What to do now about the proposed downsizing policy
One of the more positive announcements out of the 2017 Federal Budget was the ability to contribute to super when downsizing a home, and there are a number of considerations that SMSF professionals should now be taking into account for their clients.
Whilst this measure is not yet legislated, and not due to commence until 1 July 2018, it has raised a lot of discussion from advisers and clients in a short space of time.
There are some significant benefits from this proposal that advisers should be raising with their clients. First, there are no work test requirements to contribute proceeds from downsizing into super. Given this measure is slated to only apply to people aged 65 and over, this change is important. At the moment any client’s aged 65 to 74 would need to meet the “work test” of 40 hours gainful employment within a 30 day period during the year in order to contribute to super. And people aged 75 and over cannot contribute at all (irrespective of working status). People of these ages would be eligible under this measure.
Second, the contribution will not be subject to the new $1.6 million of total super cut-off that applies from 1 July 2017 to determine your eligibility to make non-concessional contributions to super. This means that those who are already at the cap will have an extra opportunity to boost their super.
Third, for those for have never had the ability to contribute to super, or very limited ability to benefit from increasing rates of super guarantee etc, this may be their first (and only) chance to use super to its maximum extent.
All of these are positive benefits that this proposal will bring to clients in the future, and have received a lot of focus since the Budget announcements. However, we are still operating in an environment where we don’t have sight of the legislative amendments that will need to be made to allow this proposal to proceed. Despite this, there are a number of factors that advisers should consider raising with clients (possibly now) as they may impact on the client’s future ability (or desire) to take advantage of this proposed change. Some of these considerations are as follows.
Will the timing of the sale of the property have an impact?
The Budget night announcements are clear that the ability to contribute to super under this measure will commence from 1 July 2018, but what is unclear is whether the sale of the property must also occur on or after that date.
Whilst it may be prudent to assume that would be the case, this could have an impact on some existing client decisions. For example, if a client was considering downsizing their home at the moment, would they be better off deferring the sale until 1 July 2018 to ensure they can contribute the proceeds to super under these new rules? Doing so, however would introduce an element of investment risk as it involves taking a view that property markets won’t decline over the next 12 months.
How soon after sale must the proceeds be contributed to super?
If a client is downsizing, but has not yet found a replacement property, how long will they be able to retain the sale proceeds in their own name before they are prohibited from contributing under this measure? Will there be a defined timeframe from the time of sale within which the proceeds need to be contributed? If this is the case, whether the timing is then determined from the date of contract or the date of settlement could lead to reduced or extended settlement timeframes in the future.
What are the Centrelink implications?
Clients who have access to this measure may currently be eligible for the age pension. The Government has confirmed that any change to a person’s balance in superannuation as a result of this measure will be assessed under the assets test. Clearly this has the potential to significantly impact on a person’s age pensions entitlements as funds are moved from an exempt asset (principal residence) to an assessable asset (superannuation).
Under existing Centrelink rules, if a pensioner sells their principal residence, the proceeds can be exempt from the assets test for up to 12 months if their intent is to buy a new principal residence. If this is the same time frame within which to contribute the proceeds to super under this proposal, some clients may consider delaying making the contribution to super to delay impacts under the assets test.
Can the proceeds be invested between the time of receipt and contribution?
Currently unknown is whether the proceeds of sale can be invested during the period from receipt until contribution, or if that breaks the nexus.
Will the proposal change current ownership structures?
One of the requirements to be able to contribute to super under this proposal is that the property needs to have been owned for at least ten years. Whilst it would be fair to assume the property needs to be the principal place of residence at the time of sale, it is unclear if it also needs to have been the person’s principal place of residence throughout the ten year period.
Additionally, if clients have taken appropriate estate planning and asset protection advice in the past and, as an example, had the property owned in the name of one member of a couple, then presumably only that member can utilise this opportunity, even if the other person has been contributing to mortgage repayments.
Do you have to downsize?
Whilst the proposal is premised on the concept of downsizing the principal residence – that is using some of the sale proceeds to buy a new property and contributing the difference of up to $300,000 into super, is this actually necessary? For example, if the sale was occurring because a person was moving to an aged care facility, would they be eligible? If the existing principal residence was sold, and the person moved into a second property they own (that may have been previously leased out), will they be eligible?
Will this opportunity impact on overall retirement strategies
One issue that advisers will need to consider and discuss with clients is how this opportunity could impact on their retirement plans. An obvious strategy to consider would be to utilise super from age 65 (perhaps with a combination of age pension) to achieve the right balance and only to sell the property as existing superannuation balances reduce, thereby achieving a balance between age pension and superannuation funded retirement benefits.
For a measure that is only a proposal at this stage, this remains subject to how the Government regulates it, and whether it passes the Senate. However there are certainly a number of requirements that advisers will need to consider and that may be important to discuss with clients now, even in the absence of legislation.
This article is brought to you by BT Financial Group, and written by Bryan Ashenden, Head of Financial Literacy and Advocacy at BT Financial Group.