 months. However, the proceeds will still be subject to deeming. An additional 12-month extension may be granted where the income support recipient has a continued intention to apply the sale proceeds to the purchase, build, rebuild, repair, or renovation of a new principal home and have:

made reasonable attempts to purchase, build, rebuild, repair, or renovate their new principal home (eg signing a contract to purchase or renovate, etc);
made those attempts within a reasonable period after selling the principal home; and
experienced delays beyond their control in purchasing, building, rebuilding, repairing, or renovating their new principal home.

To reduce the impact of selling and buying a new principal home and encourage pensioners to downsize, the Bill introduced by the government would automatically extend the existing assets test exemption from 12 to 24 months. An additional 12-month extension may be available in particular circumstances, taking the maximum exemption period to 36 months in total.

It should be noted that only the value of the principal home proceeds that are intended to be used to purchase/build a new home can be exempt. For example, suppose an individual sells their principal home for $1,000,000 and intends to purchase a new home for $700,000 and use the remaining $300,000 to buy an investment. In that case, the total amount of sale proceeds that can be exempt from the assets test is $700,000, while the $300,000 is not exempt from the assets test.

In addition to extending the exemption, the Bill also seeks to apply a lower deeming rate to the principal home sale proceeds when calculating deemed income for the period during which the proceeds are exempt from the assets test. For deeming purposes, the threshold is currently $56,400 for an individual and $93,600 for couples. Below those thresholds, the financial assets are deemed at a rate of 0.25%, while anything above those thresholds is deemed to earn 2.25%. If this proposed measure becomes law, the exempt principal home sale proceeds will be treated as a separate pool from the other financial assets and deemed calculated at 0.25% instead of 2.25%.