The Deprivation Formula

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.    

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.

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 greater than 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 greater than 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.