Much like fast food staffers who try to entice you to up-size, the future of super looks to be heading in the same direction. With changes to super having taken effect from 1 July 2018, the question many could ask themselves is, “do I want to downsize with that?”
From 1 July 2018, a new opportunity has been available to let you contribute more to your super.
Commonly referred to as the “downsizer strategy”, a range of measures in the 2017-18 Budget announced by the Government to help people purchase property, encouraged those aged 65 and above to consider downsizing their homes.
More importantly though, the downsizer strategy is opening up opportunities for people to top up (or in some cases even commence) their super, and has fast gained traction as one of the most exciting strategies currently available. A recent release from the Australian Taxation Office has confirmed that over 5,000 individuals have used this strategy since its commencement, with 55% of those being females.2
With average superannuation balances at the ages of 60-64 ($270,710 for men and $157,050 for women) still below ASFA’s $640,000 projection for a comfortable retirement for a couple, an opportunity to top up your super is an important consideration, particularly as you near or enter retirement.
Who would suit a downsizing strategy?
In order to utilise the downsizer strategy to make contributions to super, you need to be at least 65 years of age.
Despite existing opportunities for super top ups between ages 65 and 74 (provided you meet a work test), this doesn’t suit everyone. It also doesn’t consider the challenges involved in finding a suitable role from the age of 65 if you aren’t currently working, so it’s important to keep that in mind.
The benefit of the downsizer contributions strategy is that there is no requirement to meet a work test for this contribution, which makes it ideal for those aged between 65 and 74. It is even more appealing if you are aged at least 75 and able to contribute to your super, as outside of this opportunity, you can no longer make voluntary contributions.
Not only is this a great advantage of the downsizer contributions strategy, but it also means, it doesn’t matter how much you already have in super.
The total superannuation balance threshold of $1.6 million that would normally prevent the ability to make further non-concessional contributions to super doesn’t apply for downsizer contributions.
Who is eligible?
In addition to the current age 65 threshold, there are a number of other important criteria to be met.
First, you must sell a property that is located in Australia, and you must have owned the property for at least 10 years.
Next, when you sell that property, you need to be eligible for some form of exemption from capital gains tax (CGT) on the sale of the property under the “main residence” provision. Basically, this means the property needed to be your principal place of residence for at least some time during its ownership. If you purchased the property before 20 September 1985 (so that CGT doesn’t even apply), you still need it to have been your principal place of residence at some stage during ownership. Keep in mind, it also doesn’t matter if the exemption from CGT is a full or partial exemption, which means the property could have been an investment at some stage during your ownership of it.
How much can be contributed to superannuation under this opportunity?
If you qualify as a “downsizer”, you can make an additional contribution of up to $300,000 into super. It’s an after tax contribution so no tax is paid on the way in, and because you are over 65, it is returned tax free when you seek to withdraw these funds in the future. Note, that if you are eligible to make other contributions to super, you can still do this.
The opportunity for couples is even greater. If your spouse also qualifies (based on age), then they can also contribute $300,000 (which equates to $600,000 in total), even if only one member of the couple has owned the property.
To do this, however, the sale price is key, as your couple contributions cannot be more than the total sale price of the property.
So how does the downsizer contributions strategy work in practice?
Whilst the sale price of the property will dictate how much can be contributed to super, the proceeds from the sale don’t have to be used to make the contribution, as other monies can be used.
While this opportunity is referred to as the ’downsizer’ contributions strategy, it doesn’t mean that you need to ‘downsize’ cheaper to access the opportunity. As long as you (and the property) meet all the relevant requirements, there is no need to move to something smaller or cheaper. If it involves the sale of a previous principal residence (that is now an investment property), there is actually no need to move at all.
What else do downsizers need to be aware of?
If you qualify, or are hoping to qualify for the Age Pension, the impact of selling an asset needs to be considered. The value of your main residence is excluded from the assets test, however if it is sold, and some of the proceeds added to your super, that value will then be assessed and may reduce your age pension benefits.
Perhaps the most important issue to be aware of is around the timing of the contribution to super under the downsizer contributions strategy. There is a time limit of 90 days from receiving the sale proceeds to putting money into super. Because of this, you need to notify the superannuation fund at the time of the contribution (or earlier) that the contribution is a downsizer contribution. If you get the timing wrong, or forget to notify the fund in advance that it is a downsizer contribution, then you could be deemed to have made contributions in excess of what is permitted, which could result in the amount being returned to you, or, penalties applying.
Does the downsizer contributions strategy suit everyone?
Clearly, you need to be in a position where you are thinking about selling your home. For many, the attachment to their principal residence is an important factor which means the downsizer contribution is not an option, even if you qualify in all other respects.
Given many Australians have their savings invested in their home, this opportunity to contribute more to super may offer a welcome relief. The initial indications are that there is interest in this opportunity, but like all things with super and finance in general, getting it right is important and you should seek professional guidance when considering what to do next.
Source: The article was prepared by Bryan Ashenden is the Head of Financial Literacy and Advocacy at BT and is current as at 23 January 2019. https://www.bt.com.au/personal/your-finances/retirement/downsizing-do-you-want-fries-with-that.html
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