Downsizing – new government scheme to increase housing turnover

Written by Andrew Jewell.

There is a growing number of empty nesters in Australia – households in which children have left the family home (yes, most do leave eventually), leaving parents to reside in a large multi-bedroom home, or even acreage, that their lifestyle often no longer demands.

In recent times, empty nester homes have been the subject of debate in discussions about housing affordability. As new generations of homeowners attempt to gain a foothold on the property ladder, in particular in relation to obtaining a family home, proponents argue about the underutilisation of homes owned by empty nesters.

While it’s typical for homeowners to downgrade in later years, better health care and support, increased life expectancy, increased transaction costs and limited construction of freestanding homes in inner and middle suburban areas means there is short supply of appropriate family homes in major capital cities.

A further disincentive to sell and downsize for homeowners aged over 65 has been the inability to invest remaining net proceeds, after purchasing a new home, into superannuation.

Under current legislation, people aged 65 or below can contribute a non-concessional (after tax) contribution of $100,000 per financial year or $300,000 under the ‘bring it forward’ rule.*

However, under newly proposed legislation those aged over 65 will soon be able to make a contribution of up to $300,000 to their super upon the sale of their family home – an initiative aimed to increase the available supply of family homes.

Like any scheme, there are advantages and disadvantages for participants, which are explored below:

Advantages

• Eligible couples can contribute $300,000 each to their respective super fund, representing a total of $600,000;
• To be eligible, sellers do not have to purchase, or move into, another property – an appealing notion to those opting to relocate to their beach house or spend their retirement years caravanning;
• A downsizer contribution does not count towards existing concessional and non-concessional contribution caps (if applicable); and
• Investing the funds in super may provide higher long-term returns compared to bank interest.

Disadvantages

• A member must be aged 65 and over to be eligible. Remember, the bring-forward rule can be used if aged under 65;
• A member, or a member and their spouse, must have owned the primary residence for 10 years or more;
• The ruling applies to contracts-of-sale of a primary residence entered into after 1 July 2018. Those downsizing prior will not be eligible for the downsizing contribution;
• The downsizer contribution must be made within 90 days of settlement via a form submitted to the seller’s super fund to provide prior notice;
• The downsizer contribution only applies to one primary residence, and does not apply to the sale of subsequent residences;
• The contribution counts towards the total superannuation balance and transfer balance cap, currently set at $1.6 million;
• Investing in super carries a risk, such as investment and market risk. Refer to First Super’s publication ‘Investing in Super’ pages 2 and 3 for more details; and
• Upon reaching Age Pension age, any net proceeds from downsizing kept in the bank or added to super becomes subject to the Age Pension Asset and Income Test, which may result in a reduction or ineligibility for the Age Pension.

Before deciding if the downsizing contribution is right for you it’s important to consider the pros and cons to make an informed assessment. For more information about the downsizing contribution refer to the ATO website: ato.gov.au.

At First Super, our Financial Advice team can assist with personal advice regarding the downsizing contributions and how it may impact your eligibility for the Age Pension.

*Conditions apply. See ato.gov.au for more information or consult your financial adviser for personal advice tailored to your needs.