4.6.3.80 Exempting the Principal Home - Sale Proceeds (from 01/07/2007)

Summary

This topic covers the following:

• the definition of principal home sale proceeds,
• when the principal home sale proceeds exemption can apply,
• the 12 month exemption of principal home sale proceeds,
• the exemption of principal home sale proceeds beyond 12 months,
• existing income support recipients whose principal home sale proceeds assets test exemption expired prior to 1 July 2007, and
• income test rules for sale proceeds held in a financial investment.

Policy reference: SS Guide 4.6.3.30 Defining the Principal Home

Definition of principal home sale proceeds

Principal home sale proceeds can include:

• funds from the sale of the principal home that are held in a financial investment, which the income support recipient intends to be applied to purchase, build, rebuild, repair or renovate a new principal home, and
• payments that have been applied to build, rebuild, repair or renovate a new principal home.

Intention to apply sale proceeds

Only the value of principal home sale proceeds that are intended to be used to purchase, build, rebuild, repair or renovate a new principal home can be exempt under the assets test.

Example: Geoff sells his principal home for $450,000. Geoff intends to purchase a new principal home for $350,000 and to spend $100,000 on establishing a new business venture. Given Geoff only intends to use $350,000 of the sale proceeds to purchase a new principal home, the total amount of sale proceeds that can be exempt from the assets test is $350,000. The $100,000 is NOT exempt from the assets test.

Application of sale proceeds

The value of principal home sale proceeds that have been applied to build, rebuild, repair or renovate a new principal home can be exempt under the assets test. This could include the value of:

• the residence or partially finished residence that is in the process of being built, rebuilt, repaired or renovated, and
• a structure on the land to the extent that the structure was built before the income support recipient began applying the sale proceeds, and
• land on which the new principal home is to be built, rebuilt or repaired. Land that was purchased prior to receiving the sale proceeds (whether owned outright or mortgaged) can be exempt once the principal home sale proceeds have been received.
  • Example: Sally purchased a block of land for $100,000 prior to selling her principal home. Sally sold her principal home and $350,000 was received on 30 July 2007 at settlement which she used to pay off the mortgage on the block of land. The balance of the settlement money was placed into a bank account and Sally intends on using this to build a home on the block of land. In this case the block of land and the money in the bank account can be exempt from 30 July 2007.

The maximum total asset value that may be exempt is the value of the proceeds of the sale of the old principal home.

Example: The maximum asset value that Sally can have exempt is $350,000, which includes the value of the block of land.

For couples, where one member of the couple intends to or has applied the proceeds, then their partner will also be regarded as intending to apply, or having applied the proceeds.

Act reference: SSAct section 1118(1B) Application of proceeds of sale of principal home

When the principal home sale proceeds exemption can apply

The principal home sale proceeds exemption only applies IF:

• an income support recipient sells their principal home, and
• the income support recipient does not have a right or interest in their principal home, or
• that right or interest does not give the income support recipient reasonable security of tenure.

Explanation: An income support recipient can only gain access to the principal home sale proceeds exemption if they do not have another principal home.

If an income support recipient has sold their principal home and is living in another home they own, they CANNOT gain both a principal home exemption on the home they are currently living in as well as an exemption on the principal home sale proceeds. If this is the case, either the home they are currently living in or the principal home sale proceeds will be exempt from the assets test, but not both. The one which is exempt depends on what property the income support recipient intends to be their new principal home.

Example: Joan sells her principal home and moves into another home that was previously her investment property. Joan cannot gain a principal home exemption on the home she is living in as well as having the sale proceeds exempt from the assets test. In this case, Joan intends her principal home to be the one she builds with the sale proceeds. Therefore, given Joan does not intend the home she is currently living in to be her principal home it will be assessed as an asset. The sale proceeds that will be used to build a new principal home will be exempt from the assets test.

Act reference: SSAct section 1118(1B) Application of proceeds of sale of principal home

Exemption of principal home sale proceeds - 12 months

IF an income support recipient sells their principal home the portion of the proceeds that will be used for the new principal home can be exempt from the assets test for up to 12 months.

When the principal home sale proceeds exemption starts

The principal home sale proceeds are exempt from the date of sale. The income support recipient continues to be assessed as a homeowner during this period.

When the principal home sale proceeds exemption ends

The principal home sale proceeds exemption ends when either:

• the new principal home is purchased, or the building, rebuilding, repair or renovation of the new principal home is complete, or
  • Example: The settlement on a new home purchase occurs.
• the income support recipient ceases to have an intention to apply the proceeds to purchase, build, rebuild, repair or renovate a new principal home,

whichever occurs first.

Example: On 10 January 2007 Mr and Mrs Jones sold their principal home with the intention of purchasing a new principal home. However, on 20 June 2007 Mr and Mrs Jones decide they no longer want to purchase a new principal home but would rather purchase a campervan and travel around Australia. The principal home sale proceeds exemption ceases on 20 June 2007 - when the intention to purchase a new principal home ceased.

If an income support recipient has sold their principal home by instalments or the payment is deferred ONLY those payments received within 12 months of the sale are exempt from the assets test.

Act reference: SSAct section 1118 Certain assets to be disregarded in calculating the value of a person's assets..., section 1118(1B)(c) Application of proceeds of sale of principal home

Exemption of principal home sale proceeds beyond 12 months

From 1 July 2007, IF the income support recipient has not been able to purchase, build, rebuild, repair, or renovate a new principal home within 12 months, the principal home sale proceeds CAN be exempt from the assets test for up to 24 months, subject to the income support recipient meeting certain criteria.

Criteria to gain extended exemption

To gain an extended principal home sale proceeds exemption for up to 24 months the income support recipient must have a continuing intention to apply the proceeds of the sale to purchase, build, rebuild, repair or renovate a new principal home and 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.

All of the above criteria MUST be met. If one of the above criteria is not met then the income support recipient CANNOT gain an extended principal home sale proceeds exemption for up to 24 months.

Making reasonable attempts

An income support recipient would be considered to be making reasonable attempts to purchase, build, rebuild, repair, or renovate their new principal home IF they entered into some form of agreement including:

• signing a contract of sale to purchase a house, or
• purchasing or signing a contract to purchase a block of land to construct a house on, or
• signing a contract with a builder to construct or rebuild a house, or house and land package, or
• contracting or accepting a quotation from a tradesman to undertake repairs or renovations.

The income support recipient will be required to provide some documentary evidence (when the extended exemption period is being requested) to satisfy they have been making reasonable attempts.

Example: A copy of the agreement/acceptance of quotation to rebuild a new home.

Exception: In special circumstances an income support recipient may be considered to be making reasonable attempts to purchase, build, rebuild, repair, or renovate their new principal home if they have been unable to enter some form of an agreement. These circumstances include where the income support recipient has:

• experienced delays relating to the purchase, construction, rebuilding, repair or renovation of the new principal home, or
  • Example: Delays in gaining building approval from the local shire council that is required prior to entering into an agreement with the builder.
• been absent from the place they intend to purchase, build, rebuild, repair or renovate their new home due to reasons beyond their control, or
  • Example: Caring for a close family member in a separate location to the place where they were to build their new principal home.
• had changes in health that have had a major bearing on the individual's circumstances, or
  • Example: Being hospitalised for an extended period.
• been unable to gain a commitment/enter into an agreement with a builder because demands in the building industry are stretched in a particular area.
  • Example: After a natural disaster.

The income support recipient will be required to provide some documentary evidence for special circumstances to apply.

Example: A copy of correspondence from the local shire council.

Making those attempts within a reasonable period

The income support recipient must have made attempts to purchase, build, rebuild, repair or renovate a new principal home within a reasonable period after selling the principal home.

Explanation: The income support recipient must have taken action towards entering into some form of agreement to purchase, build, rebuild, repair, or renovate a new principal home, within 6 months from the date of the sale. Taking action could include: plans being developed by an architect or draftsman, gaining quotes from builders, attending open houses, contacting real estate agents on house and land packages available.

The income support recipient may be required to provide some documentary evidence (when the extended exemption is being requested) to satisfy they have been making attempts within a reasonable time period.

If an income support recipient has NOT made attempts within a reasonable period, i.e. 6 months from the date of sale, the extended exemption CANNOT apply.

Example: Sam and Jenny sold their principal home on 20 December 2006. They went overseas and came back to Australia on 30 October 2007. They entered into a contract of sale to purchase a new home on 15 December 2007 and settlement will occur on 15 March 2008. In this case, although Sam and Jenny made reasonable attempts (i.e. they entered into a contract of sale to purchase a new home within 12 months) they did not make those attempts within a reasonable period (i.e. 6 months) from the date of sale. In this case, Sam and Jenny cannot gain an extended exemption for principal home sale proceeds.

Experienced delays beyond their control

An income support recipient would be considered to have experienced delays beyond their control IF they have been unable to commence or complete the purchase, construction, repair, rebuilding, or renovation of their home due to delays in the building industry.

Example: Mr and Mrs Smith sold their principal home in October 2007. They purchased a block of land in January 2008 and were unable, due to delays with developers, to commence building on the land until June 2008. Mr and Mrs Smith signed a contract in June 2008 for the building to be completed by January 2009. The builder experienced delays and the new home was only partially complete by January 2009. The builder estimates the home will be completed by March 2009. In this case, given Mr and Mrs Smith:

• made reasonable attempts (i.e. buying a block of land and signing a contract to build a home within 12 months),
• made those attempts within a reasonable period (buying a block of land within 6 months), and
• experienced delays beyond their control (developer and builder delays),

they would gain access to the extended exemption for the period of October 2008 to the end of March 2009.

Determining a time period for the extended exemption

An income support recipient can only gain a principal home sale proceeds exemption for up 24 months from 1 July 2007. This includes the original 12 months and up to a further 12 months extended exemption.

The length of time that the extended exemption period will apply for should be determined. This time period should be in line with when the income support recipient anticipates, or the contract stipulates, the purchase, building, rebuilding, repair or renovation of the new home will be complete.

Example: George sold his principal home on 2 August 2007. George intended to purchase a block of land and build a new principal home. On 20 January 2008 George settled on a house and land package. Due to delays in the building industry George's builder estimates that the house will not be built until the end of October 2008. In this case, George's 12 months exemption will take him up until 1 August 2008. Provided George meets the criterion, the extended principal home sale proceeds exemption may apply until the end of October 2008.

If an income support recipient's new home is still not complete the time period can be further extended provided the criteria continues to be met and the overall timeframe does not exceed the total allowable 24 month exemption period.

When the extended exemption ends

The extended principal home sale proceeds exemption ends when either:

• the income support recipient ceases to have an intention to apply the proceeds, or
• a new principal home is purchased, or the building, rebuilding, repair or renovation of the new principal home is complete, or
• the determined extended time period expires,

whichever occurs first.

Act reference: SSAct section 1118(1B) Application of proceeds of sale of principal home

Existing income support recipients whose principal home sale proceeds assets test exemption expires prior to 1 July 2007

Income support recipients whose 12 month principal home sale proceeds exemption period expired prior to 1 July 2007 CANNOT gain an assets test exemption for the period between when their exemption ceased and the extended exemption came into effect (1 July 2007).

If, on 1 July 2007, the income support recipient is still in the process of purchasing, building, repairing, rebuilding or renovating a new principal home they can request an extended assets test exemption. If the income support recipient meets the criterion the extended exemption can only apply from 1 July 2007 and when the new home is anticipated to be purchased, built, repaired, rebuilt or renovated.

Income test rules for sale proceeds held in a financial institution

The principal home sale proceeds that are held in a financial investment are subject to deeming.

Act reference: SSAct section 9(1)-'financial investment'

Policy reference: SS Guide 4.4.2 Deeming of Financial Investments, 4.6.3.60 Exempting the Principal Home -Temporary Vacation of Property, 4.6.3.70 Exempting the Principal Home - Care Situation

_______________________________________________________

Last reviewed: 2 January 2013