There are many questions to ask yourself as you look to make a smooth transition into the next stage of your life, but one of the biggest decisions to make is what to do with the family home?
Do you stay put in the big house you’ve had so many great memories in? Or, do you shift to a smaller place, which could give you some extra funds to help you live the lifestyle you want in your retirement years?
A new measure, coming into effect from 1 July 2018, might just make that decision a bit easier.
In a bid to reduce pressure on housing affordability in Australia, the government released a package of reforms in last years’ federal budget, one of which is a new ‘downsizing measure’.
The new downsizer measure will allow eligible individuals 65 years or older to contribute up to $300,000 (or $600,000 for couples) into their superannuation from the sale proceeds of a home they’ve owned for 10 or more years.
Currently, those aged between 65 and 74 must pass a work test to make voluntary contributions to their super. And, for those over 75, they are highly unlikely to be able to contribute to their super at all.
However, contributions made under the downsizer scheme are exempt from those boundaries and available to everyone aged 65 and older. Further, amounts contributed under this scheme are available in addition to any other concessional or non-concessional contributions you make.
To take advantage of the new measure, there are a number of criteria you must meet:
- You must be 65 or older;
- Contracts for a property must be exchanged on or after 1 July 2018 – no earlier;
- Contributions to your super fund need to be made within 90 days of settlement;
- The property doesn’t have to be your main residence at the time you sell it but it needs to be eligible for part (or full) main residence CGT exemption. So, a house you used to live in, but which is now an investment property, may still qualify under this measure; and
- The home must not be a caravan, houseboat or other form of mobile home.
It is also worth noting that while the amount you have in super will not impact on your ability to make a downsizing contribution, amounts contributed to super under this measure will not be excluded from the $1.6 million pension transfer balance cap.
This might mean that you cannot transfer the full amount you contribute from downsizing into a retirement pension account, meaning that some of your super may need to remain in the super accumulation phase where earnings are taxed at up to 15 per cent.
So, for those with super approaching $600,000, it might be worth considering the tax effectiveness of downsizing. The $600,000 won’t affect your total super balance and it will count towards the $1.6 million balance.
Additionally, it’s worth remembering that the amounts in your super accounts will count towards the pension assets test and income test. Depending on your circumstances, this means that the decision to downsize your family home could impact your age pension.
The new downsizing super contributions measure could help you to achieve your retirement goals. But there is a lot to consider and the rules are complicated so it’s always worth seeking professional advice from a financial adviser.
Mark Haynes, of Haysman Financial Services, is an authorised representative of AMP Financial Planning Pty Ltd, ABN 89 051 208 327, AFS Licence No. 232706.
Any advice given is general only and has not taken into account your objectives, financial situation or needs.