How downsizing retirees can boost superannuation with home sale

Michael Hallinan | 19 Sep 2017

Page 1 of 1

People over 65 will be able to make an additional contribution to super provided they sell their house to do it.

 

This measure was part of the May 2017 budget changes. The basic details are that individuals who are home owners can, from the proceeds of sale of their principal place of residence, each make a non-concessional contribution of up to $300,000 to their superannuation.

This special superannuation contribution will not be affected by the work test and can still be made even if they have a total superannuation balance of $1.6 million or more.

However, there are a number of pre-conditions:

• First, the sale of the principal place of residence must occur after 1 July 2018.

• Secondly, the member making this special contribution must be aged 65 or more.

• Thirdly, the principal place of residence must have been held for 10 or more years.

Finally, the downsizing contributions can be made even if the total superannuation balance already exceeds $1.6 million.

While the legislation is yet to be enacted, one matter is clear: these special contributions will still be included in the transfer balance cap; that is, they are included within the $1.6 million transfer balance.

So, while downsizer contribution is not prevented from being made by reason of the $1.6-million balance rule, they are not exempted from the transfer balance cap.

Example

Bill and Mary are both aged 76 and have not worked for many years.

They each have a pension balance of $1.6 million and, because of the recent changes, they each have an accumulation balance of $100,000.

Bill and Mary can still each make $300,000 of downsizer contributions.

It is irrelevant that they don't satisfy the age and work tests for superannuation contributions (these tests will be modified to ensure the tests do not apply to downsizer contributions).

It is also irrelevant that they have a total super balance in excess of $1.6 million (again the rules imposing a nil non-concessional contributions cap if your total superannuation balance exceeds $1.6 million will also be amended).

However, there will be no amendment to the transfer balance cap. Consequently, as they each have exhausted their transfer balance cap, the $300,000 can only increase their accumulation accounts and not their pension accounts.

It seems there will be a 90-day period for making the downsizer contribution.

This period will run from the date of disposal of the home. In general (unless the ATO decides to allow an extension) if the contribution is made more than 90 days after the disposal, it cannot qualify as a downsizer contribution.

It is not clear whether the downsizing contributions have to be sourced from the proceeds of sale or simply that an amount of up to $300,000 can be contributed within 90 days of the sale where the sale proceeds equal or exceed the contribution.

While this measure (if and when enacted) may be beneficial--in that up to $300,000 could be contributed to super in circumstances where the contribution could not otherwise be made due to either the work test, age test, or the $1.6 million total super balance test--it will result in value (currently embedded in the family home and, as such, immune from capital gains tax and Centrelink testing) moving to an environment where any earnings on the value will be subject to tax (if the transfer balance cap space is nil) and will be exposed to the Centrelink means test.

Consequently, this measure may be beneficial to some but not all super members.

More from Morningstar

• Household wealth rising, but so is mortgage debt and stress

• Politics, fees, complexity among concerns in super inquiry submissions

• Make better investment decisions with Morningstar Premium | Free 4-week trial

 

Michael Hallinan is special counsel, superannuation, at Townsends Business & Corporate Lawyers. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

This report appeared on www.morningstar.com.au 2018 Morningstar Australasia Pty Limited

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.