When downsizer contribution should be delayed 🏠🏦
Just because you can do this from 55 doesn’t mean you should. The benefits of downsizer contributions can be substantial but be careful about your timing.
If you sell your home and are 55 or older, you can make a downsizer contribution to super provided you meet the eligibility criteria.
Before January 1, you had to be 60 or older. And when the former Coalition government mixed housing affordability with superannuation policy and introduced this contribution in 2018, the minimum age was 65.
The reduction in minimum age gives eligible people the opportunity to get more into super earlier. So they should end up with more for retirement given the power of compound interest.
But just because you may be able to make a downsizer contribution – now at a younger age – doesn’t necessarily mean you should. Depending on your circumstances, you could be better off waiting.
And be aware that if you’re under 65, a downsizer contribution (like any contribution) will be “preserved” until you meet a condition of release – generally retirement.
If you sell your home and end up with surplus cash, contributing it to superannuation is compelling because of the tax benefits.
How it works
You could make a non-concessional (after-tax) contribution and if you need to reduce any capital gains tax (CGT) arising from the sale because the property wasn’t your home for the entire time, you might be able to claim a deduction for a personal contribution – making it a concessional contribution.
But you cannot make a non-concessional contribution if the total amount you had in super – your total superannuation balance (TSB) – at June 30, 2022 was $1.7 million or more. This threshold is increasing to $1.9 million this June 30 for the financial year ending June 30, 2024.
Normally, you cannot make voluntary contributions to super once you’ve passed 28 days after the end of the month in which you turn 75.
So, you cannot contribute if you’re over a certain age or you’ve got too much in super.
This is where a downsizer contribution comes in handy as it gives you the opportunity to boost your super even if you’re otherwise ineligible to contribute. It is not treated as a non-concessional contribution and therefore doesn’t count towards this cap and can be made regardless of how much you have in super.
Bigger, not smaller
Don’t let the name fool you. A downsizer contribution may be made where you’ve sold your home to buy a bigger one – if in fact you buy another property at all. You could be moving into your investment property, holiday home or even into aged care. You don’t even need to have sold the place you’re living in – you could have sold another property that was once your home.
Making a downsizer contribution must arise from the disposal of a property in Australia that was owned by you or your spouse for a continuous period of at least 10 years.
Importantly, the property must qualify – or for a home acquired before September 20, 1985, would have qualified – for the CGT main residence exemption, but it doesn’t have to be your main residence when you sell it.
Each member of a couple may be eligible to make a downsizer contribution even if only one is on title. But the spouse not on title must still meet the requirements, including having lived in the property.
The contribution, which must be made within 90 days of change of legal ownership, is the lesser of the sale proceeds or $300,000 per person. So, a couple may be able to contribute up to $600,000.
While you may be eligible to make a downsizer contribution, there’s a lot to consider before jumping in.
The appeal of a downsizer contribution is somewhat offset by the ability to make non-concessional contributions to age 74, but it’s extremely attractive if you’re aged 75 or more or your TSB prevents you either making after-tax contributions or using the bring-forward rule.
When to watch out
For senior Australians receiving the age pension, your home is an exempt asset but amounts in super are “deemed” under the income test and counted under the asset test. A downsizer contribution could reduce, even eliminate, your pension.
Self-funded retirees need to consider the Commonwealth Seniors Health Card. Starting a pension from a downsizer contribution will result in loss of the card – which provides benefits including cheaper medicines under the Pharmaceutical Benefits Scheme – where deemed income from that pension and other assessed income exceeds $90,000 a year for singles and $144,000 for couples. Retaining the contribution in accumulation phase will not affect the card.
If you’re younger, you may need to consider when to use a downsizer contribution – especially where you might end up accumulating a lot in super. Once you’ve made a downsizer contribution, you cannot make another one from the sale of another home – you only get one bite at the apple.
So, if you’ve sold your home and make a downsizer contribution now, you will be unable to make another one in the future when it could really be useful because your TSB at that time prevents you from contributing.
A downsizer contribution increases your TSB and if your TSB in the future is more than the general transfer balance cap (TBC) at the time, then you will not be able to make a non-concessional contribution. The general TBC dictates the TSB in the test for non-concessional contributions.
On the other hand, if you make a non-concessional contribution now (instead of a downsizer contribution) and in the future your TSB is more than the general TBC at the time, you may be able to make a downsizer contribution from the sale of another home.
So, if there’s a possibility of qualifying in the future, it could be worthwhile saving the opportunity to make a downsizer contribution until then, assuming the rules don’t change by then.
If you’re at the younger end of the scale, there’s every chance you could qualify as the average time of owning a home is 11 years.
Of course, you don’t have to worry about all this if the amount you’ll have in super will never be more than the general TBC.
But say you inherit your spouse’s super after your spouse’s death – as a death benefit pension – which increases your TSB to the point you’re ineligible to make a non-concessional contribution, then a downsizer contribution could be useful.
So you may want to “keep your powder dry” for when it may really come in handy.
This article was first published by Colin Lewis of Fitzpatricks Private Wealth.
Subscribe to our newsletter