Loans and liabilities against assets 108-04020040

Where there is a small change to asset values determine whether the customer is required to notify.

Customer advises of an encumbrance over a particular asset.

Obtain as much information as possible about the encumbrance from the customer, for example:

• for a loan, obtain copy of loan agreement
• if asset is part of a business, obtain a copy of the business balance sheet
• if a mortgage, a copy of mortgage papers will be required
• If an encumbrance is secured over both an exempt and assessable asset: If the exempt asset has an existing encumbrance, details of the existing encumbrance on the exempt asset are required to determine its net asset value for apportionment. See the Resources page for examples

Has the customer given evidence of an encumbrance over an asset?

• Yes, go to Step 3
• No, request the details verbally or in writing and give them a reasonable timeframe to respond. Procedure ends here until they respond or the time has lapsed

Where the customer gives evidence, determine if the Service Officer or Complex Assessment Officer (CAO) should assess the encumbrance.

Does the assessment of encumbrance involve a Private Trust or Private Company?

• Yes, go to Step 4
• No, see Step 1 in Table 2

Has the Complex Assessment Officer (CAO), completed an assessment?

• Yes, go to Step 5
• No, refer case to a CAO. See Identifying and making suitable referrals to the Complex Assessment Officer for more details. Procedure ends here pending the CAO assessment

Code details as per the CAO assessment. For assistance with coding, see Assessment of assets and select procedure according to type of asset, following recommendations of the CAO.

Complete the DOC with details of the effect of the encumbrance.

Procedure ends here

Is the encumbrance part of a business structure?

• Yes, each type of business structure has specific guidelines for treatment of secured liabilities. For more information about treatment of the encumbrance, see Business liabilities. Procedure ends here
• No, go to Step 2

Is the encumbrance a secured liabilities exception?

• Yes, the encumbrance cannot be deducted from the value of an asset. Code asset at its net market value. For help, see Assessment of assets and select procedure according to type of asset. Record details of asset, encumbrance and reasons for decision on a DOC. Procedure ends here
• No, go to Step 3

Is the encumbrance secured over both assessable assets and an exempt asset exempt from assessment?

Note: if the exempt asset has an existing encumbrance, details of the encumbrance are required to determine net asset value.

• Yes, go to Step 4
• No, and the customer:
• is a primary producer, go to Step 6
• is not a primary producer, go to Step 5

Secured liabilities

Subsection 1121(4) of the Social Security Act 1991 provides that the amount of the liability is apportioned between the assessable and exempt assets to calculate the net value of the assessable assets using the apportionment formulae.

For assistance to calculate a mortgage apportionment see Resources for a link to the Mortgage Apportionment tool.

Note: if the exempt asset has an existing encumbrance, details of the encumbrance are also required to determine its net asset value for apportionment.

The customer estimated value of the exempt asset (for example, principal home) should be accepted in most circumstances. If it appears the value is completely unreasonable, then normal valuation processes should be undertaken.

See the examples on the Resources page.

The result of the apportionment calculation provides the portion of the loan which can be deducted from the value of the assessable assets.

The amount of the loan for which the exempt asset provides security cannot be deducted from the value of assets owned by the customer and is effectively disregarded when determining the customer's total assessable assets.

Unsecured liabilities

The outstanding value of an unsecured loan or an unregistered mortgage may be deducted from the value of a particular asset if the customer provides evidence the loan was obtained specifically for the purchase of that particular asset. Evidence could include a credit card statement or a mortgage contract (even if it is unregistered).

For example, the Real Estate (RE) screen has a field for the amount of the mortgage/loan which reduces the asset value. Code the mortgage/loan or the result of the apportionment calculation in this field.

For assistance with coding assets other than real estate, see Coding income and assets for Centrelink payments and services and select procedure according to type of asset.

Although reduced for the asset test, deeming will however still apply to the gross value of any financial investments.

Note: the value of an asset-tested income stream cannot be reduced by the amount of an unsecured loan.

Record details of asset, encumbrance and reasons for decision on a DOC.

Procedure ends here.

If the customer is involved in primary production activities, the 'aggregation' rules of section 1121A of the Social Security Act (SSA) 1991 apply.

These rules override the general provisions of section 1121 of the SSA concerning deduction of liabilities secured against assets.

Under section 1121A of the SSA, all assets used in primary production and all liabilities relating to primary production are aggregated.

The resulting amounts are offset as if they were one asset and one liability under the Assets Test.

Aggregation of primary production assets and liabilities provides for the full deduction of any business liabilities against the value of primary production assets, regardless of whether the primary production asset or liability is included on the business balance sheet.

For more information about aggregation, see Primary production aggregation.

Note: for Farm Household Allowance assessment of assets, see Assessing assets for Farm Household Allowance (FHA)

Record details of asset, encumbrance and reasons for decision on a DOC.