Amanda Rishworth (Kingston, Australian Labor Party, Minister for Social Services) Share this | Link to this | Hansard source

I move:

That this bill be now read a second time.

This bill delivers on an important election commitment of the government to provide real support to older Australians confronted by the challenges of rising prices and soaring cost of living. It delivers amendments that will remove a potential barrier to pensioners downsizing their principal homes by reducing the impact that this has on their social security means testing.

The bill will reduce the impact of selling and buying a new principal home on pensioners and other income support recipients, consistent with the values of the Albanese government. It is yet another important step to ensuring that no-one is left behind and no-one is held back in our government's vision for the future of this country. It works in concert with the government's separate commitment to allow people aged 55 or over to make a one-off downsizing contribution of up to $300,000 into superannuation when they sell their principal home. It also works together with this government's decision to freeze deeming rates for a period of two years.

These measures, working together, encourage more older Australians to downsize their homes, reducing the impact of downsizing on older Australians' access to the pension at the same time as improving housing access and affordability and enabling growing families more opportunities to find suitable housing options.

From 1 January 2023, this bill will amend the Social Security Act 1991 and Veterans' Entitlements Act 1986 to double the period of the automatic asset test exemption for the principal home sale proceeds which a person intends to use for the purchase of a new home. It also ensures the financial assets of pensioners are calculated on the lower deeming rate, recognising the high prices and values of home sales at the moment could mean that a high deeming rate would apply and discourage downsizing.

Under existing arrangements, an income support recipient's principal home is exempt from the social security assets test. When a person sells their principal home, these sale proceeds are exempt from the assets test for up to 12 months, so long as the person still intends to use the proceeds to purchase, build, rebuild, repair or renovate a new principal home. During this exempt period, the person continues to be treated as a 'homeowner' for means testing purposes for income support payments meaning that they remain eligible for their income support payments.

The rationale here is that the asset test exemption works to protect an income support recipient who's moving between homes from the potentially significant impact the sale proceeds could have on their support payments if the house sale were to be counted in their assets.

Given the currently high values of Australian real estate, in many cases an individual or couple wouldn't continue to be eligible for any income support payment if the full value of their home were to be counted. In the past, the exemption period was considered to be a reasonable amount of time for people to find or build a new principal home.

The exempt period generally ends when the income support recipient no longer intends to use the sale proceeds for a new home, or when they move into their new home. The current situation is that there's an additional extension available of up to 12 months in extenuating circumstances, such as when there are building delays due to a natural disaster.

The amendments in this bill that I'm bringing forward today will extend this assets test exempt period for principal home sale proceeds from the current maximum of 12 months to a new maximum of 24 months. The additional 12-month exemption for extenuating circumstances will continue, meaning that in exceptional cases, home sale proceeds could be exempt from the social security assets test for up to 36 months from the date of the house sale.

Now let me turn to the second part of the means testing arrangements that this bill addresses. The second limb to social security means testing considers income. In this part, the value of the home sale proceeds that are intended to be used in buying and the financial assets of the individual are 'deemed' by applying a uniform amount of assumed interest gained from the person's financial assets working. This saves the recipient the complexity of having to bring forward evidence of their actual income derived from their financial investments. This component of means testing can also affect a person's rate of income support, based on the threshold applied.

Financial investments might include a person's bank account balance, managed investments, shares and superannuation. Investment income is assessed by applying the deeming rates to the total market value of a person's financial investments. The actual returns from the investments aren't used and any excess returns above the assessed income do not affect a person's payment rate and generally benefit individuals if their financial investments are performing better.

From a policy perspective, taking into account some level of deemed income on principal home sale proceeds is appropriate, because if the proceeds were placed in a savings account or other financial investment, they would generate returns which a person could use to support themselves.

Under the current deeming rules, the lower deeming rate of 0.25 per cent is applied to the value of the financial assets up to a deeming threshold of $56,400 for singles and $93,600 for couples combined. The upper deeming rate, presently at 2.25 per cent, applies to the value of financial assets above these thresholds.

These thresholds apply to the principal home sale proceeds—even when they are exempt from the assets test—in the same way that funds placed in other financial investments, such as shares or bonds, are treated.

Again, given the high value of most Australian homes, this means the bulk of the home sale proceeds are often subject to the upper deeming rate. This can have a significant negative impact on a person's pension or other payment rates and works as a considerable disincentive for pensioners considering downsizing their principal homes.

This bill will substantially reduce this barrier and disincentive for pensioners by ensuring that only the lower deeming rate is used to assess income on principal home sale proceeds which are also exempt from the assets test for up to 24 months, with the possibility of a further 12 months for extenuating circumstances.

This legislative change will significantly reduce the amount of income deemed on assets test exempt principal home sale proceeds. It builds on the doubling of the exemption period by further reducing the impact on a person's payment rates during the process of selling and purchasing a new principal home.

As I noted earlier, the government has separately committed to freezing the deeming rates at their current levels for two years to 30 June 2024. This means that, for the next two years, principal home sale proceeds which a pensioner or other income support recipient intends to use to purchase a new principal home will generate deemed income at a rate of only 0.25 per cent per annum.

Let me share with the House two practical examples that illustrate how this bill helps pensioners downsizing and reduces the impact of selling and buying a new principal home on their payment rates.

The first illustrates the benefit of extending the assets test exempt period and the application of the lower deeming rate. Consider a maximum rate pensioner couple who choose to downsize by building a new, smaller home that better suits their needs.

Under the current rules, if the couple sold their existing family home for $1 million and intended to use $800,000 of that amount to purchase, build, rebuild, repair or renovate a house of equal value, then the $800,000 would be exempt from the pension assets test for up to 12 months.

Without the changes in this bill, assuming the couple put the full sale proceeds of $1 million into a savings account and had no other financial assets, the deemed income assessed on this amount would be at the upper deeming rate of 2.25 per cent on the $1 million less the couple's deemed threshold amount of $93,600, which would be deemed at the lower rate. This would have an effect of reducing this couple's payment rate by about $229 a fortnight. The other significant impact is that the sale proceeds of $800,000 which the couple intends to use for their new principal home will be set aside from the assets test for only 12 months.

On the other hand, with the changes to the deeming and the assets exemption period in this bill, the $1 million less the deeming threshold area of $93,600 would be deemed at only 0.25 per cent, with the effect of reducing the deemed income on this couple's home sale proceeds to well below the income-free area of $336 per fortnight, meaning they would remain on the maximum pension rate.

In terms of the assets test which could knock out their eligibility for the pension entirely, what if a building delay outside the couple's control prevents their new home from being completed within 12 months? Under the current arrangements, they could apply for an additional 12-month asset test exemption due to extenuating circumstances. But if there are further complications such as flood or other natural disaster preventing the couple's new home from being completed by the end of the second year, the assets test exemption would expire and their home sale proceeds of $800,000 would be subject to the assets test. Under the current arrangements, after 12 months they would no longer be treated as 'homeowners' for means testing purposes.

Assuming they had no other assets, under the assets test for a non-homeowner couple, their pension would be reduced by a very significant $1,069.50 a fortnight to a part rate pension of $419.30 per fortnight.

Unfortunately, some people do face such repeated setbacks to the completion of a new home. We know, with the pressures on the economy, labour supply and supply chain issues due to the impact of COVID-19, there have been significant impacts on the building sector across the country, and many areas of Queensland and New South Wales have experienced repeated bouts of severe flooding over the last two years.

The amendments in this bill will allow the asset test exemption to be extended to a total of 36 months in extenuating circumstances, giving these people more time and certainty to complete the building or purchase of their new home and to have greater peace of mind.

Let me share with the House a second example that illustrates the benefit of the changes to the deeming rules in this bill. Let's consider the case of a single pensioner—let's call him Nick—who sells his home for $600,000, intending to downsize to a smaller unit of equivalent value. As he intends to use the full amount to purchase his new home, the assets test exemption applies, and the $600,000 is exempt from the pension assets test for up to 24 months under the changes in this bill.

Nick then deposits the sale proceeds into a savings account. He has no other financial assets.

Without the change to the deeming rules in this bill, deemed income would be calculated on Nick's home sale proceeds at the lower rate of 0.25 per cent for the first $56,400, and the higher rate of 2.25 per cent for the remaining $543,600. As a result, Nick would have assessed income of $12,372 a year, or around $476 a fortnight.

Pensioners benefit from an income test free area, which for singles is currently $190 a fortnight. This means the first $190 a fortnight Nick receives from any source, including the deemed income from his financial investments, does not affect his rate of pension. Nick's remaining income will reduce his pension by 50c for each dollar over $190.

Without the changes in this bill, Nick's pension would be reduced by about $143 a fortnight.

However, with the benefits of this bill, the full $600,000 of Nick's home sale proceeds will be deemed at the lower rate of 0.25 per cent while they remain exempt from the assets test.

This would result in Nick having assessed income of only $1,500 a year. As he has no other income, this would not be enough to impact upon Nick's age pension rate.

In Nick's case the amendments in this bill would leave him $143 per fortnight better off during the period between selling his old principal home and moving into his new, smaller unit.

We know that people weigh up many factors in making a choice to sell a home and downsize to something smaller. One of the considerations that people make is how this transaction will impact on the income support that they receive. The changes in this bill will assist older Australians contemplating downsizing who are concerned about the impact on their pension rate during the process of selling and buying a new home.

The changes in this bill will apply to all people who sell their principal home from the later of 1 January 2023 or one month after the day the bill receives royal assent.

These changes are beneficial for affected pensioners and other income support recipients, and are expected to cost the budget $61.4 million in underlying cash terms over the next four years.

The changes in this bill build on the government's separate commitment to allowing people aged 55 years or over to make a one-off downsizer contribution of up to $300,000 into superannuation when they sell their principal home. By encouraging more older Australians to downsize their home, these measures will improve access to appropriate housing for all people in our community, including growing families.

The Albanese Labor government is deeply committed to serving all Australians and ensuring that no matter what your circumstances, we do everything we can to make sure that you are supported. This measure is yet another building block in what we're putting in place to help ordinary Australians manage in challenging economic times. This will ensure that we are removing the barriers that could negatively affect pensioners when they downsize their homes. I commend the bill to the House.

Debate adjourned.