Budget 2017 encourages downsizing by pensioners, caution urged on entitlements

The Federal Budget has given seniors a nudge as part of its attempts to ease housing affordability by getting them to downsize. 

From July 1, 2018, people aged 65 and over will be able to make a non-concessional contribution (NCC) of up to $300,000 from the sale of their principal residence into their superannuation, if they have lived there for at least 10 years.

With this move, the government aims to encourage empty nesters to downsize to free up more multi-bedroomed properties.

The downsizing contributions will be outside of existing contribution caps, and both members of a couple will be able to take advantage of the measure from the same home. The scheme is expected to cost the government $30 million in lost revenue over the forward estimates period, News.com.au reported.

The new incentive is in addition to concessions already permitted and will be exempt from the age test, work test and the $1.6 million balance test for the NCC.

The measures apply from July 1, 2018.

The budget measure has been welcomed by the SMSF Association.

Association Chief Executive Officer John Maroney it would allow a couple to contribute up to $600,000 from the sale of their home to superannuation outside of the existing caps and balance restrictions.

"This means people can make a significant top-up contribution to their super funds, allowing them to fund a dignified and secure retirement,” he was cited as saying by moneymanagement.com.au.

"While the measure may not be a significant trigger to encourage downsizing, we welcome the ability for older Australians to top up their superannuation where downsizing their home provides them with funds to do so.”

But there are concerns for down-shifters on how the extra super assets would reduce their part-pension entitlement.

SMSF Association head of policy Jordan George had advised caution about such a move ahead of the budget.

“Incentives to encourage people to downsize their home is a sensible idea,” George told selfmanagedsuper. 

But while the exemption was a good idea in principle, George said it was crucial to consider any ramifications of such a measure for people’s pension entitlements. 

“The assets test for the age pension when people downsize and the profit from downsizing may affect their entitlement to the age pension – that could become a significant issue,” he noted. 

KPMG tax partner Damian Ryan said allowing older couples downsizing to contribute to their super funds was welcome news.

"This will allow some older Australians to sell the family home and contribute some of the proceeds into superannuation,” he said, adding, “Those on the age pension are unlikely to take up this initiative.”

He said the measure would be attractive to a group of members who would like to sell their family home but due to contribution caps would have been prevented from topping up their superannuation balance, essentially transferring funds from one tax-preferred asset to another.

Also, residence requirements for the Age Pension and Disability Support Pension are increasing to 10 years continuous residence, including five of a person’s working life, which will affect about 2,400 people.