In the most recent budget it was announced that retirees were going to be allowed to add more funds to Super if they downsized their home. Since then there has been little press on the subject. To be fair, it has not been legislated as yet, and assuming it does pass, it will not be introduced until July 1st 2018.
There’s a strong possibility the legislation will pass however, and as such for many of you, careful planning may need to occur now in order to take advantage of these changing rules.
First a summary of exactly what’s been proposed and what you need to do to qualify:
- If you are over 65 and you sell your Principle Place of Residence, you will be allowed to make a $300,000 personal non-concessional contribution into Super, even if you are not working and do not satisfy “the work test”.
- The contract must be signed after 1st July 2018, (the day the rule comes into effect).
- The contribution will contribute to the personal non-concessional cap.
There are some very interesting points to take away from this:
- Firstly, if you are working after age 65 and satisfying the work test (40 hours worked over a 30 day consecutive period), then you can already make $100,000 personal non-concessional contributions, so this new rule only adds an additional $200,000 for you.
- You don’t actually have to downsize! There is no requirement to reduce the size or value of your home. In fact, you don’t even have to buy a new home! The rule will apply to anyone who sells their PPR and claims the PPR capital gains tax concession.
How does the new legislation help anyone? It really just comes down to whether or not adding to Super is going to be beneficial to you from a tax perspective. i.e. It will potentially allow you to have more funds in Super, ipso facto more funds in Pension phase, which means tax-free earnings. It will not, therefore, benefit everyone, but I would argue it will be a potential benefit for most.
Case Study – Brian and Doreen, both aged 74, who own their own home valued at $500,000 and have nothing in Super. They live on the full age pension. They sell their home and buy a new home for $300,000. They then have $200,000 to invest. Let’s first assume the new legislation did not exist. Since they cannot add to Super, they invest $100,000 in each of their personal names and assuming a conservative return of 4%, or $4,000 each, then combined with their age pension this is already enough to take them over the tax-free threshold of $18,200, and they will pay tax. With the new rule however, if they put the $200,000 into Super, and then into pension phase, they can earn any amount from the funds, (even 20% in a given year), they will pay no tax and will remain under the tax-free threshold.
In summary, I believe the new legislation will favour the wealthier. The more money people have outside Super means more tax to pay. So, by allowing more to be transferred into Super, it will essentially be a tax dodge for those people. This is especially true given that you are not required to actually downsize. I foresee many individuals choosing to sell the PPR, only to buy another at the same value but then move $300,000 from their funds outside Super into Super.
For those that genuinely want to downsize and increase the amount of funds they have to invest and create an income from, the two main things to consider will be a) will they be happy to live in a smaller/cheaper property? And b) the fact that this will reduce the inheritance for their beneficiaries.