Empty nesters and older Australians often consider selling the family home as they prepare for a simpler life in retirement. If you're planning on selling the family home and using the sale proceeds to boost your retirement nest egg, making a downsizer contribution could be one of the superannuation strategies available to you.
Keep reading as we cover the pros and cons of downsizer contributions and whether you may be eligible.
Downsizer contributions are contributions made to your superannuation fund, of up to $300,000, from the sale proceeds of your primary residence. The name comes from the idea of downsizing — selling your property to move into something smaller or more appropriate for your next stage of life.
As of the 1st of January 2023, you must be at least 55 years of age to be eligible to make a downsizer contribution. The property you've sold (or partially sold) must have been your primary Australian residence that you owned for at least ten years.
Other eligibility criteria and downsizer rules that you must satisfy, include:
You must not have previously made a downsizer contribution to your super fund.
You must provide your super fund with the 'downsizer contributions into super form' either before or at the same time as you make the contribution.
You must send the money to your super account within 90 days of the settlement date.
Did you know: If you are a couple, each member of the couple can contribute up to $300,000 from the sale, or part sale, of your home to your respective superannuation accounts! And the good news is, there is no upper age limit to make a downsizer contribution!
Increasing your superannuation balance by up to $600,000 (as a couple) is one of the evident benefits of making a downsizer contribution. We unpack more on the pros and cons below.
Aside from providing an immediate boost to your total superannuation balance, some of the pros to downsizer contributions include:
Contribution caps not affected
Usually, to make contributions to your super, you must remain within the contribution cap limits and be wary of the superannuation transfer cap limits. Neither apply to eligible downsizer contributions.
Tax-free contribution
Downsizer super contributions are tax-free, meaning that you will not pay the superannuation contributions tax rate of 15%. Also, the contribution will count towards the tax-free component of your super fund (along with other non-concessional super contributions), meaning that you may have better accessibility to retirement income as you transition into the retirement phase (such as moving to an account-based pension).
Remember: investment earnings within your super are taxed at 15% while in the accumulation phase, and 0% while in pension phase.
No maximum age limit
There is no maximum age limit to be eligible to make a downsizer contribution.
A downsizer contribution may affect the age pension
While generally, the sale of your home will go towards your assets test for age pension eligibility, it's important to check with Services Australia how making downsizer contributions might affect your age pension. For example, you may be deemed as receiving income from a deprived asset, which will affect your income test.
No further tax deductions
A downsizer contribution is considered an after tax contribution, therefore you cannot claim any tax deduction on the contribution. If you're a high income earner with a high marginal tax rate, other contribution strategies may entitle you to claim the deduction against your income, depending on your financial situation.
Some properties are excluded
Caravans, mobile homes, and houseboats are not eligible properties for proceeds of sale to be contributed as a downsizer contribution.
The downsizer rules state that the home must have been owned by either yourself or your spouse for at least ten years, and that the disposal must be exempt or partially exempt from capital gains tax.
The downsizer contribution rules do allow you to use the sale proceeds, or partial sale proceeds of an investment property, provided that the property is exempt from CGT under the 'main residence' provision.
Like most big decisions regarding your retirement savings, discussing which strategy will be in your best interest with a financial adviser can ensure that you're making the best choice for your personal objectives. Professional advice can also provide clarity over the downsizing rules. If you're already looking to downsize and sell your home, it could be a good time to weigh up the pros and cons of the downsized contribution.
You cannot make multiple downsizer contributions to your personal super fund, however, if you're a member of a couple, you can both contribute up to $300,000 to your respective super funds. If you're both members of the same SMSF, you can both make a contribution toward your member balance.
There is no particular fee for making a downsizer contribution, or lodging a downsizer form, however, you will understandably incur expenses related to the property sale, and of course, any fees for the financial, taxation or legal practitioners that you seek professional advice from, along the way.
Whether you've made a major contribution to your self-managed super fund, or are looking to invest the proceeds of the sale of your family home outside the superannuation environment, HALO Technologies is committed to building world-leading investment technology for all investors.
Discover more about how to make the best investment towards your golden years, today.
All information contained in this publication is provided on a factual or general advice basis only and is not intended or be construed as an offer, solicitation, or a recommendation for any financial product unless expressly stated. All investments carry risks and past performance is no indicator of future performance. Before making an investment decision, you should consider your personal circumstances, objectives and needs and seek a professional investment advice. Opinions, estimates and projections constitute the current judgement of the author as at the date of this publication. Any comments, suggestions or views presented in this communication are not necessarily those of HALO Technologies, Macrovue or any of their related entities (‘we’, ‘our’, ‘us’), nor do they warrant a complete or accurate statement.
The opinions and recommendations in this publication are based on a reasonable assessment by the author who wrote the report using information provided by industry resources and generally available in the market. Employees and/or associates of HALO Technologies or any of the other related entities may hold one or more of the investments reviewed in this report. Any personal holdings by HALO Technologies or any of the other related entities employees and/or associates should not be seen as an endorsement or recommendation in any way.
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