Whether it’s a financial or lifestyle decision, downsizing your home once the kids have flown the nest is a common occurrence for many Australians. Selling the family home is a great way to unlock equity and help fund the next phase of your life. However, completing the sale and purchasing a new property is only one part of the problem. The next step can be just as tricky, as you need to identify the best way to get any excess cash generating a return into your superannuation.

Making voluntary contributions

For people aged under 67, the easiest way to contribute to super is by using the member contributions cap. Each year you are eligible to contribute $27,500 of pre-tax money (concessional contribution) and a further $110,000 of post-tax non-concessional contributions. If you are wanting to make concessional contributions, it is important to claim these on your tax return as an income tax deduction.

For people aged between 67 and 74, they will need to satisfy the work test before being able to make voluntary super contributions.  What is the work test and how can we ensure it is met? For the work test to be met you must be gainfully employed for at least 40 hours during a consecutive 30 day period in the financial year in which the contributions are made. If you are currently employed while you are looking to downsize, then meeting the work test is not a task that you will need to complete and you will have the ability to contribute to your super.

Downsizer contribution

For those aged 67 and older, the downsizer contribution scheme could be the best way to funnel the released equity from downsizing the family home into the superannuation environment. The downsizer contribution allows individuals to contribute the direct proceeds of downsizing into superannuation of up to $300,000 and $600,000 for couples. This contribution is treated as a post-tax non-concessional contribution and will not affect your contribution caps. To be eligible to make a downsizer contribution, the following criteria must be met;

• The individual is aged 65 or older.
• The property was owned for at least 10 years and must have qualified as your primary residence at some point during that period (making it wholly or partially CGT exempt).
• The contribution is made to the superfund within 90 days of receiving the proceeds of the sale (This is usually the settlement date).
• You provide the superfund administrator with the required NAT75073 form before or at the same time as making the contribution.
• You have not previously made a downsizer contribution (This is a once in a lifetime opportunity and cannot be repeated).
• The property being sold is in Australia and is not a caravan, houseboat or other mobile home.

Using this once in a lifetime downsizer contribution gives retirees the ability to contribute one last time into Super which holds significant advantages over investing the funds outside super or holding the equity in cash.

• Income is taxed concessionally at 15% within the superannuation environment.
• Upon meeting retirement conditions, the entire balance of your super may be tax-free in terms of both income and ongoing drawdowns.
• Upon meeting retirement conditions, unrealised capital gains could be waived.
• It does not affect your contribution caps/limits.
• Once invested, the funds will generally produce a higher return than holding cash.

If you wish to seek advice around downsizing options, please reach out to one of our Financial Advisers.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

For many retirees who were unable to enjoy the wonderful retirement savings vehicle that superannuation now affords, the age pension is a major source of income for them. A bonus of part-pension eligibility is the prized ‘Pensioner Concession Card’ (PCC), even if the actual benefit is only minuscule.

Eligibility for the age pension is tested under both an ‘income test’ and an ‘assets test’ and the test that produces the lower benefit is the one that is used. Accordingly, the following traps need to be avoided.

Additional income

If you are assessed under the assets test then you can potentially earn additional income without having your benefit impacted. For instance, a home owning couple with $800,000 in assessable assets will receive an age pension benefit of $137 each per fortnight under the assets test. Under this scenario, their assessable income can be as high as $68,000 before their benefit reduces.

This potentially allows pensioners to undertake some form of work, if they are inclined, without having their age pension or PCC entitlement affected.

Valuing assets

The principal residence is not an assessable asset, however, furniture, vehicles, boats and caravans are. Many pensioners fall into the trap of valuing these assets at replacement value which could be costly as every $10,000 of excess assets reduces the age pension by $780 a year. To avoid the trap, furniture, vehicles, boats and caravans should be valued at what you expect to get from them in a garage sale, not what it will cost you to replace them.

Don’t spend just to get or increase the pension

There is absolutely nothing wrong with spending money on a holiday, renovating the home or enjoying a better quality of life. $100,000 worth of family home renovations increase your age pension by $7,800 per year, however, it will take almost 13 years of the increased pension to get that $100,000 back, not to mention the forgone return on that money. The benefits of renovating the home or travelling may be compelling, however, the main thing is to not spend money with the sole purpose of getting a higher age pension benefit.

Revaluations

Each year on 20 March and 20 September, Centrelink updates the value of market-linked investments such as shares and managed funds. Notwithstanding this automatic update, at any time the asset value can be updated. This means the rules favour pensioners because if the value of your investments rises, you can wait for Centrelink to run the automatic update in March and September. Conversely, if the value of your investments decline, you should notify Centrelink immediately which may lead to receiving a greater benefit.

Gifting

A pensioner can reduce their assessable assets by giving money away, however, it is important to seek advice. The rules allow gifts of $10,000 in a financial year with a maximum of $30,000 over five years. A pensioner could reduce their assets by $20,000 in a matter of days by giving away $10,000 just prior to 30 June and then another $10,000 on 1 July or thereafter.

Superannuation

Where a member of a couple has not yet reached age pension age, it can be beneficial to hold as much super in the younger person’s name in ‘accumulation’ mode as it will be exempt from Centrelink assessment. However, the moment that person is age pension age or a pension is commenced from that accumulation account, Centrelink will assess that asset.

Mortgaged assets

A common trap arises where a loan is used to purchase an investment property and the loan is secured by a mortgage against the pensioner’s residence. A debt against an investment asset is only deducted from the asset value if the mortgage is held against the investment asset. If the mortgage is secured against another asset, the full value of the investment asset will be assessed. The effect could be a complete disaster.

Bequests

Another trap can arise due to the significant difference between the asset cut-off point for a single person and that for a couple. At 20 September 2021, the single home owner asset cut-off point was $593,000, whereas for a couple it was $891,500. By leaving assets to each other, the surviving partner may lose entitlement to the age pension, hardly helping the grief being experienced at that time.

Jointly owned assets with adult children

A decision without proper planning can have consequences in the future. A scenario many of you have no doubt faced, especially in recent times, is helping a child to enter the residential property market for the first time. It might seem like a great idea at the time for a couple aged 55 to take on a 50% share of a house worth $400,000 to enable their child to borrow against their portion of ownership, but how might this look when you get to age pension age and you still own 50% of that property?

The value of the property could appreciate substantially over the next 12 years i.e; when the couple become eligible for the age pension, to the point that it results in their assets being above the asset test cut-off point.

If their 50% interest is then transferred to their child, not only will there be potential Capital Gains Tax implications but Centrelink will treat that ’gift’ as a deprived asset for the next 5 years, further adding to age pension eligibility woes.

In this instance, it would be far more appropriate for the couple to become a guarantor for their child, possibly putting up their own home as part security. The rules of the age pension are complex, sourcing appropriate advice could pay dividends!

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

Purchasing a first home is a high priority goal for many clients. This is particularly true for Millennials based on current demographics.

On the surface, this sounds easy, but with many banks requiring a 20% deposit, a full time work role and sourcing the ongoing payments for the loan, a home purchase can be a difficult and onerous task that requires forgoing or delaying other goals.

As an example, the 20% deposit is getting increasingly harder to achieve, with Domain’s December 2021 House Price Report showing capital city buyers across the nation forked out an average of $1,066,133 to buy a house over the past 12 months.

Without going into full time vs casual employment, let’s have a look at the classic statement from a few years back featuring everyone’s favourite breakfast ensemble – smashed avo and feta (and maybe some bacon and eggs) and the compulsory cappuccino.

Bernard Salt wrote in an article for ‘The Australian’, “I have seen young people order smashed avocado with crumbled feta on five-grain toasted bread at $22 a pop and more. I can afford to eat this for lunch because I am middle-aged and have raised my family. But how can young people afford to eat like this? Shouldn’t they be economising by eating at home? How often are they eating out? 22 dollars several times a week could go towards a deposit on a house.”

So, for those with calculators, they will have worked out that $22 a meal. If this is ordered say twice a week, it totals $2288 per year.  Whilst this would certainly help cover rent, it won’t get a home deposit by itself!

Of course, his point was not that the smashed avo by itself would get someone a home, but that we need to consider our needs and wants when creating our budgets.  At the end of the day, it isn’t easy for everyone to save and it often comes at the expense of luxuries such as eating out or paid activities and holidays, but for anyone who wants to buy a house, saving the required deposit means reducing discretionary spending and establishing a means for storing the hard earned home deposit.

It is often pointed out in the smashed avo discussion that there is also the value of social engagement, absolutely!  With present day circumstances and with many people having faced lockdowns and isolation, this personal interaction has value in itself and the target for discretionary savings may need to fall elsewhere. The debate on what is a need vs want is a personal debate so I will leave that for individuals out there.

So how can we have our smashed avo and eat it too?

This is the best bit…..prepare it ourselves.  Sometimes the simple things in life can be the best. Nothing is to say that with a little preparation, a morning picnic with friends can be a great way to get outdoors and save a few dollars on the way.

Courtesy of taste.com.au (https://www.taste.com.au/recipes/avocado-feta-smash-toasted-rye/5d68e7c9-9d57-43cd-bb91-392588c3c0d9), here is a very easy morning breakfast to put together.

• Simple ingredients which should feed around 4. Here are the estimated costs
• 2 avocados – ($3 to $4)
• 80g creamy feta ($1.50 for around 100g)
• 2 tablespoons fresh mint ($3 or even better, grow your own herbs in pots – smells great and can save a lot at the checkouts)
• 1 lemon ($1.50) – add to taste (and stops the avocado from going brown)
• Half a loaf of rye bread or any crunchy bread would really be fine (around $3 to $4 for a loaf)

Total expenditure ~ $13.

Preparation is easy, mix the ingredients and place them on the bread.

Of course, if you are at home, you could impress your guests with an egg and some bacon too – having spent less than $5 per person on the avocado dish, you can treat everyone a little. Maybe as an accompaniment, some homemade baked beans to impress your friends further (https://www.taste.com.au/recipes/quick-boston-baked-beans/520a0aad-3d9f-4c68-926f-1fe8713a0088).

The smashed avo debate was never going to solve the homeownership issue but it does highlight the value of budgeting.  It doesn’t matter what your expenditure goal is, making your own breakfasts isn’t going to necessarily get you that dream, but will certainly leave a few more dollars in your pocket and heading in the right direction.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.