For many Australian retirees selling the family home can be an effective way to release equity to fund retirement.
Following legislation passed in December, homeowners aged 65 years or over are able to downsize their family home and invest the surplus into the tax effective environment of superannuation.
Key Points
- The sale of the property must be from 1 July 2018 or after
- The property must have been owned for at least 10 years and be the principal place of residence (hence eligible for the main residence exemption for capital gains tax)
- Up to $300,000 per person from the sale proceeds of the family home can be contributed
- Any super contributions made using the new downsizing rules are in addition to any voluntary contributions made under the existing non-concessional (after-tax) contributions cap
- There is no requirement for the individual to purchase another home, therefore this is an option for people moving into aged care or another property
- The downsizer contribution to super must be made within 90 days of the sale of the home
Benefits for Retirees Looking to Downsize
1. Lower Tax Rates in Super: Downsizing contributions within the super environment will benefit from lower tax rates – earnings on a super balance are only taxed at 15%, or tax-free if rolled into a retirement income stream.
2. Superannuation Top Up: Previously, people aged 65 to 74 could only make voluntary contributions to superannuation if they met the conditions of the “work test”, i.e. they were employed for at least 40 hours within a 30-day period. This legislation opens up the possibility for this age group to top-up their super whether they met the work test or not. Individuals over 75 were not able to add to their super account – with this legislation they will be able to.
3. Downsize Contributions Exempt from Total Balance Cap: Individuals who have reached the $1.6 million total superannuation balance limit will still be able to make a downsizing contribution, as these contributions are exempt.
Details to Consider Before Making Downsizing Contributions
- Individuals making a downsizing contribution into their super account will still have a $1.6 million transfer balance cap on the amount of super savings they can move into tax-exempt retirement phase. If a person has reached their $1.6 million transfer balance cap, then any downsizing contribution made will remain in accumulation phase subject to 15% tax on any earnings.
- Downsizing contributions can only be made for the sale of one home – it will not be possible after the sale of a second home.
- Downsizing contributions will be counted for the assets and income tests used to determine eligibility for the Age Pension and DVA benefits. Downsizers will be moving money out of an exempt asset (their family home), into the non-exempt and assessable environment of their super fund. Also, the super balance including downsizing contributions is used to determine eligibility for residential aged care and home care services.
If you are 65 or over and considering downsizing this year, we recommend seeking professional advice to assess whether this new legislation will affect your financial position. If you have any questions please do not hesitate to contact us.
Kate is an Authorised Representative of Hillross Financial Services Limited (AR Number 1007833).