Given the number of changes that have occurred within the superannuation system over recent years, it’s important not to overlook the positive initiatives that have arisen and may benefit individuals.
One of the more significant changes was announced in the 2017 Federal Budget and took effect from 1 July 2018. If the level of interest from advisers regarding this opportunity is any gauge, then its potential application for clients could be significant.
This new initiative, commonly referred to as “the downsizer strategy”, was announced by the Government as part of a range of measures in the 2017 Federal Budget designed to help in opening up the ability for more people to buy a home – in this case by offering some encouragement to those aged 65 and above typically considering selling their property and moving somewhere smaller (hence the term “downsizer”).
More importantly though, the downsizer strategy is opening up opportunities for individuals to top up (or in some cases even commence) their super, and has fast gained traction as the most topical strategy we’re seeing this financial year.
With average super balances at retirement ($270,710 for men and $157,050 for women) still below the amount the Association of Superannuation Funds of Australia (ASFA) estimates is required to fund a comfortable retirement for a couple ($640,000), an opportunity for clients to top up their super is an important consideration, particularly for those approaching retirement.
The new downsizer strategy means clients now have more opportunity to upsize their nest egg.
Which clients might be interested in this strategy?
Despite existing opportunities for those aged between 65 and 74 to top up super, subject to meeting a work test (or the one-off top up opportunity announced in the 2018 Federal Budget with no work requirement), these options don’t suit everyone. And it also doesn’t consider the challenges involved in finding a suitable job.
The benefit of the downsizer strategy is that there is no requirement to meet a work test to make this contribution. This is beneficial for clients aged between 65 and 74, but it is even more appealing for clients aged at least 75 who may still wish to contribute to their super – whether they are still working or not.
Not only is this a great advantage of the downsizer strategy, but so is the fact that it doesn’t matter how much a client already has in super. The total superannuation balance threshold of $1.6 million that would normally preclude an individual from being able to make further non-concessional contributions to super doesn’t apply for downsizer contributions.
If your client is eligible to make a “downsizer” contribution, they can make an additional contribution of up to $300,000 into super. It’s an after tax contribution so no tax is paid on the way in, and because they are over 65, it can be withdrawn from super tax free. And if your client is eligible to make other contributions to super, they can still do this, as the contribution does not count towards their contributions cap.
The opportunity for couples is even greater. If your client’s spouse also qualifies, then they can contribute $300,000 each from the sale proceeds – so $600,000 in total – even if only one owned the property. The fact that the property can be owned by one of the members of the couple is important, as this means strategies previously implemented for valid estate planning or asset protection outcomes won’t need to be unwound just to access the downsizer strategy.
Which clients are eligible?
To be eligible, an individual must sell a property that is located in Australia that they or their spouse have owned for at least 10 years. And the contract for sale has to be entered into on or after 1 July 2018. Clients who exchange a contract for sale on a property before 1 July 2018, even where settlement occurs after 30 June 2018 are unfortunately not eligible to make a downsizer contribution from the sale proceeds of the property.
Any contributions made in error on this basis could be regarded as non-concessional contributions and could possibly result in excess contributions being made, as well as having been made in circumstances where the client was not actually able to make that contribution.
Previously, super funds could reject member contributions in the event they inadvertently exceeded the contributions caps. Given this has now changed, it’s important for advisers and clients to work together to ensure they stay within the relevant caps.
Finally, the property needs to have been your client’s principal place of residence at least some point during its ownership. In essence, your client needs to be eligible for an exemption from capital gains tax when it’s sold – whether that’s a full exemption or a partial exemption.
This distinction is important as the property being sold could be an investment property today, so long as it was the main residence in the past (or the other way around).
When the property is sold, the sale price is key. If it sells for more than $600,000, for example, then your client could contribute up to $600,000 to super (being $300,000 maximum for each member of a couple, if both eligible). If it’s sold for less than $600,000, your client can only make a downsizer contribution up to the sale price (and subject to the maximum allowed per person).
So how does the downsizer strategy work in practice?
Firstly, clients must be in a position where they are thinking about selling their home. It is worth noting that clients do not necessarily need to move to a home that is smaller or cheaper to use the downsizer strategy.
As long as the client (and the property sold) meets all the relevant requirements, there is no need to actually “downsize”. If it involves the sale of a previous principal residence that is now an investment property, there is no need to move at all.
And while the sale price of the property will dictate how much can be contributed into super, the physical proceeds from the sale don’t have to be used to make the contribution. Other monies can be used.
Perhaps the most important issue to be aware of is around timing of the contribution to super under the downsizer strategy. There is a time limit of 90 days from receiving the sale proceeds to putting the money into super. And like contributions made under small business capital gains tax provisions, you need to notify the superannuation fund at or before the time of making the contribution that the contribution is a downsizer contribution. If the contribution is made outside of these requirements, it may be regarded as a non-concessional contribution which could raise issues about excess contributions, or even ineligibility to contribute.
For clients who are eligible for this opportunity, it should certainly be considered, even if they are looking for a new house to buy in the meantime.
Given many Australians have their savings invested in their home, this opportunity to upsize super may offer a welcome relief to many. The extent of how widely this is used is still to be seen, as eligible contributions are likely to only now be starting to make their way into the super system.
But like all things with super and finance in general, getting it right is important and clients should be seeking professional guidance.
Bryan Ashenden is head of financial literacy and advocacy at BT Financial Group.