In 2017, superannuation changes were legislated which particularly affect first home buyers and retirees. Their combined intent is to make property more affordable and free up supply. For many, that’s a great outcome! But for individuals and small businesses, these changes may affect your overall wealth planning considerations – so it’s vital to get across the detail.
The 2017 superannuation changes broaden the base of people who can use superannuation as an effective vehicle. It’s long been recommended for retirement planning, and the downsizer contribution strengthens that utility. Now, young people starting out are also encouraged to consider superannuation contributions as part of their overall wealth management strategy.
The changes to superannuation come into effect on 1 July 2018, but understanding them now will help you and your clients position yourselves ahead of the new financial year.
So, let’s take a closer look at how the changes will impact first home buyers and downsizers.
The FHSS is designed to help potential first home buyers accumulate savings in a concessional tax environment. Eligible first home buyers can make voluntary contributions into their superannuation fund for the purpose of saving for a first home.
Who is eligible?
To be eligible, you must:
FHSS funds may only be used for residential property that is capable of being lived in, which excludes vacant land. Unfortunately, houseboat and motor home purchases are ineligible.
How do I access the scheme?
You can begin contributing to the FHSS immediately, but you can’t apply for the release of funds until 1 July 2018. Applicants must be 18 years or over to access the funds, but may make contributions before reaching that age.
You may apply for the release of your FHSS funds up to the following amounts:
When you make the application, the ATO will determine the gross amount for withdrawal and issue an assessment. If you wish to proceed, you have 60 days to request a release authority. The ATO will estimate the tax payable on the concessional contributions and notional earnings (calculated using the 90-day bank bill plus 3%), withhold the estimated tax and remit the balance to you.
Who will benefit?
The higher the tax bracket, the more beneficial the FHSS will be. An individual on a marginal tax rate of 34.5% who earns an extra $10,000 will only be able to save $6,550 for their own use after paying 34.5% in tax. The same individual who contributes that $10,000 to their superannuation fund as a pre-tax contribution will pay $1,500 in contributions tax and retain the remaining $8,500 for use towards their first home.
For retirees wanting to downsize, the 2017 superannuation changes now allow individuals over 65 who sell their principal residence to contribute up to $300,000 each from the sale proceeds into superannuation.
Who is eligible?
The triggering event that creates the ability to contribute is the sale of the principal residence. To be eligible, the residence must:
You must be 65 or over to be eligible and the contract for sale must be signed on or after 1 July 2018.
You may only make downsizing contributions on the sale of one home in your lifetime.
What’s the process?
You must make the contribution within 90 days of the receipt of sale proceeds. Contributions can be the lesser of $300,000 per individual, $600,000 per couple, or the total sale proceeds.
A couple can choose to contribute in unequal amounts providing neither exceeds $300,000. For example, on the sale of a house for $400,000 a couple may contribute $150,000 and $250,000 respectively, but not $50,000 and $350,000.
The contribution must be made using the approved downsizer contribution form, which will shortly be available from the ATO. You should check with your super fund or financial advisor to make sure your plan can accept a downsize contribution.
Who will benefit?
The downsizer contributions will help older Australians who have built up a lot of equity in their homes and want to use it for a comfortable retirement.
Individuals do not need to meet the ‘work test’, and the contributions do not count towards the non-concessional contribution cap. It does, however, count towards the total super balance and balance cap, currently set at $1.6 million. Be aware that making a downsizer contribution will affect eligibility for the Age Pension, as the contribution moves money from an exempt asset to a non-exempt asset.
There are other things to consider too, as every person’s financial situation is different. Feel free to get in touch with CCASA for advice on how these changes might affect your superannuation plan.
We recommend you seek legal and/or accounting clarification on the best financial options for you and your clients.
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