Once you reach age 65, you often find yourself wanting a smaller home or one more suited to your empty-nest requirements.
For some retirees, selling the family home can also be a great way to release built-up equity and make an extra contribution to their super account.
Under the downsizer contribution rules, your eligible contributions are exempt from some of the normal limits and rules, so you can give your super account a welcome boost.
Good to know
The contributing the proceeds of downsizing into super measure was announced in the 2017/18 Federal Budget and the proposal became law on 13 December 2017.
How the downsizer measure works
Since 1 July 2018, Australians aged 65 years or older have been able to make a non-concessional (after-tax) contribution into their super account of up to $300,000 from the sale proceeds of their family home if they have owned the property for at least ten years.
Downsizer contributions have proved popular with some retirees, with more than 4,200 individuals making these contributions during the 2017/18 year.
The legislation requires the property being sold to be the person’s home (their main residence) and it must be eligible for the main residence exemption for capital gains tax. The home must be in Australia and cannot be a caravan, houseboat or other mobile home.
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Couples will be able to contribute up to $300,000 each into their super accounts, giving a total contribution per couple of up to $600,000.
Any super contributions made using the downsizing rules do not count towards either your concessional (before-tax) or non-concessional (after-tax) contributions caps.
Need to know
If your home was owned in one partner’s name, both partners are still entitled to make a downsizer contribution – or have one made on their behalf – provided they meet the other eligibility requirements.
The contribution amount can’t be greater than the total proceeds of the sale of your home.
10 issues to consider with downsizing and contributing to super
1. It’s an opportunity to boost your super balance
Retirees who have not had the opportunity to save sufficient funds for a comfortable retirement can use the downsizer contribution rules to top up an inadequate super balance.
For some people, using the surplus proceeds from downsizing their home to make a contribution into their super account may be their first chance to use the beneficial tax environment of the super system.
2. There’s no ‘work test’ or age limit
The current work test for voluntary contributions into your super account if you are aged 65–74 does not apply to downsizer contributions. For more on the work test, read SuperGuide article Work test: Making super contributions over 67.
Good to know
If you are aged 75 and over, the current super rules prevent you from making a contribution to your super account. However, you can make a downsizer contribution into your super account regardless of whether you have worked or not.
For more on the contributions restrictions for over-75s, read SuperGuide article How to contribute to your super in your late 60s: What are the rules?.
3. Contributions count towards your transfer balance cap
If you decide to make a downsizer contribution into your super account, it’s important to remember it will count towards your transfer balance cap (TBC) if you decide to move your super account into the tax-free retirement phase and start a retirement income stream.
If you have already reached your $1.6 million TBC, your downsizer contribution will need to remain in your accumulation phase super account (where it will be subject to 15% tax on any investment earnings from the contribution).
For more on the TBC, read SuperGuide article Definitive guide to the $1.6 million transfer balance cap.
Need to know
Downsizer contributions are not tax deductible.
4. Contributions are not subject to the Total Superannuation Balance limit
Since 1 July 2017, you cannot make non-concessional (after-tax) contributions to your super account if you have a Total Superannuation Balance (TSB) of $1.6 million or more.
If you have maxed out your opportunity to make non-concessional contributions to your super account, you can still make a downsizing contribution, as these contributions are exempt from the $1.6 million TSB limit. However, your downsizer contribution will count as part of your TSB in future financial years. (For more about your TSB, read SuperGuide articles What is included in my Total Superannuation Balance, and when does it apply? and A super guide to understanding the bring-forward rule.)
5. There’s no requirement to buy a new home
If you make a downsizing contribution (from the sale of your principal place of residence) you are not required to buy a new home. In fact, there is no requirement to buy a cheaper or smaller home after making a downsizer contribution, so you could decide to purchase a more expensive replacement.
6. You must submit a downsizer contribution form
To be eligible to make a downsizer contribution, you must provide your super fund with the Downsizer contribution into super form either before or at the time of making your downsizer contribution. This form allows your super fund to verify on behalf of the ATO that the contribution is from the sale of a family home owned for more than 10 years.
7. Contributions count toward Age Pension assessment tests
Your main residence is generally exempt from the assets and income tests used to determine eligibility for the Age Pension and DVA benefits, but super is generally not exempt, so it’s important to consider this before downsizing.
Downsizing contributions are counted for the assets and income tests, so you will be moving money out of an exempt asset (your family home) into the non-exempt and assessable environment of your super account.
It’s also worth noting that your super balance (including downsizer contributions) is used to determine eligibility for residential aged care and home care services.
Need to know
If you are considering making a downsizer contribution, you should seek professional advice on how it will affect your particular situation before making a decision. This is a complex area and requires careful thought, particularly in relation to the potential impact on your Age Pension eligibility.
8. It’s a one-time only offer
Under the downsizer contribution rules, you can only make contributions using the proceeds from the sale of one home. You cannot access it again for the sale of a second home.
For your downsizer contribution to be eligible, the proceeds from the sale of your home must be either exempt or partially exempt from capital gains tax (CGT) under the main resident exemption (or entitled to the exemption if it was purchased prior to 20 September 1985).
The costs involved in selling a family home can be substantial. Sales commissions, moving costs and high stamp duty and land taxes if you purchase another home all mount up, so you need to think carefully before deciding to downsize.
It’s worth remembering that selling a large home and downsizing to a smaller property does not always release much excess capital (particularly in a capital city), so do some careful calculations on how much you will have left to contribute to super before you sell.
9. There’s a time limit for making the contribution into super
Under the downsizer contribution rules, you must make your downsizer contribution (or multiple contributions) within 90 days of receiving the sale proceeds (typically settlement day). You need to apply for an extension if you require a longer period due to circumstances outside your control, such as ill health or a family death.
10. You can invest the proceeds before contributing
Under the downsizer contribution rules, you have 90 days in which to make your contribution, but there are no rules on what you can do with the money during that period. During the period between settlement and making a super contribution, there are no rules preventing you from investing the sale proceeds or mixing the proceeds with other money.
For more on housing and super, read SuperGuide article How does the First Home Super Saver (FHSS) Scheme work?
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