Contributed by Allan Coe, Senior Content Specialist, Wolters Kluwer CCH
The government announced several initiatives in the 2017 Federal Budget that address housing affordability. Proposed initiatives include releasing land currently held by the federal government, changes to planning and zoning, tax changes for foreign investors, and changes to superannuation.
Both of the proposed superannuation measures of downsizing the family home and super saver scheme have received significant media attention. While the broader policy of both superannuation changes is publicly available, there is limited information on how each measure will operate in the absence of draft legislation.
The measure of downsizing the family home is targeted to retirees and allows individuals to make additional contributions to superannuation through the proceeds of downsizing. This is expected to place more family homes on the market. The first home super saver scheme will allow individuals to save for a home deposit within superannuation, and thus benefit from concessional tax treatment. This enables first home buyers to save a deposit quicker and access the property market earlier. With both superannuation initiatives there are a number of issues and personal circumstances to consider.
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Downsizing the family home
Superannuation contribution through sale of principal residence
From 1 July 2018, a person aged 65 or over will be able to make a superannuation contribution up to $300,000 from the proceeds of the sale of their principal residence they owned for at least 10 years. If a couple sell their principal residence they are able to contribute $300,000 each.
The superannuation contribution the retiree makes is a non-concessional contribution. Ordinarily, an individual aged over 74 is unable to make a non-concessional superannuation contribution as they fail the age test, while an individual aged 65 to 74 can only make a non-concessional superannuation contribution if they meet the work test. In addition, an individual is only able to make a non-concessional superannuation contribution if their total superannuation balance is less than $1.6m. The age, work and total superannuation balance tests are all relaxed for the purposes of a “downsizing” superannuation contribution, and an individual can make a non-concessional superannuation contribution regardless of whether they meet these eligibility requirements.
Downsizing the family home and making a superannuation contribution is mainly beneficial to an individual who is a self-funded retiree who will have $1.6m or less in superannuation after downsizing the family home. This is due to the interaction of this measure with the age pension assets test and the $1.6m transfer balance cap.
Age pension assets test
While an individual’s principal residence is excluded from the age pension assets test, any change in an individual’s superannuation balance (including superannuation contributions made from the proceeds of downsizing) will count towards the age pension assets test. The downsizing initiative does not result in a relaxation of the age pension assets test, and these new assets will count. This may impact on a retiree’s ability to access the age pension, and means that downsizing the family home and making a superannuation contribution is mainly beneficial to an individual who is already, or intends to be, a self-funded retiree.
Transfer balance cap of $1.6m on assets supporting a retirement income stream
The non-concessional superannuation contribution made from downsizing is exempt from the $1.6m total superannuation balance cap (essentially, total amount in superannuation). However, an individual is still subject to the $1.6m transfer balance cap (superannuation in retirement phase). This means an individual with superannuation interests in retirement phase of $1.6m can still make a contribution to superannuation from downsizing, but they will be unable to transfer that amount from accumulation into the retirement phase (having reached their transfer balance cap). Superannuation in the retirement phase is generally tax-free, while tax is imposed on superannuation in the accumulation phase. An individual in these circumstances will therefore be unable to receive the full tax advantage, and will limit the benefit an individual receives from downsizing the family home.
First home super saver scheme
From 1 July 2017, an individual will be able to make voluntary contributions into their superannuation fund of up to $15,000 per year and up to a maximum $30,000, to be withdrawn, along with associated deemed earnings, for a first home deposit. The contributions must be made within an individual’s existing annual contribution caps.
A first home buyer will be able to make a withdrawal from their superannuation fund for deposit from 1 July 2018. If a couple decide to purchase their first home, they can both make a withdrawal.
For an individual to use the first home super saver scheme, the superannuation contribution must be a voluntary contribution. The 9.5% compulsory superannuation guarantee contribution made by an employer is not a voluntary contribution and cannot be accessed under the super saver scheme. However, it appears other superannuation contributions made by an employer or employee will be a voluntary contribution. This includes salary sacrificed contributions.
While earnings will accrue on the superannuation contribution, it is not the actual earnings that can be withdrawn from the superannuation fund under the super saver scheme. Instead, deemed earnings can be withdrawn for the purpose of a first home deposit. Deemed earnings accrue at the rate of the 90-day bank bill plus three percentage points. Currently the deemed rate is 4.78%.
Concessional contributions (including salary sacrificed contributions and personal contributions that an individual has claimed a tax deduction for) will be taxed at 15% in the superannuation fund. The withdrawal will be taxed at an individual’s marginal tax rate, less a 30% tax offset. Non-concessional contributions will not be taxed on entry or exit from the superannuation fund.
A withdrawal from superannuation for the purpose of a first home deposit is a withdrawal of capital and as such will not trigger a reduction in social security entitlements. While the concessional part will be included in taxable income it will not flow through to other income tests, such as HECS/HELP repayments, family tax benefit or child care benefit.
What happens if an individual does not purchase a home?
Generally, any contribution made to a superannuation fund must stay in the superannuation system until a condition of release is met, such as retirement. For the first home super saver scheme, a new condition of release will need to be legislated which will be a withdrawal for a deposit on a first home.
An individual may change their plans about the purchase of a first home. The reason for a change in plans may include a change in life’s circumstances such as a desire to undertake study or travel, loss of employment, relationship breakup, or the property market has moved further and the purchase of a first home is no longer feasible. Also, the government has not stated what the rules will be for when there are joint purchasers and only one purchaser is a first home buyer. An individual’s new partner may have previously owned a home which may prevent an individual from accessing their superannuation for the joint purchase of a first home. It would appear in each of these circumstances that the superannuation contributions must remain in superannuation until a condition of release is met, for eg retirement.
Salary sacrificed amounts
An individual can make a voluntary superannuation contribution by salary sacrificing income into an employer superannuation contribution. These salary sacrificed superannuation contributions are in addition to compulsory superannuation guarantee contributions.
Employer superannuation guarantee contributions are a compulsory contribution paid by an employer and calculated as 9.5% of ordinary time earnings. Superannuation guarantee contributions are not payable by an employer on salary sacrificed amounts.
If an employee increases their voluntary superannuation contributions by salary sacrificing part of their salary package, this may reduce the compulsory superannuation guarantee contribution and thus further increase their voluntary superannuation contribution. For example, an employee who maintains their overall salary package and wishes to make the maximum voluntary contribution of $15,000 may achieve this by salary sacrificing $13,698.63 into superannuation. As the compulsory superannuation guarantee component of the superannuation contribution is calculated on the reduced income, this will reduce the compulsory employer superannuation guarantee contribution by $1,301.37 (9.5% of $13,698.63) and, in turn, effectively convert what was a superannuation guarantee contribution of $1,301.37 into an additional voluntary contribution.
Liquidity and volatility within an SMSF
If voluntary superannuation contributions are made to an SMSF for the purpose of a first home deposit, the trustees of the SMSF may need to consider their investment strategies and levels of liquidity. The primary intent of a superannuation fund is to provide for the retirement income of a member. Investment strategies would generally be directed to this long-term objective, and it is likely that there would be capital investments and little liquidity in the earlier stages of an individual’s superannuation account, and then a movement from capital to liquidity as the individual nears retirement and will be drawing down on their superannuation account. If the contributions are of a shorter term and will be drawn down for a deposit on a first home, investment strategies will need to be re-thought. There may be a need for increased liquidity in the shorter term and less capital investment.
There may also be issues around the volatility of investment returns. Normally, volatility of returns evens out over the duration of an individual’s working life. However, if the superannuation contribution is for a shorter period, volatility may impact the individual’s account balance to a greater extent. As the amount being withdrawn is the amount contributed plus deemed earnings, there may be a significant difference between the amount released and the amount the contribution is now worth. An SMSF may need to maintain liquid assets for a withdrawal that do not match the actual value of the voluntary contribution.
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