In this guide
Owning your own home is part of the Aussie dream, but it’s also a key part of any good retirement plan. With Australia facing a housing shortage and rising rents, having a place to call your own can make the difference between a happy retirement and one that’s much tougher and insecure.
But your home can also play an important role in helping to boost your income in retirement.
If you’re thinking about a smaller or better located home for your retirement years, selling your family home could be a great way to release some of the equity you have built over the years to give your super a big last-minute boost.
The government’s willing to give you a hand as well, by offering some attractive incentives. It sees helping older people to ‘right size’ their home for retirement as one way to free up larger homes for young families looking to enter the housing market.
What are downsizer contributions?
Put simply, the intention of the downsizer contribution rules is to allow older Aussies to sell their current home and use the proceeds to purchase a smaller one, then contribute the difference into their super account.
New rules starting 1 January 2023 have lowered the minimum eligibility age to allow people aged 55 and over to access downsizer contributions. Originally the minimum age was 65, but this has progressively been lowered to age 55.
The lower age limit (55 years) is based on your age when you make the contribution and there is no upper age limit. Normally, once you reach age 75 the super rules prevent you from making voluntary contributions, so a downsizer contribution presents a rare opportunity to top up your super.
There is no work test requirement to make a downsizer contribution. In fact, there is no requirement for you to have ever been in paid employment. However, you can’t claim a tax deduction for a downsizer contribution.
Downsizer webinar
What are the contribution limits?
Under the downsizer rules, you are allowed to contribute up to $300,000 ($600,000 for a couple) from the sale proceeds of your eligible family home.
The contribution limit is the lesser of $300,000 and the gross actual sale proceeds. This means if you gift your home to a family member and the sale proceeds are $0, you will not be able to make a contribution.
Any debt or remaining mortgage on the property does not impact the amount you are permitted to contribute into your super account.
To sweeten the deal for potential downsizers, eligible downsizer contributions are exempt from many of the normal contribution caps and rules limiting what you can put into your super account. Contributions made using the downsizing rules do not count towards either your annual concessional (before-tax) or non-concessional (after-tax) contributions cap.
Downsizer contributions can be made in addition to any concessional and non-concessional super contributions you make, without needing to worry about exceeding your annual cap amounts.
Is my home eligible?
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.
- 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.
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). This cap limits the amount you can move from your accumulation account into the tax-free retirement phase to start a super income stream (or pension). 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 $1.9 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.
It’s also important to note that super benefits are included in the Age Pension assets test once you reach Age Pension age.
When you own a home (your main residence), it is exempt from the Age Pension assets test. From 1 January 2023, the proceeds from the sale of your home remain exempt from the assets test for up to 24 months if you use the money to purchase, build or renovate another home.
The change is designed to give pensioners more time to find, build, repair or renovate a new main residence without worrying it will significantly impact their Age Pension entitlements.
After the 24-month deadline, the dreaded deeming rules start to bite. The remaining proceeds from your sale will be counted under the Age Pension income test if they are held in cash or other financial instruments, including income streams from superannuation pensions and annuities. The result is your entitlement to government benefits and support – such as the Age Pension – could be cut or reduced.
From 1 January 2023, when the 24-month exemption ends your sale proceeds are deemed to be earning 0.25% (the current lower deeming rate). As part of a wider change, the government has committed to freezing deeming rates at their current levels until June 2025.
It’s worth noting an additional 12-month assets test exemption is still available in extenuating circumstances
The impact on your pension entitlements doesn’t disappear even if you do downsize and buy another home. Any amounts left from the sale proceeds that you don’t contribute to super or use to purchase or build your new home may be subject to both the income and assets test, depending on where they are held.
Why is it not $300k per person total on any number of sales. e. g. If a couple’s home is worth less than $300k can that money be contributed to Super by one of them and later in life the other make a similar contribution from a subsequent home sale 10 or more yrs later? If not this is yet another govt scheme advantaging the property rich over those less fortunate, widening the wealth gap further.
This article is great and has brought a little known aspect of tax free contribution to my notice.
I am outraged that one house can be used by couples to contribute $600,000 to super, but solos ( single home owners) can only contribute $300,000. This policy discriminates against solos and places them at a significant relative disadvantage in retirement.
so…which is true??!?
Contributions after-tax are normally debited to the Tax-free Component of your Super account. Since the Downsize Contributions are “like” an NCC, can we be certain that they get debited to Tax-free Component of the Super account? What have super funds been instructed on this?
This is very important since the real-estate asset of the family home is now essentially tax free for non-dependent children after your death. It would be mighty tricky of the government to find a way to apply an 18% “death tax” via this mechanism.
If you are retired and on a part-pension this is yet another ScoMo scam. The article doesn’t address what may be a vital issue: if you are a part-pensioner under the old rules and put additional funds into your super will Centrelink then re-assess you under the new rules? This means the capital you have in an account based pension will be deemed and any income you take will also be counted. This double-counting is called by pollies “the fairer way”.
No this won’t occur. Any existing pensions will only be deemed if they are stopped and a brand new pension is restarted. Adding the contribution proceeds to super and starting a new pension will not cause the entire pension balance to be deemed. If you have an existing pension running and you stop it and add these funds to that account then yes it’s a new pension and these funds will be deemed so be very careful. The solution may be to have either mulitple pensions going or if the income test is not an issue it may be worth it.