The change to the age at which homeowners become eligible for the downsizer scheme was announced as part of the 2021-22 Federal Budget. It will most likely take effect from 1 July, 2022.
The scheme was first introduced in 2017 to encourage empty nesters to downsize their large homes by allowing eligible over-65s to make a one-off contribution to their superannuation of $300,000 from the sale of their house. Soon, people from age 60 will be able to do the same.
Canstar finance expert Steve Mickenbecker said the extension of the downsizer scheme could help address the inefficient allocation of housing in Australia, potentially making more homes available to young families.
He said it would also be a good move for many individuals, because super is tax-effective and it would add significantly to their retirement savings, particularly for retirees who don’t have a super balance that’s benefitted from a lifetime of compulsory contributions.
“It can be a good strategy for people to sell an underutilised asset to produce a big capital gain, and buy a smaller house that suits their needs better and still earn capital gains on a lesser dollar base,” Mr Mickenbecker said.
“You’d be freeing up capital that would have been tied up in a house, releasing $300,000 and putting it into a tax-effective investment that’s being managed by professionals and hopefully earning you an average of around 7% per annum.”
As to whether reducing the cut-off age for the downsizer scheme would solve the current home affordability problem, Mr Mickenbecker said uptake of the scheme would have to be “massive” to have a real impact on house prices today.
He said a more likely benefit would be that it encourages people to bring forward their downsizing, which would bring bigger houses onto the market earlier.
Below, we answer some of the key questions for anyone interested in learning more about downsizer contributions and their eligibility for the scheme:
What are downsizer contributions?
Downsizer contributions allow people who want to downsize their home to use up to $300,000 from the sale as a one-off contribution to their superannuation, where it typically enjoys a tax rate of only 15%. The current minimum age for people to do this is 65, but that will drop to 60 after this new measure from the Budget comes into effect. Based on information from the Australian Taxation Office (ATO), couples could each contribute $300,000 to their super if the sale of the property was at least $600,000, even if only one spouse owned the home.
To avoid people taking advantage of the scheme, it’s a requirement that the home must have been the seller’s main place of residence and they must have owned it for at least 10 years. The scheme can only be accessed once, meaning you can’t use it again if there were to be another property sale.
What is the eligibility for downsizer contributions?
According to the ATO, people need to meet the following criteria to be eligible for the downsizer scheme:
- You must be 65 years or older, or at least 60 once the Federal Budget changes are introduced in 2022.
- The contribution must come from the sale of your home.
- Your home must have been owned by you or your spouse for at least 10 years prior to the sale.
- Your home must be in Australia and can’t be a houseboat, caravan or other mobile home.
- Capital gains or losses from the sale of the home must be exempt or partially exempt from capital gains tax under the main residence exemption, or you must be entitled to such an exemption.
- Your super fund must have received your ‘Downsizer contribution into super’ form before or at the time of making your downsizer contribution.
- Your downsizer contribution must be made within 90 days of you receiving the proceeds of the sale, which is usually at the date of settlement.
- You must not have previously made a downsizer contribution to your super from the sale of another home.
Is a downsizer contribution non-concessional?
No, downsizer contributions are not non-concessional contributions and do not contribute towards either of your contributions caps. According to the ATO, even if you already have a super balance greater than the transfer balance cap (currently $1.6 million), you can still make a downsizer contribution.
Does the downsizer contribution affect my transfer balance cap?
According to the ATO, downsizer contributions do count towards your transfer balance cap, which is the limit on the total amount of super savings you can move into a tax-free retirement phase pension account (such as an account based pension). The cap is currently $1.6 million, and will change to $1.7 million from 1 July, 2021.
Does downsizing impact my eligibility for the Age Pension?
Yes, downsizer contributions will be considered when determining your eligibility for the Age Pension because they are not tax-deductible, according to the ATO.
Pension Boost CEO Paul Rogan recommended seeking advice before downsizing, because it could lead to increased financial assets which could impact your Age Pension eligibility.
“An alternative to downsizing which doesn’t impact your Age Pension eligibility is accessing the government’s Pension Loans Scheme (PLS) to release the equity in your home to assist with funding your lifestyle,” Mr Rogan said.
There are interest costs associated with the PLS, however, so you may want to consider seeking professional advice to decide which approach is right for you.