The New Downsizing Contribution Scheme for Retirement-Aged Australians
- 19 July 2018
Housing affordability is something that’s always making news within Australia, as prices in our major cities continue to rise and our population continues to age. This year, the Australian Government has introduced a measure which aims to reduce housing affordability pressure and - importantly for older Australians - enable retirees to more easily downsize their residences. Coming into effect from the 1st of July, the ‘Contributing the proceeds of downsizing into superannuation (downsizing) measure’ will take effect. In this article, we take a closer look at the details of this new measure and help you to understand how it might apply to you.
Who it applies to
If you’re a retiree (over the age of 65) in Australia who owns your own home, this scheme is aimed at making it easier for you to downsize your property by providing a unique financial incentive. Like many older Australians, if you’re now enjoying your retirement years, you might find that the family home is simply not suited to your needs any longer. Maintaining a family home such as the traditional 3 or 4-bedroom abode with a sprawling backyard might be a drain on your time and your budget. Despite this, many retirees find themselves holding onto the family home simply because selling it can be an expensive and complicated process when it comes to fees, taxes and superannuation concerns. This new government incentive will make it much easier - and more affordable – to downsize your home. Whether you would like to build a brand new home which better suits your needs and is tailored to your specifications, or purchase an existing, smaller property, you could be spending your retirement years in a new property, in a location that suits your needs, and earn yourself a great bonus towards your superannuation, to boot!
The fine print
The initiative will apply to the sale of dwellings which act as the main place of residence for Australians aged 65 and over, who have owned their home for more than 10 years. The exchange of contracts must occur on or after the 1st of July 2018 if you’re to be eligible, so properties sold before then will not qualify for the scheme. If you do qualify for the scheme and choose to sell your home or downsize after July 1st, you will be eligible to make a tax-free contribution to your superannuation of up to $300,000. This $300,000 contribution can be made by each individual who is involved in the sale of the home (both you and your spouse, for example).
Importantly, this contribution is not considered to be a non-concessional contribution, which means that it does not affect your contribution caps. According to the ATO website, if your super balance is over $1.6 million, you will not be excluded from the new downsizer contribution scheme. It’s important to note that the downsizer contribution can only be made from the sale of one home – your primary place of residence – and can’t be made on the sale of any further properties.
There are a couple of other important exceptions to the downsizer contribution scheme, including its effect on your transfer balance cap, and your eligibility for the age pension, so it’s important to consult your financial planner and make sure you’re aware of all the conditions which apply to you.
How to make your contribution
First and foremost, you’ll need to check that your superannuation fund accepts downsizer contributions, and that you’re eligible for the scheme. Once you’ve established these factors, you will need to fill out the downsizer contribution form upon or before making the contribution to your superannuation fund. Failing to do so may result in your super fund not properly allocating the funds and may affect your eligibility for the tax concession. Before you go ahead with the sale of your home and your downsizer contribution to your superannuation, it’s a good idea to consult with a financial planner to ensure that you’re making the best financial decision based on your circumstances. Finally, you must submit your contribution no later than 90 days after the final settlement on the sale of your home, unless you meet the exemption criteria and are eligible for an extension.
Great news for retirees
Although the sale of your primary residence may be exempt from CGT (capital gains tax), the repercussions for superannuation have previously meant that downsizing was simply not an option for many Australians. Thanks to this new incentive from the Australian Government, not only will retirement-age Australians be able to more affordably downsize and find or build the perfect new home, but pressure will be relieved on the housing market as more properties become available.