By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
Ensure you get it right when making a ‘downsizer contribution’.
If you sell your home and are aged 55 or more, you can make a ‘downsizer contribution’ to super provided you meet the eligibility criteria.
Prior to 1 January, you needed to have been 60 or more. And when the former Coalition Government mixed housing affordability with superannuation policy and introduced this contribution in 2018, the minimum age was 65.
The reduction in minimum age gives eligible people the opportunity to get more into super earlier than would have otherwise been the case – so, they should end up with more for retirement given the power of compound interest.
But just because you may be able to make a downsizer contribution – now at a younger age – doesn’t necessarily mean you should. Depending on your circumstances, you could be better off waiting.
And be aware that if you’re under 65, a downsizer contribution (like any contribution) will be ‘preserved’ until you meet a condition of release – generally retirement.
If you sell your home and end up with surplus cash, contributing it to superannuation is compelling due to the tax benefits.
You could make an after-tax non-concessional contribution (NCC) and if you have a capital gains tax (CGT) problem, you might be able to claim a deduction.
But you cannot make an NCC if the total amount you had in super – your total superannuation balance (TSB) – at 30 June 2022 was $1.7 million or more. This threshold is increasing to $1.9 million at 30 June 2023 for 2023-24.
Normally, you cannot make voluntary contributions to super once you’ve passed 28 days after the end of the month in which you turn 75.
So, you cannot contribute if you’re over a certain age or you’ve got too much in super.
This is where a ‘downsizer contribution’ comes in handy as it gives you the opportunity to boost your super even if you’re otherwise ineligible to contribute. It is not treated as an NCC and therefore doesn’t count towards your NCCs cap and can be made regardless of how much you have 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.
Making a downsizer contribution 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 qualify – or for a home acquired before 20 September 1985, would have qualified – for the CGT main residence exemption, but it doesn’t have to be your main residence when you sell it.
Each member of a couple may be eligible to make a downsizer contribution even if only one is on title. But the spouse not on title must still meet the requirements, including having lived in the property.
The contribution – which must be made within 90 days of change of legal ownership – is the lesser of the sale proceeds or $300,000 per person. So, a couple may be able to contribute up to $600,000.
Whilst you may be eligible to make a downsizer contribution, there’s a lot to consider before jumping in.
The appeal of a downsizer contribution is somewhat offset by the ability to make NCCs to age 74, but it’s extremely attractive if you’re aged 75 or more, or your TSB prevents you either making NCCs or using the NCC bring-forward rule.
For senior Australians receiving the Age Pension, your home is an exempt asset but amounts in super are ‘deemed’ under the income test and counted under the asset test. A downsizer contribution could reduce, even eliminate, your pension.
Self-funded retirees need to consider the Commonwealth Seniors Health Card. Starting a pension from a downsizer contribution will result in loss of the card – which provides benefits including cheaper medicines under the Pharmaceutical Benefits Scheme – where deemed income from that pension and other assessed income exceeds $90,000 a year for singles and $144,000 for couples. Retaining the contribution in accumulation phase will not impact the card.
If you’re younger, you may need to consider when to use a downsizer contribution especially where you might end up accumulating a lot in super because once you’ve made a downsizer contribution, you cannot make another one from the sale of another home – you only get one bite at the apple.
So, if you’ve sold your home and make a downsizer contribution now, you will be unable to make another one in the future when it could really be useful because your TSB at that time prevents you from contributing.
A downsizer contribution increases your TSB and if your TSB in the future is more than the general transfer balance cap (TBC) at the time, then you will be unable to make an NCC.
The general TBC dictates the TSB in the test for NCCs.
Whereas if you make an NCC now (instead of a downsizer contribution) and in the future your TSB is more than the general TBC at the time, you may be able to make a downsizer contribution from the sale of another home.
So, if there’s a possibility of qualifying in the future, it could be worthwhile saving the opportunity to make a downsizer contribution until then, assuming the rules don’t change by then – don’t laugh!
If you’re at the younger end of the scale, there’s every chance you could qualify as the average time of owning a home is 11 years – according to the internet which is never wrong.
Of course, you don’t have to worry about all this if the amount you’ll have in super will never be more than the general TBC.
But say you inherit your spouse’s super after they die – as a death benefit pension – which increases your TSB to the point you’re ineligible to make an NCC, then a downsizer contribution could be useful.
So, you may want to ‘keep your powder dry’ for when it may really come in handy.
*The information in this document (information) has been prepared by Fitzpatricks Private Wealth Pty Ltd (ABN 33 093 667 595, AFSL 247 429) (Fitzpatricks). The information is of a general nature only and does not take into account the objectives, financial situation or needs of any person. Before acting on the information, investors should consider its appropriateness having regard to their own objectives, financial situation and needs and obtain professional advice. No liability is accepted for any loss or damage as a result of any reliance on the information.