Is downsizing the family home the answer to low super?
Compulsory superannuation was made available for many Australians in 1986, in the form of industrial awards, at 3%; then for more working Australians from July 1992, in the form of the super guarantee. It was only in 2002 that this guarantee increased to 9%.
Let's consider for a moment those Australians struggling with the financial demands of retirement who had already been in the workforce for 25 years or more before compulsory super contributions played a part in ensuring they could retire safely. Retirees over 60 years have not had time on their side to build significant super balances.
For this generation the family home has always been considered as a retirement nest egg, the long-term plan being to sell it and downsize to a smaller property costing less in both purchase price and maintenance, thus releasing much-needed capital to support living costs.
Today many seniors - whether single or one of a couple - are disinclined to sell their family home (an untaxed asset) to invest any net proceeds from downsizing into a taxed environment.
Let's imagine for a moment if these retirees could, at whatever age, sell their family home, downsize and contribute all or part of the net proceeds into the super environment. Can they do this? Well, most would not meet the "gainfully employed" test to be able to contribute, nor under current contribution caps would they be able to contribute the whole of their investable net proceeds and therefore would need to look at investing in a fully taxed environment. We are seeing little desire to do this.
To force this downsizing, an option already mooted is to change the social security laws to means-test part or all of the family home, effectively forcing seniors to sell to unlock equity to supplement their income. Such a move would be extremely unpopular with Australia's largest voting population. We need to consider that there is another solution.
Let's look at an option where a retiree - at whatever age, and without needing to pass the "gainfully employed" test, and without being limited to current contribution caps - could downsize and contribute the net proceeds into super. Let's face it, under the small business provisions if I sold my small business to retire, I could roll over the proceeds of that sale into my super fund without meeting those same tests.
What would such a move require? An amendment to the Superannuation Industry (Supervision) regulation 7:04 "Acceptance of contributions" and the relevant sections in the Tax Assessment Act 1997.
Such a solution would not only bring peace of mind to many retirees but would also reduce the pressure on the age pension system and would free up large family homes for the next generation.