When the kids have flown the nest, it’s common for pre-retirees and retirees to consider downsizing their home into something more manageable.
It’s also the stage in their life where superannuation becomes front of mind, as you can finally unlock the vault and benefit from further tax savings through an account-based pension.
These two events can work harmoniously together with the use of the downsizer contribution.
What is a downsizer contribution?
The downsizer contribution allows you to contribute money from the sale of your principal residence into super. The special part about this contribution is that it is a non-concessional contribution but doesn’t count towards the contribution cap limit. Also, it’s not subject to the maximum age restrictions like typical non-concessional contribution.
You can contribute up to a maximum of $300,000 per person (that’s $600,000 for a couple), into superannuation under the downsizer contribution.
Combine this with non-concessional and concessional contributions, it’s possible to get $690,000 (or $1.38 million as a couple) into superannuation in a single financial year (numbers based on the 2023/24 FY cap limits).
Eligibility requirements
To be eligible to utilise the downsizer contribution, there are a number of eligibility requirements you need to meet. This includes the following:
- Age: You are aged 55 or older;
- Ownership: The home was owned by you or your spouse for 10 years or more before the sale. If the house is only in one person’s name, you can still use the $300,000 limit each;
- Capital Gains Tax Exemption: If you have made a capital gain on the property, the proceeds must be exempt or partially exempt from capital gains tax under the main residence exemption. This means the property must have been your main residence for a part of the time it was owned, but not necessarily at the time of sale;
- Timing: The contribution must be made within 90 days of sale. That is, 90 days from settlement date. If you need longer than this due to factors out of your control, you can apply for an extension by lodging an Objection form; and
- One-Time Opportunity: You cannot have previously made a downsizer contribution. You only get one opportunity to utilise the downsizer. Even if you don’t utilise the full $300,000 limit, you can’t make up the difference in the future.
How to make the contribution
To make a downsizer contribution, you need to provide your super fund with a “Downsizer contribution into super form”. This can be found on the ATOs website and should be submitted either before or at the time of making the contribution.
You deposit the money into your super fund as you would any other voluntary member contribution. This can often be done via electronic funds transfer (EFT), BPay or cheque.
Factors to consider
Before making a downsizer contribution, you need to consider the following:
- Preservation: Contributions are preserved in your superannuation until you meet a condition of release. The most common condition is reaching preservation age and retiring from the workforce or attaining age 65. You need to familiarise yourself with the conditions of release before making a contribution.
- Legislative changes: Superannuation is subject to legislative changes. Rules around superannuation may change which could result in adverse outcomes for you.
- Investment strategy and fee structure: Before putting any additional money into superannuation, you want to ensure you understand (and are comfortable with) the investment strategy and fee structure within your super fund.
- Transfer Balance Cap: The downsizer contribution counts towards the transfer balance cap. It will also affect your total super balance (TSB) when it is recalculated at the end of the financial year.
Th Guided Investor approach
Here at Guided Investor, the downsizer contribution comes into play in Phases 3 and 4 of the Wealth Creation process, when we are setting up clients for retirement.
It is a particularly useful strategy where there are significant assets to transfer into a tax-free account based pension as it allows an additional $300,000 to be contributed on top of the standard cap limits.