Are you looking to downsize your home and boost your retirement savings? If so, the downsizer contribution could be the solution. Introduced in 2018 this is a superannuation contribution option for Australians and provides an opportunity for retirees to increase their superannuation balance.
The contribution allows people 55 and over to add $300,000 from the sale of their primary property to their superannuation.
There are some factors to consider including tax implications, eligibility and how this contribution can be a valuable addition to your retirement strategy. Find out more about retirement advice.
What is the Downsizer Contribution?
Many of us think about the amount of money we will need to comfortably retire, and there are many incentives and ideas on how to boost your retirement fund. Here’s the article on how much money do I need to retire.
The downsizer contribution is a government incentive and from 1 January 2023, if you’re aged 55 years or older you may be eligible to make a downsizer contribution of up to $300,000 to a complying super fund. (Most superannuation funds will accept eligible downsizer contributions unless you are in a defined benefit fund.) This contribution is from the proceeds of the sale of your primary residence, which needs to have been owned for 10 years or more. Prior to 1 January 2023, you had to be 60 years or older to make a downsizer contribution.
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 $1.9 million, or if they 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 55 years or older from 1 January 2023, 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 do this, the sale price is key, as your couple’s contributions cannot be more than the total sale price of the property.
Contribution limits and restrictions
- Age Limit: You must be at least 55 years old to be eligible to make a downsizer contribution.
- Property Requirements: The property you are selling must have been your main residence at some point in time, and you must have owned it for at least 10 years.
- Contribution Limit: The maximum downsizer contribution is $300,000 per person or $600,000 per couple. This amount is not indexed to inflation and is a lifetime limit.
- Time Limit: You must make the downsizer contribution within 90 days of receiving the proceeds from the sale of your property.
- Non-Concessional Cap: Downsizer contributions do not count towards the non-concessional contributions cap, which is currently $110,000 per year, or $330,000 over three years if you are eligible to use the bring-forward rule, as long as your superannuation balance does not exceed $1.9 million dollars.
- Taxation: Downsizer contributions are not tax-deductible and are made using after-tax dollars. However, the earnings on the contributions are taxed at the concessional rate of 15%. Additionally, if converted to an account-based pension at or in retirement, earnings will be tax free.
- Notify your superannuation fund: You need to notify your superannuation fund that you intend to make a downsizer contribution and provide them with the necessary documentation. It is important that the downsizer form is received by the fund either before or at the time the contribution is made for it to be an eligible downsizer contribution.
Before making any contributions to your superannuation accounts, it is crucial to keep in mind that limits and restrictions may change at any time. To ensure that you are making the right move, contact us today.
Tax implications to consider
In Australia, there are several tax considerations associated with downsizing for retirement. Here are a few key things to keep in mind:
- Capital Gains Tax (CGT): When you sell your home and make a downsizer contribution, you may be subject to CGT (if the property was not your home for a period of time). However, there are some exemptions and concessions available that can reduce or eliminate the CGT liability. It’s important to seek advice from a tax professional to understand your CGT obligations.
- Centrelink Benefits and the Age Pension: Downsizer contributions may affect your Centrelink benefits, as they are considered an asset for the purposes of the assets test. This means that if you contribute a large amount to your superannuation fund, it could reduce your Centrelink benefits.
- Inheritance: Whilst true in general, the downsizer contribution would be tax free to beneficiaries. However, it’s crucial to note that whilst the downsizer contribution itself may be exempt from tax, any earnings generated from that contribution have the potential to accumulate and become taxable. This aspect must be taken into consideration, particularly in terms of the implications it may have on the inheritance of your superannuation balance by your beneficiaries.
- Withdrawal Restrictions: Once you make a downsizer contribution, you will not be able to withdraw the funds until you meet a condition of release, such as reaching preservation age and/or retiring. This means that downsizer contributions may not be suitable for those who need access to their funds in the short term.
- Stamp Duty and other taxes: If you are buying a new home, you may be required to pay stamp duty. However, some states in Australia offer stamp duty concessions for seniors who downsize. Other taxes to consider when downsizing for retirement in Australia include transfer duty, land tax, and council rates.
Find out more about tax criteria from the ATO.