Navigating the Downsizer Super Scheme • Pitfalls to steer clear of when selling your family home 🏠💰
The trend of downsizing from larger family homes to smaller, more cost-effective properties has gained significant traction, driven in part by a beneficial superannuation exemption supported by successive governments. This trend is particularly popular among older Australians who may have missed the opportunity to contribute to their super under existing rules. By leveraging the proceeds from the sale of their family home, retirees can make a special contribution to their retirement fund, thanks to the government’s ‘Downsizer superannuation contribution scheme.’
As of 2022, a substantial $9.4 billion had been funneled into this government initiative, a stark increase from the initial $1 billion contributed in the 2019 income year. Notably, 55 percent of participants were female, and 45 percent were male. The success of this super policy is expected to continue its growth, especially as the entry age for the Downsizer scheme has been lowered from 65 to 55 years old.
However, a recent case in the Administrative Appeals Tribunal of Australia sheds light on the complexities surrounding the use of the government’s Downsizer rules concerning retirees’ eligibility for the Age Pension. The Parton’s Case centered on a couple who sold their family home but did not utilise all the net proceeds to purchase a new one.
Tribunal decision: Unused money and pension eligibility
The Tribunal ruled that any portion of the net sale proceeds not used to acquire a replacement home would no longer be subject to special rules. While the used proceeds (contributed to super) would be counted as an ‘asset,’ the unused sale proceeds (left outside super) would be included in the pool of financial assets subject to normal deeming rates for income means testing.
This case underscores the importance of ensuring that the net sale proceeds are entirely applied to the purchase of a replacement home to benefit from the special rules. In the Parton’s situation, they sold their home, delayed the acquisition of a replacement home, and did not use all the sale proceeds when they eventually acquired it. The Tribunal clarified that any unused net sale proceeds, once the replacement home is acquired, lose their eligibility for the special rules.
Smart moves: Using leftover money for home repairs
The Tribunal did recognize that if the Partons used the unused portion of the sale proceeds for repairs and modifications to the replacement home, that amount would become part of the replacement home. Consequently, it would be disregarded for the assets means test and cease to be considered a financial asset for income means testing.
Since the Partons’ case transpired before January 1, 2023, the sale proceeds would only be excluded from the assets means test for 52 weeks instead of 104 weeks. The remaining balance of the sale proceeds would be treated as part of the ordinary pool of financial assets subject to varying rates.
Downsizer program is still a popular (and can be a smart choice)
The Downsizer initiative, despite the complexities illustrated by specific cases, remains a popular and intelligent government initiative aimed at supporting retirement and housing outcomes. To recap the scheme’s history and rules: introduced in 2018 by the Federal Government, the downsizer contribution allows individuals over 65 (later reduced to 55) to make a substantial contribution to their super by selling a family home held for at least 10 years.
The contribution must be made within 90 days of the residence’s sale settlement. Apart from bolstering retirement assets without affecting contribution caps, this strategy offers the additional benefit of reducing the taxable component of the super benefit and increasing the tax-free component. Generally, after-tax contributions to super can be withdrawn tax-free as part of the tax-free segment of superannuation.
Crucial reminder: Seek expert advice
This strategy not only boosts retirement money without any contribution limits but also reduces taxes on the super money. After-tax money put into super can be taken out tax-free later.
It’s important to note that only one downsizer contribution is allowed per couple. Given legislative intricacies, seeking advice from a superannuation expert before proceeding is recommended. This helps understand the rules better and make informed choices.