The Australian Government has confirmed that changes announced as part of its 2019-20 budget have the potential to allow downsizers to tip up to $1.2m into their super account from the sale of the family home.
The potential windfall comes about as a result of changes to the age eligibility of what is known as the superannuation lump sum ‘bring forward’ arrangements.
The ‘bring forward’ arrangements allow people to make up to three years’ worth of future annual superannuation lump sum contributions in a single year, up to a maximum of $300,000 for a single or $600,000 for a couple.
At present, people must be aged under 65 to use the ‘bring forward’ arrangements.
However, as part of the 2019-20 Budget released in April, Treasurer Josh Frydenberg announced that the ‘bring forward’ arrangement, from July 2020, would be extended to people aged 65 and 66.
Importantly, the government’s existing superannuation downsizing incentive, which has been in place since July 2018, is targeted to the same age bracket. This incentive makes it easier for singles aged over 65 to place up to $300,000 from the sale of the family home into super (or $600,000 in the case of a couple).
Treasury confirms measures can be used alongside each other
Until now, it has not been known whether the new ‘bring forward’ arrangements would be able to be used concurrently with the downsizing superannuation incentive, including when people wanted to make a large superannuation deposit thanks to a family home sale windfall.
However, in a comment to Downsizing.com.au, an Australian Treasury spokesperson confirmed the two initiatives would be able to be used alongside each other.
“Downsizer contributions allow people aged 65 and over to make a contribution into their superannuation of up to $300,000 per individual (up to $600,000 per couple) from the proceeds of selling their home,” the spokesperson said.
“This amount is in addition to any other contributions that people are able to make under other concessional and non-concessional contribution rules and caps, and is not subject to the work test requirement.”
The spokesperson did also point out, however, that the expanded 'bring forward' arrangement still needs to be enacted in Parliament to become law, before its proposed 1 July 2020 commencement date.
The combination of the ‘bring forward’ measure, and the downsizing superannuation incentive, clearly now opens the door for downsizing couples, from July 2020, to release up to $1.2 million into their superannuation from the sale of the family home, compared to $600,000 at present.
Singles have the potential of releasing $600,000 using the same pathway, compared to $300,000 at present.
Use of new pathway may be limited, expert says
In an interview with Downsizing.com.au, HLB Mann Judd wealth management partner Jonathan Philpot said however that there would be limited opportunities for people to access such a large additional superannuation contribution from downsizing.
“If there is a situation where most of a person's wealth is tied up in their home, and not much at all in the super side of things, if they were in that situation, this could be a really big opportunity for them to correct it,” Mr Philpot said.
“However, I think the majority of people, who have got the home, have still been able to build up decent levels of super.
“So if they can do a final top-up of $600,000 in super, that may well be enough for them from the downsizing incentive.
“Alternatively, if the (bring forward) rules now allow a little bit more, terrific - they may be able to put a little bit more into super and it would be more of a bonus.”
Mr Philpot’s second scenario would then see a downsizing couple potentially using the $600,000 downsizing superannuation incentive, alongside a more modest contribution of say $100,000 from the ‘bring forward’ arrangement.
Mr Philpot also said a separate issue was that the downsizer incentive was not particularly well-known or used.
“The downsizing super incentive is not that well-known, it is still under the radar,” he said.
“It (also) amazes me people that are in the pre-retirement phase, say they are going to use their house to make up the shortfall in their retirement, but when it comes to the crunch it doesn’t happen.
“It doesn’t mean they don’t sell the property, but often they are moving into a place with a better suburb, closer to the beach or an apartment with water views, and after all the transaction costs have very little to put away.”
Other key considerations
Two other issues are well worth considering.
Firstly, age pension eligibility and the level of fortnightly pension payments may be impacted by releases of cash to super, from the sale of the family home. This means the downsizing super incentive is potentially better suited to self-funded retirees.
Secondly, the ‘bring forward’ arrangement cannot be used to exceed the $1.6 million superannuation cap, while the downsizing incentive is not subject to this cap.
It is well worth seeking advice from a professional financial advisor before making any large financial decisions in relation to downsizing.
By Mark Skelsey
This article was originally published on downsizing.com.au.