Downsizing; to upsize super
Wealth Management Solutions

Anne-Marie Tassoni, Partner – Private Wealth Management
James Cummings, Senior Analyst

Downsizing the family home is almost a rite of passage; a representation that children have flown the nest, allowing parents to transition to their next phase in life by unlocking equity in their home to fund themselves in retirement.
Posted 22 October 2022

First introduced in 2018 as a measure to address supply-side housing affordability issues, downsizers now have the opportunity to contribute part of the proceeds from the sale of their home to superannuation, bypassing ordinary contribution caps. An individual aged 60 or over can contribute $300,000 to superannuation from the sale of their main residence (or former main residence), and a couple is eligible to contribute $600,000 combined. That age limit could also soon lower to 55 years if legislation introduced into Parliament last month is passed.

Presenting the opportunity to both boost retirement savings and take advantage of the tax savings that come with it, the appeal of ‘Downsizer contributions’ is growing with 6,000 people contributing $1.5 billion in the first year (2018), rising to 15,000 people contributing nearly $4 billion last year.

Like everything to do with superannuation, there are specific rules to follow. To be eligible to make a Downsizer contribution, the main criteria to satisfy includes:

  1. You must be aged 60 years or older, however there is no maximum age. Normally, if you are aged over 75 years, you are precluded from making voluntary contributions, therefore a Downsizer contribution provides an opportunity to contribute to the tax-effective, superannuation environment when you would otherwise not be permitted to.

  2. The property must:
    a. be an Australian property,
    b. have been owned by you or your spouse for at least 10 years, and
    c. be or was formerly your principal place of residence (‘PPR’) and is exempt from capital gains tax (‘CGT’).

  3. You have never made a Downsizer contribution previously.

  4. The contribution must be made within 90 days from receiving the proceeds (typically the property sale settlement date).

  5. You provide your superannuation fund with the required ATO notice either before or at the time of making the contribution.

Whilst this scheme provides a significant opportunity to individuals, its value is magnified for couples. Even if the home was owned by only one spouse, the non-owner spouse can also make a Downsizer contribution provided they meet the above criteria. Should there be sufficient proceeds, this means a couple can contribute $600,000 to their superannuation accounts.

Furthermore, Downsizer does not count towards either your contributions caps and will not affect your Total Superannuation Balance. However, it does count towards the Transfer Balance Cap (‘TBC’), meaning if you have already reached the maximum $1.6 million or $1.7 million pension balance, your Downsizer will remain in Accumulation mode.

A client couple in their mid sixties have just sold their four-bedroom family home in Melbourne and put a deposit on a two-bedroom apartment which will complement their holiday house on the surf coast. After purchasing the new apartment, they will have $1.1 million of proceeds left over. Our client couple are still engaged in gainful employment and both have a marginal tax rate of 34.5% (including Medicare Levy).

Whilst the house is held in the husband's name for historical asset protection reasons, both can individually take advantage of the Downsizer contribution. This will see $600,000 added to their superannuation and $500,000 invested outside superannuation.

As compared to not adding $600,000 of the proceeds to superannuation and instead investing the entire $1.1 million in their joint names, the table below illustrates the annual tax savings that could be achieved by making the Downsizer contribution. In our client couple’s case, they would save $10,350 each year in tax by contributing the funds to superannuation rather than investing the capital in their joint names.

As the proceeds from the sale of their home exceeded the Downsizer contribution cap, they may also be able to combine the Downsizer contributions with Non-Concessional contributions to further amplify the capital added to superannuation and save even more tax.

Following the abolishment of the ‘Work Test’ on 1 July 2022, individuals under 75 years of age can now continue to make Non-Concessional contributions irrespective of employment. The current Non-Concessional contribution limit is $110,000 per annum, and in more good news, the ‘bring forward’ opportunity also remains available whereby three years’ worth of Non-Concessional contributions can be made in one year – for a total of up to $330,000.

Taking the example above one step further, our clients have $500,000 left over after having contributed $600,000 of the $1.1 million net proceeds as Downsizer contributions. Assuming their Total Superannuation Balance ('TSB') is less than $1.45 million, they can each contribute $250,000 as a Non-Concessional contribution under the ‘bring forward’ provisions without breaching the $1.7 million TSB cap.

The result is that the entire $1.1 million of proceeds from the sale of their home is contributed to what will ultimately become a tax-free pension environment, saving up to $18,975 in tax per year.

The above example illustrates that there is no single, simple answer when it comes to superannuation planning and in many cases, there is more than one opportunity or strategy for each person.

To add complexity to an already complex patchwork of superannuation rules, legislation is constantly changing; be it indexation and age factors or the political and economic landscape that shapes fiscal policy. As advisers, we understand the devil in the detail and are able to devise a strategy to best suit your circumstances.

Cameron Harrison have been advising business owners and their families on asset allocation and intergenerational wealth management for over 50 years. We have demonstrated over a long period our ability to manage investments through both the good times and bad by keeping the client at the centre of our business.

To discuss your superannuation contribution or longer-term retirement plans, please contact us on +613 9655 5000.

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