When to Apply the Reasonableness Test
Last amended: Purpose of the reasonableness test
As a means of minimising the capacity for assets test avoidance, a test of reasonableness is applied to the granny flat entry contribution. The reasonableness test uses an approximation of actuarial values, based on life expectancy, to estimate the value to the veteran of the life accommodation interest. Examples where the reasonableness test may be applied include where the veteran:
- transfers additional assets, as well as the title to their home, for the granny flat interest; or
- pays for the cost of constructing the premises, as well as transferring additional assets.
Reasonableness test calculation exceeds the principal home value
The premise behind the reasonableness test is that in some circumstances the value of a lifetime accommodation interest (actuarially calculated) may exceed the value of the principal home being transferred. Where the reasonableness test calculation exceeds the principal home value, additional assets beyond that of the principal home (such as funds) can be transferred up to this higher amount, without deprivation occurring.
The funds making up the higher amount calculated under the reasonableness test must be directed to acquiring a granny flat interest. This means that the costs of purchasing, constructing, repairing or necessarily modifying (eg wheelchair access) a residence are acceptable. The transfer of funds for a purpose not related to acquiring a granny flat interest are not acceptable.
How to apply the reasonableness test
The following table demonstrates whether the amount paid for a granny flat can be automatically considered reasonable or if the deprivation formula should be applied.
If a pensioner or partner... | And... | Then... |
Provides the funds for construction of a granny flat with life interest | The full amount is spent on construction | The amount is considered reasonable |
Provides the funds for construction of a granny flat with life interest | The funds provided are in excess of the total construction costs | Apply the deprivation formula |
Transfers the title of their principal home to another person, retaining a life interest | The person has resided in properties of similar or greater value and retains a life interest Note: genuine short breaks from homeowner status (eg. for respite care, or in between home purchases) may be accepted as not affecting a person's status as a traditional homeowner. | The amount is considered reasonable |
Transfers the title of their principal home or pays for the cost of construction of a granny flat with life interest | Also transfers additional assets | Apply the deprivation formula |
| Who are non-homeowners, provide the funds for the purchase of a property, retaining a granny flat interest | Apply deprivation formula to entire amount | |
Disposes of principal home, intending to purchase a property, retaining a granny flat interest | Spends more than the Extra Allowable Amount | The amount is considered reasonable, if comparable to the value of other properties the pensioner has resided in. Note: - the proceeds from the sale may be exempt.
|
Disposes of principal home, intending to purchase a property, retaining a granny flat interest | Spends less than the Extra Allowable Amount | The amount is considered reasonable Note: - the proceeds from the sale are NOT exempt |
Disposes of principal home, intending to purchase a property, retaining a granny flat interest | Spends the proceeds from the sale of principal home and transfers additional assets | Apply deprivation formula to entire amount Note: - the proceeds from the sale may be exempt. |
Note: Where the title of a farm is transferred in exchange for a granny flat interest, the same rules apply. This only applies to farms which have satisfied the extended land use test, and therefore the value of the whole farm has been exempt from assessment.
Relevance of the reasonable amount
Once the reasonable amount is calculated, this is the amount that is considered to be the entry contribution when applying the Special Residence - Basic Assessment Rules.
Source URL: https://clik.dva.gov.au/compensation-and-support-policy-library/part-9-principles-determining-pension-rate/92-residential-situation/926-reasonableness-test/when-apply-reasonableness-test