How Down Sizing Helps Retirement

The new financial year has arrived and there are new superannuation rules that need to be negotiated. They can aid investors, young and old who have a looming capital gains tax bill to shed.

The super downsizer lets any person over the age of 65 to drop up to $300,000 into super. This is a non-concessional contribution that means no contributions tax is taken out when it is paid in.

You need to have lived in your main abode for at least a decade, entered the sale contract after July 1, 2018, and claim the money into super within 90 days of settlement.

Where this might be valuable is if you plan to economise but don’t have the resources to erect a new home or capture the bargain that you just found.

Rather than getting your pockets hit hard by taking out a bridging loan, you could take money from super to do the change-over while putting up your existing home for sale. Then when you are primed and ready, sell your home and re-inject the incomes back into your super to refill the nest egg.

However, choose wisely

Deciding the right time and how to downsize is a crucial decision to make. When you’re in your 60s, the “4×2 with BG pool” might be described as “big empty home with a pool that costs a fortune to maintain.”

Like thousands of others, you should look around and chances are you’ll soon discover there’s a world of choices out there, and a poor decision could be costly for you.

Seniors basically have three options when it comes to downsizing. The first will be to move to a smaller home or a strata-titled residence such as a unit or villa.

In this situation, you have a direct interest in the property, with your name documented as the proprietor with Landgate. While you bear the costs of maintenance, you enjoy the benefits of being the property owner. If it appreciates in value, you or your loved ones would benefit from the profits.

Neither of these is available if you pick options two or three and utilise the proceeds of your home to enter a retirement or lifestyle village.

Village promoters are experts at promoting the positives, so let’s take a close look at issues to ponder on. In this arrangement, you purchase a right to reside in the village and to use the facilities on offer.

But to be clear: this is not a real estate transaction. Your specific entitlements and obligations are specified within a multi-page contract. In reality, most of the contract seems to be focused on protecting the rights of the village operators.

There are a few other new year super changes to think about:

First home super saver scheme

The new first home super saver scheme is an essential for first homebuyers. It lets you save a deposit quickly and economically earning a rate of interest that would thump any bank and is taxed at a huge discount.

Voluntary contributions of up to $15,000 a year, capped at $30,000 per person, can go into super and then be taken out to be used towards a deposit for your first home.

Qualified contributions date back to July 1, 2017, but July 1 this year is the first date you can take away the money. You can’t access the boss’s compulsory super, only the extra money you pay in.

The money can be added through salary sacrifice which means that it comes out before tax is computed. If you can convince your parents to give you the money, you can simply pay the money in without claiming a deduction or, claim it as a personal tax deduction yourself.

That way, you might be up for a tax refund at the end of the year. If salary sacrificed or claimed as a deduction, you’ll often lose 15% contributions tax but that’s still a whole lot better than the personal income tax you might have paid. If no deduction is claimed, no contributions tax comes out.

But there’s a catch. If your funds perform better than the statutory rate, it would help augment your retirement nest egg because the surplus stays in your super. If your fund performs worse, you run the risk of biting into your remaining super capital and eroding your future nest egg.

Roll over unused concessional contribution caps

July 1 is also the beginning of an ability to roll over unused concessional contribution caps.

Let’s say your combined compulsory employer super and salary sacrifice total $20,000 for this fiscal year, $5000 short of the $25,000 cap. If not used, you can now carry that $5000 into the 2019-2020 tax year and could make concessional contributions totalling $30,000 next year.

The rules lets you aggregate up to five years worth of concessional contributions, which is very useful if you have a fairly decent capital gain.