Contributing proceeds from downsizing to superannuation

The Government announced a person aged 65 or over will be permitted to make a non-concessional contribution to superannuation of up to $300,000 from the proceeds of selling a principal residence owned for the past ten or more years from 1 July 2018.

The contributions are stated to be in addition to contributions currently permitted under existing contribution rules.

The contributions are stated to be exempt from the existing age test, work test and the $1.6 million balance test for non-concessional contributions that may otherwise prohibit the contributions being accepted by the superannuation fund under the current rules.

There is a lot of detail that remains unclear, including how downsizing will be defined, whether you will be required to contribute the actual proceeds from the property sale and whether the contribution amount will be $300,000 per couple or $300,000 each.

Removing the restrictions on non-concessional contributions for these downsizers may improve individuals’ capacity to self-fund their retirement. The proceeds from downsizing a home in this manner are not proposed to be exempt from the Age Pension assets test, which seems to be a missed opportunity to further unlock barriers to downsizing in the current system.

First Home Super Saver Scheme

The Government announced a scheme that will allow first home buyers to use superannuation as a means of saving to purchase a first home.

Voluntary contributions to superannuation made by first home buyers from 1 July 2017 will be able to be withdrawn from 1 July 2018 for a first home deposit, along with associated deemed earnings.

Contributions and earnings withdrawn will be taxed at marginal rates less a 30% offset. In most circumstances, the net tax paid on contributions and earnings under the scheme would be 15%, which may result in a better outcome compared to marginal tax rates that would apply if savings were outside a fund.

Up to $15,000 per year and $30,000 in total can be contributed within existing contribution limits of $25,000 per annum. Members of a couple will each have access to the scheme (taking this to potentially $60,000 in total).

Similar schemes have been tried in the past and failed due to complexity and the marginal benefits ultimately achievable. Hopefully, the Government has learnt from previous failures and implements the scheme as it has been announced, in which case it will have a high take up rate amongst middle income first home savers.

Superannuation Borrowing Arrangements

From 1 July 2017, a person’s superannuation balance may affected by borrowing arrangements entered into by a superannuation fund. 

The effect of the measure will be to increase what is counted in an individual’s total superannuation balance, and how the person’s $1.6 million pension cap is measured.

This was announced prior to the Budget, including the release of draft legislation. According to the draft legislation, the changes will only apply to borrowings entered into on or after the commencement of the legislation. However, the Budget papers did not confirm whether the measure would remain prospective.

Advice should be sought prior to entering into borrowing arrangements.

Non-Arm’s Length Expenses

The Government announced a separate integrity measure relating to non-arm’s length arrangements.

The non-arm’s length provisions will be amended to ensure expenses that would ordinarily apply in a commercial transaction are considered in determining whether a transaction entered into by a superannuation fund meets the arm’s length requirements under income tax law.