Downsizer super contributions: Rules and eligibility

While the downsizer rules are generous, it’s essential to ensure your home is eligible before you sell.

The key criteria are:

• You must have owned your property for a continuous period of at least 10 years. This is usually measured from the date of your original settlement when you purchased the property, to the settlement date when you sell it.
• The property being sold must be your family home (main residence) at the time of the sale, or it must be partially exempt from capital gains tax (CGT) under the main residence exemption. This means it may have been your principal residence in the past and you have since acquired a new principal residence.
• The home you sell must be in Australia.

Some types of property are not eligible under the downsizer rules. These include an investment property you have not lived in, caravans, houseboats and other mobile homes. Vacant blocks of land are also ineligible.

How downsizer contributions affect your super

Downsizer contributions don’t count towards any of your annual contribution caps and won’t affect your total superannuation balance (TSB) until it’s re-calculated at the end of the financial year on 30 June. You can make a downsizer contribution even if your most recent TSB is above the general transfer balance cap for the year.

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Once downsizer contributions are in your super account, they are subject to the normal tax rules governing the super system. That means when you move into the retirement phase and start drawing a super pension, your investment earnings are tax free. If you invest the proceeds from your sale outside the super system, however, you will be liable for tax on any income from your investments.

Although downsizer contributions don’t immediately count towards your TSB, they do count towards your transfer balance cap (TBC) if you use the amount you contributed to start a pension. This cap limits the amount you can move from your accumulation account into the tax-free retirement phase. Your downsizer contribution is also counted when assessing your eligibility for the Age Pension (see section below).

If you reach your personal TBC (between $1.6 million and $2 million), downsizer contributions must stay in your accumulation phase super account, where any investment earnings will be subject to tax at 15%.

What are the rules after selling?

Oddly enough, if you sell your home and want to make a downsizer contribution, you are not actually required to buy a new home with any of the sale proceeds. Also, there’s no requirement to buy a cheaper or smaller home after making your downsizer contribution, so you can even decide to purchase a more expensive replacement home.

It’s important to understand that under the downsizer rules, you can only take advantage of the measure once. The downsizer rules are a one-time-only concession and you can’t access them again for the sale of a second home, or for the sale of a remaining interest in the property.

You are permitted to make multiple downsizer contributions to different super funds, but they must all relate to the one property you sell.

For your downsizer contribution to be eligible, you must complete the ATO’s Downsizer contribution into superannuation form or the form required by your super fund. If you make multiple downsizer contributions or contribute the money to different super funds, you must provide a completed form for each contribution.

The form allows your super fund to confirm on behalf of the ATO that you have met all the eligibility requirements for making a downsizer contribution. It must be submitted to your super fund when you make your contribution, or prior to making it.

How will it affect my pension entitlement?

Before rushing off to sell your home and make a downsizer contribution into your super account, don’t forget it may have an impact on any pension you receive from the government. It could reduce – or even eliminate – your entitlement to an Age Pension or DVA service pension.

When you own a home (your main residence), it is exempt from means testing. Selling the home and contributing to super or retaining the funds in other assets that are not your main residence can increase the assets and income assessed in Centrelink means tests and reduce your entitlements. However, it’s also important to note that super benefits in an accumulation account are not included in Centrelink means tests until you reach 67. If you or your spouse are under 67, making a contribution to an accumulation account could increase Centrelink benefits.

Special rules are available to preserve your entitlements if you’ve sold your home and intend to use the proceeds to build or purchase a new home at a later date.