Downsizer changes mean retirees can upsize their super

Until now, government initiatives to alleviate the pandemic’s economic impacts have not offered much support to the older generation. However, a new ruling by the Australian Tax Office provides a potential way for some retirees to improve their retirement income. Now, the government’s downsizer legislation allows retirees who own their home to sell a part of it and top up their super. Since July 1, 2018, eligible people, aged 65 or over, have been able to make a downsizer contribution into their superannuation of up to $ 300,000 per spouse from the proceeds of selling their home, with the caveat that the whole property had to be sold. A downsizer contribution is not subject to the usual contribution caps, and therefore can still be made even if the member’s balance exceeds $ 1.6 million. Although 5000 retirees used this facility in the first year, research indicates a large proportion of retirees would prefer to access the downsizer provisions while remaining in their home. Seniors organisations support this and suggest any benefit of the current arrangement must be weighed against the disruption and additional cost of relocating. The ability for retirees to top up their super by selling a part of their home, however, reallocates a portion of the financial resources tied up in their home to their super. Depending on their financial situation, this could mean an increase of up to $ 600,000 in their superannuation, and a much larger income stream from their fund. The ATO ruling, in the form of an Administrative Binding Advice, states that a partial disposal of a home by senior Australians will satisfy the government’s downsizer contributions legislation, if done through DomaCom’s (ASX: DCL) Senior Equity Release (SER) product. Prior to this ruling, a person had to sell or dispose of their entire interest in their home to be eligible to make a downsizer contribution. However, the ATO confirmation on a partial disposal now means SMSF retirees can sell a partial interest in their home, make a downsizer contribution, and stay in their home, provided they use DomaCom’s SER product. The ATO’s affirmation is a significant development, because up until now the only way to top up super from home equity was to sell the entire house and move to cheaper accommodation. While the same rules apply to the DomaCom Fund and the government’s downsizer “sell and move” strategy, under the DomaCom model seniors have a permanent right of abode in their home and retain the title. Retirees can even rent their house out. Even related parties can invest in a senior’s home. Children with SMSFs can invest via their SMSF, as can friends and other non-related investors. Obviously, this is a big step, because as well as permanently reducing the equity in the home there are other issues such as how ongoing expenses will be handled and potential issues with Centrelink for those receiving a part age pension, as you would be converting part of a non-assessable asset – your home – into an assessable asset, namely superannuation. This is why retirees considering it should obtain expert financial advice, and of course discuss with any family members affected. Further information is available at: www.domacom.com.au. I am aged 71, single, a non-homeowner, with $ 630,000 in the bank. This is my only financial asset. I receive a pension of $ 609 a fortnight including rent assistance. Do you think investing $ 500,000 in Commonwealth government bonds is a good idea? If you invest in 10-year Commonwealth government bonds you will receive an income of less than one per cent per annum, and leave yourself open to a capital loss if interest rates rise in the next 10 years and you want to redeem the bond before maturity. I think a much better strategy would be to look at one of the new income streams now available whereby only 60 per cent of the sum invested counts for the assets test, and 60 per cent of the income counts for the income test. As an example, Challenger tells me if you invested $ 230,000 in a lifetime annuity, with full CPI indexation, you would receive an indexed income for life starting at $ 12,936 a year. Also, as only 60 per cent of the $ 230,000 would be assessed for the assets test, your pension would increase by $ 7176 a year. This means that an investment of just $ 230,000 would increase your income by just over $ 20,000 a year initially, and then continue to grow as time passes. For a single person with no home and no dependents, it may be well worth considering. You could also hedge your bets a little by investing say $ 100,000 in an index fund which should pay you around four per cent per annum mostly franked, and by definition cannot go broke. Anybody considering investing in these types of products should take advice because like all investments they have their advantages and disadvantages. For example, if you die after 14 years the annuity would have no residual value for your estate. You’d mentioned the benefit of an offset account and being able to move residences taking the equity with you. However, I’ve noticed that there may be a disadvantage. Would it be true that if you wanted to use that equity (in the offset account) for investment e.g. shares, you wouldn’t get a tax deduction as you’re not really borrowing anything for the investment. Also, the bank might not lend against the offset account because you can withdraw these savings at any time. You make a valid point, so you would need to borrow for the investment by way of a home equity loan or a margin loan. It would be unusual to be borrowing for an investment unless you had a substantial equity in your residence but, if the bank did insist on extra security, you could always withdraw part of the balance in the offset account and place that on term deposit. Of course, you would lose the tax benefits of keeping that money in the offset account. Can you please advise what is meant by the terms buy, add, hold and accumulate? Buy means the share is suitable to buy now at the current price. Accumulate means the share is undervalued, but there is time to purchase, Hold means appropriately priced, is neither a buy nor a sell and Sell means sell at the current price. Just bear in mind that the above is just one broker’s opinion. You have mentioned a few times about a non-dependent inheriting money from a Superannuation account, where tax is liable. Does this only apply to accounts in Accumulation mode or also to accounts in Pension mode, where there is no taxable component? You are confusing the tax status of the superannuation fund, with the components in the member’s accounts in the fund. Yes, an accumulation fund pays income tax at 15 per cent per annum, and a pension fund pays zero tax on its earnings. But each member account has two components. The non-taxable one arises when a non-concessional contribution is made. All concessional contributions, that means tax deductible ones, form part of the taxable component in the fund, as do the earnings on all the components. Therefore, every member’s account will always have a taxable component, and may or may not have a non-taxable component. You can reduce the taxable component by making tax free withdrawals from your fund and re-contributing funds as non-concessional contributions. At best, this will reduce the taxable component, but it’s impossible to erase it completely. The best way around the tax on death is to have your attorney withdraw the money prior to your death, and deposit it in your bank account.

Now, the government’s downsizer legislation allows retirees who own their home to sell a part of it and top up their super.

Since July 1, 2018, eligible people, aged 65 or over, have been able to make a downsizer contribution into their superannuation of up to $ 300,000 per spouse from the proceeds of selling their home, with the caveat that the whole property had to be sold. A downsizer contribution is not subject to the usual contribution caps, and therefore can still be made even if the member’s balance exceeds $ 1.6 million.

Although 5000 retirees used this facility in the first year, research indicates a large proportion of retirees would prefer to access the downsizer provisions while remaining in their home. Seniors organisations support this and suggest any benefit of the current arrangement must be weighed against the disruption and additional cost of relocating.

The ability for retirees to top up their super by selling a part of their home, however, reallocates a portion of the financial resources tied up in their home to their super. Depending on their financial situation, this could mean an increase of up to $ 600,000 in their superannuation, and a much larger income stream from their fund.

The ATO ruling, in the form of an Administrative Binding Advice, states that a partial disposal of a home by senior Australians will satisfy the government’s downsizer contributions legislation, if done through DomaCom’s (ASX: DCL) Senior Equity Release (SER) product.

Prior to this ruling, a person had to sell or dispose of their entire interest in their home to be eligible to make a downsizer contribution. However, the ATO confirmation on a partial disposal now means SMSF retirees can sell a partial interest in their home, make a downsizer contribution, and stay in their home, provided they use DomaCom’s SER product.

The ATO’s affirmation is a significant development, because up until now the only way to top up super from home equity was to sell the entire house and move to cheaper accommodation.

While the same rules apply to the DomaCom Fund and the government’s downsizer “sell and move” strategy, under the DomaCom model seniors have a permanent right of abode in their home and retain the title.

Retirees can even rent their house out. Even related parties can invest in a senior’s home. Children with SMSFs can invest via their SMSF, as can friends and other non-related investors.

Obviously, this is a big step, because as well as permanently reducing the equity in the home there are other issues such as how ongoing expenses will be handled and potential issues with Centrelink for those receiving a part age pension, as you would be converting part of a non-assessable asset – your home – into an assessable asset, namely superannuation.

This is why retirees considering it should obtain expert financial advice, and of course discuss with any family members affected. Further information is available at: www.domacom.com.au.

Noel answers your money questions

I am aged 71, single, a non-homeowner, with $ 630,000 in the bank. This is my only financial asset. I receive a pension of $ 609 a fortnight including rent assistance. Do you think investing $ 500,000 in Commonwealth government bonds is a good idea?

If you invest in 10-year Commonwealth government bonds you will receive an income of less than one per cent per annum, and leave yourself open to a capital loss if interest rates rise in the next 10 years and you want to redeem the bond before maturity.

I think a much better strategy would be to look at one of the new income streams now available whereby only 60 per cent of the sum invested counts for the assets test, and 60 per cent of the income counts for the income test.

As an example, Challenger tells me if you invested $ 230,000 in a lifetime annuity, with full CPI indexation, you would receive an indexed income for life starting at $ 12,936 a year. Also, as only 60 per cent of the $ 230,000 would be assessed for the assets test, your pension would increase by $ 7176 a year. This means that an investment of just $ 230,000 would increase your income by just over $ 20,000 a year initially, and then continue to grow as time passes.

For a single person with no home and no dependents, it may be well worth considering. You could also hedge your bets a little by investing say $ 100,000 in an index fund which should pay you around four per cent per annum mostly franked, and by definition cannot go broke.

Anybody considering investing in these types of products should take advice because like all investments they have their advantages and disadvantages. For example, if you die after 14 years the annuity would have no residual value for your estate.

You’d mentioned the benefit of an offset account and being able to move residences taking the equity with you. However, I’ve noticed that there may be a disadvantage. Would it be true that if you wanted to use that equity (in the offset account) for investment e.g. shares, you wouldn’t get a tax deduction as you’re not really borrowing anything for the investment. Also, the bank might not lend against the offset account because you can withdraw these savings at any time.

You make a valid point, so you would need to borrow for the investment by way of a home equity loan or a margin loan. It would be unusual to be borrowing for an investment unless you had a substantial equity in your residence but, if the bank did insist on extra security, you could always withdraw part of the balance in the offset account and place that on term deposit. Of course, you would lose the tax benefits of keeping that money in the offset account.

Can you please advise what is meant by the terms buy, add, hold and accumulate?

Buy means the share is suitable to buy now at the current price. Accumulate means the share is undervalued, but there is time to purchase, Hold means appropriately priced, is neither a buy nor a sell and Sell means sell at the current price. Just bear in mind that the above is just one broker’s opinion.

You have mentioned a few times about a non-dependent inheriting money from a Superannuation account, where tax is liable. Does this only apply to accounts in Accumulation mode or also to accounts in Pension mode, where there is no taxable component?

You are confusing the tax status of the superannuation fund, with the components in the member’s accounts in the fund. Yes, an accumulation fund pays income tax at 15 per cent per annum, and a pension fund pays zero tax on its earnings. But each member account has two components. The non-taxable one arises when a non-concessional contribution is made. All concessional contributions, that means tax deductible ones, form part of the taxable component in the fund, as do the earnings on all the components.

Therefore, every member’s account will always have a taxable component, and may or may not have a non-taxable component.

You can reduce the taxable component by making tax free withdrawals from your fund and re-contributing funds as non-concessional contributions. At best, this will reduce the taxable component, but it’s impossible to erase it completely. The best way around the tax on death is to have your attorney withdraw the money prior to your death, and deposit it in your bank account.

The Star – The Star Life