Don't Downsize Your Home Until After You Are 65

 

 by Lynette Murray, Platinum Adviser

If you want to take advantage of a new opportunity to increase your retirement savings, read on.

Recently introduced legislation allows people aged 65 and over to make a contribution to their superannuation from the proceeds of selling their home.  

The Government has introduced this measure to encourage older Australians to downsize homes that no longer meet their needs and free up properties for young families entering the housing market.  There are many factors that make downsizing an attractive option. You no longer have to manage the day-to-day maintenance required by a big house on a big block. The children have left home. And being able to release the equity built-up in your home can pay for retirement expenses or in-home support. Unfortunately, up until now, there hasn’t been an incentive to downsize. Contributions from the proceeds of the house sale could not be made to your superannuation.

So, how does this new opportunity measure up?

What you need to know

• The contract of sale must be entered into on or after 1 July 2018 and contributions must be made within 90 days of change of ownership. Contributions of up to $300,000 per person can be made.
• There is no requirement to meet a work test but you must meet an ownership requirement (at least one spouse owns the property), the dwelling must be located in Australia and held for a minimum of ten years.
• Downsizer contributions are not tax deductible and can be made for an individual in relation to one sale of a main residence. Further downsizer contributions cannot be made by an individual in the future in relation to the sale of another dwelling.

Do you have to downsize?

Despite the name given to the contribution, there is no requirement to downsize when making a subsequent purchase. In fact, there is no requirement to make a subsequent purchase of a property.

This allows for flexibility, and down-sizer contributions can be made where an individual wishes to move into a retirement community, aged care facilities or move in with their family.

Eligibility requirements

For a contribution to be a downsizer contribution it must meet the following conditions:

• The individual must be aged 65 years or older at the time the contribution is made.
• The contribution must be an amount equal to or part of the capital proceeds of the sale of an interest in a dwelling in Australia (and cannot exceed $300,000).
• Any capital gain or loss from the disposal of the dwelling must have qualified (or would have qualified) for the main residence CGT exemption in whole or in part.
• The contribution must have been made within 90 days of disposing of the dwelling (or as such longer time that the Commissioner allows).
• The individual has not previously made a downsizer contribution in relation to an earlier disposal.

 

What is the impact on other benefits?

Existing contribution caps and restrictions will not apply to a downsizer contribution at the time the contribution is made, but the $1.6 million transfer balance cap, total superannuation balance restrictions and Age Pension means test will continue to apply after the contribution is made.

Age Pensioners should carefully consider that selling the family home and then making a downsizer contribution, may reduce their Age Pension entitlements.   This is because, as an exempt asset, the principal residence isn’t counted for Centrelink purposes - whereas superannuation is counted as an asset for clients of Age Pension Age.

Perhaps being eligible to make a downsizer contribution may present you with an opportunity to implement a re-contribution strategy.   This enables you to increase the tax-free component of your superannuation, which can help reduce the tax liability of death benefits paid to non-dependant beneficiaries.

If you have already reached your $1.6 million transfer cap, and make a downsizer contribution, then you will be unable to transfer these funds to pension phase.  Leaving the contribution in accumulation phase could see the earnings taxed at 15%, which for many people over 65, may be higher than your marginal tax rate. 

Lynette Murray is a Platinum adviser on Adviser Ratings, and founder of Acton Advice Group, Canberra. This article first appeared on the Acton Advice blog.

Article by:

Lynette Murray, Acton Financial Planning

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