Assessing Assets with Encumbrances and Loans

Effect of encumbrance or loan on value of assets

If there is an encumbrance or loan against a particular asset, the following formula is used:

The assessable value of the asset = the net value of the asset - the value of the encumbrance or loan

Secured loans on assets

For secured loans on assets the asset value is the amount of the person's interest in the asset. The value of any charge or encumbrance secured against the asset is deducted from the value of the asset. If, for example, a person's land is subject to a mortgage, the assessed assets value of the land is its current market value minus the amount of the outstanding mortgage.

Secured loan on principal home or other disregarded assets

If a loan obtained to purchase an asset is secured against a person's principal home or another disregarded asset, the value of the outstanding loan cannot be deducted from the value of that asset.

Unsecured loans or mortgages on assets

The outstanding value of an unsecured loan or unregistered mortgage may be deducted from an assessable asset's value in certain circumstances. For the value of the asset to be reduced, the person must provide evidence that the loan was obtained specifically to purchase the asset. Unsecured loans obtained for other purposes e.g to purchase a different asset, cannot be offset against the assessable asset's value.

Excluded security loans

Excluded security loans cannot be deducted from the value of an asset. An excluded security is the amount of a charge or encumbrance that is:

• a collateral security, or
• provided for the benefit of a third party, other than the person's partner.

Examples of excluded security loans

The following are examples of excluded security loans:

• A person obtains a loan to purchase a block of land. As part of the loan the land and another asset (a home unit) are offered as security. The value of the loan may only be deducted from the land value. It cannot be deducted from the value of the collateral security, the home unit.
• A person provides their property as security for a mortgage to a third party (other than his or her partner). The outstanding balance of the loan cannot be deducted from the value of that property.
• A person and his son borrow $80,000 to jointly purchase an asset but the security for the loan is an assessable asset owned solely by the person. The person is only able to deduct $40,000 from the value of the asset: the son's part of the loan is an excluded security and cannot be deducted.

Unregistered mortgages

To determine whether the value of an asset can be reduced by an unregistered mortgage, the decision maker must obtain copies of all documents supporting a person's claim, such as contracts or unregistered agreements. These documents are sent to the Department's Legal Services Group, who are responsible for clearing all unregistered mortgages.

Apportioning a loan or encumbrance

If a person has one encumbrance or loan for both a disregarded asset (e.g. their principal home) and an assessable asset, the value of the loan is shared between the assets in proportion to the respective values of the assets.   The following formula is used to apportion the loan and determine the value of the assessable asset:

(Value of loan X Value of assessable asset) divided by the Value of assets loan is secured against

Example of apportioning a loan

A person has one loan secured against both their farm and  principal home. The total amount of the loan is $100,000.  The value of the farm is $180,000 and the value of the principal home is $60,000.  The total combined value of the farm and principal home is $240,000.  Using our formula (ie. $100,000 x $180,000) ÷ $240,000 = $75,000), the net asset value of the farm is $105,000 (ie. $180,000 minus $75,000).

Primary Production Assets

If a primary producer has assets that are used in the carrying on of the primary production, and also has liabilities that are related to the carrying on of the primary production then these assets are taken to be a single asset. The value of the single asset is the total value of the production assets minus the total value of the production liabilities. This gives the value of the person's primary production assets. If the result gives an asset value of less than zero then the value of the asset is taken to be nil.

Example of aggregating assets for primary producers

A person has farmland worth $200,000 and a mortgage of $50,000 is secured against the land. The person runs the farm in partnership with his son. The partnership owns plant, stock and machinery to the value of $100,000. The partnership has liabilities of $150,000. The person has:

• primary production assets of $250,000 (ie. his own farmland plus his share of the partnership assets), and
• primary production liabilities of $125,000 (ie. his mortgage on the farmland plus his share of partnership liabilities).

The total assets of $250,000 minus total liabilities of $125,000 = net primary production assets of $125,000.