New Changes to Superannuation

March 2, 2018

Australians are about to receive a helping hand thanks to the new First Home Buyer and Downsizing your Home in Retirement rules which will come into effect on July 1.  So if you’re looking to buy your first home or nearing retirement and looking to downsize – these new rules may help.

As of July 1, first home buyers will be able to contribute up to $30,000 into their super fund towards a home deposit while downsizers can put up to $300,000 of the proceeds of selling the family home into super. 

So what does this all mean and how may it work for you?

Buying a home

Under the new First Home Super Saver (FHSS) scheme, individuals can arrange for up to $30,000 to be deducted from their pre-tax income and put in their super account. They can then withdraw 85 per cent of that money ($25,500), plus any interest earned on it, to use for a home deposit. In the case of a couple, both partners can save $30,000, meaning a home deposit of $51,000 (i.e. 85 per cent of $60,000) plus interest can be accumulated. 

Is this strategy right for you?

Whilst this new measure may assist first home buyers whom have struggled to save a deposit with rising house prices, this new measure won’t help everyone!

Individuals can only contribute a maximum of $15,000 into their First Home Super Saver (FHSS) account in any one year. This contribution is included towards your concessional contributions, which have an annual cap of $25,000 that cannot be exceeded without penalty.  This annual cap also includes all employer Super Guarantee contributions and any other voluntary contributions you make. What’s more, the compulsory 9.5 per cent employer super contributions can’t be accessed under the scheme. Therefore additional contributions need to be made by you.

The FHSS works best for middle-income earners.  Low-income earners already pay little or no tax and therefore won’t benefit from the favourable tax treatment that money in super receives and higher income earners may be required to pay some tax on the funds when they are withdrawn. This is because when the money is withdrawn it is taxed at the individual’s marginal tax rate minus a 30 per cent tax offset.  This effectively means that most people on low to middle incomes will pay little or no tax – although higher-income earners on high marginal rates will still be required to pay some tax.

What can you do now?

If you’re looking to purchase your first home, you will need to check whether your superannuation fund allows FHSS contributions and, more importantly, withdrawals.  Once this has been confirmed, you’ll then need to arrange with your employer to deduct voluntary contributions of up to $15,000 a year.  When you want to access your money, you will have to acquire a ‘FHSS determination’ (this is effectively a balance statement) from the Commissioner of Taxation before requesting your super fund to release the money.  Following approval of this request, your super fund would then deposit your FHHS money, minus any tax you’ve incurred, into your personal account.  You then have a 12-month window to sign a contract to buy or build a home.

Selling a home (downsizing for retirement)

Under the Downsizer Super Contribution Scheme (DSC), homeowners who are 65 years or older can put up to $300,000 of their home sale proceeds into their super. The proviso on this is that the home was their principal place of residence and they’ve owned it for at least 10 years.  In the case of a couple, both partners can deposit $300,000 (collectively $600,000) into super.

This change is to help older homeowners who frequently find themselves in large houses while trying to survive on a modest super balance or the age pension.

Is this strategy right for you?

For those who already have more than $1.3 million in super, adding a $300,000 downsizer contribution will breach the $1.6 million balance transfer cap. This cap is the maximum balance that can be held in a tax free super pension account. Any excess funds above $1.6 million would be required to be retained in a super accumulation environment which does not receive the same tax free benefits of an account based pension.

However, given the current generation of Australians retiring have average superannuation balances of well under $300,000, this balance transfer cap is unlikely to be an issue for most downsizers.  Downsizers need to know that there would be no special treatment with the transaction costs involved in selling one residence and buying another – stamp duty will still need to be paid on the new purchase! 

If you are looking to downsize your home, you will first need to check your superannuation fund accepts downsizer contributions.  If it does, you can deposit up to $300,000 within 90 days of receiving the proceeds of sale.  Your super fund will need to receive a ‘downsizer contribution form’ from you either before or when transferring the money into your account.

As always the Burcheart team are here to help you plan.  So please reach out to us to find out if these new rule changes may benefit you.

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