Nick Bruining: Baby boomers get ahead of cooling housing market to make use of super tax breaks

Baby boomers keen to cash in before WA’s cooling property market gathers pace are looking to maximise their options under a range of senior-friendly rules.

These include an ability to generate a tax-free income from the proceeds of the sale by using special superannuation downsizer rules.

Properties above the $1.5 million price point appear to be holding up well, and in most cases these are homes in established suburbs, often populated by those who bought in the 1980s and 90s.

Property expert Gavin Hegney said those taking advantage were often drawing on past experience.

“People who bought back then are the ones who experienced Australia’s last real recession,” Mr Hegney said.

“They’re now close to retirement, and with a number of commentators now predicting a major correction, they don’t want to risk it.”

Under super downsizer rules, a person can effectively dump $300,000 into their fund and, in turn, convert the contribution into a tax-free income stream via an account-based pension fund.

Independent financial planner Mick Steffan said the once-in-a-lifetime concession was open to anyone aged 55 or older who had owned the property as their primary dwelling for at least a decade.

“You or your spouse must have owned the home for at least 10 years, and the sale needs to qualify at least partly for the main residence capital gains tax exemption,” Mr Steffan said.

The money must hit the super fund within 90 days of settlement, and you need to complete a special downsizer application form before the contribution is made. Super downsizer contributions do not have an upper age limit.

Crucially, a super downsizer payment does not count towards any of the contribution caps.

“A couple under the age of 67 with less than $500,000 each in super hoping to make maximum use of superannuation could, theoretically, make a one-off contribution of a combined, $1.73m into super over a few days,” Mr Steffan said.

Each member of the couple could make a one-off concessional contribution to super of up to $175,000. That makes use of the carry-forward rule, which applies unused concessional contribution from the previous five years to the 2027 cap of $32,500. This assumes no concessional contributions were received during the previous five years.

A minimum 15 per cent contributions tax applies, but the concessional contribution could be used to reduce capital gains and other income tax liabilities in the same financial year.

If you are over 67, the strategy is still viable, except each person needs to satisfy the 40 hours-in-30-days “work test”.

“Next, if the couple are under 75, they could each use the annual $130,000 non-concessional contribution cap and, assuming it has not been triggered in the past two years, make use of the bring-forward rules,” Mr Steffan

In this case, a single contribution of $390,000 each is possible, which now lifts the total amount paid into super to $565,000. To that, we can add the super downsizer payment of $300,000.

If you’re getting close to the transfer balance cap limit of $2.1 million, then timing and the order of contributions becomes important. The cap is the maximum amount that can be converted into a tax-free income stream at retirement.

“Eligibility for non-concessional and concessional catch-up super contributions is based on your total super balance at the previous June 30, so the order matters when the contributions are spread across several financial years,” Mr Steffan said.

The full three-year bring-forward amount of $390,0000 is only available if your balance was below $1.84m at the previous June 30.

While a super downsizer contribution isn’t counted towards your contributions caps, it is included in the total super balance.

Assuming you have no existing super and you’re retired and over 60, the $838,750 balance of each fund could be converted into a tax-free account-based pension. This total includes an allowance for a 15 per cent contributions tax on the concessional contribution.

All payments, including regular and lump-sum withdrawals, are not counted as taxable income.

For a 67-year-old couple, the 5 per cent minimum payment under ABP rules would be just under $84,000 a year, tax-free.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association