How To Size Up Your Superannuation Downsizing Scheme

Whether you take advantage of the over-65s super contribution rule change depends on how you're going to invest the proceeds, writes Sam Henderson who answers your questions on superannuation.

Q: Our self-managed superannuation fund (SMSF) has the maximum of $1.6 million each in the tax-free pension phase. My wife and I are both over 65. I work part-time and my wife is retired. I am considering downsizing the family home. Is it worth contributing $300,000 each into our SMSF or leaving it outside super? Adrian

A: Adrian, the answer may depend upon your assets held outside super but for many people, the benefits of the downsizing opportunity will mean the funds will be locked into a tax-free environment inside super and used to provide a tax-free income stream to retirees.

By way of introduction, in the May budget this year, the federal government announced proposed changes to super from July 1, 2018 to allow people over 65 who had owned their home for more than 10 years to sell it and put up to $300,000 each (or $600,000 for a couple) into super as a non-concessional contribution.

Importantly, this provision would allow people over 65 to undertake the strategy without having to meet the work test and without the limitation of age-based super contribution limits – so essentially a 96-year-old could contribute to super and start a tax-free income stream.

At the moment someone over 65 can only make non-concessional contributions that are limited to $100,000 (ie, there is no three-year bring forward available) if they meet the work test of working 40 hours work in 30 consecutive days and only up until age 74.

The bill was introduced to parliament on September 17, 2017 and is yet to be debated or passed as legislation, so we are watching this space very closely. It's a terrific opportunity for retirees to pack a few more dollars into the super savings system to boost their income and bolster their retirement. It's also excluded from the $1.6 million super balance cap, allowing users with more than $1.6 million to make the contribution.

It should also be noted that the addition to the asset base for retirees will be assessed under the assets test for Centrelink purposes, so for many it may signal a departure from a relationship with Centrelink. If you're worried about putting the money into super and the share market crashing, then simply leave it in cash and enjoy all the benefits super provides.

In any case, as you're over 65, you have full access to your funds any time because you've already met a full condition of release.

To my point about assets outside of super, you can usually have around $300,000-500,000 outside super before you pay tax. But if you buy growth assets such as shares or property, to avoid capital gains tax (CGT) you're better off owning those assets inside super and perhaps cash assets outside super where they remain tax-free for income tax purposes (assuming rates stay low).

Q: My wife and I are both retired, aged 62 and 63 and have an SMSF with a balance of $1.6 million each in pension phase. We also have substantial assets outside super which we pay tax on after franking credits etc. I was thinking of putting our SMSF back into accumulation phase and drawing down our funds outside super until they are tax-neutral. That way our super would build up past the $1.6 million cap and we'd be in a better position over the long term. What do you think about this strategy? Brian

A: Brian, if you start the pension now and solidify your pension transfer balance below the $1.6 million, you will be able to continue building assets inside super as you're able to contribute your pension payments back into super as non-concessional contributions until you turn 65 without having to meet a work test.

Further, the assets supporting the pensions will not be subject to CGT or income tax inside the fund as you are below the pension transfer balance cap and over 60. If you put your fund back into accumulation phase, you'll pay 15 per cent earnings tax (offset with franking credits) and 10-15 per cent CGT.

With this in mind, do your numbers to compare the approximate cost of putting your super back into accumulation phase versus the cost of having it in pension phase and re-contributing the tax-free pension amounts back into super. Or perhaps into your partner's super, if she has a lower account balance to "future proof" your fund. That's another way to undertake the re-contributing strategy and increase your partner's tax-free amounts while evening up your super balances. A chat with your accountant or adviser would be recommended to determine the ideal result.

By Sam Henderson

Financial Review

6 December 2017

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