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Downsizing your home? Here’s how to understand the downsizer contribution.

July 5, 2023

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.

Benefits of the downsizer contribution

There are several benefits to utilising the downsizer contribution in Australia. This contribution offers a unique opportunity for retirees to potentially increase their superannuation balance, but it also provides a range of tax benefits and exemptions.

  • Tax Benefits: Downsizer contributions are treated as non-concessional contributions, which means that they are not taxed like other contributions. As a result, they can be a tax-effective way to boost your superannuation balance.
  • Boost Retirement Savings: Downsizer contributions allow you to boost your savings by making a one-time payment to your superannuation fund.
  • Work Test: Unlike other contributions, downsizer contributions do not require you to meet the work test. This means that you can still make a contribution to your superannuation fund even if you are no longer working.
  • Estate Planning: Downsizer contributions can be a useful tool for estate planning. By contributing more to your superannuation fund, you can ensure that your beneficiaries receive a larger inheritance.
  • Relocation Opportunity: Downsizing a property opens up different avenues to relocate, whether that be closer to family, amenities or even a sea change.
  • Reduction in overall household bills: Downsizing to a smaller property may reduce your utility bills, travel expenses and rates depending on where you relocate to. This may provide more income for hobbies or another way to contribute to your superannuation savings. Home maintenance costs will also be reduced due to downsizing your home.

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.

FAQ about downsizing

How does it impact the Age Pension?

If you qualify or are hoping to qualify for the Age Pension, the impact of selling an asset needs to be considered. The value of your main residence is excluded from the assets test, however, if it is sold, and some of the proceeds added to your super, that value will then be assessed and may reduce your age pension benefits.

How do I make a downsizer contribution?

If you are eligible, you’ll need to complete a downsizer contribution form and provide this either before or together with your contribution cheque, to your complying superannuation fund so it can be correctly classified. The form is available from the ATO website. It’s important to be aware of the timing of your contribution to super. The contribution must be made within 90 days of receiving the proceeds of a sale (a longer permitted period), which is usually the date of settlement.

How do I know if downsizing is the right choice for my retirement plans?

As you near retirement and find that your family home no longer suits your needs, downsizing can provide a dual benefit of generating extra cash and simplifying your life.

The maintenance of larger homes can be costly, downsizing to a smaller property can assist in reducing costs and adding more savings to your retirement.

There is an emotional aspect to be mindful of when considering leaving the family home, having support systems in place and careful planning can help with the transition to a new living arrangement.

Consult a real estate agent about housing market conditions, it may not be the right time to sell or buy, and they will help you know if entering the market is a wise choice. This may also help you to understand if your property is in the right shape to be sold, being mindful of the cost of upgrades.

How can I prepare for downsizing for retirement?

Determine your budget: Determine how much you can afford to spend on a new home by assessing your current and future financial situation. Consider factors such as your retirement income, savings, and other expenses, like healthcare costs.

Research the housing market: Research the housing market in the area where you’re considering downsizing to get a sense of what’s available and at what price. This will help you identify homes that fit within your budget.

Calculate the costs of selling your current home: Selling your current home will likely involve real estate commissions, closing costs, and other fees. Calculate these costs to get a sense of how much you’ll have left over after selling your home.

Plan for moving costs: Downsizing typically involves moving, which can be expensive. Plan for the cost of hiring movers or renting a moving truck, and consider other expenses, such as temporary housing or storage fees.

Factor in taxes: Downsizing may (but in most cases won’t) affect your tax situation, so it’s important to consider how it will impact your tax liability. Consult with a financial advisor to understand the tax implications of downsizing for your specific situation.

Plan for potential expenses: Even if you’re downsizing to a smaller home, there may be expenses you hadn’t anticipated, such as home repairs or renovations. Plan for these potential expenses by setting aside some savings.

What are some common mistakes to avoid when downsizing for retirement?

Not planning ahead: Downsizing is a big decision and should not be taken lightly. It’s important to plan ahead and consider all the options available to you.

Underestimating your expenses: Many people underestimate their expenses in retirement and end up with less money than they need. Make sure you have a clear understanding of your expenses, including healthcare costs, before downsizing.

Focusing only on the price: When downsizing, it’s important to focus on the value of the property, not just the price. A cheaper home may end up costing you more in repairs and maintenance in the long run.

Not considering future needs: When downsizing, it’s important to consider your future needs, such as mobility issues or the need for additional space for family visits. Make sure the home you choose will meet your needs for the foreseeable future.

Ultimately, the decision to downsize for retirement will depend on your unique situation and priorities. Consider all the factors carefully and consult with a financial advisor or real estate agent to help you make the best decision for your needs.

At Aurora Wealth we are here to help you get everything you want out of your retirement. Contact us to find out more about anything to do with your retirement and how we can help you get there.

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Micheal is a financial expert with over a decade of experience in the field. Growing up in countryside Victoria, and later moving to Melbourne to pursue higher education, Micheal has since then been working in the financial industry for over 13 years with much of his career spent as a financial advisor. He holds the prestigious Certified Financial Planner designation and is a registered member of the Financial Planning Association of Australia. Micheal is also a dedicated family man and proud father of 3 amazing children. When he isn’t working or spending time with his family, he enjoys outdoor activities such as hiking and camping.

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