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Assessing Assets where Beneficial Interest Arises
Last amended: 15 July 2008
Effect of beneficial interest on value of assets
The value of an asset held in a pensioner's assessment may be reduced where there is evidence that another party holds a beneficial interest in that asset. Recognising a beneficial interest is authorised by section 5L(2) of the Act (Assets test definitions), which provides that the value of an asset is limited to the value of the person's interest in the asset. Federal Court judgments have confirmed that it is permissible for a pensioner's asset value to be reduced by the beneficial interest held by a party, where there is acceptable evidence of the contribution made by that party.
Beneficial interest is the extent to which a person, other than the legal owner of an asset, has acquired a share in the value of that asset. It arises out of the reasonable expectation, following a promise or assurance, that a person may through their actions generate some equity or interest in an asset (as distinct from the question of legal ownership or control). Equity courts recognise that an unfair outcome will occur if an asset is sold or if a party is dispossessed, without considering the contribution made by them to the value of the asset. A large body of equity law exists to protect the rights of parties who have acquired an interest in an asset, without acquiring a share of the legal title.
Life interest may arise beneficially
A beneficial interest of a person may result in a contingent, remainder or reversionary interest for the legal owner, which is not assessable. A life interest can arise beneficially, that is, can be created without recourse to a formal or legal written agreement such as a will. For example, if a disabled or elderly relative, who may or may not be a part owner of a house, has a long term attachment to it, and an understanding or commitment exists that this person is to have possession of the house until death or choosing to move out, then a beneficial life interest exists and can be recognised. This means that the property cannot be counted as an asset in the assessment of a DVA pension recipient who has legal title. This exemption continues until the life interest ceases, for example on the person vacating the property.
Calculation of beneficial interest
The calculation of beneficial interest requires that the extent of a party's proven contribution to the purchase of an asset, and subsequently adding value to the asset, be determined on the basis of the available evidence.
Relevant factors to consider
The Federal Court has ruled that consideration may be given to the following factors when determining the extent of a party's beneficial interest:
- the value of the property at the time at which expenditure was incurred and the relationship between the expenditure and the increase in the property's value as a consequence of that expenditure,
- the funds that were expended in carrying out renovations or other capital improvements to the property,
- property costs, such as rates and other outgoings,
- whether compensation for occupying the property rent-free should be made, and
- whether dispossession would be unconscionable having regard to the emotional investment put into the property by the person claiming a beneficial interest.
The Federal Court ruling acknowledges that this list is not exhaustive, and that there may be other relevant factors. If it is likely that an equity court would find that a party's contribution to the value of an asset requires that they be compensated, then it is relevant to determine that beneficial interest has arisen out of that contribution.
Balancing beneficial interest against legal title
While beneficial interest may reduce the held asset value, this will only arise where the delegate has been provided with acceptable evidence of the contribution made by a party other than the legal owner. General and unsubstantiated statements by the legal owner of intent to transfer legal title to a party, are not sufficient to determine that beneficial interest arises. Where evidence of a party's contribution is not available, the asset value should remain with the pensioner based on his/her legal ownership of the property.
Example of beneficial interest calculation
A pensioner holds legal title to a real estate property that was purchased in 1990 for $200,000. There is acceptable evidence that the pensioner's son contributed $50,000 towards the purchase price. The property is now valued at $350,000. It is appropriate to determine that the son holds a 25% beneficial interest (now valued at $87,500) in the property. The asset value to be held in the pensioner's assessment will be $262,500.