Downsizing Superannuation Contributions

June 7, 2018
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Many Australian retirees find they want a smaller home, or a home more suited to their empty-nest requirements. For some Australians, selling the family home can be great way to release built-up equity to pay for retirement living expenses or in-home support that will allow them to stay at home longer.

Older Australians are the people targeted by the Government’s new policy (now law) to allow homeowners aged 65 years or over, to downsize their family home and invest the surplus into their super account. Although downsizing and contributing to super is an interesting idea, there are definitely some benefits and dangers – together with a few unknowns – to consider before taking the plunge.

As of July 1 2018, you may be able to take advantage of the option to make a downsizer contribution into your superannuation of up to $300,000 from any proceeds received when selling your home. However, you will first need to be 65 years or older and meet various other eligibility requirements to be able to do so.

Keep in mind that your downsizer contribution is not a non-concessional contribution, meaning that it will not count towards any contribution caps. However, if an individual has a super balance totaling more than $1,6 million, the downsizer contribution can still be made.

Your downsizer contribution also won’t affect your total super balance until such time as your total balance is recalculated to include all contributions (including downsizer amounts), on June 30 at financial year-end. Your downsizer contribution will also count towards your transfer balance cap, which is currently $1,6 million. This cap will apply when super savings are relocated to retirement phase.

You will only be allowed to make downsizing contributions from the sale of one home, and your fund will not be able to be accessed again in the event of a second home being sold. Downsizer contributions will be taken into consideration for determining eligibility for old age pension and they are also not tax deductible. If you sell a home and qualify to make a downsizer contribution, you are not obligated to buy another home.

Eligibility Criteria

You will need to be able to answer “yes” to all of these points:

The funds you are contributing are from the proceeds of selling your home where the sale contract was exchanged on or after July 1 2018
You are 65 or older at the time of making a downsizer contribution – no maximum age limit applies
Your home has been owned by you or your spouse for 10 years or longer before the sale. The period of ownerships is normally calculated from the date of settlement of purchase to the date of settlement of sale
Proceeds (capital gain or loss) from the home’s sale are either partially or fully exempt from capital gains tax (CGT) under the main residence exemption, or would qualify for such exemption if the property was a CGT instead of a pre-CGT asset (acquired before 20 September 1985)
Your home is in Australia and is not a houseboat, mobile home or caravan
You make your downsizer contribution within three months of receiving the sale proceeds, which is normally the date of settlement
You haven’t previously made a downsizer contribution to your super as a result of selling another home
You have provided your super fund with the downsizer contribution from either at the time of or before making your downsizer contribution

Contribution Amounts

Eligible persons may make a downsizer contribution of a maximum of $300,000. Your contribution amount may also not exceed the total proceeds from the sale of your property. If your contract is signed before July 1 2018, you do not qualify.

Exemption of Main Residence

Capital gain or loss proceeds from the sale of your home are either:

Partially or fully exempt from capital gains tax (CGT) under the main residence exemption
Be entitled to such exemption if your property was a CGT instead of a pre-CGT asset (acquired before 20 September 1985)

Timing is Crucial

Your downsizer contribution must be made within three months of receiving the sale proceeds, which is normally at the settlement date. In some cases, a longer period may be negotiated owing to circumstances beyond your control. However, you will need to apply for an extension of time to do so.

Multiple Contributions

Multiple downsizer contributions may be made from the proceeds of a single sale. However, your total contribution amount may not exceed $300,000 or the full proceeds of the house sale minus any other downsizer contributions that have been made by your spouse. Again, all contributions must be made within three months of receiving the sale proceeds, normally by settlement date, unless an extension has been granted.

Non-downsizer Contributions

If it is found that a contribution doesn’t meet the downsizer contribution requirements for eligibility, you, along with your super fund, will be informed.

Once informed, your fund will determine whether the contribution could have been made in a personal capacity under the contributions acceptance regulations.

If a contribution can be accepted, the amount concerned will count towards the appropriate contribution cap. However, if the contribution cannot be accepted, your super fund will return the amount to you.

Misleading and false penalties may apply if it is determined that your downsizer contribution wasn’t eligible and you have incorrectly declared that you were eligible to make the initial contribution.

Making your Downsizer Contribution

Before deciding to make a downsizer contribution, it is essential to:

Find out from your super fund if they accept downsizer contributions
Determine whether you will be eligible to make a downsizer contribution

It is also recommended that you seek professional financial advice regarding the age pension asset tests.

Filling Out the Downsizer Contribution Paperwork

After deciding to make a downsizer contribution, you will be required to fill out a downsizer contribution form. This must then be provided to your super fund either before or at the time of making the contribution.

If multiple contributions are going to be made to a single super or to various different funds, a form will need to be completed for each transaction. When submitting the form with your contribution, you confirm that you meet all of the requirements for eligibility.

The approved paperwork will become available before July 1 2018.

Extension of Time

It is possible to request a longer timeframe for making your downsizer contribution in some cases where the delay has been caused by circumstances beyond your control. When circumstances warrant that an extension be granted, it will be done.

Decision Review

You may also be able to seek a review of a decision that has been made regarding the granting of an extension. For instance, if you are not happy with the length of the extension or where a decision has been made to not grant one.