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From 1 July 2018, people aged 65 or over may be eligible to make additional super contributions of up to $300,000 per person from the proceeds of the sale of their home. These are known as ‘downsizer contributions’ and they can be made on top of the existing contribution caps, without having to meet many of the existing contribution rules and restrictions.
The downsizer contribution rules have removed some of the existing barriers that prevent or restrict your ability to make super contributions at age 65 or over.
Provided certain other conditions are met, it may be possible to contribute up to $300,000 per person (or $600,000 per couple) from the proceeds of selling your home on or after 1 July 2018. The contributions won’t count towards your concessional (pre-tax) or non-concessional (after-tax) contribution caps and there is no maximum age limit. Also, the ‘work test’ (for people aged 65 to 74) and the ‘total super balance’ test won’t apply.
There are a number of conditions you’ll need to meet to be eligible to make downsizer contributions, including:
There are some key issues that should be considered when assessing whether making downsizer contributions could be a suitable strategy, including:
So, should you consider making a downsizer contribution? There are two very important considerations which may make this option unattractive.
As noted above, the proceeds of your home, if invested in any asset other than a primary residence (ie your new home), will be assessed for the Age Pension Assets Test (and the Income Test if this is relevant for you). As nearly 70% of Australians over pension age receive some form of pension benefit, this is a critical consideration. Once your assets exceed the lower threshold for the Assets Test, each additional dollar reduces the pension you receive until your Age Pension cuts out entirely. (The amount at which your pension starts to reduce depends on whether you own a home, and whether you are single or part of a couple). As the Age Pension forms an essential component of most Australians’ retirement income, you should ensure you know how whether your pension will be reduced, and if so, by how much. It may be that the reduction of your pension income is not offset by the income that can be produced by your home’s proceeds, in which case this strategy may not be beneficial for you – or even be detrimental to your overall financial position.
Rates and thresholds: homeowners (for period 1 July – 19 September 2018)
Up to $258,500
Up to $387,500
Up to $387,500
Rates and thresholds: non-homeowners (for period 1 July – 19 September 2018)
Up to $465,500
Up to $594,500
Up to $594,500
Source: MLC Technical
Another critical consideration is the tax treatment of superannuation relative to your other income. In addition to tax free super income, Australians over the age of 65 receive the Senior Australians Pensioner Tax Offset and other tax concessions that increase their effective tax free threshold to $32,915 for a single person and $59,222 for a couple for the 2018/19 financial year (excluding the benefit of franking credits). If your income prior to downsizing is substantially lower than this amount, contributing to superannuation may not be of any benefit to you –while the pension phase of super is a tax free environment, investing in your own name may be also, without some of the costs and complexity of superannuation.
One of the primary impediments to buying and selling property remains the imposition of stamp duty and other costs, such as agents’ commissions, marketing costs, removalists and so on. These costs are largely unavoidable and should be factored into any discussion of the benefits of downsizing to a smaller or less expensive property if your objective is to free up your capital.
Those who are most likely to benefit from this strategy are those who are currently on a high marginal tax rate and those who are ineligible for social security due to their income or assets, or for some other reason such as their residency status. A person earning in excess of $180,000 in taxable income per annum – who has also not exceeded their $1.6m transfer balance cap - could save tax at a rate of 45c in a dollar by contributing to super rather than investing in their own name. Assuming income of 5% per annum on $300,000 ($15,000pa), this could amount to a saving of $6,750 each year.
While it sounds attractive, the downsizer contribution is unlikely to benefit large numbers of people. If you wish to sell your home or a property that has previously been your home, you should consider whether it may benefit you. Among the issues you should consider are the transaction costs, your current and expected Age Pension entitlements, and the likely tax savings of investing in superannuation – you may just find you’re better off staying in your current home after all.