With all the changes in superannuation law over the last year, one could be forgiven for completely tuning out at the mention of new superannuation rules, however in November of last year, an interesting piece of legislation was passed. Garth Collingwood, from Ausure Financial Group, takes a closer look at ‘Downsizer Contributions’.
Currently, once over 65, the only way to shift capital into super is to meet a “work test”, that is, declare that you have worked 40 hours, in a 30 day period – and one is typically limited to $100,000 per annum of “tax free” contributions. And even then, it requires that the total balance of your superannuation is under $1.6 million. However, the new legislation allows for anyone over the age of 65 to move a sum of up to $300,000 into superannuation, regardless of work status and current super balance.
Known as “Downsizer Contributions”, the measure was introduced as part of a package aimed at reducing pressure on housing affordability, and is available for anyone over 65 who is selling their home. As you can expect, there are eligibility criteria to meet. More interesting, however, are the requirements that do not have to be met. There is no stipulation that you are in fact even purchasing another home. Nor does it matter if you are purchasing a new home that costs more than the one you just sold, but you wish to use the opportunity to contribute excess funds you already had in the bank.
The main criteria are:
– The contract date is after 1 July, 2018
– The home was owned by you, or your spouse, for at least 10 years prior to the sale
– You will be claiming at least a partial exemption from CGT under the “main residence” requirement. Ie, you do not have to have lived in the house since purchase – as long as you have lived in for part of the time you have owned it.
This is not an exhaustive list, and you should discuss with your financial planner and/or accountant. Given that individuals with taxable income over $37,000 pa in retirement face an effective tax rate of 48.5% on the income they or their investments earn (due to the shading out of various tax offsets at this level), the ability to shift capital into super where the maximum tax rate is 15%, or even 0%, could be a valuable option.
Take, for example, the situation of Homer, aged 70.
Homer’s situation is as follows;
– House – $500,000
– Contents and Vehicle (Centrelink Value of $35,000)
– Bank Accounts and Term Deposits – $320,000
– Allocated Pension – $250,000
He lives off $40,000 pa, drawing the funds from his allocated pension, term deposit interest, and dipping into his bank
accounts. Over time, his retirement capital follows the following trajectory:
And his income funding is drawn from the following sources:
(All graphs in this article are shown in present value. They assume :
– Lifestyle Spending of $40,000 pa (indexed to inflation)
– Inflation of 2.5% pa
– Allocated Pension Long term net return of 5%,
– Bank interest of 2.5%
Graphs are provided for illustrative purposes only)
As he is above the Centrelink Asset Value cut off, he receives no age pension, and lives entirely off his Term deposit interest, and allocated pension.
Homer wants to move closer to family, and into a home that requires less maintenance. He finds one for $600,000. After 1 July 2018, he puts a deposit on the new home, gets a bridging loan from the bank, and once he moves in and his old house sells up, is left with $170,000 in the bank (after stamp duty and moving costs). Under the new Downsizer Contribution rules, Homer
chooses to contribute $120,000 into super, which he combines with his existing allocated pension. He then claims the Age Pension online, and now receives $290 per fortnight in Age Pension.
His retirement capital trajectory now looks like this:
And his income is drawn as below:
After the move, Homer has less retirement capital (after all, the move cost him in total approximately $150,000), but the resulting Age Pension payment means that he does not necessarily have to
sacrifice his living costs – he can keep living on $40,000 pa. But as you can see, the move has pulled Homer’s retirement capital down to a level he would have otherwise not have reached until five years from now.
This is just an example. Homer moved for personal reasons – it would not be advisable to make such a move simply to contribute funds into super or access an age pension, as the rules can (and do) change quite regularly. It is designed to give an example of the new downsizing rules in practice, and should be taken as such. Every decision you make will have pros and cons, and it would be advisable to discuss these with your planner as part of the decision making process.
The information contained in this article does not taken into account your individual circumstances, goals and objectives.
Principal/Senior Financial Planner
Ausure Financial Group
If you would like more information or would like someone to review your individual requirements, call us on 1300 587 225, or click here to leave us a message and we will get back to you.