Downsizer contributions offer a unique opportunity for Australians over 55 to boost their superannuation savings. This strategy allows eligible individuals to contribute up to $300,000 from the proceeds of selling their home into their super fund without the usual restrictions.
Below we explore the key aspects of downsizer contributions, examine some practical examples and outline the pros and cons of this strategy.
Eligibility criteria
To make a downsizer contribution, you must meet the following requirements:
- Age
You must be 55 years or older at the time of the contribution. - Property ownership
You or your spouse must have owned the home for at least 10 years before the sale. - Property type
The home must be in Australia and cannot be a caravan, houseboat or mobile home. - Capital gains tax
The property must have been at least partially eligible for the main residence capital gains tax exemption. - Timing
The contribution must be made within 90 days of receiving the sale proceeds.
Contribution limits and rules
- The maximum contribution is $300,000 per person or $600,000 per couple.
- The contribution amount cannot exceed the total proceeds from the sale of your home.
- Downsizer contributions don’t count towards your annual contribution caps.
- There’s no upper age limit or work test requirement.
Examples of downsizer contributions
Let’s look at some examples to illustrate how downsizer contributions work in practice.
Example 1
Maximum contribution for a couple
Mitch (58) and Karen (56) sell their family home for $900,000. They can each contribute the maximum of $300,000 to their respective super funds (total of $600,000).
Example 2
Contribution limited by sale price
Bruce (62) and Donna (60) sell their home for $500,000. They can contribute a total of $500,000 between them. They can decide to split it evenly, contributing $250,000 each to their super funds, or one party contributes $200,000 and the other $300,000.
Note: the total contributions cannot exceed the sale price of the home.
Example 3
Single person contribution
Joanne (65) sells her home for $750,000. She can contribute up to $300,000 to her super fund as a downsizer contribution even though the sale price exceeds this amount.
Example 4
Partial property sale
Peter (57) and Wendy (55) sell 20% equity in their $500,000 home to one of their children, receiving $100,000. They can make a downsizer contribution of up to $100,000 between them, despite retaining ownership of the property.
If they decide to sell more of the ownership interest in the property in the future, they will not be eligible to make another downsizer contribution as they can only access the scheme in relation to one disposal of an ownership interest in this or any other home.
Example 5
Contribution below the maximum
Tom (70) sells his home for $450,000. Although he’s eligible to contribute up to $300,000, he decides to contribute only $200,000 to his super fund and use the remaining funds for other purposes. NOTE: It is not compulsory to contribute to the limit.
Example 6
Contribution with existing high super balance
Chris (59) has a super balance of $1.8 million. She sells her home for $700,000 and can still make a downsizer contribution of up to $300,000 despite her high existing balance.
These examples demonstrate the flexibility of downsizer contributions in various scenarios.
Remember, this strategy can be a powerful way to boost your retirement savings, however it’s essential to consider your individual circumstances and seek professional advice before proceeding.
To round out our discussion on downsizer contributions, let’s examine the pros and cons of this strategy.
This balanced view will help you make an informed decision about whether a downsizer contribution is right for your situation.
Pros of downsizer contributions
- Boost super balance
Allows you to inject a significant amount into your super to potentially increase your retirement income. - No contribution caps
Downsizer contributions don’t count towards your annual concessional or non-concessional contribution caps. - No age limit
You can make a downsizer contribution even if you’re over 75 when other contribution types are typically restricted. - No work test
There’s no requirement to be working to make this contribution. - No total super balance restriction
You can contribute regardless of your existing super balance. - Tax-free component
The contribution forms part of the tax-free component in your super fund that can be beneficial for estate planning. - Potential for better lifestyle
Downsizing can lead to reduced home maintenance costs and a more manageable property.
Cons of downsizer contributions
- One time opportunity
You can only make a downsizer contribution once so timing is crucial. - Potential impact on Age Pension
Increasing your super balance may affect your eligibility for the Age Pension or reduce your entitlement. - Locked into super
Once contributed, the funds are subject to superannuation preservation rules and will potentially limit access. - Property market risks
The success of the strategy depends on property market conditions at the time of sale. - Emotional considerations
Selling the family home can be emotionally challenging and may not suit everyone. - Complexity
The rules around downsizer contributions can be complex and will potentially require professional advice. - Limited by sale proceeds
The contribution amount is capped at $300,000 per person or the sale proceeds, whichever is lower. - Time limit
The contribution must be made within 90 days of receiving the sale proceeds. This may create pressure to act quickly.
Potential future policy changes
Government policies around superannuation and downsizer contributions may change in the future.
By weighing these pros and cons against your personal circumstances, financial goals and retirement plans, you’ll be better equipped to decide if a downsizer contribution aligns with your overall strategy