CPN 028: Shared Equity Home Buyer Helper – Financial Assets & Excess Savings
Practice note number | CPN 028 |
Tax/benefit | Shared Equity Home Buyer Helper – Financial Assets & Excess Savings |
Date issued | 1 March 2023 |
Issued by | Cullen Smythe Commissioner of State Revenue |
Effective from | 2 December 2022 |
Effective to | - |
Status | Current |
Purpose
- The Shared Equity Home Buyer Helper (also known as the NSW Shared Equity Scheme) (the Scheme) was established on 2 December 2022 to help people acquire their own home in New South Wales. The Scheme was established by the NSW Shared Equity Scheme Order 2022 made under section 24C(1) of the First Home Owner Grant and Shared Equity Act 2000 (NSW) (the Act).
- Section 24D of the Act prescribes that the Chief Commissioner must administer the Scheme in accordance with policy guidelines published by the Treasurer. These guidelines, referred to as the NSW Shared Equity Scheme Policy Guidelines 2022 (the Policy Guidelines), were published on 2 December 2022.
- Part 2 of the Policy Guidelines sets out eligibility criteria for applicants to participate in the Scheme, including an asset limit. Part 5 explains how the State will calculate the amount of money it will provide towards the total property price and the financial contribution required of the applicant.
- This Commissioner’s Practice Note sets out the following:
- The types of financial assets the Chief Commissioner may include under clauses 2.23(f) and (g) of the Policy Guidelines for determining whether an applicant satisfies the asset limit and whether the applicant has excess savings.
- Circumstances when the Chief Commissioner may or may not require an applicant to apply some or all excess savings towards the purchase of a property under the Scheme.
- As the circumstances of each applicant will differ, this practice note cannot be exhaustive but is intended to be indicative of the Chief Commissioner’s practice.
Background
Financial assets
- As part of the eligibility criteria for the Scheme, clause 2.1(d) of the Policy Guidelines requires a person to satisfy the asset limit. Clause 2.22 provides that an applicant satisfies the asset limit if the applicant’s financial assets on application, whether in Australia or overseas, are no more than:
- 30% of the total property price if the joint applicants’ aggregate gross annual income is more than $90,000 for a Scheme assessment in the 2022-23 financial year; or
- 45% of the total property price if the applicant’s aggregate gross annual income is up to $90,000 for a Scheme assessment in the 2022-23 financial year; or
- 65% of the total property price if the applicant is a single person 50 years of age or older.
- The gross annual income thresholds mentioned above and in clause 2.10 are subject to annual indexation in accordance with clauses 2.15 to 2.18. The annual indexation will also apply for the purposes of assessing ongoing eligibility criteria under clause 6.5(a).
- Clauses 2.23(a) to (e) broadly set out the types of assets which the Chief Commissioner must treat as financial assets for the purposes of clause 2.22.
- The Chief Commissioner has a discretion to include the following as financial assets of an applicant:
- household assets considered to be luxury items (clause 2.23(f)); and
- any other financial assets considered to be relevant for determining eligibility (clause 2.23(g)).
- Clause 2.24 carves out ordinary household assets from being financial assets unless they are considered to be luxury items.
Example 1 - Administration of the Asset Limit
- A is a single person, aged 53, who intends to purchase a home in Sydney as her principal place of residence with a dutiable value of $750,000. A derives a gross annual income of $80,000 and has financial assets with a combined value of $90,000, consisting of:
- Cash - $45,000
- Shares - $25,000
- Loan receivable - $20,000.
- A’s asset limit for entry is 65% of the purchase price of the property under cl 2.22(c). A’s asset limit for entry is $487,500, calculated as follows:
$750,000 x 0.65 = $487,500
- The value of A’s financial assets is $90,000, which is below the asset limit of $487,500.
Excess savings
- Clause 5.1 of the Policy Guidelines defines the Scheme amount as the amount of money provided, and where applicable expected to be provided for construction works, by the State at the time of settlement in exchange for a Scheme interest in the property. The maximum Scheme amount under clause 5.3 is:
- 30% of the total property price for an established home, or
- 40% of the total property price for a new home.
- Clause 5.10 specifies that the Scheme Amount is to be determined as:
- the total property price,
- less the maximum loan for which the Panel Financier has given final approval,
- less the financial contribution of the applicant, which is required to be no less than:
- 2% of the total property price, plus
- any excess savings the Chief Commissioner has determined are required to be used as a financial contribution (per clause 5.11), and
- up to the maximum Scheme amount in clause 5.3.
- Clause 5.11 defines excess savings as the financial assets of an applicant greater than $100,000 in aggregate. Where the applicant satisfies the asset limit, the Chief Commissioner has the discretion to require an applicant to use some or all of any excess savings as a financial contribution towards the total property price of a property to be purchased under the Scheme. This has the effect of increasing the applicant’s required financial contribution and reducing the Scheme amount.
- In exercising this discretion, consideration will be given as to what is reasonable in the circumstances based on how these excess savings are intended to be used by the applicant.
Example 2 - Determination of excess savings
- A & B are joint applicants and have a combined gross annual income of $120,000 and combined financial assets of $220,000. The total property price of the property A & B intends to purchase is $950,000.
- A & B satisfy the asset limit in clause 2.22(a) as the value of their financial assets of $220,000 is less than $285,000 (being 30% of the total property price of $950,000).
- A & B’s excess savings are determined as follows:
Financial assets > $100,000 (per clause 5.11) being, $220,000 - $100,000 = $120,000
- In this example, A & B have excess savings of $120,000 and the Chief Commissioner has the discretion to require its application (whether in part or in whole) as a financial contribution towards the total property price, in circumstances where it is reasonable to do so having regard to how A & B intend to use these excess savings.
Commissioner’s Practice Note
Financial Assets
- The value of all financial assets must be disclosed in Australian dollars at the time an application to participate in the Scheme is made. In general, the value of a financial asset is the unencumbered market value of that asset in Australian dollars.
- Where the value of an asset is denominated in a foreign currency, this value must be converted to Australian dollars using the rate of exchange last reported by the Reserve Bank of Australia as at the date of application to participate in the Scheme. At the time of publication, the Reserve Bank of Australia published historical exchange rates.
- Where there is no active market for an asset or a valuation of the asset is not available, a reasonable estimate may be provided. Insofar as the asset is physical in nature, the Chief Commissioner may accept estimated values derived from various sales platforms, of assets that are identical or substantially similar. Where an asset is not physical in nature or there is no open market, the Chief Commissioner may undertake enquiries and employ a reasonable methodology to estimate the value of the asset. A number of valuation methodologies are available and will vary depending on the nature of the asset and the industry concerned. The Chief Commissioner will consider each methodology on a case-by-case basis.
Clause 2.23(f) - Luxury household items
- For the purposes of clause 2.23(f), household assets are assets generally found in or around a home such as furnishings, fittings, appliances and personal effects. A household asset may be considered a luxury item where it is of a high cost or value, but it is not essential for living or for which there is a more modestly priced alternative that provides substantially the same core functionality or meets a similar purpose.
- Household assets that may be considered luxury items include, but are not limited to:
- Haute couture clothing
- Designer or bespoke watches, jewellery, shoes and accessories
- Cellared wine and champagne
- Artwork including paintings, prints and sculpture
- Home entertainment systems and servers
- Antique furniture, objects and other items
- Luxury, performance and vintage motor vehicles and motor vehicles surplus to household transportation needs
- Recreational vehicles (e.g. motorhomes, campervans and caravans)
- Recreational vessels (e.g. any water craft capable of being used as transportation on water).
Clause 2.23(g) - Other types of assets
- For the purposes of clause 2.23(g), the other types of financial assets considered relevant for determining eligibility include, but are not limited to:
- Crypto currencies
- Uncleared cheques (of which the applicant is a payee)
- Funds of the applicant held in trust accounts
- Gold, silver or platinum bullion or other interest in precious metals
- Gemstones
- Licences such as commercial fishing and taxi licences
- Surrender value of life insurance policies
- Surrender value of annuities
- Collectables (whether for trading, investment or hobby purposes)
- Call options over securities.
Excess savings
- The Chief Commissioner’s discretion in clauses 5.10 and 5.11 to require an applicant to apply some or all excess savings towards the total property price of a purchase will generally be exercised to maximise an applicant’s financial contribution to the acquisition of their own home.
- The extent of excess savings (if any) required to be used as part of an applicant’s financial contribution towards the total property price will depend on the reasonableness of such a requirement having regard to the intended use of the excess savings by the applicant. That is, the Chief Commissioner will consider, on a case-by-case basis, whether excess savings are more reasonably applied to the acquisition of the applicant’s home rather than any stated and verifiable intended use of those excess savings by the applicant.
- If the Chief Commissioner requires excess savings be applied towards the total property price, an applicant may need to sell financial assets in order to apply some or all of the proceeds of sale to acquire their home.
Intended Use vs Use to Acquire a Home
- Factors relevant to weighing the applicant’s intended use of the excess savings against their use to maximise the applicant’s financial contribution to the acquisition of a property may include:
- Necessity. The more essential an intended use of the excess savings is to the applicant and any dependants (such as in the areas listed below), the less likely the excess savings must be used towards the acquisition of a property:
- Basic living expenses. Being reasonable expenses for food, shelter or clothing;
- Essential medical treatment. Being medical treatment needed to sustain life or maintain health;
- Education. Being reasonable expenses for primary, secondary or further learning;
- Time critical. The sooner the funds are required and/or the more difficult it is to defer the use to a later date, the less likely the excess savings must be used towards the acquisition of a property;
- Reasonable alternatives. The lack of lower cost alternatives that provide a reasonable substitute to the applicant’s intended use of the excess savings, the less likely the excess savings must be used towards the acquisition of a property.
- The Chief Commissioner may request an applicant provide a written declaration (together with supporting evidence) describing the intended use of financial assets, the proportion or value of those assets needed for such purpose, when the assets are intended to be so used and any other details relevant to the above factors.
- The following are examples of how the above factors might be applied.
When excess savings may be applied
- Examples of when the Chief Commissioner may require the applicant to use some or all of any excess savings as a financial contribution towards the purchase of a property could include:
Example 4 – Application of excess savings
- E is an eligible person (as defined under clause 2.1) and has financial assets with an aggregate value of $130,000, broken up as follows:
- Cash - $10,000
- Shares - $25,000
- Motor vehicle - $95,000.
- As E has excess savings of $30,000 (being the proportion of B’s financial assets greater than $100,000 pursuant to clause 5.11) and does not intend to use such savings for any particular purpose in the short term, the Chief Commissioner may require B to contribute up to $30,000 towards the total property price.
- If E is required to make a financial contribution of $30,000, E has the option to liquidate all the shares and contribute a one-half portion of the cash as a financial contribution towards the purchase of a property (or liquidate 80% of the shares and contribute all the cash). In the alternative, E can sell the motor vehicle and use the sale proceeds to satisfy this requirement.
Example 5 – Prospective (Not Time Critical) expenses
- F is a single parent (as defined under clause 2.4) of a dependent child one year of age. F has excess savings of $70,000 (per clause 5.11) and intends to build upon these savings as a tertiary education fund for the dependent child (and any additional children).
The Chief Commissioner may require F to contribute all or part of the excess savings if the funding of the dependent child’s education is not an imminent expense and which will be incurred at a later date, when other options could be available to F (such as re-financing with the Panel Financier to any extent permissible under clauses 8.6 and 8.9).
When excess savings may not be applied
- The examples below broadly set out the application of the principles above, with some common scenarios where the Chief Commissioner may consider allowing applicants to retain their excess savings.
Example 6 – Business as dominant source of income (Necessity)
- Drawing from example 2 above, A & B are eligible persons (as defined under clause 2.1) and have excess savings (per clause 5.11) of $120,000 which include the value of shares held by B in ABC Pty Ltd. B is the sole shareholder of ABC Pty Ltd, which operates a small business; the profits of which form B’s dominant source of income. The Chief Commissioner determines that the value of the shares in ABC Pty Ltd is reflected in the net asset value shown in the company’s most recent annual financial statements.
- The Chief Commissioner may consider the continuation of the small business as being reasonable under A & B’s circumstances and allow for B’s shares in ABC Pty Ltd to be retained as an excess saving. This is because it is desirable for B to continue his ownership and control of the company through which he alone operates a small business and derives his income. Any divestiture of B’s shares in ABC Pty Ltd will reduce B’s share of the profits, which may affect A & B’s ability to meet repayments on their loan with the Panel Financer under clause 6.13.
Example 7 – Medical expenses (Necessity)
- G is an eligible person (as defined under clause 2.1) and has excess savings (per clause 5.11) of $40,000. G is planning to undergo a medical procedure for a health condition that is impacting his quality of life. G intends to use the $30,000 to fund the medical procedure.
- Under such circumstances, the Chief Commissioner may waive the requirement for G’s excess savings to be applied as a financial contribution towards the purchase of a property. G will be required to substantiate his intentions to apply the excess savings towards the performance of the medical procedure. This can be in the form of a medical report describing the nature of the health condition, the timing and proposed cost of the medical procedure, and any anticipated post-procedure expenses.
Example 8 – Contingency for construction cost overruns (Necessity and Time Critical)
- H is an eligible person (as defined under clause 2.1) and has excess savings (per clause 5.11) of $50,000. H has entered into an eligible agreement for sale to acquire a vacant block of residential land and signed an eligible comprehensive home building contract (as defined under clause 3.8). Notwithstanding that the eligible comprehensive home building contract specifies a fixed price for the construction of the home, H intends to retain the excess savings as a contingent amount for any cost overruns that may arise.
- The Chief Commissioner may consider waiving the application of the whole (or part) of H’s excess savings as a contribution towards the purchase of a property. This will involve consideration of the fixed price of the eligible comprehensive home building contract and the capacity of H to meet any cost overruns should H not have access to the excess savings (see also clause 5.19).
- If the Chief Commissioner allows H to retain the excess savings, H undertakes to make full disclosure with respect to the actual cost overruns (if any) at the earlier of the completion of the construction works (under clause 5.18) or the initial review cycle (under clause 7.2).
Example 9 – Payment of outstanding debts (Necessity and Time Critical)
- I is an eligible person (under clause 2.1) and has excess savings (per clause 5.11) of $60,000. I has liabilities in the form of outstanding debts which will need to be satisfied. I intends to apply the $60,000 in satisfaction of the outstanding debts.
- The Chief Commissioner may consider the application of the excess savings towards I’s outstanding debts as being reasonable. This will be subject to confirmation of the particulars set out below so the Chief Commissioner can be satisfied that there is a genuine debt arrangement in place:
- Whether full disclosure of the outstanding debt was made to the Panel Financier
- The nature, amount and repayment terms of the outstanding debt
- Who the outstanding debt is owed to (identity of the creditor and relationship to I).
- Whether I has made a genuine attempt to minimise the outstanding debt (e.g. by making regular repayments or by way of debt consolidation).