Downsizing Incentive for Seniors

About the author:

Terri Bradford
Author name:
By Terri Bradford
Job title:
Head of Wealth Management
Date posted:
24 March 2022, 9:30 AM

As part of its "housing affordability" theme in the 2017 Federal Budget, the Federal Government is incentivising older Australians to downsize their family home by allowing them to invest the proceeds into superannuation.

Suburban housing by Tom Rumble on UnsplashSource: Tom Rumble, Unsplash

What's it all about?

Individuals aged 65 and over can make a personal superannuation contribution of up to $300,000 using proceeds from the sale of a family home, which has been owned for at least 10 years. These new contributions can be over and above any other voluntary contributions the person is able to make under the existing contribution rules and concessional and non-concessional caps.

The contribution must be made within 90 days of the disposal of the home (i.e., from settlement date).

Currently, a person must be over age 65 at the time of making the contribution. From 1 July 2022, the age for eligible downsizer contributions will reduce to age 60.

Subject to the $300,000 cap, an individual can make as many downsizer contributions as they wish. However, the contributions can only ever be made from the proceeds of one sale of a dwelling. That is, it is a once-only application and cannot be used for any future sale of another main residence. This allows individuals to make contributions to different superannuation providers if they choose to do so.

Note: If the contract of sale is less than $300,000 then the individual can only contribute that amount of sale proceeds into superannuation. Funds from other sources cannot be used to "top up" the contribution to $300,000.

Eligible Home/Dwelling

To make a downsizer contribution, an individual or their spouse must have ‘disposed’ of an ‘ownership interest’ in a ‘dwelling’ they held just before the disposal which is located in Australia. In respect to this measure, the definition of the term ‘dwelling’ is modified to exclude caravans, houseboats and other mobile homes. The effect of this modification is that a ‘dwelling’ includes:

  1. a unit of accommodation that:
    • is a building or is contained in a building; and
    • consists wholly or mainly of residential accommodation; and
  2. any land immediately under the unit of accommodation.

Contribution Rules

Voluntary contribution rules for people aged 67 and older can be restrictive. Currently, for those aged between 67 and 74 years, a 40-hour work test must be met. In addition, after tax personal contributions for people with total super balances above $1.7 million cannot be made. The good news is that from 1 July 2022, individuals in this age bracket can make salary sacrifice or personal (non-deductible) member contributions without having to meet the work test.

Under the downsizer rules there is no requirement to meet the work test regardless of age. Individuals over age 65 can contribute up to $300,000 regardless of their age or work situation, as long as the home has been owned for a minimum of 10 years. It means a couple can contribute up to $600,000 for the same home via the downsizer cap. The only requirement in this respect is that the individual/s must be over age 65 at the time the contribution is made. As mentioned earlier, from 1 July 2022 the eligibility age for downsizer contributions will be reduced to age 60. This allows people more opportunity to save a greater amount within the super environment for retirement.

Downsizing and the $1.7 million Pension Transfer Balance Cap

While there is no “Total Super Balance” limit that needs to be considered, such as there is with non-concessional contributions, individuals will still be subject to the $1.7 million Pension Transfer Balance Cap. Individuals and couples will need to consider how funds contributed into super under this scheme can be used. That is, funds may have to remain in an accumulation (taxable) account if the member has used up his or her personal Transfer Balance Cap. Funds remaining in the accumulation phase will not be tax exempt and a maximum of 15% tax will apply on earnings and capital gains.

Preservation Rules and Condition of Release – over age 60

If a person is making a contribution via the downsizer rules after 1 July 2022 and is over age 60 but not yet retired, the contributions will remain preserved within the superannuation environment. A condition of release must be met before the person can access benefits (in the form of lump sum withdrawal and/or a pension income stream).

This is an important difference to current rules. Age 65 is an automatic condition of release to access super benefits. It does not matter if the person is still working or retired. Strategies that include the downsizer contributions for people over age 60 but under age 65 should bear this in mind when determining if contributing proceeds of sale of the family home into super is appropriate.

Social Security Assessment

Age pensioners should exercise caution before considering this strategy.

The full value of a family home is exempt from both the Income and Assets test for social security purposes. However, any remaining sale proceeds (after a new home is purchased) will be assessable regardless of whether funds are contributed into super or not. Therefore, a sale of the existing family home could actually result in the individual, or couple, losing some or all of their age pension benefits. If full benefits are lost so too is access to the pensioner concession card.

Case Study

Jeff & Helen, age 80 and 76 respectively, have owned their home for 35 years.

  • The home is valued at $1.4 million. This value is exempt from social security assessment.
  • Jeff has an account-based pension worth $350,000, drawing 7% min based on his age. The pension is deemed for Income Test
  • Helen has an account-based pension worth $105,000, drawing 6% min based on her age. The pension is deemed also.
  • They also have $5,000 in a cash account.

Table 1: Current Centrelink & Income Position

 Assets Centerlink Assessment Income Received
Family home  Nil NA
Account-based pensions  $455,000 $30,800
Cash $5,000 $0
Age Pension - Combined   $33,082
 Total Income   $63,882
Source: Morgans 2022

 

Let's assume Jeff and Helen sell their home for $1.4 million and buy a new home worth $800,000. The remaining sale proceeds of $600,000 are contributed into their respective super accounts under the downsizing scheme ($300,000 into each member account). They commence new account-based pensions from this new money and draw the required minimum annual payments. How will this affect their age pension benefits?

Table 2: Proposed Centrelink & Income Position

 Assets Centerlink Assessment Income Received
Family home  Nil NA
Account-based pensions  $455,000 $30,800
Cash $600,000 $39,000
Age Pension - Combined   Nil
 Total Income   $69,800
Source: Morgans 2022

 

Jeff and Helen receive more income because of the strategy; however, it has resulted in them losing access to any age pension benefits. This means they will also lose access to the pensioner concession card. This may not be the outcome they wanted as concessions from the senior's card were an important factor for Jeff and Helen in retirement.

Age pension recipients should consider what impact contributing proceeds of sale into super will have on their entitlements before taking any action.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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