Downsizing your home: Traps and opportunities
In the last Australian Federal Budget, an amendment to the taxation law will allow eligible Australians over the age of 65 to sell their existing home and put up to $300,000 (each, for couples) of the proceeds into superannuation. The new arrangements commence on July 1, 2018, and existing superannuation contribution limits will not apply.
While it’s pleasing to see tax relief built into the system, there haven’t been any changes to regulations concerning the Age or Service Pension. This means that only some people will be able to take full advantage of the new rules. Some could be worse off financially.
The key tax changes
- The sale of property must occur after June 30, 2018.
- The property must have been owned for a minimum of 10 years. If a house has been demolished and a new dwelling erected, the 10-year rule applies from the date of original purchase.
- The property doesn’t have to be held in joint names for a couple to both make the $300,000 contribution.
- The property must be in Australia and can’t include a caravan, houseboat, or mobile home.
- Property transferred to an individual as part of a divorce settlement takes the period of ownership from the time of purchase in the previous spouse’s name.
- The owner(s) must be over age 65 at the time of sale. They don’t have to be gainfully employed, and there is no upper age limit.
- A couple can each contribute $300,000 to a superannuation fund.
- The existing superannuation cap of $1.6 million per individual will not apply.
- The contribution to a superannuation fund must be made within 90 days of the disposal of the property (unless a longer time is allowed by the Commissioner of Taxation).
- The individual must elect to have the contribution treated as a downsizer contribution, and complete a notification form provided by the member’s superannuation fund.
The sting for Age Pensioners
Individuals and couples who receive a part or full Age or Service Pension need to seek advice on how downsizing and adding to their superannuation accounts will impact on pension arrangements.
Age Pensioners are not assessed on the value of their principal residence, regardless of its value. If the residence is sold and a dwelling of lesser value is acquired, the excess that remains after purchasing a new dwelling is likely to be treated as a financial asset.
Pensioners are assessed under an Assets Test and an Income Test. Each case will be different and advice should be sought before going ahead with any downsizing move. Centrelink officers should be able to explain the exact impact on a pensioner’s financial arrangements. Financial planners have access to computer models that demonstrate the financial impacts of both the assets test and the income test.
Practical considerations when moving
Moving from one dwelling to another is traumatic for most people, but it’s likely to create additional stress and anxiety for people over age 65. In some cases, downsizing may be due to misfortune, and in other cases it may be involuntary.
Moving to another dwelling is expensive, especially in Sydney and Melbourne. The total cost of moving includes Stamp Duty, estate agents’ fees, legal costs, removalist charges and, perhaps, more expensive insurance costs. Then there may be the need to buy new furniture and so on.
Finding a suitable smaller dwelling is not always easy. In the well-established suburbs of the capital cities, a typical home has a garden, separate garage, and a large backyard. The home may be double storey and contain a separate office or study, a family room and several bathrooms.
Many suburbs lack small single level dwellings. The newer buildings tend to squeeze numbers of units onto what was originally one residential home site. A recent study, published by National Seniors Australia, found that 9 out of 10 people they surveyed wanted a smaller single level dwelling on its own block, with two car spaces, a small garden, and two or three bedrooms to accommodate visiting children and grandchildren. The opportunity to have a pet may also be a consideration.
Then again, many won’t take up the opportunity to downsize because they have adult children still living at home.
Downsizing isn’t for everyone. In some cases, the sums don’t add up. For others, the sums might add up, but finding the right place to move to may prove to be too hard. It could also be argued that some people are too old to move.
If planning to downsize, tread carefully and get good advice.
Owen Weeks is director and authorised representative of Lifestyle Matters Pty Ltd and a Registered Tax Agent. He is a Fellow of the Financial Planning Association, a Fellow of the Institute of Professional Accountants, and an Honorary Fellow of the Association of Superannuation Funds of Australia. He is also the co-author of Retire Bizzi.
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