What is a downsizer contribution?
A downsizer contribution allows eligible Australians aged 55 or over to contribute up to $300,000 from the proceeds of selling their home into super. Couples may each be able to contribute up to $300,000, meaning a combined contribution of up to $600,000 may be possible from the sale of your home.
One of the biggest attractions of a downsizer contribution is that it sits outside the normal contribution caps. This means it doesn't count towards your concessional or non-concessional contribution cap limits.
Downsizer contributions also offer several other advantages:
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Both spouses may be able to contribute – even if only one spouse owns the property, the other spouse may still be eligible to make a downsizer contribution, provided all the eligibility requirements are met.
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There is no upper age limit – unlike most voluntary contributions, downsizer contributions can still be made after age 75. In fact, for many people over 75, this may be the only way to contribute additional money to super.
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Your super balance doesn't matter – many contribution strategies become unavailable once your super balance reaches certain thresholds. Downsizer contributions are special as they can still be made regardless of how much you already have in super.
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No work test applies – you don't need to be working or recently retired to qualify. Whether you're still employed, self-employed or fully retired, there is no work test to satisfy.
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It forms part of the tax-free component – once the contribution is made, it forms part of the tax-free component of your super. This can provide advantages when benefits are eventually paid from your super.
Who is eligible to make a downsizer contribution?
To be eligible, you must satisfy all of the following requirements:
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You are aged 55 or older when you make the contribution.
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The amount of the contribution is an amount equal to all or part of the sale proceeds of your main residence, capped at $300,000 per person.
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You, your spouse or your former spouse owned the home for at least 10 years before it was sold.
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The property is located in Australia and qualified for at least a partial main residence capital gains tax (CGT) exemption because it was your main residence at some point during your ownership.
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You make the contribution within 90 days of settlement (unless the ATO allows a longer period).
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You give your super fund the approved downsizer contribution form (NAT 75073) at or before the time of the contribution.
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You have not previously made a downsizer contribution from the sale of another home.
It's important to remember that all of these conditions must be met before a contribution will qualify as a downsizer contribution.
An example of a downsizer contribution
John and Mary are both aged 55.
John recently sold an apartment for $850,000. He purchased the apartment in his own name in 2000 and lived there with Mary for several years before they bought their family home. After they moved out, the apartment was rented to tenants.
Because John owned the apartment for more than 10 years, it was his main residence at one point, and he meets the other eligibility requirements, he can make a downsizer contribution of up to $300,000.
Mary can also make a downsizer contribution of up to $300,000, even though she wasn't an owner of the apartment. This is because the property was owned by her spouse for more than 10 years and it was also Mary's main residence for a period of time.
What if the sale proceeds were lower?
Now let's assume the apartment sold for $550,000 instead.
Although each person has a maximum downsizer contribution limit of $300,000, the combined contributions can't exceed the sale proceeds. In this case, John and Mary could contribute a total of $550,000 between them.
For example, they could each contribute $275,000, or John could contribute $300,000 and Mary $250,000.
What if Mary was only 50?
If Mary was only 50 when the contribution was made, she wouldn't be eligible because she hadn't yet reached the minimum age of 55.
John, however, could still make a downsizer contribution of up to $300,000.
When might downsizer contributions be useful?
Downsizer contributions can be particularly valuable if you:
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Have already used your contribution caps – most people are limited in how much they can contribute to super each year. A downsizer contribution sits outside these normal contribution caps, allowing you to add more to your super after selling your home.
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Are over age 75 – for many people, making voluntary contributions after age 75 is no longer possible. Downsizer contributions are one of the few exceptions, making them an attractive option for older Australians looking to move more wealth into the concessionally taxed super environment.
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Have a large super balance – having a large super balance may prevent you from making certain types of contributions, particularly non-concessional contributions. Downsizer contributions aren't subject to these restrictions, meaning they may still be available even if your balance is well above the usual thresholds.
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Want to increase tax-free benefits – because downsizer contributions form part of the tax-free component of your super, they may improve the tax position of beneficiaries who receive your super after your death, particularly where benefits are paid to adult children or other beneficiaries who aren't considered tax dependants.
Common misconceptions about downsizer contributions
Downsizer contributions are often misunderstood. Below are some of the most common myths and the facts behind them.
Myth 1: You have to buy a smaller home
Despite its name, a downsizer contribution doesn't require you to buy a smaller home or even buy another home at all. As long as you sell an eligible home and meet the eligibility requirements, what you do next is your choice. Whether you downsize, upsize, move into a retirement village, rent or move in with family won't affect your eligibility.
Myth 2: The home must be your main residence when you sell it
Many people think they have to be living in the home when they sell it. That's not actually the case.
The home simply needs to qualify for at least a partial main residence CGT exemption. In other words, it must have been your main residence at some point during the time you owned it – it doesn't have to be your main residence when you sell it.
For example, you might have lived in the home for several years before moving out and renting it to tenants. As long as it still qualifies for at least a partial main residence CGT exemption, you may still be able to make a downsizer contribution.
This is exactly what happened in John and Mary's example. Although the apartment was being rented out when it was sold, John was still eligible because it had previously been his main residence.
Myth 3: The contribution must come directly from the sale proceeds
The contribution doesn't need to be paid from the exact money you receive at settlement. For example, you might use all of the sale proceeds to purchase your next home and fund the downsizer contribution from your savings instead.
What's important is that the contribution is no more than the sale proceeds (up to the $300,000 limit per person) and all of the eligibility requirements are met.
In some cases, it may even be possible to make an in-specie downsizer contribution by transferring an eligible asset, such as listed shares, rather than cash to your SMSF.
What happens if your downsizer contribution isn’t eligible?
The ATO checks downsizer contributions using information reported by super funds and state land title offices.
If it believes a contribution doesn't meet the eligibility requirements, it will usually contact you first and ask for more information.
If the ATO ultimately decides the contribution isn't a valid downsizer contribution, it will notify your super fund.
What happens next depends on your circumstances:
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If your fund wasn't allowed to accept the contribution, it will generally need to return the money to you.
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If your fund could have accepted it under the normal contribution rules, the contribution may instead be treated as another type of contribution, such as a non-concessional contribution.
Because an incorrect downsizer contribution may affect your contribution caps or create unintended tax consequences, it's important to make sure you're eligible before making the contribution.
Providing false or misleading information on the approved downsizer contribution form may also result in penalties.
Key things to remember about downsizer contributions
While downsizer contributions aren't affected by your super balance when you make them, they do increase your super balance once they're in your fund.
This may affect your eligibility to use other super contribution strategies in future.
For example, a higher super balance may affect your ability to:
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Make non-concessional contributions.
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Use the carry forward concessional contribution rules.
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Receive government co-contributions.
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Qualify for the spouse contribution tax offset.
If you're considering making additional contributions in future, it's worth understanding how a downsizer contribution may affect these opportunities.
What if you’re still working?
If you haven't yet met a condition of release, such as retirement or reaching age 65, the downsizer contribution will remain preserved (locked away) in your super until you do.
So while you may be eligible to make the contribution from age 55, you won't necessarily be able to access those funds straight away.
What if you’re retired and receiving the Age Pension?
If you're receiving or expect to receive the Age Pension, it's important to understand how a downsizer contribution may affect your Centrelink entitlement.
Your family home is generally exempt from the Age Pension assets test. However, once money is contributed to super, it will count once you turn Age Pension age or commence a pension.
This means moving money from your home into super could reduce your Age Pension entitlement or, in some cases, affect your eligibility altogether.
In summary
Downsizer contributions can be a valuable way to increase your retirement savings, particularly if you've already reached your normal contribution limits or are over age 75. However, the eligibility rules are quite specific and getting them wrong can have unintended consequences. If you're unsure, your financial adviser or SMSF professional can help you determine whether a downsizer contribution is right for your circumstances.
