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Once you reach your sixties and the kids have finally flown the nest, you may find yourself wanting a smaller or more suitable home.
For some retirees, selling the family home can also be a great way to release some of the equity they have built up and use it to 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 a meaningful last-minute boost.
It’s also worth remembering that when these contributions are moved into the retirement phase and you start drawing an income, your investment earnings are tax free. Whereas if you were to invest the sale proceeds outside super you would be liable for tax on any income from the investments.
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 retirees, with government statistics showing around 22,000 individuals had made a downsizer contribution by May 2021.
To make a downsizer contribution the property being sold must be your family home (main residence) and must be eligible for the main residence exemption for capital gains tax (CGT). The property must be in Australia and cannot be a caravan, houseboat or other mobile home.
Couples can 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.
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 their 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 make good use of the tax benefits super offers.
2. There’s no ‘work test’ or age limit
The current work test for voluntary contributions into your super account if you are aged 67–74 does not apply to downsizer contributions. This means you can make a downsizer contribution into your super account regardless of whether you have worked or not.
Normally if you are aged 75 and over, the current super rules prevent you from making voluntary contributions to your super account. However, there is currently no upper age limit for making a downsizer contribution.
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 the $1.7 million TBC (from 1 July 2021), 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).
Note: From 1 July 2017 to 30 June 2021 the TBC for people starting a new retirement phase pension was $1.6 million. Anyone with a transfer balance account of $1.6 million at any time since 1 July 2017 is ineligible for the full $100,000 cap increase from 1 July 2021.
4. Contributions are not subject to the Total Superannuation Balance limit
You cannot make non-concessional (after-tax) contributions to your super account if you have a Total Superannuation Balance (TSB) of $1.7 million or more (from 1 July 2021).
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 $1.7 million TSB limit. However, your downsizer contribution will count as part of your TSB in future financial years. Yes, it’s complicated, so do seek professional advice before you act.
Note: From 1 July 2017 to 30 June 2021, the TSB cap was $1.6 million
5. There’s no requirement to buy a new home
If you make a downsizer 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 superannuation 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 ten 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 the implications of these rules before selling your home or making a downsizer contribution.
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.
8. It’s a one-time only offer
Under the downsizer contribution rules, you can only take advantage of the measure once. You can’t 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 CGT under the main resident exemption (or entitled to the exemption if it was purchased prior to 20 September 1985).
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 providing the total amount is the lesser of the sale amount or $300,000 per person) within 90 days of receiving the sale proceeds (this is typically on 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.