Notional income on unrealisable assets 108-04120070

All property disregarded under the hardship provisions (except household contents, personal effects, motor vehicles) will be deemed to produce income which is the lesser of:

• 2.5% of the value of the property, or
• the amount that could reasonably be obtained by commercial application of the property (the commercial lease value, which will generally be the net market rental value)

Any income actually received by the customer from the property is deducted from this deemed amount.

Where more than one item of property is being disregarded, the comparison of 2.5% of the value of the property and the commercial lease value of that property must be done separately for each item of property being disregarded.

In administering the second part of this rule, the overall financial situation of the family member will be taken into account in determining what rent, if any, that family member could reasonably be expected to pay if:

• residential premises are disregarded when occupied by a near relative or long term tenant with low income (see Unrealisable assets under the Assets Test hardship provisions), or
• a farm is being operated by a family member, and
• it is not reasonable to expect the property to be used for any other purpose

For any case involving a farm property, first check if it is not reasonable for the farm to be used for any use other than by the family member:

• If it is not reasonable, the notional income is the lowest of:
• 2.5% of the net value of the farm, or
• the farm's commercial lease value, or
• the amount of reasonable rent determined in accordance with farming properties - use by family member – see the Resources page which contains more information.
• If it is reasonable for the farm to be used by someone other than the family member, or the farm is being operated by someone else, see the Resources page which contains links to other farming situations

If a farm is being operated by the customer, see Farming properties - used solely by customer or partner - see the Resources page which contains more information.

If real estate other than farms is occupied by a family member or long term tenant with low income, then for the purposes of calculating the notional income, 20% of total income of the occupant (and partner) of the property, is to be assessed. This would include all income and allowance sources, that is, basic rate of pension, Energy Supplement, Pension Supplement, Rent Assistance, Mobility Allowance and Pharmaceutical Allowance etc.

The DVA uses a Veteran's Affairs Act rule which corresponds to the Social Security Act income rule.

If the partner of a social security customer is a DVA customer affected by the notional income rule, it will be necessary to liaise with DVA to ensure that the rule is applied the same way by both Departments.

The notional income rule also applies to assets disposed of on or after 1 June 1984 where a delegate has disregarded the application of the disposition provisions (subparagraphs 1129(1)(b)(ii) (pensions) and 1131(1)(d)(ii) (benefits) of the Social Security Act 1991).

In these cases, notional income is assessed as if the asset were still in the customer's possession (subsections 1130(9) (pensions) and 1132(7) (benefits) of the Social Security Act 1991).

If a property is being operated by a member of the customer's family (either solely or in partnership with the customer) the first step is to determine if it is reasonable to expect the property to be leased to someone else or be used for another purpose.

• It is not reasonable to expect the farm to be used for any purpose other than use by the family member if:
• the farm is being run efficiently or to full capacity as a serious economic enterprise
• the farm activities are the main source of the family member's livelihood, and
• the farm is a viable or potentially viable economic concern (for example, it is capable of providing a livelihood if run efficiently or to full capacity)
• It is reasonable to expect the farm to be used for a commercial purpose if:
• the family members' other income producing activities (for example, off-farm employment in a business) prevent them from running the farm efficiently or to its full capacity (for example, it is under stocked), or
• the use of the property is not essential for the family member to obtain a livelihood (for example, it is reasonable to expect a commercial rental return where the property is used to increase the size and profitability of the family member's already viable farming enterprise.)

The family member's financial statements (for example, profit and loss accounts) and income tax returns for the past 2 years may show whether there has been a scaling down of farming operations.

If it is not reasonable to expect the farm to be used other than by the family member, the issue is the amount of rent that the member can reasonably be expected to pay. As a general rule, this will be the lowest amount of:

• 2.5% of the net value of the farm
• the farm's commercial lease value
• half of the amount of income of the family member (and partner) in excess of the Family Tax Benefit (FTB) Part A income free area applicable

If the family member has no children, the applicable additional family payment income free area is taken to be the FTB Part A income free area. This is indexed on 1 July every year.

For Family Tax Benefit (FTB) Part A income free area, see the Family Tax Benefit (FTB) Part A – income test (pa) link on the Rates and Threshold page.

Any income received by the customer from the use of the farm is deducted from the reasonable rent. If that income exceeds the reasonable rent, that income is taken into account and no notional income is taken into account.

If it appears that the amount of rent the family member could reasonably be expected to pay will be lower than 2.5% of the net value or the commercial lease value, it will not be necessary to wait for an assessment of the commercial lease value before assessing each case. A request for an assessment of commercial lease value should be sent to an approved valuer as follow up action and should be endorsed 'an office assessment or kerbside estimate will suffice'. However, information should be provided as described in Other farming situations - see the Resources page which contains more information.

In other farming situations where:

• it is considered reasonable for a farm to be used by other than the family member currently operating it, or
• a farm is not being operated by a family member
• deemed income is the lesser of
• 2.5% of the net value of disregarded assets, or
• the commercial lease value of disregarded assets

This notional income figure is reduced by any income actually received by the customer from the disregarded assets. If actual income exceeds the notional income figure, no notional income is taken into account but the total income is to be included in the rate calculation.

The net value of disregarded assets means the value of the customer's interest in the land, improvements, livestock, plant and machinery minus the value of any encumbrances. It is not considered reasonable to assess notional income in respect of household contents, personal effects or a motor car.

If the customer is living on the property, the net value of disregarded assets does not include the home, private land or any area exempted under the extended land use test.

The commercial lease value given by an approved valuer will take account of the following factors:

• non-domestic or commercial improvements on an extended curtilage area
• the inherent characteristics of the land (for example, soil conditions, extent of erosion, salinity and the state of the fencing)
• demand for the land (for example, the possibility of finding a suitable lessee)
• the general state of farm incomes
• legal impediments to commercial use (for example, an existing lease)
• expenses that a customer would reasonably be expected to meet if a commercial lease existed (for example, rates, insurance, management fees)
• in irrigation areas, whether the water rights or licences are let with the land or separately, and
• whether any tobacco quota is leased separately to the land

However, this value will have no regard to any particular circumstances surrounding the current use of the land (for example, the fact that a close relative is using the land and paying an amount as 'rent' which is less than the potential commercial rental). The valuation will not include any deduction for interest expenses relevant to the disregarded assets. When determining notional income, the commercial lease value advised by an approved valuer must be reduced by any interest expense relevant to the disregarded assets.

Referrals to approved valuers

As much of the above information as possible should be provided to the valuer to assist with the valuation. All referrals to the valuer for commercial rental value should provide:

• a current authority to enter the property in the event that the valuer considers an on-site inspection is necessary
• a telephone contact to arrange valuer access
• a copy of any relevant lease document, relevant correspondence or other evidence detailing the terms and conditions of occupancy, including the responsibilities of the respective parties in respect of outgoings
• a clear indication as to whether the whole property or only excess land or part of it is to be appraised
• the relevant date or dates at which the appraisal(s) is required

In any case where notional income is taken into account, the customer must be advised in writing of how the amount maintained has been calculated.

If the property is being worked to its full capacity by the customer or partner, no notional income is assessed. In this situation only the actual income derived from the property is taken into account. A farm can still be considered to be run solely by the customer or partner if they employ someone to help them run the farm.

If they employ someone to run the farm (for example, farm manager), then the farm is to be assessed as being run by other than a family member for notional income calculation purposes.

If the property is not being worked to its full capacity it may be reasonable to expect part of the property to be leased. The rationale is that a customer is expected to draw on his or her own resources before turning to the community for support. If it is considered reasonable for part of the farm to be leased out, a valuation of the commercial lease value needs to be obtained from an approved valuer. Generally it is accepted that a customer is working the farm to its full capacity where there has been no significant reduction in the number of livestock, volume of crops etc.

If a customer separates from their partner and moves out of their jointly owned home, notional income may still be assessed in relation to that property.

In this situation there may be an agreement between the parties under which the occupier is obliged to pay rent to the non-occupier. Where the rent reasonably equates to the non-occupier's interest in a fair market rental for the property, deemed income will be the lesser of:

• 2.5% of the customer's interest in the property
• the rent entitlement, less all reasonable expenses, under the agreement.

The non-occupier's interest in a fair market rental will be determined by:

• his or her share in the property, and
• a fair rental for a house of that value in its location

For example, a customer whose interest in a house is 50% would be expected to receive 50% of a fair market rental.

If there is no agreement on rental between the parties, notional income will be the lesser of:

• 2.5% of the value of the customer's interest in the property
• the customer's share of the commercial lease value (net market rental value)

However, where there is a pending property settlement and the non-occupier can establish that he or she cannot obtain rent from the occupier, no notional income should be taken into account. Some clear evidence will be necessary before it can be accepted that the non-occupier cannot obtain rent.

If the property is not occupied by a close relative, or a long term tenant with a low income, then the notional income will be the lesser of:

• 2.5% of the value of the property, or
• the amount that could reasonably be obtained by commercial application of the property (the commercial lease value, which will generally be the net market rental value)

If the property is occupied by a close relative, or a long term tenant with a low income, then the notional income is the lesser of:

• 2.5% of the value of the property, or
• the amount that could reasonably be obtained by commercial application of the property (the commercial lease value, which will generally be the net market rental value), or
• 20% of the total income of the occupant (and partner) of the property. This would include all income and allowance sources, that is, basic rate of pension, Energy Supplement, Pension Supplement, Rent Assistance, Mobility Allowance and Pharmaceutical Allowance etc.

In some cases, a customer's home property may be attached to the property occupied by the relative or long term tenant. (For example, a customer may occupy a unit in a block of flats.) Where the customer could not sell units without also selling his or her own home unit, it is considered unreasonable to expect the customer to sell. Note: this would not apply where the flats are under strata title. However, notional income must be assessed for the other units.

In these situations, where required an approved valuer will assess the commercial lease value. See Valuation of real estate and other assets at new claim.

Any income actually received by the customer from the property is deducted from this deemed amount.

If the property does not have a commercial lease value, then notional income cannot be assessed.

If a customer owns a property jointly with another person and that other person lives in the property, there is no notional income assessed where the other owner refuses to pay rent.

Property owned with another person who occupies the property as their home

The commercial lease value of an asset is the value that can reasonably be obtained by using the asset. If a person's asset cannot be leased due to a legal impediment, notional income cannot be assessed.

Example: A customer owns a factory located in an area that has been rezoned by the local council to high density residential. This rezoning means the current use of the property (factory) is now prohibited under the new Local Environment Plan.

If a commercial lease value of disregarded property does not exist, no notional income can be assessed.

Such assets include most types of livestock, private company shares which are unable to be sold, loans owed to the customer unable to be repaid (not failed loans) and the surrender value of a life insurance policy.

No notional income can be assessed as the zero commercial lease value is less than 2.5% of the net market value of that property.