Notional Annual Rate of Ordinary Income - farms

Last amended: 10 October 2007

Unrealisable assets, including farms, are deemed to produce a notional income, except where special provisions apply.

Notional ordinary income – person's farm

Where the unrealisable asset is a farm being worked to its full capacity solely by the pensioner or their partner, notional income is not assessed. In this situation, only the actual income derived from the property is taken into account.

Notional ordinary income – person's farm being used by a family member

Special provisions apply if the farm is being worked by a family member. In this case, the notional ordinary income for a person's farm that is an unrealisable asset is the lower of:

• 2.5% of the value of the farm, or
• the commercial lease value, or
• the rent that the family member can reasonably be expected to pay (reasonable rent) minus any rent actually received by the person from the family member.

Reasonable rent

Reasonable rent is defined by the following formula:

Reasonable rent = (Income – FTB free area) ÷ 2

Example: A pensioner's son and his partner are sole occupants of the farm. The annual net farm income is $32,000. The partner's annual salary is $12,000. Therefore their total income is $44,000. The maximum family income free area for 2007 is $41,318. Reasonable rent is $1,341 calculated as ($44,000 - $41,318) ÷  2

The farm is valued at $240,000. Therefore 2.5% of $240,000 = $6,000

The commercial lease value of the farm is $8,000 per annum.

Reasonable rent is $1,341

Therefore notional income for the property is $1,341

Net value of a farm

The net value of a farm is the value of :

• the farm, plus
• the land, improvements, livestock plant and machinery, minus
• encumbrances.

Example of net value of a farm

The value of the farm includes improvements, livestock, plant and machinery.

The farm value does not include the value of a person's:

• principal home,
• household contents and personal effects, and
• motor vehicle.

Notional annual rate of ordinary income – other farming situations

When the farm is not operated by a pensioner, their partner or a family member, reasonable rent does not need to be calculated. In this case, the notional income for the farm is the lower of:

• 2.5% of the net value, or
• the commercial lease value.