Superannuation’s best kept secret
Explaining the downsizer contribution
The superannuation downsizer contribution first became effective from 1 July 2018.
In a nutshell, if you meet the eligibility requirements, you can make a once-only contribution into your superannuation of up to $300,000 when you sell your home, which could be $600,000 per couple!
Unlike other methods of topping up your super, your eligibility for the downsizer contribution does not depend on your total superannuation balance, your age, or your work status.
It’s a special once-off, so the downsizer contribution does not count towards your normal annual concessional and non-concessional contributions caps, which means you can use them too, if you are eligible.
Importantly, as it’s an after-tax contribution, there will be no contributions tax inside super plus it will be tax-free in the hands of your beneficiaries after your death.
Put simply, depending on your circumstances, selling your family home and making a downsizer contribution into super is a once-in-a lifetime opportunity to build up your retirement nest egg, and preserve value for the next generation, in a very tax efficient way.
Here’s some more information.
Policy reasons for the downsizer measure
The Australian population has grown to 26 million and this has created unprecedented demand for our limited supply of low density housing stock in our large urban cities like Sydney.
Whilst regulators have been making it easier for developers to build medium and high density accommodation, many families still aspire to a detached dwelling.
The downsizer contribution is a government incentive to encourage empty-nesters to sell their main residence (which can be any type of permanent dwelling) so that this stock becomes available as extra supply into the market.
Eligibility for this government incentive
You are eligible to make a downsizer contribution into super if you meet ALL of the following criteria:
- You must be 60 years or older at the time you make the contribution (this reduced from 65 years on 1 July 2022 and in the near future it will drop again to 55 years)
- The home was owned by you, or your spouse (married or de facto), or both, for at least 10 years prior to the sale
- The amount you are contributing, in total between you and your spouse, is not more than the proceeds from the sale
- Your home is in Australia and is a permanent dwelling, not a caravan, houseboat or other mobile home
- Any capital gain on the sale of your home is exempt (or partially exempt) from CGT under the main residence exemption (or would be exempt if it’s a pre-CGT asset)
- You must provide your super fund with a short 2-page “Downsizer contribution into super” form (or their version of this) either before or when you make the contribution
- You must make the contribution within 90 days of receiving the sale proceeds (although in extenuating circumstances you can apply to the ATO for a time extension)
- You haven’t previously made a downsizer contribution
The contribution amount cannot be greater than the total proceeds of the sale of your home, or $300,000 per person, and may be made as an in-specie contribution (e.g. shares) or from other sources of finance (e.g. savings).
You don’t literally have to “downsize,” in fact, you can “upsize” or “sidesize” whatever is the best way for you to “rightsize.”
There is no requirement relating to your next home, in fact, you don’t even have to buy one, so you can live with family or move into a retirement village or aged care.
Some examples
Example 1: Geoff and Jane
Geoff and Jane sell their empty-nest home for $900,000 to move into a retirement village. Each partner contributes $300,000 into super.
Example 2: Bruce and Barbara
Bruce and Barbara sell their home for $1,500,000 and buy their next property for $1,000,000 releasing $500,000 of surplus. Even though theoretically they could make the maximum downsizer contribution of $600,000 in total, they don’t have any liquid funds to contribute anything above the $500,000 equity they’ve just released. They make downsizer contributions into super of $100,000 for Bruce and $400,000 for Barbara.
Example 3: Isobel
Isobel sells her mortgage-free 1-bed unit for $800,000, and, with the help of a $600,000 mortgage, buys a new luxury 2-bed unit in a serviced security building for $1.4 million. Isobel has savings of $300,000. She taps her savings and makes a $300,000 downsizer contribution into her super.
Combining a downsizer contribution with a non-concessional contribution
The downsizer contribution does not impact on the other contributions limits.
If you are eligible, you can still contribute $27,500 concessionally and up to $330,000 non-concessionally using the bring-forward rule.
This opens up some very interesting strategies, especially if you will release a substantial amount of equity on downsizing, or you have significant assets outside of super, or can potentially benefit from a re-contribution strategy. When combining strategies, the timing and sequencing can be very important, so it’s a good idea to get qualified advice from an expert.
Check that your super fund can receive the payment
If you have an SMSF, you may need to amend the trust deed to make the fund eligible to receive the downsizer contribution.
If you are with an industry or retail fund, you should also check that they are able to process the downsizer contribution correctly, as it’s neither a concessional nor non-concessional contribution; rather it’s a special contribution. If it is wrongly allocated, you could have a problem with the ATO.
Is downsizing right for you?
Additional information about the financial aspects of downsizing is available on the Australian Government’s MoneySmart website which also links to the ATO website.
Importantly, always seek qualified advice to confirm the suitability of any financial arrangements for your own objectives, financial situation and needs, especially in relation to the age pension assets and income tests and estate planning.
If you’d like to find out more about Downsizer.com and how we can help you transition to your new home, please visit our marketplace, play with our snapshot tool, and ask any questions you have using our contact form.
