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Budget incentives to encourage downsizing – do they go far enough?

By Julie McStay and James Horwood18 May 2017

In last week’s budget, the Government announced measures aimed to encourage older Australians to downsize.  The Government has stated the intention of the incentive is to help free up property supply for younger families (which we suspect is to try and ease pressure on housing prices). 

For many older people, most of their wealth is tied up in the equity of the family home. The ability of homeowners to downsize, and therefore free up capital to fund entry payments, has a significant impact on the aged care and retirement industries. 

Penetration rates for the aged care and retirement industry are often reported as being relatively low.  One of the biggest barriers to older Australians entering into residential care or a retirement village is the fear that they will be financially disadvantaged by doing so (through loss of their pension or taxes).  Of course, that is in addition to important non-monetary factors, such as the perceived loss of independence and disconnect with their community, which may also influence that decision.

What are the measures?

Under the new incentives, from 1 July 2018 Australians aged 65 and over can make a non-concessional (post-tax) contribution of up to $300,000 each (i.e. up to $600,000 total for couples) into their superannuation fund from the proceeds of selling the family home.  To qualify each person must have lived in their home for at least ten years.

The contributions incentive will apply even where they have already transferred the maximum $1.6 million into their superannuation account, although any funds over that amount must be in place in a separate account and income earned on those funds will be taxed.  The incentive will also apply to those Australians over 65 years who are still working.

Effect of measures

While it is a positive move for some downsizers, it is unfortunate the Government has not provided any relief from the operation of the asset test (which is used to determine eligibility for the aged pension). 

Many downsizers, while gaining some tax benefits from the sale of their home under the incentives, would still lose all or part of their pension due to operation of the asset test.  In that way, the measures may not encourage a significant amount of additional downsizing, but rather incentivise those homeowners that were likely to do so anyway.

Comments

To further boost downsizing, the Government could consider additional exemptions from the asset test.  That could, for example, include quarantining a certain value of the proceeds of the sale of the family home from operation of the test.  By doing so, it would encourage more older Australians to sell their home and free up capital necessary to enter into appropriate aged care or retirement accommodation.  At the same time, it would help free up housing stock for younger Australians. 

Some commentators argue that a financial stick (e.g. in the form of a penalty for those remaining in houses over a certain market value) might be better than a carrot (in the form of incentives) to effectively promote downsizing.  However, we expect any measures that may be seen as ‘forcing’ someone out of their home is not likely to be well-received by the public. 

Either way, we believe the Government needs to continue looking at ways to further encourage downsizing. This will promote older Australians to transition into an environment where they can receive the care and services they need to enjoy a better quality of life.  In turn that will increase demand for aged care and retirement accommodation and provide a boost to the industry.

Questions

If you have any questions regarding this article, please contact Julie McStay Director - Aged Care and Retirement Living.

This content is not intended to be advice of any kind.  Hynes Legal cannot give any financial or taxation advice.  Should you require any such advice regarding these measures, please contact your relevant advisor.

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