Before making any plans, be sure to understand the provisions, and the potential impacts, fully.
How do the downsizer rules work?
If you’re aged 65 years or older, you can make a non-concessional (after tax) contribution to your super of up to $300,000 from the sale proceeds of your family home. Your downsizer contribution will not count towards your contribution caps in the year you make it.
The downsizer measures apply to individuals, so a couple which meets the criteria may contribute up to $300,000 each, or $600,000 combined.
Now that the non-concessional cap has been reduced to $100,000 per annum, the downsizer measures offer a real chance for ordinary Australians to maximise their retirement savings.
Are there any conditions?
Yes, conditions apply. Key conditions include the following:
– A downsizer contribution may be made from proceeds of a sale where the exchange of contracts occurs on or after 1 July 2018.
– You must be 65 years or older. There is no maximum age limit, nor is there a work test to be satisfied.
– You, or your spouse, must have owned your home for at least 10 years.
– The property sold must be your main residence.
– You can only make downsizer contributions from the sale of one home.
– You must make your downsizer contribution with 90 days of settlement.
– A caravan, houseboat or other mobile home does not qualify as a main residence.
How will the ATO ensure compliance?
In order to make a downsizer contribution, you will need to complete an approved ATO form, and submit this to the trustee of the super fund. The super fund will report downsizer contributions to the ATO as part of the fund’s annual reporting requirements. The ATO will run its own verification checks to ensure the member has made an eligible downsizer contribution.
Things to be mindful of….
SMSF Trust Deeds may need to change
The downsizer contribution is a new type of contribution and will not have been contemplated in SMSF trust deeds. For this reason, if you have an SMSF and are thinking of making a downsizer contribution, you must first seek advice regarding your SMSF trust deed. It’s likely that the trust deed will need to be varied to expressly allow members to make downsizer contributions. This is especially important for a member who is over 65 years of age, and who is not gainfully employed.
Impacts on the age pension and other Centrelink entitlements
Your decision to downsize and make a downsizer contribution to your super fund may impact your pension entitlements. When Centrelink calculates your age pension, it does not include your main home in the assets test. However, superannuation savings are included once you reach retirement age. This means that shifting a substantial portion of your assets from your home into superannuation may adversely affect your Centrelink entitlement. Be wary, seek advice if necessary, and be sure to understand fully the impacts before making any decision to utilise the downsizer measures.
Sean is 67 and Patsy is 66. Patsy is a homemaker, and Sean is still working, but is eager to transition to retirement. They have modest super balances, particularly Patsy as she’s had limited paid work over the years. With Sean’s retirement imminent, they’re keen to boost their retirement savings so that they can look forward to financial security in their retirement. They also want to maximise the benefit of the lower-tax environment which super offers.
Their children have long since moved out of the family home, which they’ve owned for over 20 years. They’ve been contemplating downsizing for some time, and have decided the time is right, and plan to put their house on the market after 1 July 2018, after the downsizer measures come into effect.
Sean and Patsy estimate that the move from their current home to a unit in a neighbouring suburb will release approximately $500,000 in equity. They’ve decided to contribute a combined $450,000 to their super. Sean will contribute $200,000 and Patsy will contribute $300,000. These contributions will not count towards their annual caps of $100,000. If not for the downsizer measures, Sean and Patsy’s non-concessional contributions in any one year would have been limited to $100,000 each ($200,000 combined). So, for them, this is the only likely way of boosting their retirement savings substantially.