“Asset rich – cash poor” is a term used to describe the dilemma facing many Australian retirees, where the value of their home has increased faster than their superannuation. Real estate demand and inflation has made many properties in established suburbs a very valuable investment that superannuants are unable to draw down on like shares or bank deposits.
How do Baby Boomers capitalise on this significant asset built up over a lifetime and release lump sum cash for the necessities of retirement such as overseas travel, a new car, grandchildren’s education, your health costs and perhaps long term in-home care?
To free up many of Australia’s large family home for the next generation and help retirees help themselves, the Commonwealth Government has introduced a generous downsizing incentive scheme.
From July 1, 2018 Australians aged 65 or over can downsize their family home (if they have owned it for more than 10 years) where the contract of sale was exchanged on or after 1 July 2018 and invest up to $300,000 surplus funds into their tax-effective super accounts.
Singles 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 and couples will be able to contribute up to $300,000 each (a total contribution per couple of up to $600,000).
But before you plan the sea change, tree change or inner city apartment and advertise your lawnmower on E-Bay, here are a few tips and potential traps.
1. Extra Contributions
Super contributions utilising the new downsizing rules are in addition to any voluntary contributions made under the existing non-concessional (after-tax) contributions cap.
2. 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 contributions rule to top up their super balance, regardless of existing funds.
3. 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 be gainfully employed for at least 40 hours within a 30-day period during the financial year to make a super contribution. People aged 75 and over who are currently unable to add to their super account will also be able to make a downsizing contribution, irrespective of whether they worked or not.
4. Contributions not subject to the $1.6 million Total Superannuation Balance (TSB) 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 (TSB) above $1.6 million. However, downsizing contributions are exempt from the TSB limit, which means that anyone who has more than $1.6 million in super (in both accumulation and pension phase), can still make a downsizing contribution from 1 July 2018.
5. No requirement to buy a new home
Although the scheme is known as a downsizing contribution (from the sale of a principal place of residence) there is no requirement to buy a new home or indeed a cheaper or smaller home. For example you may wish to own a larger property by the sea or an expensive inner city apartment – your choice.
6. Potential tax savings
Downsizing contributions will be invested within the super environment, which means such assets will be able to take advantage of the lower tax rate of 15% (or are tax-exempt if rolled into a retirement income stream), rather than taxed at an individual’s marginal tax rate.
1. Must be sale of principal place of residence
The legislated rules indicate that the property sold must be the person’s principal place of residence (eligible for the main residence exemption for capital gains tax) not an investment or holiday property.
2. Retirement phase Transfer Balance Cap remains in place
As outlined above retirees making a downsizing contribution into their super account must still comply with the $1.6 million Transfer Balance Cap (TBC) rule. If a person has reached their $1.6 million transfer balance cap, then any downsizing contribution will remain in the accumulation phase and will be subject to a maximum 15% tax on any earnings derived from the investments made from that contributions.
3. Requirement to submit downsizing contribution form
The ATO will be responsible for administering the scheme. Before a super fund can accept contributions under the downsizing rule, they require verification on behalf of the ATO that the downsizing contributions come from the sale of a family home owned for more than 10 years. An individual planning to make a downsizing contribution must provide their super fund with the special declaration before or at the time of making the downsizing contribution.
4. Contributions count toward Age Pension tests
Eligibility for the Age Pension or DVA benefits are determined by Centrelink via the application of an income and assets test. Realising equity tied up in the family home will result in moving money out of an exempt asset (the family home), into the non-exempt and assessable environment of a super fund.
Therefore, downsizing contributions will be counted for the income and assets tests). Additionally, super balances (including downsizing contributions) are also used to determine eligibility for residential aged care and home care services.
5. Smaller does not always mean cheaper
Selling a large home and downsizing to a smaller property does not always release much excess capital (particularly when purchasing a newer property or an inner city apartment). Potential downsizers need to understand the implications of the strategy and check they will have sufficient funds left over for a worthwhile super contribution. Additionally, the costs involved in selling a home can be substantial (agents fees, stamp duty and land taxes), so people considering downsizing should carefully calculate the net capital benefit.
6. Timeframe (90 days) for contributing sale proceeds into super
The law specifies that an individual must make the downsizing contribution within 90 days of receiving the sale proceeds (typically settlement day) otherwise they are prohibited from making a downsizing contribution. There are some limited circumstances where an extension to the 90 day limit can be requested. Centrelink rules currently give pensioners who sell their principal residence a 12-month exemption under the assets test for the Age Pension, but there is no grace period for the downsizing super contribution.
7. Use now or later
The legislation specifies that an individual can only utilise the downsizing contribution for one sale. If you have already made downsizing contributions (which can be in multiple contributions up to $300,000) from a home sale, you cannot use this policy again at a later date.
Anyone considering taking advantage of the new downsizing policy should seek professional advice on how it will affect their particular situation before making any decisions.
For more information:
Mark Bastiaans is an Authorised Representative #296627 of Guideway Financial Services Pty Ltd ABN 46 156 498 538 AFSL 420367.
The information provided above contains general advice that does not take into account your financial situation, specific needs or objectives and is not intended to be personal financial advice and should not be relied upon without written advice from Guideway Financial Services Pty Ltd.