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Downsizers may not have much to give to super

Published February 2021

Nigel Bowen looks at the pros and cons of downsizing to make the most of new generous super-contribution rules.

There’s a widespread perception that many older Australians opt for a sea or tree change, or shift to a funky inner-city apartment, once work and raising children are no longer concerns.

However, the reality is many Australians stay put. For example, one academic report estimated only 9 per cent of Australians over age 50 downsized between 2006 and 2011. It seems the majority of Australians have traditionally lived in their chosen residence as long as they are able to.

But that may be about to change.

Is the new downsizing rule right for you?

In the 2017-18 federal budget, the government announced various measures to make Australia’s housing market ‘function more rationally’, to the benefit of both older homeowners and aspiring first-home buyers.

It was legislated in December 2017 and took effect from July 1, 2018. 

How it works:

  • A retired couple (if they meet certain conditions) can sell the family home and collectively deposit $600,000 into their super accounts.
  • Such a contribution will not count towards their concessional or non-concessional contribution limits, the contributor won’t need to meet the work, maximum age, or $1.6 million balance tests for contributing to super.
  • The home sold must have been owned by the individual, their spouse or former spouse for the past 10 or more years.
  • It must have been the principal residence of the individual(s), making the sale exempt, or partially exempt, from capital gains tax under the main residence exemption.
  • You must be at least 65 years old at the time of making a downsizer contribution and the home cannot be a caravan, houseboat or other mobile home.
  • In total, an individual can contribute up to $300,000 to their super (that’s $600,000 for a couple).
  • There is no requirement to buy another home.

Financial considerations before downsizing

Jacaranda Financial Planning senior financial advisor Brett Stene is not opposed to downsizing, but has seen it go wrong for clients.

He tells his clients if they just move to a single-storey house in the same area, or sell a four-bedroom suburban house to buy a two-bedroom flat in the inner city, they probably won’t end up with much money to put into super.

This is especially the case once you deduct the cost of shifting residences.

Greville Pabst, chief executive officer and executive chairman of WBP Property Group, and judge on Channel Nine program The Block, says when a homeowner sells his or her existing home and buys another for $1 million, around $100,000 disappears into the black hole of stamp duty, legal fees, removalists, real-estate agent commissions, advertising and presenting the house for sale.

Obviously, the cheaper the house the less stamp duty there is to pay, but even on a $600,000 house in New South Wales the stamp duty would be $22,490.

Stene warns that “the government giveth and the government taketh away” when it comes to the downsizer contribution. For example, if a couple sells the family home and puts $600,000 into super, they can lose both their pensioner concession card and their pension.

“If they go from a full pension to no pension at all, they are $35,000 a year worse off. Super is concessionally taxed, but your home is currently still an exempt Centrelink asset. You can live in a house worth $5 million and still get a full age pension.”

Consider all your options

RetireInvest Circular Quay financial adviser John Walker says that many clients don’t want to move but feel they need to.

He encourages his clients to consider all their options before selling.

“I always point out there’s usually a uni student nearby happy to earn some money mowing their lawn,” he says. “Also, they can release equity by taking out a reverse mortgage rather than selling.”

Walker encourages people to try before they buy. For example, to lease their existing home and rent where they’re planning on moving to.

“A seaside town that seems delightful during a weekend stay might not seem so attractive once you’ve lived there for 12 months,” he adds. “Once you sell up in locations such as Sydney and Melbourne, it can be difficult to get back into the market. Especially if prices have gone up 10 per cent, 20 per cent or 30 per cent since your departure.”

Tax advantages of downsizing

Walker doesn’t deny parking up to $300,000 (for an individual) or $600,000 (for a couple) in a low-taxed super account is tempting. But he points out many over-65s are already on an effectively low tax rate on non-super sources of income.

He is referring to the $18,200 tax-free threshold, and 19 per cent tax rate between that and $37,000. People who have reached the age where they qualify for the age pension have a higher tax-free threshold – effectively $32,279 for a single person or $28,974 for each eligible member of a couple.

“Plus, there are tax offsets, such as the much-discussed dividend imputation, which may support some older Australians who have share portfolios.”

He adds: “Nobody is denying putting money into super is a simple and effective investment strategy but there are other options to generate lightly taxed income in retirement.”

A unique super opportunity

But it is a unique opportunity to add up to $300,000 to your super, outside of the strict contribution limits. So if downsizing is in your plans or an idea that appeals to you then do your sums thoroughly to work out what you’d have left over after downsizing to contribute to super.

If they add up, and you’re happy with what you’d have to contribute, and with all that is involved in downsizing your home, then a next good step would be to talk it over with a financial planner.

It could be particularly useful for wealthier Australians who cannot add to their super once it hits the $1.6 million limit, beyond the small pre-tax limit and incremental investment returns. For them, the downsizing option is a golden opportunity to add a lump sum.

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