How will the superannuation downsizing scheme work?
Here’s how the recently announced Superannuation Downsizing Scheme will benefit older Aussies with a new tax-free income stream.
In May 2017, the Turnbull Government announced a proposal to allow Australian homeowners aged 65+ to make non-concessional contributions to their superannuation from the proceeds of selling their family home. Budget documents said the measure was introduced to reduce disincentives to downsize for retirees:
Being unable to invest the proceeds of selling their home into superannuation discourages some older people from downsizing. This means many larger family homes sit occupied by only singles or couples. Encouraging downsizing should enable more effective use of the housing stock by freeing up larger homes for younger, growing families.”
Additionally, the measure will allow older Australians who are currently unable to contribute all or any proceeds of the sale of their home into superannuation because of the existing restrictions and caps to make tax-free contributions. The announcement was part of a raft of changes to address housing affordability, some aimed at the supply side of problems that home buyers face, and others aimed at helping first home buyers save a deposit.
There are a number of ways you can benefit from the downsizing scheme:
The proceeds which you put to your super account are non-concessional (after tax) contributions. This means you can downsize your home and gain a tax-free income stream for retirement.
Existing contribution caps and restrictions do not apply to the downsizer contribution.
You don’t have to make any subsequent home purchase to be eligible.
You and your partner may make a downsizer contribution up to $300,000 each, even if your partner was not on the title of your home.
How does the scheme work?
Thanks to the new scheme, Australian aged over 65 will be allowed to make a $300,000 post-tax contribution into their super using the money received from selling their home. You cannot simply contribute $300,000 of your owns savings into your super and benefit from this scheme, it's only for the proceeds of selling your home.
If you’re a couple, both of you can take advantage of the measure, meaning a maximum of $600,000 can be contributed to your superannuation through downsizing. The measure will apply to the sale of your family home (principal place of residence) if you have held the property for a minimum of 10 years.
How does the scheme work with existing superannuation contribution rules?
There are currently a number of restriction in place as to how much you're able to contribute to your super as a post-tax (non-concessional) contribution. However the current restrictions on people aged over 65 and those with more than $1.6 million in their super will not apply to this scheme. Rather, these new contributions can be on top of any existing contributions under the current rules.
Basic fictional example
Let’s say Dave (70) and Jess (65) want to sell their large family home which they’ve lived in for 30 years and transition to a two-bedroom apartment after all their children move out. Both are still working part-time. The proceeds from the sale of their family home are $1.2 million. Under the new downsizing scheme, both Dave and Jess are able to make a total non-concessional contribution of $600,000 ($300,000 each) into their superannuation accounts. Additionally, they can still take advantage of standard contribution arrangements and make additional contributions to their superannuation accounts.
Are there any downsides to the scheme?
As contributions from the sale into super are not exempt from the Aged Pension means test, if you contribute $300,000 your eligibility to receive the full-pension may be affected.
To explain why, let’s look at a made-up scenario:
Let’s pretend Alex and Shelly are a married couple, both aged 70, and have a family home worth $1.5 million which they’ve owned and lived in for 15 years. Additionally they have $350,000 in superannuation, $40,000 in personal items (a car), $25,000 in the bank and receive the full pension. Neither of them receive a regular income.
Both feel as though they want a sea-change and are contemplating purchasing a property worth $1.2 million. After selling their current home, this would give them approximately $300,000 in proceeds (excluding fees from the sale).
In this scenario, the Superannuation Downsizing Scheme would be of little benefit to them. The Aged Pension works by assessing a person's total assessable assets, held both inside and outside superannuation. However the family home is not an assessable asset. Therefore, by converting their non-assessable asset (the home) into an assessable asset (cash), they would lose a portion of their pension.
For Alex and Shelly, they have to decide if the increase in income they would receive from having an extra $300,000 invested in their super would compensate for the loss of $450 a fortnight in pension, as illustrated in the table below. Additionally, they have to take into account the high costs associated with selling and purchasing property.
Before Downsizing
After Downsizing
Total assessable assets
$350,000 super
$40,000 person items
$25,000 cash
$415,000 (total)
$350,000 super
$300,000 proceeds of the sale (into super)
$40,000 person items
$25,000 cash
$715,000 (total)
Total un-assessable assets
$1.5 million
Total pension, per couple
$622.45 (p/f)*
$172.45 (p/f)*
*Source: Noel Whittaker Age Pension Calculator as of February 2017.
Note: This advice is general in nature and you should seek professional advice about your personal circumstances before making any financial decisions.
Common questions about the Superannuation Downsizing Scheme
The scheme is active from 1 July 2018.
Yes
Any dwelling in Australia (other than a caravan, houseboat or mobile home) is eligible if you've owned it for at least 10 years, and it was your main residence.
No, you don't need to move into a smaller home.
The maximum you can contribute is $300,000 ($600,000 per couple). You do this in several contributions, as long as the total amount doesn't exceed this.
Yes, you may each make a downsizer contribution even if your spouse is not listed on the title.
Your super fund will be able to help you make a downsizer contribution.
Contributions under this scheme will still count towards the Age Pension test. So yes, it could affect how much you receive in your Age Pension.
Downsizer contributions don't count towards the current contribution rules, but they do count toward the $1.6 million transfer balance cap.
The existing “work test” for voluntary contributions made by those Australians aged 65-74 does not apply to downsizing contributions.
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