The federal government’s downsize incentive for homeowners aged over 65 is effective from July 1, 2018. Designed to encourage older homeowners to sell up their large family homes and downsize, the scheme enables homeowners to use the proceeds of the sale of their home to make a one-off deposit of up to $300,000 each into their superannuation fund. But how do you know if the downsize incentive is right for you?
Under normal circumstances, people over 65 have restrictions on the voluntary super contribution amounts they can make, with earnings from contributions above the cap amount taxed at a higher rate. The downsize incentive doesn’t count towards this cap, meaning homeowners not only end up with more money in retirement, but won’t have to pay the higher tax rate. Furthermore, putting money into a superfund translates to more cash in the long run, as putting money towards other investments means the earnings will be taxed at the investors marginal rate. The tax rate on super earnings is 15 per cent.
The theory behind the scheme is when older Australians sell up their home, it frees up more properties for young people to purchase. However, the scheme has been contested, arguing that cashed up older Australians will be looking to downsize into the same properties first home buyers are looking at, increasing the competition for affordable housing
Is the downsize incentive right for you?
Pros:
- You can make a large, once-off contribution to your super fund that doesn’t count towards the cap, up to $300,000 each or $600,000 for a couple.
- Your super earnings are taxed at a reduced rate of 15 per cent.
Cons:
- Taking the selling cost and stamp duty for a new home into account, homeowners may not get back the capital they expect.
- If your home is dated, you may not be paying much less for a modern and well-located smaller property.
- It is possible that selling the family home can make you ineligible for the age pension.
“Speak to your accountant about the tax implications, and a financial planner about your situation before moving forward with a sale.”
Who is eligible?
Those who an answer YES to ALL of the following questions:
- You are 65 years old or older at the time you make a downsizer contribution (there is no maximum age limit).
- The amount you are contributing is from the proceeds of selling your home where the contract of sale exchanged on or after 1 July 2018.
- Your home was owned by you or your spouse for 10 years or more prior to the sale (the ownership period is generally calculated from the date of settlement of purchase to the date of settlement of sale).
- Your home is in Australia and is not a caravan, houseboat or other mobile home.
- The proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT rather than a pre-CGT (acquired before 20 September 1985) asset.
- You have provided your super fund with the Downsizer contribution into super form either before or at the time of making your downsizer contribution.
- You make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually at the date of settlement.
- You have not previously made a downsizer contribution to your super from the sale of another home.
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