Superannuation News: Over 65 and Thinking of Downsizing?
Downsizing Day: Why a wave of Baby Boomers will be cashing in their homes from July 1
Author: DANIEL BUTKOVICH
If you’ve been waiting in the wings for the chance to buy a bigger property this year, you might be in luck.
And if you’ve been wondering whether it’s the right time to downsize, the federal government is about to give you a push out the door.
From July 1, a wave of family homes is set to hit the market, with the federal government’s new downsizer incentive kicking in.
The scheme allows homeowners over 65 to use the proceeds from selling their home to make a one-off deposit of up to $300,000 into their superannuation fund. The limit applies per person, meaning a couple can contribute up to $600,000.
What does it mean for downsizers?
The incentive is designed to encourage older homeowners to sell properties that no longer suit their needs by allowing them to take advantage of the tax benefits of investing surplus money into super.
Normally, people over 65 face restrictions on voluntary super contributions, with earnings from contributions above their cap taxed at a higher rate.
The downsizer contribution does not count towards contribution caps, meaning homeowners taking advantage of the scheme get a tax discount and could end up with more money in retirement.
“It’s a really great way for older Australians to top-up their super,” H&R Block director of tax communications Mark Chapman said. “Once it’s in super, it’s effectively cash, and once you get to over 65 you can then draw down on that super and live on it in a very tax attractive way.”
Depositing the surplus into super can make more sense than putting it towards other investments, where earnings are taxed at the investor’s marginal tax rate.
“The income within super is taxed at 15 per cent, which is a very low rate,” he said. “Once you’re over 65 you can effectively withdraw the money out tax-free as a lump sum or an income stream.”
The new measures could help some homeowners more than others, according to Mr Chapman.
“It will particularly benefit those people who are asset rich but cash poor,” he said.
“If you’re retired, then chances are you’re not working as much and not bringing in much in the way of income. Maintaining that house can actually be a chore and a financial burden.”
What does it mean for upsizers?
The measures could increase the supply of homes for younger families by reducing barriers preventing older homeowners from selling, and allow more movement within the property market, according to Property Mavens founder Miriam Sandkuhler.
“It’ll free up bigger properties, which people below are going to upsize into,” she said.
However, an influx of downsizers could create more competition for affordable properties.
“First home buyers and first time upgraders who are borrowing to buy will struggle to compete with cashed up downsizers looking to buy the same stock – smaller houses and single storey units and villas,” Ms Sandkuhler said.
“While the legislation benefits older Australians, it will be to the detriment of Gen X and Y.”
Older homeowners are already beginning to take advantage of the scheme, with Richard Matthews Real Estate director Richard Baini reporting an increase in over-65 vendors listing their homes.
“There’s been a significant shift,” he said. “A lot of the properties I’m selling at the moment are for people in that bracket.”
“It’s a way to dangle the carrot for homeowners.”
Is the scheme worth it?
Despite the tax benefits, downsizers should carefully consider whether the scheme will be effective for their personal situation.
Taking into account selling costs for the old property and stamp duty for the new home, the amount of capital released may be less than expected.
And for homeowners moving from a dated family home to a modern and well-located apartment, there may not be a big difference between the prices of the two properties.
It’s also possible that selling the family home could make some people ineligible for the age pension, according to Mr Chapmain.
“Your family home is exempt from your assets when you’re looking at the pension tests, but cash is not exempt,” he said. “By disposing of your house and liquidating that into cash, you need to consider how that will affect your eligibility.”
“Two people you need to speak to are first of all your accountant to talk you through the tax side of things, and secondly a financial planner who can advise you on what the impact might be.”
Demand from downsizers could actually push up prices of large, modern or exclusive apartments, according to Mr Baini.
“They might be looking to downsize, but they don’t want to go down in quality,” he said.
What are the rules?
• Homeowners must be 65 years or older at the time of the contribution.
• The home must have been owned for at least 10 years prior to sale.
• The downsizer contribution must be made within 90 days of settlement.
• The home must be in Australia.
• Houseboats, caravans and mobile homes are excluded.
• Homeowners can only make a downsizer contribution from the sale of one home.
• The proceeds of the sale must be either exempt or partially exempt from capital gains tax under the main residence exception.
• Homeowners aren’t required to purchase another dwelling.
• Spouses of homeowners can claim the contribution, even if the house is owned in just one spouse’s name.
• The contribution can still be claimed if ownership has transferred from one spouse to another due to death or divorce, as long as the combined period of ownership is at least 10 years