Maximising your super benefits by downsizing

Andrew Degn

Asset rich, cash poor is an unfortunate catchcry we hear all too often among retirees. Many of them own their property outright, particularly in our inner Brisbane suburbs, but they’re also having to deal with increased cost of livingpressures. As such, being frugal with the household budget has become necessary, despite the fact most live in an extremely valuable asset.

Elder Aussies like remaining in their family home, but it’s not just a sense of familiarity that keeps them in place. Many are concerned about the tax implications of selling down and moving out. They’re concerned the proceeds will contribute to their taxable incomes and a large ATO bill will result.

The other concern with selling is anxiety around where to move next. Will there be adequate money remaining from the sale to ensure they have somewhere to live AND have enough dollars to live on?

It can all be a bit daunting, but some good news in this year’s budget will make it easier for a new group of downsizers to reap the benefits of capital gains while ensuring they are maintaining, or even improving, their lifestyle.

Good news budget

In his federal October budget, Treasurer Jim Chalmers announced initiatives that will deliver more financial freedom to retirees and release housing for younger buyers. 

Firstly, stage three tax cuts planned prior to the government’selection win have been maintained. These cuts are best summarised in the table below.

The second announcement of significance was a reduction in the downsizer contribution age from 60 to 55. This isapplicable to those who’ve owned their primary residence for 10 years or more.

The downsizer contribution allows people to make a one-off,post-tax contribution to their superannuation fund of up to $300,000 per person from the proceeds of selling a home. If you’re a couple, both of you can contribute and those funds do not count towards non-concessional contribution caps – i.e.they won’t be taxed in your super fund and contribution caps don’t apply to the sale proceeds being tipped into the fund.

The Bill for this measure is in Parliament and, if passed, will take effect from the start of the first quarter 2023 after it is legislated.

How it helps

This change means if you and your spouse are 55 or older, there’s added incentive to sell your home.

Say you own an older (but renovatable) three-bedroom cottage on 450 square metres in a great school zone, and it’sworth $2 million. If you sell the property, you and your significant other could downsize into a beautiful two-bedroom apartment in the same location for $1.4 million.

You could then contribute $300,000 each to your superannuation fund even if you’ve already exceeded your contribution caps. This money could then even be redrawn tax free if over the age of 60.

Of course, the impact of these contributions on your financial arrangements are specific to your own personal circumstances. You should discuss any decision to utilisefunds in this way with your financial advisor to ensure you get maximum benefit.

That said, the net result of selling your home could well be a big win for you and others.

Benefits of the initiative

By selling your home and downsizing you will have releaseda huge amount of previously underutilised equity. This is especially true if you have a larger home with too much space now the kids have flown the coop. Those unrealised dollarswere sitting there locked up in your asset – now they’re free to help boost your financial position.

The initiative means you will have a strategy via your super tominimise tax. You simply get to keep more of what you make from offloading the family home.

Your assets are more liquid too. If an emergency arises and you need dollars quickly, this extra cash in your super is far more accessible than if it were tied up in your home’s value. That should provide a peace-of-mind safety net.

While it may not feel like it when you’re in the family home, downsizing delivers huge benefits in lifestyle. A more compact but better-appointed home is easier to maintain and enjoy. It can also be more secure if you select a home that has the potential to lock-and-leave when you travel.

The benefit to others of your downsizing is that there will be more housing options available to young families looking to build a life. This is especially true in our inner-city suburbs where space is at a premium.

These changes are a great result delivering financially winning outcomes to owners and new buyers.

If you are interested in finding out more about how you can take advantage of the new rules, contact your accountant and financial advisor to discuss your specific circumstances.

Also, have a word with your local agent about what your home might achieve in today’s market and how much a downsize property might cost. Once the numbers are laid out, you could discover there’s a bright financial future in selling down the family home.