The 2017 Federal Budget has come and gone. Unlike other recent budgets, the Federal Government seems to have lost interest in picking on us pending retirees! Of course the superannuation rules haven’t been left completely alone, and I describe the changes here. As usual, I will describe the rule changes, and then show how they impact on our situation.
Contributing the Proceeds of your home sale to Super when you are over 65
In the 2016 budget it was announced that retirees could contribute to Super up to the age of 74 without satisfying the works test. I commented at the time that this would be quite handy for us, because it would permit us to sell our house after I turn 65, while retaining the ability to move some of the proceeds into Super. However, this provision was scrapped when the 2016 federal budget provisions relating to superannuation were revised later in the year.
In the 2017 Federal Budget a similar policy has been announced. This policy allows persons over the age of 65 to use the proceeds of their home sale to make non-concessional Super contributions of up to $300,000 for singles and up to $600,000 for couples. The house must be owned for at least 10 years and passing the works test is not required. Furthermore any such contribution does not count against the annual $100,000 non-concessional Super limit (assuming you are still eligible to do make Super contributions – you must be able to pass the works test and be under 75 to do so). You can also contribute this amount even if your total superannuation balance is more than $1.6M. Note there is still a limit of $1.6M on the amount of Super that can be transferred from accumulation mode to Pension mode. The contribution can be made at any age after 65 (and not just below the age of 75).
Its not clear if the title to the property needs to be in both members of the couples names. The budget papers do state:
“This measure will apply to sales of a principal residence owned for the past ten or more years and both members of a couple will be able to take advantage of this measure for the same home.”
For the purposes of this post, I assume both members of the couple are eligible irrespective of title.
Other changes
Some other changes were also announced, however these are not particularly significant for the pending early retiree:
One off Energy Supplement payment for Age pensioners.
A small once-off payment will be paid to Age Pensioners.
Stricter residency requirements for Age Pension eligibility
Access to Pensioner Concession Card for Age Pensioners who will lose under new 2017 Age Pension rates
How will these changes affect us?
In our original plan, we planned to sell our house at 64 in order that we could contribute the proceeds into Super using the Bring Forwards rule. At that time (2.5 years ago, this is a long time in the Super industry and in Sydney Real-estate!), you could contribute up to $540K per person. Given the projected value of the house, this meant we could move all the proceeds into Super.
The new rules in the 2016 budget wound back the amount that could be contributed under the Bring Forwards rule to $300K each. This meant that we could no longer move all the proceeds into Super. However, we could mitigate the amount of taxable funds outside super via the $300K limit.
With the new 2017 budget rule, we can delay the sale of the house, and still get the benefit of being able to place some of the funds into tax free Super. This is a real advantage, and something that would be of value to us.
How much of a benefit is it?
Assuming we want to stay in our property after I reach 65, it is possible to put a monetary value against the value of this policy. i.e. how much better off can we expect to be as a result of this policy, assuming we want to leave our primary residence after 65.
However, to work it out properly you would need to take into account the age at which the house is sold, how the SAPTO policy works (relevant because SAPTO allows some earnings to be subject to to tax rebates) , and how the funds received from the house are invested outside Super (with and without the policy). If some of the funds are invested in shares, a probabilistic approach would need to be taken (similar to the ALP Super Analysis post). It can be done, but it is a lot of work, and right now I don’t have time!
To get a basic understanding, however, we can look at what happens in the first year after selling the house under various assumptions (e.g. if the funds are in shares, cash etc), and compare the taxation with and without the policy:
In the 2016 in review post, I assumed that we would contribute $600K to Super from the sale of the house at 64 and the surplus (approx $900K) would be placed in cash. Using the assumed cash rate of 2.7%, no tax would be payable in any subsequent years as the income generated would be below the tax free threshold (approx $12K each in the first year).
If the $600K could not be contributed to Super, but instead it was contributed to Super like assets outside the super system with a 6% return, we might expect an income of approx ($600000 * .06 + 900000 * .027)/2 = $30,150 each or $60,300 combined. Under SAPTO + LITO we can expect a combined tax rebate of $3,169 + $890 for a total tax of approx $4,540-$3169-$890 =$481 or about $240 each.
If instead of putting the surplus funds into cash we put the funds into Super like assets, assuming a return of 6%, in the first year, we would expect an income of $90K combined. No tax rebate is available via SAPTO, and approx $325 would be available via LITO, so we could expect tax of approx $6,172 – $325 = $5847 each. Note that the expected actual tax paid would be higher as the return is variable and higher taxes are paid when returns are high, and no refunds are provided when returns are low or negative.
Assuming we could put $600K of the funds into tax free Super our taxable income would be $52K combined. SAPTO will provide a combined tax rebate of up to $3204 and tax owing would be $1,672 each. As LITO will provide a further $445, no tax would be owing.
The table below summarizes the above:
| Tax in First Year (each) | |
| $600K in Super, $900K in cash | $0.00 |
| $600K in Super like assets, $900K in cash | $240 |
| $600K in Super, $900K in super-like assets | $0 |
| $1.5M in Super-like Assets | $5,847 |
Is this policy a con?
This policy is covered here, and is subject to a lot of negative feedback in the article and also in the associated comments. Mostly along the lines that if I sell my house, downsize and put some of the funds into Super I will lose my Age Pension, so why should I do it and what value is it.
I think this criticism misses the point. Rather than just hanging on on the Age Pension, many people would prefer to downsize, and release a whole lot of funds which can be used to enjoy oneself. Yes, the age pension will be lost while you have the funds, but think of all those cruises, trips etc you can have while you are funded! The Age Pension of course will eventually return. This policy allows those who wish to follow this path to invest some of the funds from their house sale into the tax free Super system and avoid taxes that would otherwise be due without the policy.
Conclusion
The 2017 federal budget has made one significant change that will impact on early retirees. This change allows persons over 65 years of age to contribute some of the funds received from the sale of their home to Super. This is a positive change, and will especially help those planning to downsize as it will allow them to reduce the amount of taxable funds outside super after their house sale.
Retiring early for Australians 