Many Australian retirees find they want a smaller home, or a home more suited to their empty-nest requirements. For some retirees, selling the family home can be a great way to release built-up equity to pay for retirement living expenses or in-home support that will allow them to stay at home longer.
Older Australians are the people targeted by the Government’s new policy to allow homeowners aged 65 years or over to downsize their family home and invest the surplus into their super. The downsizing and super contributions proposal was announced as part of the 2017/2018 Federal Budget (May 2017 Budget). The proposal became law on 13 December 2017.
From 1 July 2018, Australians aged 65 years or older will be able to make a non-concessional (after-tax) contribution into their super account of up to $300,000 from the sale proceeds of their family home if they have owned the property for at least 10 years. The legislated rules indicate that the property sold must be the person’s primary residence.
Couples will be able to contribute up to $300,000 each, giving a total contribution per couple of up to $600,000.
Any super contributions made using the new downsizing rules are in addition to any voluntary contributions made under the existing non-concessional (after-tax) contributions cap.
Although downsizing and contributing to super is an interesting idea, there are definitely some benefits and dangers – together with a few unknowns – to consider before taking the plunge.
Set out below are 10 important issues to consider before downsizing your home and contributing to your super account:
1. Opportunity to boost super balance
Retirees who have not had the opportunity to save sufficient funds for a comfortable retirement will be able to use the new downsizing cap to top up an inadequate super balance.
2. No ‘work test’ or age limit
The existing ‘work test’ for voluntary contributions made by those Australians aged 65-74 does not apply to downsizing contributions. Currently, people in this age group need to prove they worked in gainful employment for 40 hours within a 30-day period during the year to make a super contribution.
3. Retirement phase transfer balance cap remains in place
Australians making a downsizing contribution into their super account will still face a $1.6 million transfer balance cap on the amount of super savings they can move into tax-exempt retirement phase income streams. If a person has reached their $1.6 million transfer balance cap, then any downsizing contribution they make will need to remain in accumulation phase (and be subject to 15% tax on any earnings derived from the investments).
4. Contributions not subject to the $1.6 million Total Superannuation Balance restriction
Since 1 July 2017, an individual cannot make non-concessional (after-tax) contributions to a super account if they have a Total Superannuation Balance of $1.6 million or more. Individuals who have maxed out their opportunity to make non-concessional contributions to a super account will still be able to make a downsizing contribution as these contributions are exempt from the new $1.6 million Total Superannuation Balance limit.
5. No requirement to buy a new home
An individual making a downsizing contribution (from the sale of their principal place of residence) is not required to buy a new home after they sell their home.
6. You must submit a downsizing contribution form
Downsizing contributions will be invested within the super environment, which means such assets will be able to take advantage of the lower tax rate levied on investment returns within the super system. Earnings received on a super balance are only taxed at 15% (or are tax-exempt if rolled into a retirement income stream) rather than taxed at the person’s normal marginal tax rate.
Given the tax advantages, it’s worth noting that the ATO will be responsible for administering the scheme. Before accepting contributions under the downsizing scheme, super funds require verification on behalf of the ATO that downsizing contributions are from the sale of a family home owned for more than 10 years. An individual planning to make a downsizing contribution must provide his or her super fund with the special form before or at the time of making the downsizing contribution.
7. Contributions count toward Age Pension tests
The government has confirmed downsizing contributions will be counted for the assets and income tests used to determine eligibility for the Age Pension and DVA benefits. Downsizers will be moving money out of an exempt asset (their family home) into the non-exempt and assessable environment of their super fund.
8. Transfer and property costs limit surplus capital
The costs involved in selling a family home can be substantial due to high stamp duty and land taxes, therefore, people considering downsizing should carefully calculate this impact.
In addition, selling a large home and downsizing to a smaller property does not always release much excess capital (particularly in a capital city). Hence potential downsizers should check they will have sufficient funds left over for a worthwhile super contribution.
9. Timeframe (90 days) for contributing sale proceeds into super
The new downsizing law specifies that an individual hoping to take advantage of this measure must make the downsizing contribution within 90 days of receiving the sale proceeds (typically settlement day) from their family home before they are prohibited from making a downsizing contribution.
10. 90-day timeframe may give an opportunity to invest sale proceeds before contributing
The downsizing policy starts from 1 July 2018. The new laws don’t appear to preclude investing the sale proceeds or mixing the proceeds with other money in the period between settlement and making a super contribution.
Learn more about our personal financial planning, mortgage broking or self-managed super fund services. Please note that the above is prepared as general advice, it has not taken into consideration your personal circumstances or financial goals. For more tailored advice, please contact us today, one of our friendly advisers would love to speak with you.