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The 2017 Federal Budget makes the downsizing question easier to answer for older people.
The latest Federal Budget flags an important change for people aged 65 and over wishing to downsize.
The measure encourages older people to downsize into housing that better meets their needs, freeing up larger family homes. This is intended to increase the supply of larger houses, putting downward pressure on prices to help ease the current affordability crisis for first-home buyers.
The change will allow people to make a non-concessional contribution of up to $300,000 into their superannuation from the proceeds of the sale of their principal home, which they must have held for a minimum of 10 years.
For couples, that may mean an additional $600,000 in superannuation.
The change may be a big attraction for people aged 65 and over who are currently unable to contribute all or any proceeds of the sale of their home into superannuation because of the existing restrictions and caps.
To make it more attractive, the work test will not apply and even people aged over 75 can use the scheme, which will begin from 1 July 2018 if it is passed in Parliament.
However, the Age Pension assets test will apply, as any change in a person’s superannuation balance counts towards the test. As a result, people who need to balance a pension and a higher superannuation balance will have to consider their options carefully.
Contributions made under the new rules won’t be exempt from the $1.6 million transfer balance cap. Only people who have remaining space in their transfer balance cap will be able to convert the sale contributions into a pension phase account where earnings are tax-free.
Restrictions on non-concessional contributions for people with balances above $1.6 million will not apply to contributions made under this new special downsizing cap.
The measure may give people over 65 more financial planning flexibility and may even reduce their potential tax bills. However, most changes must be legislated and pass through Parliament before they apply. If you think you may be impacted, you should consider seeking professional advice.