Disposal/Deprivation of Rental Income

What is disposal of rental income?

Disposal of rental income generally arises where pensioners allow a real estate property (other than the principal home) to be occupied, rent-free or at less than market rent, by tenants (other than family members). The amount of deprivation can be calculated by determining the reasonable rental amount, having regard to the age, location and condition of the property, as well as the property market in the area, that would otherwise be received.

Income disposal

Income disposal arises because the decision of the pensioners to allow rent-free (or below market rent) occupancy of premises that they own is regarded as a course of conduct that diminishes their ordinary income, where they receive no (or inadequate) financial consideration for the rent-free or low-rent tenancy.

Rent-free tenancy by family members    

Deprived rental income is not to be found where a pensioner's real estate property is occupied on a rent-free (or low rent) basis by a family member. Repatriation Commission decision CM5990 of 6 February 2007 determined that disposal of rental income does not arise where the following conditions are satisfied:

• the tenant enjoying rent-free (or low-rent) occupancy is a family member, being the partner, parent, brother or sister, or child of the pensioner; and
• the property is being used for residential occupancy only. Where a pensioner's property is being used for commercial purposes, including by family members, the income disposal rules will still apply. The commercial market rent amount is to be obtained from a qualified valuation service provider and held in the pension assessment in these cases.

Rent-free tenancy during the principal home exemption period    

Disposal of rental income may arise where a pensioner who is in care or is an aged care resident rents out their former principal home rent-free or at less than market rent to tenants other than family members. This applies unless the special rules that apply to some aged care residents are triggered. The special rules apply where an aged care resident is paying (or there is a liability to pay):

• a daily accommodation payment or a daily accommodation contribution , an accommodation charge or all or part of an accommodation bond by periodic payments; and
• rents out the former home.

The Commission has the discretion to consider that another person can be regarded as a family member, where there are special reasons for doing so.

Rental income does not have to be initially received

It is not necessary that rental income be received, and then no longer received (or reduced), to establish that ordinary income has been diminished and that income disposal has occurred. It is only necessary to find that the pensioner's course of conduct, being the decision not to charge rent, has made the pensioner's income smaller than it might otherwise have been.

Disposed rental income is based on the market value

The disposed rental amount is determined by obtaining a market rental value (through a qualified valuation service provider) and then comparing this amount with the rent paid (if any) by the tenants of the property. The difference between the market rent, less accepted reductions, and the actual rent received is the deprived rental amount.

Reductions in imputed rental amounts

Where a rental amount is actually received, that amount may be reduced for income test purposes by recognising the costs and outlays associated with preparing a property for rental. This also applies where a rental amount is not received. The imputed rental income amount is to be reduced by recognising the same allowable deductions that would arise if rent was paid. The disposed income amount is the difference between the market-determined rent (less the allowable deductions) and the actual rent amount received.     

Valuable consideration received

Imputed rental amounts may be reduced by any valuable consideration received from the tenants by the pensioners.

What is valuable consideration?

Valuable consideration includes those benefits not provided in money terms, but capable of being measured in money terms. This may include any contribution made by the tenant that increases the asset value of the property.

Costs that are not valuable consideration

The costs of general household maintenance (such as cleaning, mowing etc) are not recognised as valuable consideration, as it is expected that these costs would be met by tenants in any event. Household costs such as rates, taxes, repairs and insurance should not be treated as valuable consideration, as these amounts are already allowed to the pensioner as an offset against the gross market rent.

Example 1: Calculation of rental income where no rent is charged

A pensioner allows his second property to be tenanted, rent-free, by another person (not being a family member). A qualified valuation service provider advises that the market-determined rent for the property is $450 per fortnight. The imputed rental income to be held as disposed income is:

Market rent $450 LESS allowable deductions (one-third of imputed rental income allowed) = $150

LESS any rent received (nil) = disposed income of $300 per fortnight.

Example 2: Calculation of rental income where rent is charged below market value

In the same situation, if the tenant was paying a nominal rent amount of $100 per fortnight, the partial consideration received would be recognised and the disposed income amount will reduce to $200 per fortnight.

Vacant properties

It is not a requirement that pensioners seek a tenant for a vacant property, in view of the costs of preparing a property for rental and the lack of certainty regarding eventual occupancy. Disposal of rental income does not arise where a property remains untenanted.

Review of imputed rental income cases

Pension assessments which include an amount for income disposal arising out of rent-free tenancy should be regularly reviewed, to allow for changes in the market-determined rent and changes in the tenant's circumstances to be assessed.