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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.
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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. More →
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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.
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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.
One element of the means test for income support pensions whereby the rate of pension payable to a pensioner reduces progressively as their assets increase above a certain threshold known as the assets value limit (AVL).
A granny flat interest exists if a person has established a right to accommodation for life, or a life interest in another person's private home.
Granny flat interests are established by the following methods:
- transferring title of the pensioner's principal home to a relative and retaining a right of occupancy for life;
- providing funds for the construction of a granny flat in which the pensioner has a right to reside for life on a relative's property;
- providing some or all of the purchase price of a property which will usually be registered in a relative's name but in which the pensioner has a right to reside for life; or
- the terms of an estate.
Refer to Section 5MA(2) of the VEA for the full definition.
An entry contribution is the amount paid or agreed to be paid by a person for the right to live in a:
- retirement village; or
- granny flat.
If a person lives in a home subject to a sale leaseback agreement, the entry contribution is the balance of the amount still to be paid by a buyer, at the date of a sale leaseback agreement.
Refer to Section 52M of the VEA for the full definition.
Life expectancy is the length of time a person is expected to live and has the same meaning as 'life expectancy factor' under section 27H of the Income Tax Assessment Act 1936.
The "extra allowable amount" is the difference between the property owner assets value limit and the non property owner assets value limit which applies to the person.
As the property and non property owner assets value limits are indexed or adjusted on an annual basis, the extra allowable amounts also increase annually.
The assets value limits applied to this formula are the limits applicable at the time the person made the entry contribution to enter the special residence.
Refer to Section 52N of the VEA for the full definition.
The "extra allowable amount" is the difference between the property owner assets value limit and the non property owner assets value limit which applies to the person.
As the property and non property owner assets value limits are indexed or adjusted on an annual basis, the extra allowable amounts also increase annually.
The assets value limits applied to this formula are the limits applicable at the time the person made the entry contribution to enter the special residence.
Refer to Section 52N of the VEA for the full definition.
An entry contribution is the amount paid or agreed to be paid by a person for the right to live in a:
- retirement village; or
- granny flat.
If a person lives in a home subject to a sale leaseback agreement, the entry contribution is the balance of the amount still to be paid by a buyer, at the date of a sale leaseback agreement.
Refer to Section 52M of the VEA for the full definition.