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Senior Australians who feel their homes are too big now have the opportunity to sell the house, move into a smaller house and put the excess into a super fund. This is only for people aged 65 years and above, with a house that has been their permanent residence for the last 10 years. The seller can put up to a $300,000 non-concessional (after-tax) contribution into a super fund. If it is a couple selling a house, each person can put $300,000 into the fund (therefore $600,000). This will be possible starting 1 July 2018. What does a senior citizen need to keep in mind when considering this opportunity?
There Is No Age Limit Or ‘Work Test’
The current work test that applies for voluntary contributions by people aged 65-74 years does not apply to this downsizing. The work test is a requirement that people in this age bracket need to work for at least 40 hours in a 30 day period to be able to make a contribution to a super account. This arrangement allows people aged 75 years and over to make a contribution regardless of having worked or not.
There Are No Conditions On Buying A New Home
There are no conditions on the type of home the seller will move into after selling the bigger house. It does not limit you to buying a smaller or cheaper home. The scheme does not mention what happens if the seller wants to move into another owned home or moves into a home for the aged. The only condition is that the maximum contribution is $300,000 for an individual.
It Is Not Subject To The $1.6 Million Superannuation Balance Restriction
Currently, there is a restriction on adding non-concessional after-tax contributions to superannuation accounts with more than $1.6 million balances. This regulation came into effect on 1 July 2017. This downsizing arrangement does not face these restrictions. This allows people with more than $1.6 million in both accumulating and pension phases to add their contributions.
Transfer Caps In The Retirement Phase Still Apply
There is a transfer cap of $1.6 million on contributions to super funds for income streams in the retirement phase. This means that a seller who has reached this cap will have to keep the contribution in the accumulation phase where it is not tax exempt, and a 15% applies to interest income.
A Downsizing Contribution Form Must Be Submitted
The ATO will oversee this scheme. It is required to make a verification that the person applying to do the downsizing has lived in the home for the last 10 years. A form detailing the downsizing must be submitted before making the downsizing contribution. The funds will go into the super environment where the tax rate from interest earnings is pegged at 15%, and zero-rated when the interest is rolled into a retirement income stream.
Downsizing Will Affect Age Pension Tests
By downsizing, the seller will be moving money out of an exempt asset, which a home is, into a non-exempt asset (the super fund). This means that the assets and income tests used to determine the eligibility of age pension and DVA benefits will apply. The super account balance is also assessed when determining eligibility for residential aged care and home care services.
By increasing the balance of the super account, the seller might be negatively assessed. It is important that a financial advisor is consulted to give a clear picture of how the downsizing will affect a pensioner’s benefits.
There Is A 90-day Timeframe
Proceeds from a downsizing sale must be contributed to a super fund within 90 days of the funds being received. This is settlement date (when funds hit the account). This is a one-time opportunity and the chance to make the contribution cannot be deferred to a later date.
This means that a person can invest the proceeds before putting them into the contribution. Since the law comes into effect from 1 July 2018, it means anyone selling before this date has a longer time allowance to invest the funds.
Transaction Costs Could Impact The Surplus
Transaction costs in selling a house include stamp duty and land taxes. These costs can be substantial if the property is in a prime area. The seller should consider how these costs will eat into the surplus, as well as the costs of buying a new house. The surplus available to contribute to the fund may be substantially reduced making the benefits of downsizing redudant.
The government is saying that the downsizing scheme will free up housing stock for younger families with more family members. A similar downsizing scheme had been proposed by the ALP government in 2013 but didn’t become law when the Liberals took over.
Since this downsizing scheme comes with implications for age pension and aged care benefits, it is very important that a person considering it seeks the advice of a professional financial consultant, to safeguard his/her benefits.
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Elliot Watson Financial Planning Pty Ltd and its advisers are Authorised Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.
The information (including taxation) in this article does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances.