Federal government lowers downsizer super scheme to 55 year olds

Eligibility to the downsizer program where investors can put the proceeds of a large family home into super tax free have been lowered — and you don’t even need to buy another property.

The downsizer scheme is now open to those 55 years and older.

The federal government has followed through on an election promise to further reduce the eligibility age on downsizer contributions into super. The eligibility age for the program is to drop again — this time to the age of 55.

Since July 1, Australians over the age of 60 have been able to make a downsizer contribution into their super savings after selling their family home. (Before this, only over 65s were eligible). The downsizer contribution is a tax-free one-off payment that can be lobbed into super savings within 90 days of selling the main residence and is capped at $300,000, or $600,000 a couple.

Contrary to some perceptions of the program, downsizers are not required to actually downsize and purchase a replacement new home as part of the process; they can choose to rent if they wish, or even purchase a more expensive property.

Under the terms of the program, you will need to have owned the property for at least 10 years before selling and although you do not need to be living in the property at the time of sale, it must have been your principal place of residence at least at some stage over your ownership period.

“This modest change in the ­eligibility age for the downsizer program complements the government’s comprehensive plan on housing to improve access and affordability,” Assistant Treasurer and Financial Services Minister Stephen Jones said as he introduced the Treasury Laws Amendment Bill into the House of Representatives on August 3.

“This measure will increase the availability of suitable housing for growing Australian families by encouraging more older Australians to downsize to homes that better meet their needs.”

While the original move to drop the age entry limit from 65 to 60 was widely welcomed, there is some evidence the latest move may be hitting the limits of usefulness. In fact, lowering the age to 55 will have only limited appeal, economist Saul Eslake cautions.

“This is due to two social trends over the last couple of decades or more: The later age at which people have kids and the fact that those kids tend to stay in the family home for longer than they used to, partly because more of them delay their entry into the workforce because they study, and partly because even if they‘re finished studying, they can’t afford to buy their own homes,” he says.

“So the proportion of 55 year olds who find themselves having an empty nest is likely to be somewhat smaller than it would have been 20 or 30 years ago. I’m not saying it’s a bad policy, but I wouldn’t overstate its impact.”

Advisers have also cautioned that especially for Self Managed Super Funds – the timing of accessing the program is crucial.

According to SMSF Association’s Peter Burgess, “You only get one opportunity to make a downsizer contribution. So for the under 60s, in particular, they should be asking themselves: should they make that contribution now, or wait until later in life when they may have another opportunity if they sell another property?” he says.

It is a pertinent question for those with higher balances, especially those with retirement savings edging up toward $1.7m, since this is the cut-off for non-concessional contributions.

While paying a $300,000 downsizer contribution into super pushes the balance up, thereby reducing the allowable non-concessional contributions by the same amount, this is not the case if the downsizer contribution is paid once you have a super balance of $1.7m or more (this is the transfer balance cap level): since the program was first launched by the Morrison government, downsizer contributions aren’t subject to the total super balance restriction.

“Some people could find that they are able to maximise their retirement savings by waiting and then making that downsizer contribution later in life, which will enable them to keep making other contributions in the meantime,” Mr Burgess adds.

“If you make that downsizer contribution now and you’re only 55, if it pushes you over $1.7m, it means you can’t make any further voluntary contributions. You may end up getting to retirement with a smaller balance than you would have otherwise had if you waited.”

The precise launch date of the lower limit will be determined in the weeks ahead as the bill makes its way through the Senate.

Super funds will no doubt be keen to flag the changes in the weeks ahead, but there probably aren’t too many 55 year olds ready to downsize, certainly not those with teenagers or older children still living in the family home.