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The Deprivation Formula

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Last amended: Application of the deprivation formula

The deprivation formula is used in certain circumstances to calculate what amount can be considered reasonable as an entry contribution to a granny flat or to assess the value of the right to accommodation for sale leaseback residences. The Reasonableness Test determines whether or not this formula is applicable.    

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Entry contributions, granny flats or sale leasebacks

Section 9.2.5

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Deprivation formula

The deprivation formula is expressed as follows:

Annual combined maximum partnered rate   X   Conversion factor (of youngest member of a couple)

This formula applies irrespective of whether the person is a member of a couple, and is applied at the rate that was current at the time the granny flat accommodation was established.  The formula multiplies the annual pension rate by the pensioner's life expectancy factor, to provide an approximation of the actuarial value of the pensioner's right to accommodation for life.  The annual pension rate is used as the approximate measure of accommodation value rather than market rent owing to the difficulties in determining market rent in many granny flat arrangements, such as occupancy of a single room in a family residence.

Annual combined maximum partnered rate

The annual combined maximum partnered rate of pension includes the pension supplements and Clean Energy Supplement.

Relevance of the reasonable amount

The following table demonstrates whether or not deprivation applies to the amount contributed.

If the amount contributed is ...

Then...

Less than the rate determined by the formula

no deprivation applies

More than the rate determined by the formula

deprivation applies only to the amount of the contribution which exceeds the value of the granny flat or interest

Example of an entry contribution considered reasonable

A veteran and partner receiving service pension, their ages at next birthday being 72 and 68, give their son and daughter-in-law $300,000 to have a granny flat built onto their home. The parents will have no title to the property but will have a right of occupancy for life. The contract price for the construction of the granny flat is $250,000.

As the amount provided for the construction of the granny flat is not within 10% of the contract price, the Reasonableness Test is not automatically satisfied and the funds transferred (i.e. $300,000) need to be compared with the amount assessed under the deprivation formula.

Annual combined maximum partnered rate of pension (including pension supplement) = $1,013.00 X 26 = $26,338.00

(Current rate as at September 2009)

Conversion factor for youngest member of the couple (age next birthday 68) is 17.85

Value of the lifetime accommodation interest under the Deprivation Formula is $26,338 X 17.85 = $470,133.30.

As the funds provided ($300,000) do not exceed the calculated value of the lifetime accommodation interest ($470,133.30), the amount transferred is considered reasonable and is assessed as if it were an entry contribution to a retirement village.

Example of an entry contribution considered unreasonable

A single veteran, aged 89 next birthday, gives his son and daughter-in-law $300,000 to have a granny flat built onto their home.  The veteran has no title to the property but will have a right of occupancy for life. The contract price for the construction of the granny flat is $250,000.

As the amount provided for the construction of the granny flat is not within 10% of the contract price, the Reasonableness Test is not automatically satisfied and the funds transferred (i.e. $300,000) need to be compared with the amount assessed under the deprivation formula.

Annual combined maximum partnered rate of pension (including pension supplement) = $1,013.00 X 26 = $26,338.00.

Conversion factor for veteran (age next birthday 89) = 5.61

Value of the lifetime accommodation interest under the Deprivation Formula is $26,338 X 5.61 = $147,756.18.

As the funds provided for the granny flat construction ($300,000) exceed the calculated value of the lifetime accommodation interest ($147,756.18), the transferred amount is considered unreasonable and deprivation has occurred.  The amount of deprivation is the amount by which the transferred funds exceed the reasonable amount, being $152,243.82.

In this example the full transferred amount of $300,000, while including a deprived component, is still assessed as the veteran's entry contribution when determining his homeowner status as it is the amount he has paid for the right to live in the granny flat.


An entry contribution is the amount paid or agreed to be paid by a person for the right to live in a:

  • retirement village; or
  • granny flat.

If a person lives in a home subject to a sale leaseback agreement, the entry contribution is the balance of the amount still to be paid by a buyer, at the date of a sale leaseback agreement.

A granny flat interest exists if a person has established a right to accommodation for life, or a life interest in another person's private home.

Granny flat interests are established by the following methods:

  • transferring title of the pensioner's principal home to a relative and retaining a right of occupancy for life;
  • providing funds for the construction of a granny flat in which the pensioner has a right to reside for life on a relative's property;
  • providing some or all of the purchase price of a property which will usually be registered in a relative's name but in which the pensioner has a right to reside for life; or
  • the terms of an estate.

Refer to Section 5MA(2) of the VEA for the full definition.

 

 

A test of reasonableness is applied to a granny flat entry contribution. The premise behind the reasonableness test is that in some circumstances the value of a lifetime accommodation interest may exceed the value of the principal home being transferred. The reasonableness test uses an approximation of actuarial values, based on life expectancy, to estimate the value to the person of the life accommodation interest.

 

 

According to Section 5E(2) of the VEA a person is a member of a couple, if they are:

  • legally married to another person and is not living separately and apart from the other person on a permanent basis; or
  • living in a prescribed registered relationship with the other person (whether of the same sex or a different sex) and is not living separately and apart from that other person on a permanent basis; or
  • all of the following conditions are met:
  • living with another person, whether of the same sex or a different sex;
  • not legally married to that person;
  • in a de facto relationship with that person; and
  • not in a prohibited relationship

The term “partnered” is also commonly used.

According to Section 5E(2) of the VEA a person is a member of a couple, if they are:

  • legally married to another person and is not living separately and apart from the other person on a permanent basis; or
  • living in a prescribed registered relationship with the other person (whether of the same sex or a different sex) and is not living separately and apart from that other person on a permanent basis; or
  • all of the following conditions are met:
  • living with another person, whether of the same sex or a different sex;
  • not legally married to that person;
  • in a de facto relationship with that person; and
  • not in a prohibited relationship

The term “partnered” is also commonly used.

An entry contribution is the amount paid or agreed to be paid by a person for the right to live in a:

  • retirement village; or
  • granny flat.

If a person lives in a home subject to a sale leaseback agreement, the entry contribution is the balance of the amount still to be paid by a buyer, at the date of a sale leaseback agreement.

According to subsection 5M(3) of the VEA, premises constitute a retirement village if:

  • the premises are residential premises; and
  • accommodation in the premises is primarily intended for persons who are at least 55 years old; and
  • the premises consist of one or more of the following kinds of accommodation:
  • self-care units;
  • serviced units;
  • hostel units; and
  • the premises include communal facilities for use by occupants of the units referred to above.