The problem with downsizing incentives

Article published 9 October 2023

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It sounds so simple, downsizing. Attractive, too, now that everyone from 55 up can put $300K into their super. But is it simple?

BASED on Tax Office information, the Australian Financial Review reports that almost 60,000 downsizers have sold their homes and put all or some of the sale proceeds into their super fund.

ATO’s downsizer contribution

If you are 55 or older, you can put up to $300,000 from the sale of your home into superannuation as an after-tax contribution. Couples can put in $600,000 combined. Contributions like this are referred to by the Tax Office as ‘downsizer contributions’.

If you are 75 or older you qualify for this as well.

You need to have owned your home for ten years or more. You will need to have lived in it long enough for no capital gains tax to be charged. There are more conditions, but these are the main ones.

The problem with downsizing

However, as anyone looking into their downsizing options is likely to find out, there generally are not many homes to choose from, certainly not if you want to stay in your area.

It would be helpful particularly for people on low retirement incomes if they could sell up and move into something smaller and cheaper. Their home would be more manageable. They would be able to bank some of the proceeds to raise their income and their cash reserves.

The problem is cheaper and smaller generally is generally not available.

How did 60,000 people downsize?

Still, 60,000 people did manage to downsize, says the ATO, so how did they do it?

An example of how the downsizer contribution works in practice is in The Australian Financial Review story referred to earlier.

A Melbourne couple sold their four-bedroom home and bought a three-bedroom apartment in the same area. But they paid  more than they got for their old place.

So, you would think this couple missed out on making a downsizer contribution, paying more for their old place than their new one.

But no! Once you sell, you earn the right to make a downsizer contribution. It doesn’t matter where the money comes from.

The Financial Review couple had savings outside their super fund, so they put those savings in as a downsizer contribution. Technically they were contributing a chunk of the sale proceeds, but in reality, the money came from somewhere else.

The downsizer contribution doesn’t require you to buy something cheaper or even something smaller if you want to make a downsizer contribution.

It’s tax break within the giant tax break called superannuation.

Cart before the horse

The Government’s downsizer contribution policy is largely an example of putting the cart before the horse.

It might be a very effective policy if in areas where the Government wanted to free up housing for re-development, it made sure there were homes to downsize to.

Such a policy would be even more effective, if those homes were ageing-friendly so that people could stay in them until they died and wouldn’t have to go into a nursing home.

Not only would that be nice for them, it would also be cheaper for the Government’s aged care budget.

The Government’s aged care task force is investigating how it can fund aged care as the tsunami of baby boomers needing aged care builds and makes landfall. Downsizing properly done could be part of the solution.

As it is, the lack of proper housing policies at the national, state and territory and council levels is not just shutting younger people out of home-ownership and forcing them into ridiculously expensive rentals, it is also very likely their taxes will need to pay for baby boomer aged care.

That would be as unfair as it would be unnecessary.

This CPSA News post merely tries to outline how, in general, you can use the downsizer contribution to super. If you think this could be useful to you, make sure you get proper, specific financial advice before doing anything.

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