Are you over age 65, thinking of a smaller home and interested in releasing some of the capital tied up in your home – perhaps you should consider the downsizer super contribution strategy to boost your super and retirement income?
In the recent superannuation changes, two were delayed until 1st July 2018. These are:
- You can carry forward any unused portion of your $25,000 p.a. concessional super contribution limit for up to five years. Obviously this is more valuable to those with more years ahead within which to utilise it.
- The second change is more generous. A new ‘downsizer super contribution’ (DSC) lets you contribute up to $300,000 each, non-concessionally (no tax deduction) when selling your main residence. It may help relieve miserly super contribution reductions by recent governments and also help reduce your future tax load.
How does this Downsizer super contribution work?
If you’re over age 65 and contract to sell your main residence after 1st July 2018, you can contribute up to $300,000 per person of those sale proceeds into superannuation. You don’t need to buy another home but you can only use this Downsizer contribution once. The usual ‘work test’ for super contributions done after age 65 does not apply. Other eligibility requirements do apply but Downsizer contributions escape the concessional or non-concessional limits. They are included in your total super balance and also in the $1.6m transfer balance cap that applies when you move your super into pension phase.
To be eligible for Downsizer super contributions:
- You, your spouse or former spouse must have an interest in the home for over 10 years. That interest may also include the trustee of your deceased spouses’ estate.
- Your home must be in Australia – not a caravan, houseboat or other mobile home.
- Your downsizer contribution must be made within 90 days of receiving the sale proceeds, unless otherwise approved by the Tax Commissioner.
- When making it, you must give your super fund the ‘downsizer contribution form’.
- You can only make downsizer contributions to your super for one sale but you can make multiple downsizer contributions from the proceeds of a single sale. Downsizer contributions can’t have been made before from selling an earlier main residence.
What if you now receive an Age Pension?
Take care, because disposing of your home and making downsizer super contributions may adversely affect it. The Age Pension means test excludes the value of your home but your super balance is assessable once you’re over Age Pension age. So if you sell your home for a downsizer super contribution, your age pension might reduce or stop completely.
If Downsizer Super Contributions interest you, please call to discuss.
Meanwhile if you’d like a little more detail read on…
So, if you’re over age 65 and contract to sell your main residence after 1st July 2018, you can contribute up to $300,000 per person of those sale proceeds into superannuation. You don’t need to actually buy another home – but the Downsizer opportunity once can only be used once.
Unfortunately, the $300,000 limit does not rise with inflation. Downsizer contributions are not tax deductible.
What if your downsizer contribution is disallowed?
If the Tax Office disqualifies a Downsizer contribution, it can either be treated as a non-concessional contribution (within those limits), or refunded back to you. Self managed super fund trust deeds may need amending to accommodate this new Downsizer contribution.
Practical use of the Downsizer?
Despite the $300,000 per person contribution limit, a couple might not be able to contribute $600,000 ($300k each) because their combined Downsizer contribution can’t exceed the total house sale proceeds. If a couple sold their home for $400,000 (say to move into an aged care), their maximum DSC would be $200,000 each (or perhaps split $300,000 to one and $100,000 to the other, etc). Though Downsizer super contributions are not tax deductible they will form part of the tax-free component of your super.
Imagine you bought a $1m home a little over 10 years ago, sold it after 1st July 2018 for $1.3m and repaid its $1m mortgage. Your capital proceeds were $1.3 million and you have the cash, you are allowed to make downsizer contributions up to $300,000 ($300,000 each if the property is in joint names).
If instead you sold a home for $250,000, your maximum downsizer contribution would be just that $250,000.
A word of warning for Age Pensioners…
Disposing of your home to make downsizer super contributions may adversely affect your Age Pension. They’re subject to an assets test, where your home value is not usually included. But once over Age Pension age, your super balance becomes assessable – pension age is 65 to 67, depending on your birth date. So care is needed as selling your home for a downsizer contribution might reduce or completely stop your age pension. Even so, it may still be a good idea.
Having more superannuation might also affect other government entitlements, which might diminish its appeal for some.
10 year ownership rule
This 10 year rule still applies even if a property was vacant because it was destroyed or knocked down and a new home built; or a replacement property was bought and owned for less than 10 years because the former property was compulsorily acquired. The former property must have been initially acquired at least 10 years before selling the substitute property.
Must Downsizer use the sale proceeds cash?
If you’d like to boost your super but don’t meet the work test over age 65 and have not released any capital from downsizing your home (maybe just moved to a better situation), you could use some other money to make a lump sum contribution (if you have spare cash).
If Downsizer super contributions interest you, just ring us at 7120 9300 to discuss it.
Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.