Building your super in retirement (with the family home)
Retired or retiring Australians have been resistant to the idea of downsizing the family home. There are a number of reasons behind this not the least being the transaction costs involved and, for many, the inability to contribute any meaningful surplus into superannuation.
Well, that all changed in July 2018 when new policy came into effect to help underfunded retirees over the age of 65 contribute more to super.
The Government’s policy which became law on 13 December 2017 makes super more accessible for retirees. Specifically, homeowners over the age of 65 are now able to downsize their home and, if they realise e a surplus, make a $300,000 downsizing contribution to super (that’s $600,000 for a couple). It is a specific type of contribution similar to a non-concessional contribution. It is known quite simply as a “Downsizer Contribution”.
This is not something to do lightly and should be thoroughly considered by anyone planning to downsize. Consideration should be given to your personal circumstances – there may be no advantage in making a super contribution if you are unlikely to pay tax anyway. For many, however, it provides an avenue to living a more fruitful retirement by releasing capital.
This article covers the main aspects of the policy:
1. Boost your super – some retirees may not have had the opportunity to contribute to super as much as they would have liked during their working years and, now being 65 or over, current regulations do not allow them to make non-concessional contributions unless they meet the work test. Even meeting the work test, the annual non-concessional contribution is $100,000 per annum. This policy opens a window of opportunity to these retirees;
2. No age limit, no work test – As outlined in the previous point, the work test is removed for a downsizing contribution as well as there being no upper age limit. The current work test which will not apply is to have gainful employment for 40 hours within a 30 day period during the year the contribution is made;
3. Doesn’t count against non-concessional limits – if you’re over 65 and meet the work test, you can make both the downsizing contribution AND a non-concessional contribution;
4. Transfer balance cap (i.e the $1.6m pension cap soon to be $1.7M) implications – this cap, introduced with effect from 1 July 2017, means that anyone with a super or pension balance in excess of the cap cannot make further non-concessional contributions to super. HOWEVER, downsizing contributions are allowed even though it may take you over or further over the cap. For some, this may be a strategy which saves on their overall annual tax liability.
5. You don’t have to buy a new home – although you may be selling to move home, you are not required to buy a new home to access the downsizing contribution. You may choose to rent or move into another property you own. Nor are you required to buy a less expensive home – wealth permitting, you may spend more on your next home and access the downsizing contribution.
6. Specific forms – you will need to submit to your super fund a specific downsizing contribution form. Your super fund should be able to supply you with this form.
7. Tax advantaged earnings – your downsizing contribution will not be taxed but the earnings will be at the concessional rate of 15% unless you convert the contribution to a pension, in which case earnings will be taxed at 0%. This should be considered when deciding to take advantage of downsizing contributions against investing in your own name.
8. Age pension impact – downsizing contributions to super will count towards the assets and income test for age pension and DVA benefits. If you currently receive these benefits, you may be at risk of having them reduced or losing them entirely. Care should be taken to understand the impact and assess the net benefit. Also, when selling your home, Centrelink rules give pensioners who sell their principal residence a 12 month exemption under the assets test – there is no grace period for a downsizing contribution.
9. Transaction costs – the costs of selling, buying and moving home are high. There is no getting away from it. Agents fees and stamp duty are the main costs. Be careful to do your sums otherwise you may find not much capital may be released after all, reducing the benefit being sought. If your current home no longer suits your needs and you intend to move anyway, you may not be too concerned by transaction costs.
10. Time Limits – your home must have been owned by you or your spouse for 10 years or more prior to the sale. Also, you must make your downsizing contribution within 90 days of receiving settlement proceeds. You may apply to the ATO for an extension in exceptional circumstances.
11. The property must be your primary residence – the proceeds from the sale of your home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT rather than pre-CGT (acquired prior to 20 September 1985) asset. The reason for partially exempt allows for people who may have moved into what was originally an investment property – retirees in this position should be mindful of capital gains implications.
We recommend seeking advice before implementing any strategy. Sovereign Wealth Partners can help quantify the value of any strategy with long term modelling.
Speak to the team at Sovereign Wealth Partners for help and advice.
Ph: (02) 8216 1777
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