Downsizer case highlights subtle differences between super and social security laws

“There is a special rule in social security laws recognising that since people get to exclude their home from the assets test, they should also be able to exclude the proceeds from selling their home for a limited period while they’re in the process of buying a new home,” Ms Heffron said.

“The key, though, is that you only get to exclude the bit you’re going to spend on a new home. If they are specifically spending less on the second home, the ‘excess’ will count for age pension purposes.”

The case involved a couple who sold their home and the net proceeds were not entirely used for a new home. The AAT held that any amount of the net sale proceeds not used to acquire the replacement home ceased to be the subject of special rules.

It stated that 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.

Michael Hallinan, executive consultant, SMSF for SuperCentral said the case illustrates the consequence where the net sale proceeds were not entirely used up in the application of the replacement home.

“Mr and Mrs Parton sold their home and did not immediately acquire a replacement home. Once they acquired the replacement home, they did not use up all of the sale proceeds,” he said.

“They intended that a portion of the net sale proceeds would be used in repairing and modifying their replacement home.

“The issue to be resolved was how the retained net sale proceeds affected their entitlement to the age pension.

“The Tribunal did note that if the Partons 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.

“As the relevant events of the Parton’s situation occurred before 1 January 2023, the sale proceeds would only be excluded from the assets means test for 52 weeks and not 104 weeks. Additionally, the balance of the sale proceeds would form part of the ordinary pool of financial assets to which the 0.25 per cent and 2.25 per cent rates apply.”

Ms Heffron said the social security laws are quite different to the downsizer legislation for super, where it’s all about selling a home, giving one the ability to make a special contribution one might not otherwise be able to make given age or existing super balance.

“For the superannuation concept, the home sale is the trigger to eligibility and the size of the proceeds can impact the amount of the contribution you’re allowed to make – $300k each for a couple but only up to a maximum of the gross sale proceeds,” she said.

“However, there’s no requirement that the money comes from the actual proceeds – it could come from personal savings – and there’s no requirement that you be downsizing.

“In other words, super law doesn’t care what you intend to do with the money while the special social security rule covered by this case absolutely does.

“The key is that super and social security are very different even when they use some of the same language. It’s also worth noting that if the Partons, in this case, were intending to use some of the proceeds to make a downsizer contribution to super, that definitely wouldn’t get the social security carve out.”