In simple terms, the sale proceeds exemption applies when a homeowner sells their principal home and intends to spend some or all of the proceeds to purchase a new home. Under the exemption, the amount they intend to spend can be asset test exempt for up to 12 months, and in some cases up to 24 months.
During the period between selling and buying a new principal home, they are assessed as homeowners under the assets test.
However it’s important to be aware that the exemption only applies to the asset test, it does not apply to the income test. If sale proceeds are placed in a financial investment such as a bank account, they will be subject to deeming. Therefore their social security payments may still be impacted by the income test.
To be eligible for the sale proceeds exemption under the assets test, a homeowner must:
• sell their principal home and not have a right or interest in another principal home*, and
• spend or intend to spend (part or all) of the sale proceeds on a new principal home.
Under the exemption, only the amount that is spent or intended to be spent on the new residence is asset test exempt during the exemption period.
Where the proceeds are invested in a financial investment such as a bank account, term deposit or account based pension, the amount that is intended to be spent on the new home is asset test exempt during the exemption period (although subject to deeming).
In addition, funds that have been spent on building, rebuilding, purchasing or renovating a new principal home are also asset test exempt during the exemption period.
Even the value of land that was owned prior to selling their principal home can be asset test exempt under the sale proceeds exemption, as long as the new principal home will be located on that land and the land can be included in the definition of principal home.**
However it’s important to note that the exempt amount cannot exceed the value of the sale proceeds from the sale of the principal home. See below for more information.
The sale proceeds exemption is generally up to 12 months. In some cases it may be extended up to 24 months when the homeowner has experienced delays beyond their control. See ‘extended exemption period’ below for more information.
The exemption period commences from the date of sale of the principal home, which is generally the settlement date.***
The exemption period ends 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 has been completed, or
• the person no longer intends to spend the sale proceeds on a new principal home
whichever occurs first.
Ben sells his principal home and intends to purchase a new home (an apartment) for $400,000.
When assessing the sale proceeds, Centrelink will exempt $400,000 under the assets test from the date of sale.
After 10 months, he purchases an apartment as his new principal home. At this point the sale proceeds exemption ends.
If Ben purchased the apartment 14 months after selling his principal home, the sale proceeds exemption would end after 12 months (unless he qualified for an extended extension due to delays beyond his control).
If the sale proceeds exemption ended before he purchases an apartment, the amount he intends to spend on the apartment would become an assessable asset and he would be considered a non-homeowner from the end of the exemption period until he purchases the apartment.
Purchasing a new home
Where somebody sells their principal home and intends to use some or all of the proceeds to purchase a new home, only the amount intended to be spent on a new residence is asset test exempt. Any sale proceeds that are not intended to be spent on a new residence are assessable under the assets test.
In addition, the whole sale proceeds are deemed if invested in a financial investment.
John sells his principal home for $800,000 and puts the sale proceeds in the bank.
He intends to purchase a new home and advises Centrelink that he intends to use $600,000 of the proceeds for this purpose.
When assessing the sale proceeds, Centrelink will exempt $600,000 under the assets test and the remaining $200,000 will be an assessable asset.
Under the income test, the whole $800,000 will be subject to deeming.
Building a new home
Where somebody sells their home and intends to use the proceeds to build or renovate a new home, the sale proceeds exemption applies to the amount they intend to spend on building or renovating the new home, including purchasing a block of land where the new principal home will be built.
Both the amount held in financial investments waiting to pay for building costs and any amounts already paid to build the new house are asset test exempt during the exemption period.
However the total amount that is asset test exempt cannot exceed the sale proceeds from the sale of the principal home.
Under the income test, the amount invested in financial investments will be subject to deeming.
As the person makes payments towards the costs of building or renovating the new home, they should advise Centrelink of their new account balance, as the amount that is subject to deeming will reduce.
Peter and Maria own a block of land worth $300,000. They intend to build their new principal home on the land.
They sell their current principal home for $1,000,000 and put the sale proceeds in the bank.
They intend to spend $600,000 on building their new home. Under the sale proceeds exemption, Centrelink will exempt both the land they already own and the amount they intend to spend on building the new home during the exemption period ($300,000 + $600,000 = $900,000). The remaining $400,000 of the sale proceeds is an assessable asset.
Note: if this amount exceeded $1,000,000 which is the amount of the sale proceeds, the exempt amount during the exemption period would be limited to $1,000,000.
Under the income test, the amount in financial investments will be subject to deeming ($1,000,000).
As they make payments towards building their new home, the balance of their bank account will reduce. They should advise Centrelink of these reductions as it will reduce the amount of deemed income that is assessable.
How are deposits assessed?
When a person sells their principal home, they will generally receive a deposit on exchange of contracts.
As the sale proceeds exemption does not commence until the date of sale, which is generally the settlement date,*** the deposit is generally received before the commencement of the sale proceeds exemption.
In this case, the deposit will be assessed as an asset (subject to deeming) until the contract entered into is legally binding which is generally date of settlement.
If the sale proceeds exemption applies and the he/she intends to use the deposit towards purchasing another principal home, the deposit will be exempt under the asset test during the exemption period. However, deeming rules apply to amounts invested in financial investment such as a bank account.
A common question in relation to the sale proceeds exemption is whether homeowners who rent a home in-between selling and buying principal homes can receive rent assistance.
The answer is yes.
Where somebody has sold their former principal home within the last 12 months and is likely to use some or all of the proceeds of the sale (within 12 months of the sale) to acquire, build, repair or renovate another principal home they may be entitled to rent assistance.
In addition, persons who are entitled to the extended exemption period of up to 24 months due to experiencing delays beyond their control may also be eligible for rent assistance.
Extended exemption period
The sale proceeds exemption period is generally up to 12 months. However in some cases it can be extended up to 24 months if the person still intends to purchase a new principal home and they have experienced delays beyond their control.
To qualify for an extended exemption, the person must meet all of the following criteria:
• have made reasonable attempts to obtain a new principal home including building, rebuilding, repairing or renovating, and
• have made those attempts within a reasonable period after selling the principal home that is within six months, and
• have experienced delays beyond their control.
• Delays in obtaining building approval from the local shire council which delays entering an agreement with a builder.
• The homeowner is hospitalised for an extended period.
• Demands on the building industry are stretched in a particular area, for example due to a natural disaster like a flood or cyclone damage.
Jill sells her principal home for $800,000 in October 2018. She purchased a block of land in January 2019 with the intention of building a new principal home. However due to delays with developers, she was unable to commence building until June 2019.
She signed a contract in June 2019 for the building to be completed by January 2020.
However she experienced further delays due to the builder and the new home was only partially completed by January 2020. The builder estimates the home will be completed by March 2020.
In this case, the extended exemption would apply as Jill:
• made reasonable attempts (that is, buying a block of land and signing a contract to build a home)
• made those attempts within a reasonable period (buying a block of land within 6 months), and
• experienced delays beyond her control (developer and builder delays).
Jill would gain access to the extended exemption for the period of October 2018 to the end of March 2020.
What if the home is overseas?
Where a homeowner sells a principal home that is located overseas and intends to use the sale proceeds to purchase a new principal home either overseas or in Australia, they may be entitled to the sale proceeds exemption.
There is no requirement for the principal home to be located in Australia.
What if the homeowner moves into an investment property?
Where a homeowner sells their principal home and moves into an investment property, the assessment for social security purposes will depend on the person’s intention.
If they intend for the investment property to be their new principal home, then the investment property will be asset test exempt and the sale proceeds will be an assessable asset.
However if they intend to live in the investment property temporarily and use the sale proceeds to purchase a new principal home, then the sale proceeds exemption may apply. In this case, the amount they intend to spend on the new principal home is an exempt asset during the exemption period. On the other hand, the investment property would be an assessable asset.
* Or the right or interest does not give them security of tenure
** Principal home is defined in section 11A(1) of the Social Security Act. Where the principal home is a dwelling house it includes adjacent land up to two hectares held on the same title document.
*** The principal home is considered sold 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.
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