20 December 2019
By Colin Lewis
If you’re aged 65 or more and sell your home, you may be able to contribute some, or all, of the sale proceeds into superannuation. Making what is known as a ‘downsizer contribution’ is an opportunity to top-up your super even if you’re normally ineligible to contribute due to your age, work status or the amount you’ve got in super.
But don’t let the name fool you. A downsizer contribution may be made even where you’re selling your home to buy a bigger one, if in fact you buy another place at all – you could be moving into your investment property, or holiday home, or even into aged care. You don’t even have to sell the place you’re living in – you could be selling another property that was once the family home.
Whilst downsizer contributions have been around since July last year, lots of people have been getting it wrong and the Australian Taxation Office (ATO) is on the trail of rule breakers. So, it’s important to get it right.
To be eligible 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.
The 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. It doesn’t apply to the disposal of houseboats, caravans or other mobile homes.
Importantly, the property must have qualified – or for a home acquired before 20 September 1985, would have qualified – in full or part for the capital gains tax (CGT) main residence exemption, but it doesn’t have to be your main residence at the date of disposal.
If you have more than one qualifying property, you can choose which one to sell – but be mindful of any potential CGT and the restriction that a downsizer contribution can only be made with proceeds from one eligible property.
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.
It’s critical that you notify your super fund that it’s a downsizer contribution before or at the time of the contribution, and you cannot claim a personal tax deduction for it.
The beauty of making a downsizer contribution is that you do not have to satisfy the age criteria or work test.
Currently, if you’re aged 65 to 74, you can only make voluntary contributions if you satisfy the work test – working 40 hours in 30 days – or you satisfied the work test last financial year and had no more than $300,000 in the superannuation system at 30 June 2019 – a total super balance (TSB) test. From age 75, only mandated employer contributions can be made, e.g. Superannuation Guarantee contributions. However, a downsizer contribution may be made by anyone aged 65 or more.
Downsizer contributions are not treated as non-concessional contributions (NCCs) and therefore do not count towards the NCCs cap and are not subject to the $1.6 million TSB test, i.e. you may contribute even if you have more than $1.6 million in super. However, a downsizer contribution will be included in your TSB which may impact your ability to make future NCCs.
Whilst you may be eligible to make a downsizer contribution, there’s a lot to consider before jumping in.
In so many ways this government initiative – promoting housing affordability – benefits the wealthy. They’re the ones most likely to use the opportunity to make a downsizer contribution to their advantage.
Self-funded retirees with income and assets precluding them from receiving any means-tested government benefits who are planning on selling their home and wishing to maximise their super are likely to benefit most from making a downsizer contribution.
The vast majority of senior Australians receive some form of Age Pension. Few will want to see their income drop by selling their home and putting the proceeds into super.
The home is an exempt asset when it comes to the Age Pension. However, 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 social security/DVA 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. Starting 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 $55,808 for singles, $89,290 for couples and $111,616 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!
When it comes to tax, make sure the tax paid, if any, on earnings including capital gains on investments held in super arising from a downsizer contribution is going to be less than what you’ll pay if those investments are held in your personal name. The effective tax-free threshold for people aged 65 or more is $33,088 for singles, $29,783 for couples (each) and $32,088 for couples separated by illness (each). Accordingly, you can have a sizeable amount invested outside super before paying tax – you don’t need to have all your investments in super to enjoy a tax-free retirement.
According to the ATO, in the first year of operation, i.e. 2018/19, just under 5,000 people made downsizer contributions to the value of $1.1 billion.
So, if you’re selling the house and end up with a surplus to invest then super may be the way to go, but only if it works for you.
This article originally appeared on The Australian Finacial Review