Beware governments bearing superannuation gifts for downsizers.
The Federal Government recently revealed what is ‘in’ and what is ‘out’ to induce those aged over 65 to downsize, for the theoretical purpose of helping young Australians buy a home.
The draft legislation prohibits retirees from contributing extra non-concessional funds to superannuation if they move in with their adult children, buy near a school or employment hub.
Everyone has an opportunity to comment on the draft legislation flagged in the May Budget but only until Friday 4 August.
Back in May, the Government announced an incentive for those aged over 65 to sell a family home and downsize, with any excess proceeds of up to $300,000 per individual ($600,000 for couples) to be paid into superannuation free of some tax limitations.
In its Reducing Barriers to Downsizing fact sheet, the Government states that after selling a home you and your spouse have owned for a minimum of 10 years, it is not mandatory to downsize into a smaller home in order to qualify for the super exemptions.
“You would not be required to make any subsequent purchase. You can move into any living suitable for you, including into retirement communities, aged care or smaller properties,” according to the proposed legislation.
However, the new law would prohibit those wanting to take advantage of the relaxed super laws from moving in with their kids.
If you live in a caravan, houseboat or mobile home, you are also disqualified from taking part in the scheme.
So long as you or your spouse have owned the home to be sold for at least 10 years, you need not have lived in it as your main residence for that period.
The consultation draft “provides that if you receive a partial or full main residence exemption for capital gains tax purposes, then you qualify” to take part in the downsizing scheme.
“If you had moved out of your home for several years prior to selling it, you would still be eligible,” according to the draft rules.
The Government’s scheme would begin on 1 July 2018, with contributions to super to be made within 90 days of a sale. Sales before that date will not be eligible for the downsizer bonus.
According to the Government, those without a super fund who want to take part in the scheme are encouraged to open a superannuation account with a fund manager.
The draft legislation allows for the extra contributions to be made regardless of the other contribution caps and restrictions that might apply to making voluntary contributions.
Interested parties are invited to comment on the consultation papers either publicly or confidentially. The closing date for submissions is this Friday, 4 August 2017. You can email your thoughts on the draft legislation to email@example.com or write to Manager, Accumulation and Savings Unit, Retirement Income Policy Division, The Treasury, Langton Crescent, Parkes, ACT 2600.
The proposed rules around who can downsize and contribute to their superannuation with tax concessions are murky.
On the one hand, retirees over 65 who sell a family home are blocked from the super scheme if they want to buy a smaller dwelling in their suburb of choice, should that property be close to a school or an employment hub.
That sounds discriminatory. As does the ban on the option of selling and moving in with your adult kids.
Yet, if you want to move into aged care – a measure that other government policies discourage in favour of supporting the elderly to remain at home – you’ll qualify for the new super laws. No wonder retirees are confused about the Government’s seemingly conflicting intentions.
But the really bizarre thinking in the draft legislation is the attempt to encourage just about anyone – other than those who live in a houseboat, mobile home or caravan – to pull up stumps and move down the food chain.
The draft legislation also states that it doesn’t matter if your spouse is on the title of the home to be sold in order for them to also be given the privilege of making an after-tax contribution of $300,000 to super.
According to the Government’s wisdom, so long as the couple have owned the home for a decade “if your spouse was not on the title but you were, both you and your spouse could make downsizer contributions”.
But wait – there’s another discrepancy. On the question of whether the house a retiree is selling has to be their principal place of residence. The Government says “nope”.
The house needs only to have been your main residence “for some portion of your ownership period. The consultation draft provides that if you receive a partial or full main residence exemption for CGT purposes then you qualify. For example, if you had moved out of your home for several years prior to selling it, you would still be eligible”.
Essentially, you can be away from your residence for up to six years, lease it out to make money and still get the non-concessional super tax benefits if you sell.
If you are away travelling, living overseas or living in aged care for several years, and your principal place of residence is producing income, it should be classified as an investment property.
But the draft laws have written in a loophole to allow the owners of these properties to benefit from two big tax breaks – capital gains tax exemption and non-concessional super contributions.
That’s all very nice for the homeowner/investor, but it does appear to be robbing Treasury of tax revenue … which means we are all being robbed.
And even if you are lucky enough to tick all the above boxes, the proposed Bill states that whether your superannuation fund “will accept the downsizer contribution is a matter for the fund’s trustees according to the fund’s rules. You should check with your fund and consider opening a separate account if your fund will not accept downsizer contributions”.
So, it seems downsizing to capitalise on non-concessional payments of up to $300,000 into your super after selling your ‘castle’ is not so straightforward.
What the Government fails to advise is the bleeding obvious: you must speak to a financial adviser before you put your home on the market.
Joint analysis by YourLifeChoices and AA Financial Planning shortly after this year’s Budget revealed that under the proposed measures, not all retirees stand to gain a better outcome from downsizing.
In fact, many retirees would be financially worse off if they fell for this Government’s poorly thought-out downsizing incentive.
Be aware of the downside to downsizing before you speak to any real estate agents.
Do you have an insight into the downsizing policy that you would like to share? What flaws can you see in this policy that will disadvantage retirees? Or maybe you think you will be better off financially throughout your retirement if you sell the family home. If so, tell us why.
Editor's note: we are currently seeking clarification on the wording of this policy. This may, or may not, change information presented here.