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Income from Sale of Property - Payments Deferred or by Instalments
Income assessment from sale of property
The sale of a property, including the principal home, where the purchase price is paid over an agreed period, may be treated as income depending on whether or not the sale creates:
- a loan, or
- a sale agreement. More ?
Sale of property creates a loan
If the sale creates a loan, then the loan will be assessed under the deeming provisions.More ?
If a sale agreement provides for interest to be paid on the outstanding purchase price balance, then the interest payable is treated as ordinary income for DVA purposes.
If a sale agreement does not provide for interest to be paid on the outstanding purchase price balance, then it may be necessary to obtain an actuarial valuation of the payments due.
A pensioner may sell a property with the purchase price being paid over an agreed period. In all cases the repayment of the purchase price of the property is not income for DVA purposes.
However, the face value of amounts that are payable only at a future date must be discounted to work out their present value. If the present value of these payments is less than the current market value of the property sold, the agreement may involve deprivation of assets and a formal valuation may be required.
Formal valuation may be required
To decide whether a formal valuation is required, the present value of the total payments due under a sale agreement must be estimated. This is done by multiplying the total payments due by a discount factor. The present value of the total payments due can then be directly compared to the current market value of the property sold, to determine if a formal valuation is required.More ?
The discount factor will depend upon:
- the upper deeming rate at the date of the agreement,
- the term (in years) for repayment, and
- whether the purchase price is paid in regular instalments or as a single payment.
Formula used to calculate the present value
The following formula must be used to calculate the present value of the payments due under a sale agreement:
Where a person sells a property and will receive ...
N = the term for repayment in years
R = upper deeming rate at the date of agreement (eg. 4.5%),
Then the appropriate formula to estimate the discount factor will be ...
a single payment at a date in the future
1 - (N x R) + (N x R x (N – 1) x R/2
For example: if the person sells a property and will receive one payment of $100,000 ten years after sale, the following calculation would be determine the discount factor:
1 - (10 x 0.045) + (10 x 0.045 x 9 x 0.0225) = 0.641125
The present value of the total payment due is $100,000 x 0.641125 = $64,115. If the present value of $64,115 is less than then current market value of the property, deprivation of assets may have occurred and a formal valuation is required.
equal instalments paid over a period in the future
1 - (N x R/2) + (N x R x (N - 1) x R/4)
For example: if the person sells a property and will receive $100,000 in equal payments over ten years, the following calculation would be determine the discount factor:
1 - (10 x 0.0225) + (10 x 0.045 x 9 x 0.01125) = 0.8205625.
The present value of the total payments due is $100,000 x 0.8205625 = $82,056. If the present value of $82,056 is less than then current market value of the property, deprivation of assets may have occurred and a formal valuation is required.
Option to purchase a property
A person may enter into an agreement to sell a property at a certain price if a particular event, such as the rezoning of land takes place. Money may be paid to this person in return for making this commitment.
Although this money may be deducted from the balance of the eventual purchase price, the sale is not certain to take place and a contract for sale of land has not been signed.
Therefore, money paid to a person in return for an option to purchase their property at a later date is money received for the person's own use and is income for the purposes of the VEA.
The principal home has the meaning given by subsection 5LA(1) of the VEA and subsection 5LA(2) of the VEA. The principal home of a person is generally the place in which they reside. In certain circumstances, however, the principal home of a person can be the place in which they formerly resided. The following property is regarded as part of the principal home.
- the residence itself (e.g. house, flat, caravan),
- permanent fixtures (e.g. stoves, built-in heaters, dish-washers, light fittings and affixed carpets),
- [glossary:curtilage:DEF/Curtilage] (i.e. two hectares or less of private land around the home where the private land use test has been satisfied, or all land held on the same title as the person's principal home where the extended land use test has been satisfied), or
- any garage, shed, tennis court or swimming pool used primarily for private purposes provided it is on the same title as the principal home.
In 1990 the government introduced legislative changes called “deeming” to simplify the assessment of cash deposits and income from certain investments. These changes were made:
- in response to pensioner concerns about complex income and assets test rules;
- to encourage pensioners to maximise their private income.
Deemed income is the minimum rate that the government expects income support pensioners to earn from investments.
Banks created “pensioner accounts” which paid interest at the deeming rate set by the government.
On 1 July 1996 further changes meant the deeming rate was applied to all financial assets as defined in section 5J(1) of the VEA.
The ordinary income of a person for a period means, as described in section 46 of VEA, the gross ordinary income from all sources for that period without any reduction, other than a reduction of business income.
The Department of Veterans' Affairs.
The purchase price of an income stream is the nominal sum of the paymetns made to purchase the income stream (including amounts paid by way of employer and employee contributions) less any commuted amounts.
Note: In determining the means test assessment of asset-tested income streams (lifetime), the purchase price is not used. Rather, the grossed up purchase amount.
Legislation: Section 5J(1) of the VEA
According to section 5H of the VEA income is:
- an amount earned, derived or received by a person for the person's own use or benefit;
- a periodical payment by way of gift or allowance; or
- a periodical benefit by way of gift or allowance.