Downsizing the family home is often part of the longer-term financial plans for many older Australians. However, did you know that you could consider investing the proceeds of the sale of your family home to your super, depending on your age and circumstances – as a downsizer contribution?
Boosting your retirement savings by downsizing your home
If your eligible, older Aussies can put additional funds into their super using the money from the sale of their main residence, regardless of caps and restrictions that otherwise apply.
If you’re looking to boost your retirement savings, you may be able to make a tax-free contribution to your super using these proceeds.
What is a downsizer contribution?
From 1st July 2022, if you’re aged 60 years or older you may be eligible to make a downsizer contribution of up to $300,000 to a complying super fund. Though, unless you are in a defined benefit fund, the proceeds of the sale of your primary residence, which is owned for 10 years or more.
A downsizer contribution doesn’t count towards any of the contribution caps – and can still be made even if a person has total super savings greater than $1.7 million. Additionally, if you do not meet the work test requirements. It is a once-off option and doesn’t apply to the sale of any residences in the future.
Your spouse, provided they are also aged 60 years or older, can also make downsizer contributions to their own super, of up to $300,000 from the same proceeds, even if they are not an owner of the property. To make the downsizer contribution, the sale price is key, as your couple contributions cannot be more than the total sale price of the property.
Benefits of making a downsizer contribution
We’ve listed some benefits of the downsizer contribution, that you need to consider before using the proceeds of the sale of your home to top up your super.
Provides a way to top up your super balance
Older Aussies, who haven’t had the chance to save enough funds for retirement, may find that tax-free downsizer contributions provide an opportunity to top up what they’ve saved to date.
No work test or upper age limits apply to downsizer contributions
There is no requirement to be working or to have been in paid employment ever. This makes the downsizer contributions a useful option for older people who have not had a chance to save enough funds for retirement.
Annual concessional & non-concessional contributions caps don’t apply
In fact, downsizer contributions can be made in addition to any concessional and non-concessional super contributions you may be eligible to make.
Not subject to the $1.7m total super balance restriction
You usually can’t make non-concessional contributions into your super if your total super balance is $1.7 million or above as of 30 June of the previous financial year. But this rule doesn’t apply to downsizer contributions.
No requirements to buy a new home
The money you make from the sale of your home, doesn’t have to be used to purchase a new home, and there is no need to move to something smaller or cheaper. If it involves the sale of a previous principal residence (that is now an investment property), there is no need to move at all.
Both members of a couple can take advantage
For couples, both spouses can make the most of the downsizer contribution opportunity, which means up to $600,000 per couple can be contributed toward super. move at all.
May be more tax-efficient
The downsizer contribution is an after-tax contribution, so no tax is paid on the way in. And because you are over 60, it is returned tax free when you withdraw the funds in the future.
- Currently, you must be aged 60 or older to make a downsizer contribution.
- The property that is sold needs to have been your (or your spouse’s) main place of residence at some point in time and you need to have owned the home for at least 10 years.
- When you sell that property, you need to be eligible for some form of exemption from capital gains tax (CGT) on the sale of the property under the “main residence” provision. Basically, this means the property needs to be your principal place of residence for at least some time during its ownership.
- If you purchased the property before 20 September 1985 (so that CGT doesn’t even apply), you still need it to have been your principal place of residence at some stage during ownership. Keep in mind, it also doesn’t matter if the exemption from CGT is a full or partial exemption, which means the property could have been an investment at some stage during your ownership of it.
- The sold property must be in Australia and excludes caravans, mobile homes, and houseboats
- A downsizer contribution must be made within 90 days of receiving the sale proceeds.
- A downsizer contribution form must be given to your super fund before or when making your contribution.
- You can’t have previously made a downsizer contribution to super.
- The maximum amount of super savings (not including subsequent earnings) that can be transferred into a retirement pension increased to $1.7 million on 1 July 2021, but not for everyone. Find out more in our article – Transfer balance cap set to increase to $1.7 million.
- Downsizing your home may impact age pension eligibility. There are no special Centrelink means test exemption for making downsizer contributions
- Downsizer contributions are not tax-deductible super contributions.
Examples of Downsizer Contributions
Here are some two examples of how downsizer contributions can work in different situations:
Glenn and Carolyn are both aged in their 60s, own their home jointly and have lived in it for 25 years.
They sell their home on 1 August 2022 for $550,000 and the settlement date is 13 September 2022. They are exempt from capital gains tax (due to the home having been their primary residence).
Under the downsizer contribution measure, within 90 days, Carolyn makes a downsizer contribution to her superannuation of $300,000 while Glenn contributes $250,000 to his superannuation.
Though the cap on downsizer contributions is $300,000, Glenn only contributed $250,000 because the combined contributions cannot exceed the sale proceeds of their home. They could have also split the contributions evenly, contributing $275,000 each.
Robert is aged 61 and married to Kim who is aged 58, and they live in a home purchased by Kim 20 years ago.
Kim sells the home for $900,000 on 15 July 2022 and the proceeds are exempt from capital gains due to it being their primary residence.
Robert can make a downsizer contribution of up to $300,000 within the 90-day period but as Kim is under age 60, she is unable to make a downsizer contribution.
How do you make a downsizer contribution?
If you are eligible, you’ll can complete a downsizer contribution form and provide this either before or together with your contribution cheque, to your complying superannuation fund so it can be correctly classified.
It’s important to be aware of the timing of your contribution into super. The contribution must be made within 90 days of receiving the proceeds of sale (or longer permitted period), which is usually the date of settlement.
Written by Steven Field
Important information – Oracle Advisory Group makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation or needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek their own professional advice. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.