Why your principal residence is exempt from an assets test

Australians prefer to age in place in their own home. Here’s how owning your home is treated when assessing eligibility for the Age Pension.

According to the government’s 2015 Productivity Commission report, Housing Decisions of Older Australians, Australians prefer to age in place. We achieve this by staying independent in our own homes for longer, often with the help of government-subsidised home care.

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Here’s what the report said about why your principal residence – the family home – is exempt from the assets test for the Age Pension and other government subsidies.

The Age Pension and your home

The principal residence exemption means that the home you live in is not included in the assets test that decides whether or not you are eligible for the Age Pension and other government benefits. Retirement village contributions higher than the ‘extra allowable amount’ threshold are also exempt from the assets test.

A range of other assets are included in the assets test, including:

• Real estate investment properties
• Granny flat interests
• Life interests
• Financial investments such as shares or cash
• Superannuation investments
• Income streams
• Business assets

Changes to the assets test in 2016 won’t affect your home

When the 2016 reforms to the Age Pension’s assets test come into place, 90% of low income pensioners will reportedly receive a higher rate of the pension, but people who are already millionaires outside of the family home will no longer receive the pension. The new threshold will be $547,000 for singles (from $775,000 currently) and $823,000 for couples (from $1.15 million currently). Many people who were on a part pension will no longer receive any pension.

If you are worried that the changes mean you are no longer eligible for the pension, you will still be able to access home equity in a reverse mortgage in order to meet the threshold.

Why is your home exempt from the assets test?

Original reasons

The principal residence exemption has been around for a long time. In June 1908, the Invalid and Old Age Pensions Act (Cth) introduced means?tested age and invalid pensions, and in 1912, the full value of the principal residence was removed from the means test.

Prime Minister of the time Andrew Fisher said this would help make aged persons remain independent of their relatives, meaning that their relatives could invest more money in the national economy:

“Those who have built up a home … are entitled to keep that home, and live in it if they can find the means. Hitherto the best members of families have been prevented from directing their means into productive channels.” (Fisher, 1912)

The report commented that since then, home ownership has risen from 50% to 70% and life expectancy has risen from 55-59 years to 80-84 years. Yet the exemption has remained, even surviving a challenge in 1984 during the Hawke era, due to public opinion that the home should not be subject to testing.

Current reasons

In 2015, Prime Minister of the time Tony Abbott told the ABC that the family home will never be included in the assets test under a Coalition government.

This is because our pension system now relies on home ownership, meaning that any changes to the principal residence exemption would create the risk of poverty for a significant number of pensioners.

Home owners have a form of longevity insurance by being able to draw on their home equity in a reverse mortgage for emergency needs or if they outlive their superannuation and want more income than the Age Pension. In this way, the principal residence exemption relieves financial pressure on the Age Pension and other forms of government support.

Is it still beneficial?

There’s no denying that the principal residence exemption is beneficial for home owners on the Age Pension – it enables more people to receive the pension. But the Productivity Commission report suggests that it may no longer be beneficial to our national economy, and no longer equitable and fair. Consider the following points:

• Economy: It provides an incentive for pensioners to own and live in their home during retirement, even if their home is not suited to their health needs and needs for community.
• Fairness: Retirees who sell their home in order to afford to move into age-specific housing that is not deemed a new principal residence, such as a retirement village or residential aged care, will find themselves ineligible for the Age Pension under the income thanks to the proceeds of sale. A 2014 study cited by the report, of more than 2,800 Australian pensioners, found that many participants viewed ineligibility for the Age Pension as a major obstacle to downsizing (Judd et al, 2014).
• Economy: It encourages excessive investment in housing equity rather than some of that funding going into outside investments that benefit the wider economy.
• Fairness: Paying the pension to asset-rich retirees takes away resources that could be used to help less well-off pensioners. In 2011-12, according to the report, renters over 65 years old had a median wealth of just $38,000, compared to home owners with $700,000 and mortgage-owing home owners with $500,000.
• Economy: Paying the Age Pension to already-rich retirees puts a huge burden on working age taxpayers, which creates intergenerational inequity as our population ages. A shrinking number of workers are paying the pensions for a growing pool of people, according to the 2014 National Commission of Audit.
• Economy: For 2014-15, the government spent $42 billion on the Age Pension. This is 2.9% of GDP. The Treasury estimates that Age Pension spending will rise to $165 billion, 3.6% of GDP, by 2054-55, unless reforms are made. Including at least part of the principal residence in the assets test would reduce the number of pensions being paid and help to make the pension sustainable.

Reforms to the exemption suggested by the report

The report pointed to reviews in recent years that have suggested significant reforms to the principal residence exemption – without eliminating it altogether:

• The Henry Review, 2010: Apply a cap to the exemption. The excess value of homes worth more than the cap would be included in the assets test, and also in the income test as a deemed income source. Suggested cap: Home value of $1.2 million.
• National Commission of Audit, 2014: Apply a cap to the exemption. Suggested cap: Home value of $750,000 for couples and $500,000 for singles, to apply from the 2027-2028 tax year onwards.
• Rice Warner, 2015: Apply a cap to the exemption and remove all part pensions. Tapering would be eliminated, so that people with assets above the threshold would not receive any Age Pension. Suggested cap: Home value of up to $1.5 million, plus superannuation of $500,000.

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