The ability for pensioners to contribute up to $300,000 into superannuation after selling your main residence (along with the first home super saver scheme) passed both houses of Parliament and received Royal Assent, so let's have a look at what the 'downsizer contribution' measure will bring to the table.
What is it?
The main benefit is that people aged 65 or over can make downsizer contributions from the proceeds of the sale of your main residence as long as the main residence was owned for at least 10 years up to the disposal. This contribution can be made regardless of whether the individual meets the work test and it also does not count against their contributions caps.
However, it is important to note that the amount contributed will still be counted for transfer balance cap (TBC) purposes, meaning it will still reduce your available cap space if transferred into a retirement phase income stream (RPIS).
For a contribution to be a downsizer contribution in respect of an individual, the following conditions must be satisfied:
- The individual must be aged 65 years or older at the time the contribution is made
- The contribution must be in respect of the proceeds of the sale of a qualifying dwelling in Australia
- The 10-year ownership condition is met
- Any gain or loss on the disposal of the dwelling must have qualified (or would have qualified) for the main residence CGT exemption in whole or part
- The contribution must be made within 90 days of the disposal of the dwelling, or such longer time as allowed by the Commissioner
- The individual must choose to treat the contribution as a downsizer contribution, and notify their superannuation provider in the approved form of this choice at the time the contribution is made
- The individual cannot have had downsizer contributions in relation to an earlier disposal of a main residence
Who would use it?
At first glance, it did not seem to be a measure that would have a high uptake. This was due to the obvious negative repercussions of the measure for Centrelink purposes, given the home is exempt but the contribution into super does not receive an exemption.
Given the stricter nature of the age pension asset test, this means that most people who are already on the age pension will have their entitlements reduced or wiped out completely if they utilise this measure.
While people entitled to age pension may not choose to use the downsizer contribution, it is definitely a strategy that should always be considered for people who are not eligible for age pension due to their assets or income. However, other issues that may affect the uptake include:
- whether stamp duty needs to be paid (some states have exemptions)
- transfer balance cap (TBC) remaining if intending on transferring to a RPIS, and
- the individual's tax rate outside superannuation if TBC exhausted and the contribution needs to be retained in accumulation phase.
Downsizing, upsizing or moving into your investment property?
Whenever someone genuinely sell and moves into a new main residence, whether the value is greater or less than the old property, there may be an opportunity to get more money into super.
The amount that can be contributed into super is the lesser of $300,000 and the proceeds of the disposal of the dwelling. However, there is no distinction of 'net proceeds', which means that anyone that has surplus cash that they would like to contribute into super (but might be unable to due to other restrictions such as age, work status or total superannuation balance) could potentially do so while downsizing or even upsizing their main residence.
It is also a possibility for someone with more than one property to sell and move into one of their other properties without actually purchasing another property. This would leave plenty of surplus cash that could be contributed into super.
Moving into aged care
Some people may look to sell their home upon moving into an aged care facility to fund costs. While there may be some benefit of holding on to the former home for at least two years if they are on the Age Pension (as former home remains exempt for up to two years), after this period it will be assessed.
As such, downsizer contribution will potentially become a very important measure and impact the recommendations of financial advisers, given the ability to move it into an RPIS with a zero tax environment (assuming TBA cap space available), thought it should be remembered that an RPIS is deemed for income test purposes. This will provide many more investment opportunities for those entering aged care as they were usually limited to investments outside superannuation.
Estate planning: Downsizer re-contribution strategy?
Saving the best for last, it looks very likely that the downsizer contribution will be used as part of a re-contribution strategy to maximise their tax-free component. This would certainly apply for people who have already exhausted their TBC.
Basically, they could make a $300,000 lump sum withdrawal from their interest with the highest proportion taxable component and then contribute the amount back in as a downsizer contribution, which will form part of the tax-free component and minimise any potential tax for beneficiaries in future.
However the downsizer contribution manifests itself, it looks more likely that it will benefit the wealthy / self-funded retirees, though it is not clear whether this will lead to any improvements in housing affordability.