The prize for the most ill-conceived idea of the year must go to Liberal MP Tim Wilson for very publicly campaigning for first home buyers to be allowed to access part of their superannuation for a house deposit.
Not only would it drive up house prices, the plan has other major faults: it subverts the purpose of superannuation, it has tax problems, and it fails to account for the extraordinary effect of compounding over time.
Think about a person who started work at age 20 on $35,000 a year. Suppose the employer contribution remained at 9.5 per cent per annum and the fund earns 8 per cent per annum - by the time they were 30 and earning $50,000 a year, their fund should be worth $54,000.
Fast-forward 40 years, when the retiring age may well be 70. Their fund should be worth just over $3 million if the assumptions in the example are unchanged. However, if they withdrew $50,000 from that balance at age 30 for a house deposit, their superannuation would be worth just on $1.9 million. Withdrawing $50,000 at age 30 would cost them $1.1 million when they retire.
Now think about the tax implications. Under the current rules, money withdrawn from superannuation before your preservation age incurs a tax of 22 per cent or your marginal rate, whichever is the lowest. If we assume anybody buying a house would be earning more than $45,000 a year, which is where the marginal tax rate of at least 32.5 per cent rate cuts in, it's obvious that 22 per cent would be deducted from most sums withdrawn early.
Or imagine the rorts that would happen if early withdrawals were tax-free! If Jack and Jill earnt $100,000 year each, their employer contributions of $9500 would enable them to contribute a further $15,500 as a tax deduction, losing only 15 per cent contributions tax. No government in its right mind could tolerate a situation where they could withdraw that money in a few years with no exit tax.
Every strategy designed by governments to make entry to the housing market easier pushes up the price of houses. To get an idea of what would happen to the housing market if billions of dollars were released tax-free from superannuation, think about what the $10,000 withdrawn per person during COVID-19 did to the second-hand car market. Most dealers ended up out of stock.
A major plank of the arguments put forward by Liberal MPs such as Tim Wilson is that it's "their money". Well, actually it's not - it's trust money contributed by the employer using generous tax concessions provided by the government with the sole purpose of reducing the cost of welfare at retirement.
There is also the argument that we need to prevent people entering retirement without a roof over their heads. That is unquestionably true, but there are so many reasons people end up not owning their own homes. Many who have bought, lose the house they had because of relationship breakdowns or bad financial choices. The proposed scheme would have no benefit to them.
Tim Wilson needs to remember that the genesis of the global financial crisis was President Clinton's belief that every American was entitled to home ownership, irrespective of income or assets. This led to billions of dollars of bad debts, repossessions and plunging real estate prices. Australia can't afford for that to happen here.
Noel answers your money questions
I have sold my home for $1,200,000. I intend to buy or build another within the 12 months stated by Centrelink and expect to spend around $850,000 on the new property. I have just been told by Centrelink that I'll have to pay deeming rates on the full sale price and possibly lose my whole pension. I am single. Is this correct? What can I do to keep my concession card?
Services Australia General Manager Hank Jongen says that when an Age Pensioner sells their home, the portion of the proceeds which the customer intends to use to purchase, build, repair or renovate a new principal home is an exempt asset for up to 12 months.
This period may be extended to 24 months when a customer makes reasonable attempts, within a reasonable amount of time after selling their home, to purchase, build, repair or renovate their new home, and has experienced delays beyond their control.
When the proceeds are held as financial assets (for example in bank accounts in which the proceeds may produce income) they will be subject to the deeming provisions - this includes the portion of the proceeds that the customer intends to use for their new principal home.
All Deemed income from financial investments is assessed along with any other income in the income test to determine the rate of Age Pension. If you use the Deeming Calculator on my website you will see that deemed assets of $1.2 million produce, for a single person, $998 a fortnight of deemed income. That should allow a pension for a single homeowner of around $534 a fortnight
While the portion of the proceeds to be used for the new principal home is an exempt asset, the customer continues to be treated as though they are a homeowner and assessed under the homeowner asset test.
A Pensioner Concession Card (PCC) is automatically issued to eligible customers who receive a social security pension or an income support payment. When a customer's payment is cancelled, they generally lose entitlement to their PCC at the same time.
There has been much written in your columns about the $1.6 million transfer cap which is the amount that can be transferred to the tax-free pension area in superannuation. I understand this will rise to $1.7 million on July 1. Will this flow through to the current $1.6 million cap on non-concessional contributions to superannuation?
There is good news here - the limit on non-concessional contributions will also rise to $1.7 million on July 1.
My parents and I own an investment property in equal shares, as tenants in common. They would like to gift their share of the property to me, and I will take over the mortgage. Would this be a capital gains tax event for which we all have to pay tax?
Any disposal of property either by sale or gift will be a capital gains tax event.
The CGT may not be too onerous because your parents will be disposing of only 50 per cent of the property, and provided the property has been owned for more than a year your parents will get the 50 per cent discount as well. Just make sure you take advice because depending on their circumstances your parents may be able to mitigate some of the CGT by making a tax-deductible contribution to superannuation.
I have been trying to find out whether my husband and I are eligible for the Commonwealth Seniors Health Card and have spoken to at least three different people from Centrelink and am still unsure whether I have got all the facts I need, in particular how superannuation funds in Accumulation are treated.
I have been told by the last person I spoke to at Centrelink that funds we have in Accumulation in our SMSF are not subject to deeming but if these were in an Industry Fund they would be subject to deeming. I queried this because it didn't make any sense but was told that the legislation treated them differently. Surely this cannot be right. Can you confirm whether this advice is correct?
The CSHC is not asset tested - the income test will look at both your adjusted taxable income and a deemed amount on account based income streams. Superannuation in accumulation should not be deemed as you are not drawing an income stream from it. The type of fund in which you hold your money should make no difference to eligibility.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: firstname.lastname@example.org