The federal government’s new downsizer incentive started on 1st July, and experts are predicting more family homes will be placed on the real estate market as a result.
The scheme allows homeowners over 65 years, to use the proceeds from the sale of their home to make a one-off deposit of up to $300,000 into their super fund. The limit of $300,000 applies per person, which allows a couple to contribute up to $600,000.
What Are The Benefits For Downsizers?
The scheme is designed as an incentive for older homeowners to sell their properties that no longer suit their requirements, by allowing them to take advantage of the tax benefits of investing surplus money into their super funds.
The majority of people over 65 years, have restrictions on voluntary super contributions, with earnings from contributions above their cap taxed at a higher rate. The new downsizer contribution does not count towards contribution caps, which means homeowners who take advantage of the scheme get a tax discount. The income within super is taxed at the low rate of 15%. When you reach the age of 65 years, you can withdraw the money out tax-free as a lump sum or an income stream.
However, the new scheme could help some homeowners more than others, depending on their personal circumstances. In most cases, it will particularly benefit those people who are asset rich but cash poor.
What Is The Flow-On Benefit For Upsizers?
The new scheme may increase the supply of homes for younger families by reducing restrictions discouraging older homeowners from selling, and elevate the number of listings within the property market.
However, an increased number of downsizers wanting to purchase could create more competition for affordable properties.
This may result in first home buyers and people wanting to upgrade who are borrowing to purchase, competing with cashed up downsizers looking to buy the same properties.
Look Before You Leap
People should carefully consider whether the scheme will be effective for their personal situation.
It is a good idea to consult with an accountant to determine the tax side of things, and also a financial planner who can advise on what the impact might be on your personal circumstances. The need to take into consideration the selling costs for their current property and stamp duty payable for their new home. It may be that the amount of capital released is less than expected.
This could particularly apply to homeowners moving from an older family home to a modern apartment, where there may not be a significant difference between the prices of the two properties. It’s also possible that selling the family home could make some people ineligible for the age pension. A family home is exempt from your assets in pension tests, but this does not apply to cash. Selling your home and turning that into disposable cash may affect your eligibility.
What Are The Rules?
• Homeowners must be 65 years or older at the time of the contribution.
• The home must have been owned for at least 10 years prior to sale.
• The downsizer contribution must be made within 90 days of settlement.
• The home must be in Australia.
• Houseboats, caravans and mobile homes are excluded.
• Homeowners can only make a downsizer contribution from the sale of one home.
• The proceeds of the sale must be either exempt or partially exempt from capital gains tax under the main residence exception.
• Homeowners aren’t required to purchase another dwelling.
• Spouses of homeowners can claim the contribution, even if the house is owned in just one spouse’s name.
• The contribution can still be claimed if ownership has transferred from one spouse to another due to death or divorce, as long as the combined period of ownership is at least 10 years.
Further information can be found on the ATO Super FAQs.