The relationship between retirement income and housing has long been acknowledged. In fact, the family home is sometimes referred to as the fourth pillar of our retirement income system, with the age pension, superannuation and private savings the first three.
Home ownership is so important because our pension and superannuation systems are predicated upon it. One’s standard of living in retirement is very much contingent on having minimal housing costs.
Under the 2017-18 Budget downsizing measure, people aged 65 or over can make a non-concessional contribution of up to $300,000 from the proceeds of selling their family home. This measure applies from 1 July 2018.
The house must be a principal residence, owned for ten years or more. The Budget papers do not specify whether the property sold needs to be larger than the one ‘downsized’ to.
Contributions can be made over and above existing contributions caps. This means that a couple which downsizes can contribute $300,000 each to their superannuation funds, even if they have already reached the lifetime limit of $1.6 million contributed to superannuation. The reason why it’s attractive to place the funds into super is because of the higher average earnings than in bank accounts.
Those at the $1.6 million limit who take up the downsizing scheme will have to place this money in an accumulation account.
For pensioners, the proceeds of a sale will affect their assessable income and assets. This will continue to be a disincentive to downsizing. Accordingly, this measure supports capital accumulation by the already-wealthy – those with superannuation balances over $1.6 million.
Superannuation funds will not be required to account separately for contributions made by either first home buyers or downsizers. Oversight of contributions will be the responsibility of the ATO, for which the Government is providing additional funds which represent the $280 million combined cost of the two measures.
Research has shown that people don’t want to downsize, for a range of reasons which are not primarily economic. That said, the downsizing scheme may be attractive, for example if it frees up proceeds of home sales for large costs such as aged care bonds.
But to turn to the issue of housing affordability, the idea that older Australians will free up the housing market for those young people who might be using the Super Savers Scheme is hopeful, to say the least. A similar first homebuyer scheme introduced by the Rudd Government had a very small take-up. We know that mandated savings rather than these types of schemes have more of an effect.
The idea of younger Australians tapping into their superannuation savings for a house deposit is not a new one. But it is an idea that has received scarce support, and for good reason. In a housing market that is bursting at the seams, it makes little sense to introduce more demand. Withdrawing funds from superannuation also reduces the compound interest benefit of lifelong saving. The Government has sought to address this drawback by confining drawdowns to additional super contributions (above the 9.5 per cent Super Guarantee).
The First Home Super Savers Scheme permits first home buyers to access concessional superannuation tax rates for part of their home deposit. Contributions can be made from 1 July 2017, and withdrawals from 1 July 2018.
Individuals can make contributions of $15,000 per year and $30,000 in total to the Scheme, taxed at 15 per cent. Contributions are made within the existing annual concessional contributions cap of $25,000, introduced in the 2016-17 Budget. For example, an individual who contributes the full $15,000 in one year under the First Home Super Save Scheme will only be able to make $10,000 in concessional superannuation contributions in that year.
When the funds are withdrawn they are taxed at a person’s marginal rate (plus the Medicare Levy), minus 30 per cent. This means that for those on incomes up to $37,000 no tax will be paid on drawdown. For those up to $87,000, tax will be minimal as their marginal rate is 32.5 cents. Nonetheless, this tax is somewhat strange, as in general no tax applies at the point of retirement.
This Scheme will benefit people who are already saving for a house deposit; not those people who are far off from having a deposit, which, in places like Melbourne and Sydney, is likely to be upwards of $100,000. Industry Superannuation Australia analysis of ATO data has also shown that only a small number of people with significant superannuation balances are in a position to make voluntary superannuation savings. For those on low incomes, who are disproportionately women, the take up of the Scheme will be lower. The Scheme also needs to be weighed against the other measure affecting young people, which is to increase university fees and HECS repayments.
Which begs the question, what problem is the Government trying to solve with the super-housing measures? It’s likely that their combined impact will be minimal on housing supply and affordability; moreover none of the Budget 2017 measures address the substantive policy issues in superannuation.
The Budget contained no measures to deal with the gender inequalities in superannuation, including no response to a bipartisan Senate Committee which handed down a report on this issue.
While the ATO was given additional funds for the two main superannuation measures in the budget, it was given no additional funding to deal with unpaid superannuation, worth some $3.6 billion.
The sustainability of superannuation tax concessions, even at the lower level set by the 2016 Budget, remains in doubt.
Finally, the objective of superannuation also remains in flux, before a Senate Committee which Labor called for late in 2016.
Viewing this year’s budget through housing and superannuation policy lenses, its impact looks to be negligible.
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