Downsizer, Pensions

Surplus proceeds a pension threat

Downsizer Aged pension AAT asset pension test

A recent AAT case has highlighted the need for retirees to use the full proceeds of a home sale to buy another home to avoid surplus funds impacting pension entitlements.

Retirees selling a home and planning to use pension asset test exemption rules to prevent the proceeds impacting their entitlements have been reminded any surplus not applied to the purchase of a new home will affect their age pension.

SuperCentral self-managed superannuation executive consultant Michael Hallinan said an Administrative Appeals Tribunal (AAT) decision earlier this year highlighted the consequences of where net sale proceeds were not entirely applied in the purchase of the replacement home.

The case related to the application of the Social Services and Other Legislation Amendment (Incentivising Pensioners to Downsize) Act 2022, which allows for the proceeds of the sale of a home to be exempt from the pension asset where they are intended to be spent on purchasing a new home, building a new residence or repairing or renovating one. Changes to the act, effective from 1 January 2023, extended the exemption period from 12 to 24 months.

Hallinan said in the case of Parton and Department of Social Services Secretary (AAT 1903),  Rosemary and Raymond Parton sold their home and seven months later purchased a new one, but did not use all the sale proceeds, earmarking those for repairs and modifications to their new residence.

However, after the sale, but prior to the renovations, the Partons applied for the age pension, with Hallinan noting: “The issue to be resolved was how the retained net sale proceeds affected their entitlement to the age pension.

“The tribunal held that once they acquired their replacement home, any amount of the net sale proceeds which was not used to acquire the replacement home ceased to be subject to the special rules applying to the sale proceeds of the family home.

“The used proceeds would be counted as an asset and while, for income means test purposes, the unused sale proceeds would be included in the pool of financial assets to which the normal deeming rates would apply.

“The tribunal did note that if the Partons then applied the unused portion of the sale proceeds in the repair and modification of the replacement home, the amount used in this way would become part of the replacement home and therefore be disregarded for the purpose of the assets means test and cease to exist as a financial asset for the income means test.”

He also noted the Partons were unable to use the 24-month exemption period as all of the events in the case occurred before 1 January 2023, meaning the sale proceeds would only be excluded for 52 weeks rather than 104 weeks.

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