As each year passes, we often look for ways to boost our super savings. However, the strict limits on contributions to super make it challenging to significantly increase super balances later in life. The exception here is a downsizer contribution, for those aged 65 and over, which lets you direct funds from the sale of your home into super in a tax-effective way that doesn’t affect the other contribution caps.
A Quick snapshot
Downsizer contributions came into play from 1 July 2018. The intention of the legislation is to encourage retirees to move out of substantial houses and free up housing stock, whilst boosting super balances.
The downsizer measure allows individuals 65 years or over to make one or more super contributions (called ‘downsizer contributions’) from the proceeds of selling their main residence, up to $300,000 each.
Who is eligible?
- You must be aged 65 or over
- You must make the contribution within 90 days after receiving proceeds from the sale of your home
- The property must be your main residence, which you’ve held for 10 years prior to the sale
- The disposal of the dwelling must have qualified (or would have qualified) for the main residence Capital Gains Tax (CGT) exemption in whole or part
- You have not previously made downsizer contributions in relation to an earlier disposal of a main residence.
A key benefit of this ruling is the ability to invest sale proceeds in the concessionally taxed super environment when over age 65, without having to meet the work test. In addition, concessional and non-concessional contribution caps do not apply.
However, retirees need to consider the impacts on their social security entitlements and possibly aged care fees, as funds invested in super under these rules are assessed as financial investments.
Strategy considerations
Multiple residences
Where an individual owns more than one property that has at some point been their main residence, it may be important to consider the CGT implications of selling a particular property.
Total Super balance
There are restrictions around contributing to Super if your balance exceeds $1.6 million; however downsizer contributions are exempt from this cap.
Downsizer contributions cap
For couples, each spouse may make a maximum downsizer contribution of $300,000. This means a couple may invest up to $600,000 of sale proceeds in super between them. These contributions are not tax deductible.
Aged Care
If you are planning to sell the main residence and are already in or entering aged care, it is important to consider the impact of any Centrelink benefits and the impact on ongoing costs of care.
So, depending on each individual’s personal situation, having more money in super, rather than a main residence may increase the ongoing cost of aged care and potentially reduce social security entitlements.
Let’s look at an example
Andrew and Vicki are spouses who are both age 67. They sell their main residence which was owned by Andrew for $2 million. The settlement date of the sale is 1 July 2019.
Andrew has owned the main residence for more than 10 years immediately prior to the sale, so he passes the 10-year ownership requirement in his own right. Vicki also passes the 10-year ownership requirement because Andrew owned the property for more than 10 years immediately prior to the sale.
The property is a qualifying main residence for Andrew since he qualifies for the CGT main residence exemption upon sale. It is also a qualifying main residence for Vicki, as it is her main residence, and had she owned the property she would have been eligible for the CGT main residence exemption.
Andrew and Vicki may each make one or more downsizer contributions (to one or more of their own super funds) of no more than $300,000 each. These contributions would have to be made within 90 days of 1 July 2019.
Andrew and Vicki then purchase another property in Vicki’s name which they live in as their main residence. Upon the sale of this property several years later, neither Andrew or Vicki could make a downsizer contribution since they have both made downsizer contributions in relation to another main residence in the past.
Where can you find out more?
We understand planning for your future or a loved one’s can be a daunting task, that’s why we recommended that you seek specialist wealth management advice. Before proceeding with a downsizer contributions strategy, your Advisor will consider the potential tax, social security and aged care implications. We may assist with a full assessment so you may maximise your financial outcomes.
