Downsizing and the Age Pension

Often individuals and couples, once they are retired and receiving the age pension, will want to downsize their home to more suitable accommodation.  If the individual or couple own their own home, the home is excluded from the age pension assets test, irrespective of the value of the home.  But what happens to their age pension if they sell their current home to buy another home?

Consider Bill and Wilma.  They currently own their home – ‘Fairview’.  Consequently, for the assets test for the age pension, ‘Fairview’ is not counted as an asset, irrespective of the market value of ‘Fairview’.  However, they have decided to sell ‘Fairview’ to move into a different home – which they have already named ‘Betterview’ even though they have not decided on the location of the house which will become ‘Betterview’.

Once Bill and Wilma sell ‘Fairview’ and they receive the net sale proceeds, how is their age pension affected? 

If the net sale proceeds are immediately applied to purchase a replacement home, being ‘Betterview’, no issue arises. 

• The value of ‘Fairview’ was not counted an asset for the purposes of the age pension asset test (it was their family home).
• As the value of ‘Fairview’ was immediately applied to purchase ‘Betterview’ (their replacement home) and as the value of ‘Betterview’ is not counted as their new home, the replacement of one home with another has no adverse impact on their age pension.

However, if the net sale proceeds are not immediately applied in acquiring a replacement home; for example Bill and Wilma spend 56 weeks looking for ‘Betterview’ and another 6 weeks between exchange and settlement before they move into ‘Betterview’, how does the net sale proceeds affect their entitlement to the age pension during that 62-week period?

• In the absence of special rules relating to the net sale proceeds, the proceeds would be treated as an asset and will be counted in full in the application of the age pension assets test. This impact will be mitigated to some extent as Bill and Wilma will be treated as non-homeowners for that 62-week period. 
• Given current home prices, the application of the higher asset test thresholds for non-homeowners will be of little, if any, comfort. Consequently, Bill and Wilma by selling ‘Fairview’ and not moving into ‘Betterview’ for 62 weeks could have disentitled themselves to the age pension.
• Additionally, there would be consequences for Bill and Wilma under the age pension incomes test. The net sale proceeds will be treated as a financial asset and included in the financial assets pool to which the deeming rate of 2.25% would be applied (ignoring the low rate for the purposes of simplicity).
• Fortunately, there are special rules which may mitigate the means test consequences for Bill and Wilma. And, more importantly, the special rules have been recently modified to improve their application.  However, there are still limits to their application as a recent case has shown.

Special rules under the assets means test

The special rules which apply have the effect that the net sale proceeds are disregarded for asset test purposes for a period of up to 104 weeks (and this period may, in limited circumstances, be extended by a further period of 52 weeks) to the extent that the net sale proceeds are intended to be used to acquire a replacement home.

Bill and Wilma deposited the net sale proceeds in a separate bank account.  Consequently the bank account will not be counted for asset test purposes.  As they applied the entire balance of bank account in purchasing ‘Betterview’ within the 104-week period, the net sale proceeds will not have an adverse impact on the application of the assets test. 

Previously, the net sales proceeds would have been disregarded for 52 weeks with the further extension of 52 weeks.  This change applies from 1 January 2023 and was introduced by the Social Services and Other Legislation Amendment (Incentivising Pensioners to Downsize) Act 2022.

Special Rules under the income means test

The special rules which apply are that net sale proceeds are treated as forming a separate pool of financial assets to which only the low deeming rate (also known as the “below deeming rate”) of 0.25% (current rate until 30 June 2024 at which time the rate may be adjusted).

This special treatment will apply for so long as the net sale proceeds are disregarded for asset test purposes.  Also, the special treatment only applies to the portion of the net sale proceeds which are intended to be used to acquire a replacement home.

Previously, the net sales proceeds would have been included in the pool of financial assets which was subject to deeming at 0.25% rate for the low-rate portion and 2.25% on the balance.  This change applies from 1 January 2023 and was introduced by the Social Services and Other Legislation Amendment (Incentivising Pensioners to Downsize) Act 2022.

What if only a portion of the net sale proceeds was used to acquire ‘Betterview’

In this case, once ‘Betterview’ had become the family home for Bill and Wilma, the portion of the net sale proceeds not used in the acquisition of ‘Betterview’, will now be treated as an ordinary financial asset.  Consequently the unused portion would be treated as an asset for the purposes of the assets means test and the bank account would now be included in the ordinary pool of financial assets to which the 0.25%/2.25% rates would apply respectively, the low-rate portion of the pool of financial asset and the balance of that pool.

NOTE:  This article was prepared as at August 2023.  The article has not been updated in light of subsequent developments.