Downsizer scheme widens with the eligibility age decreases 🏠💸
Regardless of who was to win the federal election, people aged 60 years and over were going to be among the winners, as a Coalition promise to widen the “downsizer” scheme was matched by Labor.
As an extension to the existing downsizer contribution rules, the eligibility age will decrease from 65 to 60 from 1 July 2022. (Note: As at January 2023, the eligibility age has been further reduced to 55 years for downsizer contributions). View downsizer fact sheet here.
Under the downsizer contribution rules, on selling their house, a person can contribution up to $300,000 into superannuation outside of normal contribution caps. And contrary to what the name implies, downsizers are not required to actually downsize and purchase a replacement new home as part of the process. They can choose to rent if they wish, or even purchase a more expensive property.
You will need to have owned the property for at least 10-years before selling and, although you do not need to be living in the property at the time of the sale, it must have been your principal place of residence at least at some stage over your ownership period.
Another requirement is that the downsizer contribution must be made within 90-days of settlement and a downsizer contribution form provided to your super fund.
Caution: Don’t leave yourself short of cash by downsizing too early
A potential problem with reducing the downsizer age limit to 55 is that he preservation (or access age) for superannuation is rising to 60 for people born after 1 July 1964. So although extra money will flow into superannuation via the downsizer contribution, a situation could occur where a couple leaves themselves short of cash for up to five years in retirement.
For example: Take a 55-year old couple who sold the family home for $1.3Mn and intend to travel for a few years. If they want to max out super contribution and assuming no previous contribution, they would be able to use the regular non-concessional caps and the three-year bring forward rule to add $300,000 per person downsizer contribution. This would be a total of $1.26Mn added to super, leaving them with $40,000 personally.
This works out well on one hand because their retirement money is compounding in a concessional taxed environment, but not so great if they forgot the retirement age is not 55 any more, and had no other funds to support themselves until age 60. This means there is a five-year blackout period when they cannot touch their retirement funds.
With this in mind caution needs to be taken where the downsizer contribution is made while under 60 and retired, and between ages 60 to 64 while still working. From age 65 onwards, it does not matter if you are retired from the workforce or not, a “condition of release” criteria is satisfied and you are able to access your superannuation.
Australian Taxation Office have provided more support information to stay up to date on this topic. Visit:
Transfer balance caps
The downsizer contribution sits outside regular contribution caps. However, it is counted towards the “transfer balance cap” where up to $1.7Mn can be transferred to a tax-free pension. In other words, if you have a super balance approaching the transfer balance cap, although the downsizer contribution may help you get more money into super, it is not guaranteed that would will be able to convert all the money to a tax-free pension. Money that exceeds the transfer balance cap and is left in the accumulation phase is taxed at up to 15% on income and gains.
SMSF participants to provide “proof” for the downsizer scheme
If you are one of more than a million Australians with a self-managed super fund, there are particular elements of “proof” you must satisfy for the downsizer scheme. As detailed by lawyer Michael Hallnain at Townsends, there needs to be:
● Proof that the trust deed of the SMSF permits the trustee to accept downsizer contributions.
● Proof that the ATO Downsizer Contribution form (NAT 75073) has been signed by the member (that is, the beneficiary of the contribution and not the maker of the contribution), dated and received by the trustee of the SMSF.
This form must be given to the trustee of the SMSF at the same time as or before the downsizer contribution. If the form is received by the trustee of the SMSF after the contribution is made, then it will not qualify as a downsizer contribution – but be treated as a personal contribution.
If the contribution is made by electronic funds transfer, then the transfer must be credited to the SMSF bank account on or after the ATO contribution form is received by the trustee. If the contribution is made by cheque, the date of the cheque should be on or after the ATO form is received by the trustee.
● Proof of the downsizer contribution was sourced from the sale proceeds of a qualifying Australian dwelling (that is a dwelling that satisfies the main residence exemption) which has been owned for 10-years or more and the contribution is made within 90-days of settlement of the sale.
● Proof that there has not been an earlier downsizer contribution made in respect of the beneficiary.
● Proof that the contribution satisfies the various technical requirements of the downsizer contribution rules.
Another election pledge • Income threshold for the Commonwealth Seniors Card
Another election pledge from the Coalition that was matched by Labor is around the income threshold for the Commonwealth Seniors Card. If you are of the age pension age, but do not qualify for an age pension, as a sort of consolation prize, the government provides wealthy retirees with the CSHS, providing medical benefits such as access to medicines under the pharmaceutical benefits scheme.
However, income thresholds apply. Singles need to have income less than $57,761 and couples $92,416. Under new rules, the thresholds will rise to $90,000 and $144,000 respectively. Read more CSHS benefits here.
Sections of this article was first published in The Weekend Australian by James Gerrard of financial planning firm, FinancialAdvisor.com.au.