This section demonstrates how the Reasonableness Test is used to determine how much of the amount contributed for the purchase or construction of a granny flat [2] should be assessed as an entry contribution [2].
The amount considered to be an entry contribution is then assessed according to the Special Residence [2] Basic Assessment Rules.
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:
Refer to Section 5MA(2) [3] 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:
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.
According to subsection 5MC(2) of the VEA [3] a special residence is:
Last amended: Purpose of the reasonableness test
As a means of minimising the capacity for assets test [2] avoidance, a test of reasonableness is applied to the granny flat [2] entry contribution [2]. The reasonableness test uses an approximation of actuarial values, based on life expectancy [2], to estimate the value to the veteran of the life accommodation interest. Examples where the reasonableness test may be applied include where the veteran:
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.
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.
More → [5]
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 [6] |
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 [6] |
Who are non-homeowners, provide the funds for the purchase of a property, retaining a granny flat interest | Apply deprivation formula [7] to entire amount | |
Disposes of principal home, intending to purchase a property, retaining a granny flat interest | Spends more than the Extra Allowable Amount [2] | 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 → [8]
|
Disposes of principal home, intending to purchase a property, retaining a granny flat interest | Spends less than the Extra Allowable Amount [2] | 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 [6] 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.
More → [9]
Once the reasonable amount is calculated, this is the amount that is considered to be the entry contribution [2] when applying the Special Residence - Basic Assessment Rules [10].
Principal homes and granny flats
9.2.2/Principal Home [11]
Section 9.2.5 Special Residence - Assessment Rules [12]
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). [18]
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:
Refer to Section 5MA(2) [3] 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:
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 [3] 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 [3] 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:
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.
Last amended: Application of the deprivation formula
The deprivation formula is used in certain circumstances to calculate what amount can be considered reasonable as an entry contribution [2] to a granny flat [2] or to assess the value of the right to accommodation for sale leaseback residences. The Reasonableness Test [2] determines whether or not this formula is applicable.
More ? [20]
The deprivation formula is expressed as follows:
Annual combined maximum partnered rate X Conversion factor (of youngest member of a couple [2])
This formula applies irrespective of whether the person is a member of a couple [2], and is applied at the rate that was current at the time the granny flat accommodation was established. The formula multiplies the annual pension rate by the pensioner's life expectancy factor, to provide an approximation of the actuarial value of the pensioner's right to accommodation for life. The annual pension rate is used as the approximate measure of accommodation value rather than market rent owing to the difficulties in determining market rent in many granny flat arrangements, such as occupancy of a single room in a family residence.
The annual combined maximum partnered rate of pension includes the pension supplements and Clean Energy Supplement.
The following table demonstrates whether or not deprivation applies to the amount contributed.
If the amount contributed is ... | Then... |
Less than the rate determined by the formula | no deprivation applies |
More than the rate determined by the formula | deprivation applies only to the amount of the contribution which exceeds the value of the granny flat or interest |
A veteran and partner receiving service pension, their ages at next birthday being 72 and 68, give their son and daughter-in-law $300,000 to have a granny flat built onto their home. The parents will have no title to the property but will have a right of occupancy for life. The contract price for the construction of the granny flat is $250,000.
As the amount provided for the construction of the granny flat is greater than the contract price, the Reasonableness Test is not automatically satisfied and the funds transferred (i.e. $300,000) need to be compared with the amount assessed under the deprivation formula.
Annual combined maximum partnered rate of pension (including pension supplement) = $1,013.00 X 26 = $26,338.00
(Current rate as at September 2009)
Conversion factor for youngest member of the couple (age next birthday 68) is 17.85
Value of the lifetime accommodation interest under the Deprivation Formula is $26,338 X 17.85 = $470,133.30.
As the funds provided ($300,000) do not exceed the calculated value of the lifetime accommodation interest ($470,133.30), the amount transferred is considered reasonable and is assessed as if it were an entry contribution [2] to a retirement village [2].
A single veteran, aged 89 next birthday, gives his son and daughter-in-law $300,000 to have a granny flat built onto their home. The veteran has no title to the property but will have a right of occupancy for life. The contract price for the construction of the granny flat is $250,000.
As the amount provided for the construction of the granny flat is greater than the contract price, the Reasonableness Test is not automatically satisfied and the funds transferred (i.e. $300,000) need to be compared with the amount assessed under the deprivation formula.
Annual combined maximum partnered rate of pension (including pension supplement) = $1,013.00 X 26 = $26,338.00.
Conversion factor for veteran (age next birthday 89) = 5.61
Value of the lifetime accommodation interest under the Deprivation Formula is $26,338 X 5.61 = $147,756.18.
As the funds provided for the granny flat construction ($300,000) exceed the calculated value of the lifetime accommodation interest ($147,756.18), the transferred amount is considered unreasonable and deprivation has occurred. The amount of deprivation is the amount by which the transferred funds exceed the reasonable amount, being $152,243.82.
In this example the full transferred amount of $300,000, while including a deprived component, is still assessed as the veteran's entry contribution when determining his homeowner status as it is the amount he has paid for the right to live in the granny flat.
An entry contribution is the amount paid or agreed to be paid by a person for the right to live in a:
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.
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:
Refer to Section 5MA(2) [3] of the VEA for the full definition.
A test of reasonableness is applied to a granny flat [2] entry contribution [2]. The premise behind the reasonableness test is that in some circumstances the value of a lifetime accommodation interest may exceed the value of the principal home [2] being transferred. The reasonableness test uses an approximation of actuarial values, based on life expectancy [2], to estimate the value to the person of the life accommodation interest.
According to Section 5E(2) [22]of the VEA [22]a person is a member of a couple, if they are:
The term “partnered” is also commonly used.
According to Section 5E(2) [22]of the VEA [22]a person is a member of a couple, if they are:
The term “partnered” is also commonly used.
An entry contribution is the amount paid or agreed to be paid by a person for the right to live in a:
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.
According to subsection 5M(3) of the VEA [3], premises constitute a retirement village if:
Last amended: 22 March 2011
This table is only to be used for the purpose of establishing the reasonable amount of an entry contribution [2] to a granny flat [2] and in certain circumstances to establish the life interest of a sale leaseback contract. It is not to be used for any other purpose.
More → [24]
The conversion factor, is based on the age of the pensioner at next birthday. In the case of members of a couple, the life expectancy of the younger partner is used.
AGE NEXT BIRTHDAY |
CONVERSION FACTOR |
AGE NEXT BIRTHDAY |
CONVERSION FACTOR |
51 |
33.94 |
76 |
12.78 |
52 |
33.02 |
77 |
12.07 |
53 |
32.09 |
78 |
11.37 |
54 |
31.18 |
79 |
10.70 |
55 |
30.27 |
80 |
10.04 |
56 |
29.37 |
81 |
9.41 |
57 |
28.47 |
82 |
8.80 |
58 |
27.57 |
83 |
8.21 |
59 |
26.69 |
84 |
7.65 |
60 |
25.80 |
85 |
7.11 |
61 |
24.92 |
86 |
6.60 |
62 |
24.05 |
87 |
6.13 |
63 |
23.18 |
88 |
5.68 |
64 |
22.33 |
89 |
5.26 |
65 |
21.48 |
90 |
4.87 |
66 |
20.64 |
91 |
4.52 |
67 |
19.80 |
92 |
4.19 |
68 |
18.98 |
93 |
3.89 |
69 |
18.16 |
94 |
3.63 |
70 |
17.36 |
95 |
3.40 |
71 |
16.56 |
96 |
3.19 |
72 |
15.77 |
97 |
3.01 |
73 |
15.01 |
98 |
2.86 |
74 |
14.25 |
99 |
2.72 |
75 |
13.50 |
100 |
2.60 |
Note: The Conversion Factor table is based on the Australian Life Tables 2010-2012, published by the Australian Government Actuary. The life expectancy figures included in the Conversion Factor table are an average of the current male and female life tables published by the AGA.
Granny flats and sale leasebacks
9.2.5/Granny Flat Arrangements [25]
9.2.5/Sale Leaseback Arrangements [26]
An entry contribution is the amount paid or agreed to be paid by a person for the right to live in a:
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.
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:
Refer to Section 5MA(2) [3] of the VEA for the full definition.
Links
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[2] https://clik.dva.gov.au/%23
[3] http://clik.dva.gov.au/legislation-library
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[5] https://clik.dva.gov.au/book/export/html/15986#tgt-cspol_part9_ftn290
[6] https://clik.dva.gov.au/compensation-and-support-policy-library/part-9-principles-determining-pension-rate/92-residential-situation/926-reasonableness-test/deprivation-formula
[7] http://auth-clik.dvastaff.dva.gov.au/compensation-and-support-policy-library/part-9-principles-determining-pension-rate/92-residential-situation/926-reasonableness-test/deprivation-formula
[8] https://clik.dva.gov.au/book/export/html/15986#tgt-cspol_part9_ftn291
[9] https://clik.dva.gov.au/book/export/html/15986#tgt-cspol_part9_ftn292
[10] https://clik.dva.gov.au/compensation-and-support-policy-library/part-9-principles-determining-pension-rate/92-residential-situation/925-special-residence-assessment-rules/special-residence-basic-assessment-rules
[11] https://clik.dva.gov.au/compensation-and-support-policy-library/part-9-principles-determining-pension-rate/92-residential-situation/922-basic-principles-assessment/principal-home
[12] https://clik.dva.gov.au/compensation-and-support-policy-library/part-9-principles-determining-pension-rate/92-residential-situation/925-special-residence-assessment-rules
[13] https://clik.dva.gov.au/book/export/html/15986#ref-cspol_part9_ftn290
[14] https://clik.dva.gov.au/compensation-and-support-policy-library/part-9-principles-determining-pension-rate/92-residential-situation/927-departure-principal-home/sale-or-deprivation-home
[15] https://clik.dva.gov.au/book/export/html/15986#ref-cspol_part9_ftn291
[16] https://clik.dva.gov.au/compensation-and-support-policy-library/part-9-principles-determining-pension-rate/92-residential-situation/923-additional-assessment-rules-certain-types-residences/extended-land-use-test
[17] https://clik.dva.gov.au/book/export/html/15986#ref-cspol_part9_ftn292
[18] http://clik.dva.gov.au/glossary/assets-value-limit-avl
[19] https://clik.dva.gov.au/user/login?destination=node/16018%23comment-form
[20] https://clik.dva.gov.au/book/export/html/15986#tgt-cspol_part9_ftn293
[21] https://clik.dva.gov.au/book/export/html/15986#ref-cspol_part9_ftn293
[22] http://www.comlaw.gov.au/Series/C2004A03268
[23] https://clik.dva.gov.au/user/login?destination=node/16077%23comment-form
[24] https://clik.dva.gov.au/book/export/html/15986#tgt-cspol_part9_ftn294
[25] https://clik.dva.gov.au/compensation-and-support-policy-library/part-9-principles-determining-pension-rate/92-residential-situation/925-special-residence-assessment-rules/granny-flat-arrangements
[26] https://clik.dva.gov.au/compensation-and-support-policy-library/part-9-principles-determining-pension-rate/92-residential-situation/925-special-residence-assessment-rules/sale-leaseback-arrangements
[27] https://clik.dva.gov.au/book/export/html/15986#ref-cspol_part9_ftn294