As part two of Scott Morrison’s attack on housing affordability, a scheme to encourage older Australians to downsize will be introduced. From 1 July 2018 Australians aged 65 and older will be able to make a non-concessional contribution of up to $300,000 into their superannuation from the proceeds of the sale of a family home.
How will this work?
Helping George and Jane downsize
George and Jane, both retired and aged 76 and 69, sell their home in which they’ve lived for more than 10 years to move into more appropriate accommodation. The proceeds of the sale are $1.2 million. They can each make a non-concessional contribution into superannuation of up to $300,000 from the sale proceeds ($600,000 in total), even though Jane no longer satisfies the standard contribution work test and George is over 75. They can make these special contributions regardless of how much they already have in their superannuation accounts.
Case study source Commonwealth of Australia, 2017.
The Budget documents state that this measure will ‘free up housing stock’ particularly ‘larger homes for younger families’.
But seller beware!
Debbie and I did the sums in the budget Lockup and think this policy clearly assists the budget bottom line in significant ways. The sale of more retirees’ homes will increase stock and the lower the price of homes, thus easing the housing affordability squeeze. However, as in the example of George and Jane, if they sell their home for (net) $1.2 million, then put $600,000 into super, it may assist the Budget, but they will probably be worse off.
Well we assume that the property is owned outright and the other half of the proceeds of the sale are used for a new dwelling which would be a considerably smaller property, perhaps in a less salubrious neighbourhood. If they have an ‘average’ couples’ super balance, they probably already had around $300,000 in super. So, their new super balance they probably already had around $300,000 in super. So their new super balance is $900,000 (after half the sale amount is included) and this means they will not qualify for an Age Pension as they exceed the asset threshold for part Age Pensions. If they had not sold the family home, its value would be exempt from the asset test and they would receive an Age Pension.
So without any form of Age Pension at all, they will be forced to live on the earnings from their $900,000 balance. Drawing down the minimum of four per cent, they will have $36,000 per year to live on, compared to the full Age Pension they might have had, pre-sale, of $34,820 including supplements but with only the balance of proceeds ($600,000) to spend on what will have to be an inferior home, perhaps in a less desirable neighbourhood.
So make sure you do your sums very carefully, and check them with a qualified financial professional, before you put your home on the market.