Super tax changes to hit downsizers scheme

Changes to superannuation threaten to undermine a successful scheme that encouraged older Australians to move out of large family homes.

Fears over higher taxes are set to hit the government’s “downsizer scheme” which gives empty-nesters an incentive to switch money from the family home into superannuation.

Under the terms of the scheme – which has been improved by both Coalition and Labor governments – older Australians who have missed out saving in super can use the proceeds of the sale of the family home to top up super regardless of existing contribution rules.

However, under proposed changes, money flowing out of tax-protected family homes will now be going into a scheme where there will be a new “double tax” of 30 per cent on amounts of over $3m.

What’s more, since the $3m cap announced by the Treasurer Jim Chalmers is not indexed, the number of downsizers who may face the cap is set to increase every year.

Financial adviser Liam Shorte of the Verante Group says: “We have helped a lot of people use the downsizer scheme and what has just been introduced is a major disincentive, people are not going to move in any way towards a situation where they could have to pay 30 per cent tax in retirement.”

As Martin North of Digital Finance Analytics adds: “Our research tells us that around a million Australians say they intend to downsize. But there has been a lack of confidence in super rules. Now we have what some term as a small change coming down the line in super, but the thing is it that undermines confidence in something like the downsizing scheme.

“We see what investors – and some advisers had feared – money could be trapped and can’t escape.”

Since its launch in 2018 the downsizer scheme has attracted tens of thousands of older Australians into increasing their super. The eligible age for the scheme has been lowered three times and is now at 55.

Under the scheme, an individual can put up to $300,000 from the sale of the family home into super – couples can put in a combined $600,000. But fears are mounting that participants could ultimately be caught out by future changes to tax rates or any future tightening of pension access rules.

Similarly, financial advisers suggest a parallel plan to tax unrealised gains on earnings on super amounts over $3m will push investors to have the wrong sort of assets inside super.

There are concerns investors will seek to avoid having assets with long lifespans inside super because they will be taxed on money notionally earned but not received. “Growth” shares which do not pay dividends or private equity – especially start-up equity – may be diverted out of super under the terms of the plan.

Under the downsizer scheme – which has been taken up by an estimated 50,000 investors – the family home must have been held for 10 years and the transfer of funds must be done inside 90 days. Industry surveys show that around two-thirds of downsizers are between 60 and 70.

The scheme was envisaged as a way to unlock property supply in the suburbs while getting older Australians to invest more in superannuation. In recent times the government has also tried to encourage older Australians into the scheme through a softening of pension access rules – the current policy excludes sales proceeds from the pension asset test.

As Social Services Minister Amanda Rishworth has suggested: “We don’t want people putting off downsizing to a more suitable home because they are concerned about the impact it would have on their payment rate and overall income.”

But advisers point to the looming problems in the downsizing scheme as typical of the reverse incentives – including unrealised gains tax – now looming across the super system.

Meanwhile, dividend paying investments – especially franked dividends – effectively get upgraded in the new system even after the proposed tax changes are taken into account.

Originally published as Super tax changes to hit downsizers scheme