Changes to the home sale proceeds exemption
Legislation passed in Parliament in late November 2022 to expand the social security principal home sale proceeds exemption, aimed at assisting retirees who are looking to downsize. The changes help reduce the impact on a retiree’s social security payment during the transition between selling and buying or building their new home.
In summary:
- The assets test exemption will be extended from 12 months to 24 months.
- The assessment under the income test will be amended to treat the principal home sale proceeds intended to purchase, build, rebuild, repair or renovate a new main residence as a separate pool to the person’s other financial assets for the purposes of calculating deemed income. Only the lower deeming rate (currently 0.25%) will be applied to these proceeds for the duration of the assets test exemption.
- The changes are scheduled to commence from the later of 1 January 2023
The changes to home sale proceeds exemption explained:
The principal home sale proceeds exemption allows sale proceeds that are intended to be used to purchase, build, rebuild, repair or renovate a new principal home
to be exempt from the social security assets test for a period of up to 12 months. This can be extended to up to 24 months in certain circumstances. The person will continue to be assessed as a homeowner during the exemption period.
To qualify for the extension, the person must have a continuing intention to apply the sale proceeds to purchase, build, rebuild, repair or renovate a new principal home and meet each of the following criteria:
- Have made reasonable attempts to purchase, build, rebuild, repair or renovate their new principal home, and
- been making those attempts within a reasonable period after selling the principal home, and
- experienced delays beyond their control in purchasing, building, rebuilding, repairing or renovating their new principal home.
The exemption ends at the earlier of when:
- the new principal home has been purchased, or where the sale proceeds were intended to be used for building, rebuilding, repairing or renovating the new principal home, the build, repair or renovation of the new principal home have been completed, or
- the income support recipient ceases to have an intention to apply the proceeds to purchase, build, rebuild, repair or renovate a new principal home.
Where a person moved into another property they own and made that their principal home, they would not be eligible for the sale proceeds exemption.
i.e. they cannot access both the main residence exemption as well as the sale proceeds exemption at the same time.
There is no exemption for the sale proceeds under the social security income test. The income test assessment will be based on how the proceeds are invested.
For example, if they are invested in a bank account or term deposit, they will be subject to the usual deeming provisions.
When the exemption period commences
The rules allow sale proceeds to be exempt from the assets test from the date of sale. Centrelink considers this to be:
“…once a legally binding and unconditional agreement for the sale of the property has been entered into, or all conditions are met if the agreement is subject to preconditions. This can be before the actual settlement date.”
And based on the Guide to Social Security Law:
“…A person usually enters into a valid and legally binding contract when they ‘exchange’ contracts with the purchaser, and any ‘cooling off’ period prescribed by relevant legislation has expired. If the agreement is subject to preconditions, these preconditions have been met.”
Unconditional contracts can typically be seen at auctions. In these cases, there is generally no cooling off period and the contract date will generally be the commencement date of the exemption period.
If a deposit is received before the start of the exemption period, the funds will be assessable until the exemption period commences.
Can a person qualify for rent assistance during the exemption period?
Those who are occupying rental accommodation, including boarding and lodging with children, during the exemption period (including the extended period of up to 24 months) can qualify for rent assistance despite being assessed as homeowners.
Can sales proceeds be invested in superannuation?
It is possible to invest the sale proceeds in super and still be eligible for the exemption. In fact, a person can invest their home sale proceeds in whatever way suitable to the person and still be eligible for the exemption, as long as Centrelink can be satisfied that the funds will be available to purchase, build, rebuild, repair or renovate the new home when required.
This means that if sale proceeds are invested in super, the person will need to ensure they are able to meet a condition of release and access the funds when the funds are required.
Where sales proceeds are contributed to super prior to age pension age, the sale proceeds are exempt from both the assets and income tests. From age pension age, the sale proceeds in super remain exempt under the assets test during the exemption period but are deemed under the income test.
Proceeds can also be invested into an account-based pension to benefit from the tax-free earnings environment. The sale proceeds that are invested in an account- based pension are exempt under the assets test during the exemption period but are deemed under the income test.
Does the exemption apply when moving into residential aged care?
Single people who sell their home and intend to use the proceeds to pay lump sum accommodation payments in residential aged care are not eligible for the home sale proceeds exemption. Centrelink does not consider a person in this situation to be intending to purchase another home that will be their main residence.
Whilst the home remains unsold, the person can access the usual two-year assets test home exemption for social security purposes and the assessed value of the home is capped at $186,331.20 where not resided by a protected person1 for aged care means testing.
Once the home is sold, the person is considered a non-homeowner and the sale proceeds are assessed immediately for both social security and aged care purposes.
Where the person buys a new home using the proceeds after entering aged care, the new home is not considered their former home and it is assessed as an investment property for social security and aged care purposes.
For couples, where one person remains in the community and decides to sell the home and intends to use the proceeds to purchase another home (for example, a home closer to the aged care facility), the sale proceeds exemption will apply to both members of the couple for social security and aged care purposes.