Zest! / RETIRING AND AFTER WORK

A super option for downsizers

I'm not selling my family home yet, but when I do, I will consider making a downsizer contribution into super.

By John Wasiliev - 4 min read

A little about John

John Wasiliev writes on personal finance specialising in superannuation and self managed super funds, managed funds and trusts.

 

During my working life, I’ve owned three family homes. In the two before my current home (where my wife and I have lived for more than two decades now), I was a first home buyer in the first instance and a changeover buyer in the second, which is how anyone who has owned a home before upgrading to another is described. 

In the first home and first changeover, we made healthy profits when we sold the houses thanks to the booming property market. We did not realise these profits however, because they all went into buying or upgrading our next home. 

The size is right, for now 

Our current home still suits us even though we are now empty nesters. It can accommodate our family when they come to visit with plenty of room for them to stay. But one discussion my wife and I had when we reviewed our wills recently was whether there will be a time when where we live is more than what we need and can cope with. 

This has led to a discussion about whether we should downsize our home when we make our next changeover, although that’s something we won’t be doing in a hurry. 

Should we decide to do this in the future, we contemplated whether we should direct some of the capital proceeds that we expect from any sale into our superannuation as a downsizer super contribution.  

A super boost 

Downsizer contributions weren’t around when we made our last changeover. In fact, they have only been on the scene since July 2018.  

It was introduced by the Turnbull Government to encourage older Australians with relatively modest super balances to sell their homes to younger home buyers and give their super a boost by contributing up to $600,000 per couple ($300,000 each). Around 30,000 Australians have made use of the scheme so far.1 

Downsizer contributions won’t count towards the before-tax contribution limit of $27,500 a year or the after-tax contribution limit of $110,000 a year. However, they will count towards your transfer balance cap, which is the limit that applies when you move your super into retirement phase. The contributions will also be considered for determining eligibility for the government Age Pension.  

The benefits of downsizer super contributions are that they allow you to: 

  • include the sale of your family home in your long-term financial plan 
  • add up to $300,000 each as new investments into super 
  • introduce new money into your super no matter how much you already have 
  • allow a partner who has no super to start an account in their name with this contribution 
  • minimise tax – because there is no tax on downsizer contributions on the way into super, and if you’re above age 60 when you withdraw these amounts, these payments will be tax-free 
  • tax-effectively manage your estate – where super (inclusive of downsizer contributions) is inherited by adult children, this money is likely to be tax free. 

Like many interesting things that have to do with super, the downsizer strategy also comes with a set of eligibility criteria. For example, the entitlement is now available to people who sell a home after the age of 60.The proposal to further reduce this age limit to 55 passed parliament very recently, so if you’re aged between 55 and 59, this option will be available to you in the near future.(See breakout for more). 

Downsizer contributions are special in that you can make them at any time you satisfy the various conditions—and unlike other contribution types, there is no upper age limit. This means you can make contributions to your super from the proceeds of the sale of a home when you are in your late 70s, or even older.  

Whether this strategy is right for myself and my wife when we reach that decision point will be influenced by our circumstances at the time. While we’re happy where we are for now, it’s nice to know we will have that option in future.  

Eligibility criteria 

Here are the conditions for making a downsizer contribution: 

  • The home must be in Australia, has been owned by you or your spouse for at least 10 years and the disposal must be exempt or partially exempt from capital gains tax. 
  • You have not previously made a downsizer contribution to your super from the sale of another home or from the part sale of your home. 
  • You can make downsizer contributions on only one home. That said, where a home is owned by one member of a couple, it is possible for the spouse who did not have an ownership interest to have a downsizer contribution made to their super, provided they meet all the other requirements like being the right age. 
  • Prior to (or at the same time) as making a downsizer contribution, you must provide your super fund with the Downsizer contributions into super form. 
  • Contributions must be made to your super fund within 90 days of receiving the proceeds of the sale. In some circumstances, you may be able to request an extension where a delay has been caused by factors outside your control, like ill health or a death in the family. 
  • The total contribution amount can't be greater than the total proceeds from the sale of your home. For example, if the sale proceeds are $500,000, the maximum contribution cannot exceed $500,000 in total. This means you can choose to contribute half ($250,000) each, or split it, say $300,000 for one partner and $200,000 for the other. 

1 Coalition Federal Budget 2021–22; and Department of Social Services. (25 November 2022) Pensioners receive added incentive to downsize [Media release]. Retrieved https://ministers.dss.gov.au/media-releases/9781 

The views and opinions expressed in this article are those of the author and do not purport to reflect the views and opinions of Russell Investments.

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