Ensure you get it right when making a “downsizer contribution”
By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
The Australian housing market has gone through the roof – encouraging sellers to return to the market.
If you’re selling and not buying another property, the question is what to do with the sale proceeds. Contributing some, or all, of it into superannuation is compelling due to its tax-effectiveness.
You may be able to make a normal after-tax non-concessional contribution (NCC) and if you need to reduce capital gains tax (CGT) arising from the sale, you might be able to claim a deduction for your personal contribution – making it a concessional contribution.
But you cannot make an NCC if the total amount you had in the super system – your total superannuation balance (TSB) – at 30 June 2021 was $1.7 million or more.
Also, getting money into superannuation can be problematic this financial year once you’ve reached age 67 as you must meet the work test – 40 hours of gainful employment in 30 days – to make voluntary contributions. This applies up until 28 days after the end of the month in which you turn 75 – after that, you cannot contribute.
If you don’t meet the work test, you may still be able to contribute this financial year provided you met the work test in 2020-21 and had a TSB at 30 June 2021 of less than $300,000.
The work test is being removed for NCCs (and salary sacrifice contributions) for people aged 67 to 74 from 1 July 2022.
So, you cannot contribute if you’re over a certain age and not working or you’ve got too much in super. This is where making a ‘downsizer contribution’ is handy as it gives you the opportunity to boost your super even if you’re otherwise ineligible to contribute due to age, work status or TSB.
Downsizer contributions are not treated as NCCs and thus do not count towards the NCCs cap and are not restricted by your TSB – you may make a downsizer contribution even if you have more than $1.7 million in super.
Don’t let the name fool you. A downsizer contribution may be made where you’ve sold your home to buy a bigger one, if in fact you buy another property at all – you could be moving into your investment property, or holiday home, or even into aged care. You don’t even need to have sold the place you’re living in – you could have sold another property that was once your home.
To make a downsizer contribution you must be aged 65 or more at the time of making the contribution, which generally must be within 90 days of change of legal ownership – i.e. property settlement.
From 1 July the minimum age is reducing to 60.
If you are selling your home and wish to take advantage of this change you need to ensure settlement is not before April as the contribution must be made within 90 days of change of legal ownership.
Be aware that if you end up making a downsizer contribution from July and are under age 65, the contribution will be locked up, i.e. preserved, until you meet a condition of release – an event allowing you to access your benefits.
With the work test going, the attractiveness of a downsizer contribution is somewhat offset by the ability to contribute for longer, but it remains extremely worthwhile if you are aged 75 or more, or your TSB prevents you either making NCCs or using the NCC bring-forward rule.
Making a downsizer contribution is not just about your age and timing of the contribution – it must arise from the disposal of a property in Australia that was owned by you or your spouse for a continuous period of at least 10 years.
Importantly, the property must have been your home – it must have qualified (or for a home acquired before 20 September 1985, would have qualified) in full or part for the CGT main residence exemption, but it doesn’t have to be your main residence at the date of disposal.
Each member of a couple may be eligible to make a downsizer contribution even if only one is on the title, but the spouse not on title must personally meet the other requirements, including having lived in the property.
The amount of the contribution will be the lesser of the sale proceeds or $300,000 per individual. So, a couple may be eligible to contribute up to $600,000.
You must tell your super fund that it’s a downsizer contribution when making it and you cannot claim a tax deduction for it.
Whilst you may be eligible to make a downsizer contribution, there’s a lot to consider before jumping in.
The vast majority of senior Australians receive some form of Age Pension. The home is an exempt asset but amounts in super are ‘deemed’ under the income test and counted under the asset test. Thus, a downsizer contribution could reduce, even eliminate, any means-tested government income support payments.
Even self-funded retirees may steer clear of making a downsizer contribution if it means losing their Commonwealth Seniors Health Card – which provides a range of benefits including cheaper medicines under the Pharmaceutical Benefits Scheme. Commencing an account-based pension from a downsizer contribution will result in loss of the card where deemed income from that pension together with other assessed income pushes you over the income threshold – currently $57,761 for singles, $92,416 for couples and $115,522 for couples separated by illness. However, if the contribution is retained in the taxable accumulation phase, there may be no impact on this card.
Nobody likes losing government benefits!
So, if you’re selling a property that was your home which you (or your spouse) owned for at least 10 years and end up with a surplus to invest then super may be the way to go, but only if it works for you.
With the reduction in age to 60 from 1 July, make sure you don’t settle too early and miss out on being able to make a downsizer contribution.
*This information is prepared by Fitzpatricks Private Wealth Pty Ltd (Fitzpatricks) ABN 33 093 667 595 AFSL No. 247 429 and, where relevant, its related bodies corporate. The information in this publication is of a general nature only. All information has been prepared without taking into account your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a financial adviser, whether the information is appropriate for you.