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Should you consider making a downsizer contribution to super?

nabtrade’s Gemma Dale explains how the new downsizer contribution rule works and weighs up the pros and cons for individuals contemplating using this strategy.

Important notice: Any advice and information in this publication is of a general nature only. Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of an individual’s liabilities, obligations or claim entitlements that arises, or could arise, under taxation law, and we recommend that you consult a registered tax agent. nabtrade is not a registered tax agent.

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.
 

How it works

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:

  • You must be aged 65 or over at the time you make the contribution.
  • The property must have been owned by you or your spouse (but not necessarily both) for at least 10 years prior to the disposal.
  • The contract for sale must be entered into on or after 1 July 2018.
  • The property must qualify for the main residence capital gains tax exemption in whole or part, so properties held purely for investment purposes won’t qualify.
  •  You must make the contribution within 90 days of the change of ownership.
  • You need to make an election to treat the contribution as a downsizer contribution.
  • You cannot claim the contribution as a tax deduction.
     

Key considerations

There are some key issues that should be considered when assessing whether making downsizer contributions could be a suitable strategy, including:

  • The property being sold to fund the contributions doesn’t have to be your current home. It can be a former home which meets the requirements. Also, you don’t need to purchase another home (ie you don’t have to actually downsize – you could upsize, rent, or buy a campervan if you so wish).
  • Once contributed, downsizer contributions will count towards your ‘total super balance’ which could impact your capacity to make future contributions (if you are still eligible under the work test, for example).
  • Downsizer contributions can’t be transferred into a tax-free ‘retirement phase income stream’ if you have used up your ‘transfer balance cap’. The transfer balance cap is $1.6 million in 2018/19. If you have used up your transfer balance cap, the contribution must remain in the ‘accumulation phase’ of super, where investment earnings are taxed at a maximum rate of 15%.
  • Money held in the accumulation or retirement phase of super is assessed for both social security and aged care purposes.

So, should you consider making a downsizer contribution? There are two very important considerations which may make this option unattractive.

Social security considerations

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.
 

Assets test thresholds

Rates and thresholds: homeowners (for period 1 July – 19 September 2018)

 

Single

Couple

Illness separated

 

Full pension

Up to $258,500

Up to $387,500

Up to $387,500

 

Part pension

< $561,250

< $844,000

< $993,000

 

 

Rates and thresholds: non-homeowners (for period 1 July – 19 September 2018)

 

Single

Couple

Illness separated

 

Full pension

Up to $465,500

Up to $594,500

Up to $594,500

 

Part pension

< $768,250

< $1,051,000

< $1,200,000

 

Source: MLC Technical
 

Tax considerations

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.
 

Transaction costs

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.
 

Could you benefit from downsizer contributions?

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.


About the Author
Gemma Dale , nabtrade

Gemma Dale is Director of SMSF and Investor Behaviour at nabtrade. She is the host of the Your Wealth podcast, a fortnightly podcast for investors, featuring insights and updates from markets and finance experts across a range of topics. She provides regular market and finance commentary on ausbiz and in other media including AFR, the Australian, ABC and commercial tv and radio. Gemma was previously the Head of SMSF Solutions for nab, and the Head of Technical Services for MLC, where she led a team of specialists providing advice to advisers and their clients on SMSF, super, tax, social security and aged care.