When two worlds collide

The bill facilitating the reduction of the downsizer eligibility age from 60 to 55 is in parliament awaiting final approval. SuperGuardian education manager Tim Miller outlines the impact this proposed legislation will have on an individual’s ability to access certain social security services.

In the recent federal budget, the government reconfirmed a number of measures previously announced and with associated bills introduced to parliament to encourage retirees or those transitioning to retirement to downsize their property.

The Treasury Laws Amendment (2022 Measures No 2) Bill 2022 seeks to decrease the eligibility age for individuals to make downsizer contributions to a superannuation fund from 60 to 55. The Social Services and Other Legislation Amendment (Incentivising Pensioners to Downsize) Bill 2022 provides an incentive for those in receipt of the income support to downsize by extending the asset test exemption on the proceeds from the sale of an individual’s house from 12 months to 24 months, and ensures the proceeds will be isolated from other assets and deemed at the lower applicable rate, resulting in a lower income test outcome.

While these two bills have a common goal to encourage people to downsize their abode, they have the potential to create very different outcomes for some retirees as one will be asset test exempt and the other will be asset tested, which could impact age pension entitlements almost immediately. For clients contemplating selling their home, it’s important to look at how these measures may benefit or disadvantage them.

Decreasing the downsizer age to 55

Initially introduced as a last-minute federal election measure by the former coalition government, and subsequently matched by the then Labor opposition, this measure does nothing more than expand the age eligibility for those looking to add to their superannuation balance. Given the window for contributing to super was opened to age 75 from 1 July 2022, there are some obvious drawbacks to using the downsizer contribution at age 55 or indeed at any time prior to age 75.

Specifically, any contribution made at 55 is going to be preserved, and with preservation age fast approaching 60, individuals need to appreciate that, unlike the original downsizer contributions introduced from age 65, it may very well be that the benefits are inaccessible with the exception of a transition-to-retirement income stream prior to age 65.

Further, given downsizer contributions are not subjected to total superannuation balance restrictions, there is a train of thought that suggests it is more appropriate to exhaust all non-concessional contribution strategies prior to age 75 and then contemplate using the downsizer contribution. That’s not to suggest those selling a house between age 55 and 60 shouldn’t contemplate contributing to super, but rather that an individual, or couple, who sells their house at age 55 will requalify for downsizer eligibility at or around retirement age so could conceivably have two bites of the contribution cherry if they are someway inclined to consider downsizing again. This would almost certainly be more attractive to those who are close to exhausting the general transfer balance cap with their current total superannuation balance as they could make contribution one as a non-concessional, measurable against their balance, and contribution two as a downsizer in 10 years or more time without reference to their balance.

The obvious disadvantage to this strategy would be legislative change, where the capacity to make a downsizer contribution is withdrawn, meaning all contributions would be once again subject to the member’s age and total superannuation balance.

It should be noted all other aspects of downsizer contributions remain the same. The decrease in age will take effect from the first day of the quarter immediately following royal assent. For example, if royal assent is received prior to 31 December 2022, then from 1 January 2023 some over the age of 55 can use the measure.

As contributions must be made within 90 days of settlement, anyone aged 55 and over who settles prior to the bill receiving royal assent will still be eligible if the first day of the quarter following royal assent is within that 90-day period and the contribution is made between the first day of the quarter and the expiry of the 90-day time period. While the regulator can allow an extension of the 90-day timeframe, waiting for the law to apply would not be considered a genuine reason to apply for an extension.

Example

Tina, aged 56, sold her property on 1 October 2022, with a 60-day settlement. Assuming settlement occurs on 1 December 2022 and the relevant bill received royal assent on 30 November 2022 (illustrative purposes only), then the law will come into effect from 1 January 2023 and Tina will have until 28 February 2023 to make the contribution.

Asset test exemption for proceeds from sale of a house

As is currently the case, the principal place of residence is exempt from the asset test for age pension and other income support purposes. Homeowners have a lower asset threshold before their age pension is impacted comparative to non-homeowners. As a guide, for a single person to get the full pension, their assets must be below the following thresholds:

• Homeowner $280,000

• Non-homeowner $504,500

When an age pension recipient sells their principal home, the proceeds from that sale earmarked to be used to buy or build a new home are exempt from the asset test for a period of 12 months. A further 12-month extension can be provided upon application subject to approval by Services Australia.

While the asset test exemption provides some relief, the proceeds are still pooled with other investments and deemed for income test purposes based on the existing thresholds. The current deeming rates are as in Table 1.

Table 1

Single

Level of financial assets ---- Deeming Rate

<$56,400 ---- 0.25%

>$56,400 ---- 2.25%

Member of couple (where at least one gets a pension)

Level of financial assets ---- Deeming Rate

<$93,600 ---- 0.25%

>$93,600 ---- 2.25%

In a positive measure, the government has frozen the deeming rates until 1 July 2024.

Example

Kerry, 77 and single, sold her principal home for $800,000 in July 2022 and intends to use $650,000 towards the purchase of a new home. Kerry’s assets prior to the sale of her home were $100,000 combined and she hasn’t any other income apart from the age pension.

Following the sale, Kerry notifies Services Australia she intends to use $650,000 to purchase a new home. Immediately her assets subject to testing jump from $100,000 to $250,000 to incorporate the difference between the proceeds and the amount nominated to purchase the new home. This amount is still under the single homeowner low threshold so in itself will not impact her pension entitlement. However, the full $800,000 will now be deemed for income test purposes.

Based on Table 1, the first $56,400 will be deemed at 0.25 per cent and the balance at 2.25 per cent. Kerry’s total deemed annual income is $16,872, resulting in a fortnightly amount of $649. The fortnightly income threshold to receive a full pension is currently $190 and the cut-off income level is $2243. An income of $649 will result in Kerry’s pension entitlement reducing, however, had the proceeds been counted entirely then Kerry would have lost her pension as the maximum asset test was $622,250 for a homeowner and $846,750 for a nonhomeowner.

Unless Kerry applies for and is granted an extension, then in July 2023 her entire proceeds will count towards the asset test. Therefore, it is time sensitive for Kerry to purchase or build a new home.

The proposed legislative change, extending the asset test exemption from 12 to 24 months, would give Kerry a further 12 months’ asset test exemption. The catch is that Kerry, because she sold prior to the legislation taking effect, will not be entitled to an additional 12-month exemption.

The second part of the proposed change is to isolate the proceeds intended to be used for the purchase of a new home and have them deemed exclusively against the lower deeming rate. This would have a significant impact. If we again look at Kerry’s position, but assume she sells the house following the introduction of the new law, her income would be deemed as follows.

Deeming example

Kerry would have $150,000 subject to the standard deeming provisions. That would result in an annual deemed income of $2247. The $650,000 set aside to purchase a new house would be deemed at the lower rate of 0.25 per cent, which would result in an annual income of $1625. Her total income would be $3872. That would result in a fortnightly amount of $149 which is below the $190 low threshold, meaning Kerry would still be entitled to the full age pension for the full two years. That’s quite a difference.

Age pension age considerations

Where these two measures are conflicted is where someone who is at or above age pension age sells their principal place of residence.

If we assume Kerry, from the above example, is given advice that she is entitled to make a downsizer contribution to superannuation and contributes the full $300,000, then that $300,000 will be counted against the asset test immediately, that is, no 24-month asset test exemption will apply. Further, the $300,000 would be deemed as per to the standard deeming provisions.

It is conceivable Kerry nominates $500,000 as going towards the future purchase of a house, but from a pure income test position her deemed income would increase to $480 per fortnight, resulting in a drop in her age pension.

While this is not the end of the world, as she would still receive her pension benefits, there is a need to weigh up the desire to contribute money to super versus the desire to keep the age pension. So while these measures are complementary with regard to providing opportunities for those who are considering downsizing, they are not necessarily complementary with one another.

Similarly while the ability to take advantage of the downsizer provisions will be further enhanced, it doesn’t necessarily mean that will be the right thing to do as the action may inhibit future contribution strategies.

In all instances it is imperative people, especially those entitled to the age pension and those who are close to exhausting the general transfer balance cap, take great care and consideration prior to undertaking any strategy and refrain from doing so simply because it is the popular thing to do.