The Australian property market has defied bearish predictions in 2023, with population growth and a short supply of housing pushing prices up, especially in capital cities.
To combat the rising cost of living, it seems many Australians are realising the values of their properties wisely as part of their superannuation and tax strategies.
At BT, what we’re hearing from financial advisers is clients are interested in how downsizing from a large property can be integrated into their financial plan, especially if they are looking to self-fund all or part of their retirement. For many who are on the cusp of retirement, the family home is their most valuable asset, and they’re exploring what’s the most tax-effective strategy in regard to the sale proceeds.
Based on more than 8,000 questions that the BT Technical Services team have been asked by financial advisers in 2023, our prediction on the topics that will be top of mind for advisers and clients in the new year are:
- Downsizer contributions
- Owning commercial property in self-managed super funds (SMSFs)
- Imminent tax increase for clients with more than $3m in super
- Income tax cuts commencing in July 2024
Downsizing the tax-effective way
Retirees who are downsizing can make contributions from the sale proceeds of their home into their super, which can be a more tax-effective environment compared to, for example, putting it all in a savings account.
It would not be surprising if some of the interest in this topic is due to the rising cost of living and retirees needing to explore options to boost their savings or increase cash flow. Another potential reason is this strategy has become accessible to more Australians, with the eligibility age reduced to 55 years at the start of 2023.
To be eligible, you also need to have owned the home for 10 years or more. Downsizer contributions to a maximum of $300,000 per eligible person do not count towards any of the contribution caps and can still be made even if a person has a total super balance exceeding $1.9 million.
Small businesses transferring commercial property into SMSFs
High inflation and reduced consumer spending in some sectors are biting into the revenues of small businesses prompting business owners to ease cash flow for their business by using their Self-Managed Super Fund to buy their commercial properties, often with gearing involved.
A typical scenario in this arrangement is the SMSF buys the commercial property, sometimes with limited recourse borrowing arrangements, which can then be leased to the business that one of the trustees owns. The sale contract and lease – and loan, if relevant – have to be formalised and the arrangements must be at market rates, so it’s advisable to engage lawyers who can prepare the appropriate commercial documents.
Individuals with SMSFs need to be careful of any improvements they make to real estate assets owned via their SMSF as these can potentially be regarded as a superannuation contribution. If the value of that improvement, together with other contributions is below your contribution caps, it’s not an issue. If your contribution caps have been breached, there may be penalties. Your cap is the maximum you or your employer can contribute to your super before having to pay extra tax. Find out more on the Australian Taxation Office website.
$3m super tax looms
The government has proposed to reduce the superannuation tax concessions for those with total super balances that exceed $3 million.
Under the proposal, from July 1, 2025, affected clients will pay an additional 15 per cent in tax on earnings corresponding to the portion of their superannuation balance above $3 million.
Tax cuts for many Australians from July 2024
Many clients may not be aware of the impending cuts to income taxes. Working Australians will see more in their pay packet from July 2024, with anyone earning an annual income of $45,000 or above benefiting from tax cuts. The reduced tax rates will be a welcome reprieve for clients facing cost of living pressures.
Those who have the capacity to top up their super with personal deductible contributions may be considering the best timing for doing so. At the current marginal tax rates, and bearing in mind the 15 per cent concessional tax rate within superannuation, the tax saving resulting from putting money into super in FY2024 is greater, compared to FY2025 when the reduced marginal tax rates take effect.
This information was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian Credit Licence 233714 (Westpac) and is current as at December 7, 2023. The information provided is general information only and it does not constitute any recommendation or advice. It is intended to provide an overview or summary and should not be considered a comprehensive statement on any matter or relied upon as such. Any recommendation or opinion provided does not take into account your personal objectives, financial situation or needs, and you should consider its appropriateness having regard to these factors. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation.