Downsizer Contributions Explained

We all look forward to a comfortable and secure retirement. However, building a financial cushion that will fund our golden years is not easy for everyone. Planning for your retirement begins with thinking about your retirement goals and what you must do to meet them.

In Australia, seniors who want to increase their retirement savings can now make a tax-free contribution to their super using the money from the sale of their main residence. They can do this regardless of caps and restrictions that otherwise apply. Take a look at the potential benefits, eligibility rules, and other things that individuals need to be informed of if they plan to make downsizer contributions.

What are downsizer contributions

If a person aged 65 years and above wants to sell a property that has been their home for at least ten years, they may be eligible to make a contribution of up to $300,000 to a complying superannuation fund using the proceeds of the sale.

An individual can only make downsizing contributions for the sale of their primary residence. The spouse of the individual can also make downsizer contributions to their superannuation from the same proceeds, as long as they are also aged 65 years or older. They can do this even though they are not an official owner of the property.

Downsizer contributions are only feasible where the contract of sale was exchanged on or after 1 July 2018, and must be made within 90 days of receiving the proceeds. Downsizer contribution doesn’t count towards the contribution caps if the individual opens a pension account. However, it can still be made if the individual has a total super balance greater than $1.6 million.

Non-Concessional Contributions vs. Concessional – what’s the difference?

Concessional and Non-Concessional Contributions are payments made to a superannuation fund, however taxed differently. There are also different contribution caps for each type. Concessional Contribution (before tax) are payments made into a fund that has not been taxed yet at their marginal tax rate. Superannuation Guarantee contributions from an employer and salary sacrifice are concessional contributions.

The Non-Concessional Contribution (after tax) is a contribution made where an individual contributes with their after-tax money and offers several benefits like no tax on contribution. The earnings on the investment will be taxed at a maximum rate of 15%. There are many individuals who are on their way to retirement are now trying to get their assets into the super environment as Australia’s super system is very beneficial.

How do downsizer contributions work?

There are a few steps that must be followed to be eligible to make downsizer contributions. Upon the sale of the main residence, a member can contribute to their super fund above their usual concessional and non-concessional contribution caps in the relevant financial year. Upon receiving the downsizer contribution form, the super fund needs to inform the ATO. The ATO will then run verification checks on the amount, and they may also contact the individual for additional information.

The ATO may reject an individual’s downsizer contribution on eligibility grounds. If the downsizer contribution is deemed ineligible, they may be able to accept the amount as a non-concessional contribution if the individual meets the work test and subject to contribution caps.

Benefits of downsizer contributions

Downsizer contributions provide a way to top up your super balance. People aged 65 years and over who do not get the opportunity to save enough funds for their retirement may find that tax-free downsizer contributions provide an excellent opportunity to top up what they have saved to date.

A member who is over 65 years but not 75 years old must have worked at least 40 hours within 30 consecutive days in that financial year, while people aged 75 and over are ineligible to make any voluntary contributions.

Downsizers’ contributions are not subject to the $1.6m total super balance restriction. Because an individual won’t be able to make non-concessional contributions into their super at all, this rule does not apply to downsizer contributions if the total super balance is $1.6 million or above as of June 30 of the previous financial year.

Eligibility (Rules and Regulations)

The first step that an individual must take is to confirm that the amount they wish to contribute will constitute eligible downsizer contributions.

As mentioned, the individual must be 65 years or older at the time of making a downsizer contribution. The proceeds from selling their primary house must have been cleared on or after 01 July 2018. Applicants must have an ownership interest, and the home must have been owned by the same owner for at least ten years. In addition, the home must be eligible for PPR exemption (Principle Place of Residence exemption) and must be in Australia. This doesn’t include caravans, mobile homes, or houseboats.

A downsizer contribution must be made within 90 days of receiving the sale proceeds. They can only transfer a maximum of $1.6 million in super savings into a tax-free pension account. Downsizing the house may impact age pension eligibility.

The costs associated with selling a property and buying another one can be considerable, so they will need to take into account any further property-related costs. Also, downsizer contributions are not tax-deductible.

Part Disposal Rule

In August 2020, the ATO confirmed that a part disposal of a home for downsizer contributions could extend to DomaCom’s Senior Equity Release product. SMSF retirees can now sell a part of their home to top up their super under the Downsizer Contributions legislation. While 5,000 retirees used this facility in the first year, research pointed out that a large proportion of retirees would prefer to access the downsizer provisions but stay in their homes.

Before this ATO confirmation, it was generally considered that an individual had to sell or dispose of their entire interest in their home to be eligible to make a downsizer contribution. However, the ATO confirmation on part disposal now means that SMSF retirees can sell a partial interest in their home and make a downsizer contribution, allowing them to stay in their homes.

The COVID-19 pandemic has put excessive pressure on retirees who see their retirement incomes substantially decrease due to the significant reduction in investment returns. The self-funded retiree cohort has not benefited from many recent government assistance programs, including the JobKeeper and JobSeeker, so allowing them to top up their SMSF using their resources is one measure that can be delivered without impacting the Budget.

For investors, DomaCom’s Senior Equity Release has a 3% income plus capital growth. It may suit SMSF’s in accumulation mode as well as institutions seeking reliable long-term income and growth with no tenancy risk.

How to make a downsizer contribution

A member must complete the Downsizer contribution form to make a downsizer contribution. If the member makes multiple downsizer contributions, he or she must submit a form for each contribution. The total amount of downsizer contributions the member can make is the share of the total proceeds received from the house sale, and up to a maximum of $300,000. The form must be completed within 90 days of receiving the proceeds of the sale.

Download the form and submit it to the super fund on or before the member contribute date (within 90 days). If a member provides false or misleading information on this form, it may result in the ATO imposing an administrative penalty.

Super funds can design their form, which can be made available to members on their website. A member’s tax file number may be required by a super fund to accept the contribution, but it is not a mandated field for the request to be in the approved form. In addition to the form’s required contents, super funds may consider including key messages for members.

If the form was not submitted, the contribution is treated as an after-tax contribution, and a determination is made whether the super trustee can accept the contribution or not. If it cannot be accepted, it will be refunded to the member. If it can be accepted, the contribution is assessed against the non-concessional contribution cap. If the cap was exceeded, significant penalties might apply.

For more information or to access the required form, you can visit the ATO Website.

Seniors and investors can access the SER calculator and get further information via DomaCom’s Senior Equity Release (SER) or by calling 1300 365 930.