Budget 2021: A small change that makes a big difference for property downsizers

Constantine and Angela Tripodis outside their Black Rock home. Picture: Tony Gough

It’s an issue in every suburb in Australia: older couples rattling around in houses that are much too big for their needs. All those empty bedrooms, all those unused backyards. They may need to downsize.

At the same time younger families — often now working from home — are struggling for space. All those cluttered hallways, those overflowing closets. They may need to upsize.

New changes to rules around superannuation in the budget offer a tax-effective pathway for both sets, especially older Australians wanting to downsize.

It’s not that the government is throwing open the door for using your super on housing — the new rules have little to do with talk that the COVID crisis “early super” scheme might be extended. What we got this week were enhancements to existing programs, but the adjustments are expected to be widely popular.

For potential downsizers, the big news is that the current scheme where you can downsize the family home and put spare cash unleashed by the transaction into super has opened wider: the eligibility age is moving down from 65 to 60.

Lyn Brenton and her husband Peter sold their home of 45 years in Seaton to downsize.

“It sounds like a small change but it is going to make a big difference, because these are the key years people “downsize” — and it’s being announced against a background of rising house prices,” says financial adviser Sue Dahn at Pitcher Partners.

Moreover, early research into the downsizer “scene” has thrown up a few surprises such as the scheme is more popular with women than men (55 per cent female applicants). In fact, even under the existing terms the scheme has been growing in popularity among both Self Managed Super Funds and larger institutional funds with more than 22,000 applicants to date.

At QSuper, Jason Murray, chief of member experience, says his fund has already had more than 500 downsizers with an average contribution of $200,000 at an average age of 73.

How the downsizer scheme works

The idea behind the scheme is to encourage older Australians to shift their larger family-sized properties on to the market to make the wider housing system more efficient.

And while a study from the Grattan Institute suggested the primary reasons people don’t downsize are emotional rather than financial, there are nonetheless a range of economic reasons people resist the exercise. Until this scheme was launched in 2018 if you were already retired you could not put more money into super even if you did not have enough in there when you stopped working.

Alternatively, if you were wealthy already you may have “maxed out” all avenues to “topping up” super under current limits.

Either way all the mesmerising rules about “caps” and “thresholds” are off the table in the downsizer scheme, which operates over and above existing regulations. Whatever your situation you can sell your home and with the proceeds you can contribute up to $300,000 into your super and you can access this scheme even if you are 100 or older. (There is no age limit.)

The key rules are that you must have lived in the house for at least 10 years and that once the family home is sold — typically the settlement date — you must put the money into super within 90 days.

After that the rules do not appear especially restrictive, it is expected you will spend less on your next house but there is nothing in the terms that says it must be smaller — the system assumes it will make sense for you to buy a less expensive property because the attraction is that you put the “gap” between the old house and new house into super.

Tips and traps

At their best the downsizer contributions will fund a bigger tax-free income from super each year while also funding a new home. At Q Super, Jason Murray estimates that a 60-year-old topping up $300,000 to their balance would be able to draw an additional tax-free income for 28 years of $24,527 per year — or in the same exercise with $200,000 the extra annual tax-free income would be $16,351.

The downsizer limits are “individual”, which means that if a couple were selling the family home they could both individually contribute up to a combined total of $600,000 into super.

From a tax perspective, the optimum use of the scheme would most likely be to leave no assets exposed — in other words the entire gap between the amount earned on the old house and the amount spent on the new house would go into superannuation. Remember that money freshly created and left outside the super system could be liable for tax or alternatively could be counted against pension access.

Moreover, it is crucial that the financial cost of making such a move works out — the transaction costs of buying and selling, not to mention stamp duty — can be substantial, especially in the larger cities.

How the first home super scheme works

At the other end of the spectrum from the downsizer scheme, is the First Home Super Saver scheme which could easily be tagged as the “upsizer scheme”. This is the federal program which involves using super to help fund a first home — it has been running for four years and 18,000 applicants have already used it.

In common with the downsizer scheme, it’s not new but it is newly enhanced. The big news here is that you can save $50,000 through the scheme now compared with $30,000 previously.

It works like this: you can only use voluntary super contributions, which means extra money you volunteer (or salary sacrifice) into super each year on a pre-tax basis (officially known as a concessional basis). From July 1 this year the concessional “cap” on super contributions is $27,500 per year.

Also from July 1 this year 10 per cent of your salary must go into superannuation under the Superannuation Guarantee Charge. So to make it easy, let’s say you had a total salary of $150,000 — then $15,000 goes into super under the SGC. Now remember the concessional contribution “cap” is $27,500 — so you could voluntarily contribute an extra $12,500 ($27,500 minus $15,000) to the scheme per annum if you can afford it. The money is kept in a special account where you are not taxed at your income tax rate (marginal rate) but at the super rate, which is 15 per cent. It is this gap that allows you to accelerate your savings towards a first home.

Tips and traps

Get your timing right: both the downsizer scheme and the upsizer program enhancements will be introduced on July 1 next year. The change limits on contributions will be introduced on July 1 this year.

On the basis you are paying less tax on the super investments channelled into the special account for FHSS, it’s going to work better for you than money invested outside the super system. The key precaution is to make sure you don’t exceed the amount you contribute into the scheme in any one year — make sure you (or your super fund) calculate everything so you put in the precise amount you can afford.