10 Considerations before downsizing
From 1 July 2018, Australians aged 65 years or older are 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 home (main residence and be eligible for the main residence exemption for capital gains tax).
Couples will be able to contribute up to $300,000 each, giving a total contribution per couple of up to $600,000.
Individuals don’t need to meet the work test to be able to contribute the $300k (max. per individual).
The transfer balance cap ($1.6m)-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 he or she makes will need to remain in accumulation phase (and will be subject to 15% tax on any earnings derived from the investments made from that contributions).
10 important issues you need 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. For some people, using the surplus proceeds from downsizing to make a super contribution may be their first chance to use the beneficial tax environment of the super system.
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.
Note: 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.
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 he or she makes will need to remain in accumulation phase (and will be subject to 15% tax on any earnings derived from the investments made from that contributions).
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 that restricts you from further non-concessional contributions (from 1 July 2017).
Tip: The exemption applicable for downsizing contributions means that anyone who has more than $1.6 million in super (in both accumulation and pension phase), can make a downsizing contribution from 1 July 2018.
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.
Note: In addition, people selling their home are not required to buy a cheaper or smaller home after making a downsizing contribution, and conversely, it may be possible to purchase a larger or more expensive replacement home.
6. You must submit 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. Note: Australians who have reached Age Pension age, may already benefit from lower tax rates due to the effect of the Seniors and Pensioners Tax Offset.
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 (see also Point 9).
It’s also worth noting that your super balance (including downsizing contributions) are also used to determine eligibility for residential aged care and home care services.
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, so people considering downsizing should carefully calculate their 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), so 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. 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 this type of super contribution.
Note: You can only take advantage of this measure for one sale, that is, if you have 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.
10. 90-day timeframe may give the 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.
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