The Budget announced a reduction in the Downsizer Contribution eligibility age from 60 to 55* for individuals wanting to downsize or who are thinking about downsizing their home. This has created opportunities for many more Australians to boost their retirement funds leading up to retirement who might not have otherwise had the capital to do so, provided they meet all other downsizer contribution eligibility requirements.
However, there are a few key factors to consider before utilising the Downsizer Contribution.
One and done
The downsizer contribution can only be used once in an individual’s lifetime from the sale of one home, which means this concession cannot be used again from the sale of a second home if they decide to downsize again when they are older.
Although it has created opportunities for those that are younger (from 55) to make downsizer contributions, it is important to consider the individual’s liquidity requirements, as Superannuation is locked away and cannot be accessed until a condition of release is met, which is may be first achieved at age 60 under certain conditions.
From age 60, you would need to either retire from the work force or cease a form of gainful employment. Otherwise, if you plan to continue to work beyond 60, you will automatically meet a condition of release on reaching age 65 and can access your superannuation with no limitation at that point in time.
Maximising your super benefit
While adding $300,000 in a single contribution might sound like a great way to maximise your superannuation, this may effect your ability to access other contribution strategies that could provide a further boost to an individual’s superannuation balance, that being tax deductible carry forward contributions and non-concessional contributions.
You are able to make downsizer contributions into super at any age even if your total Super balance is greater than $1.7M (current limit), however, once your balance is above $1.48M it does limit your ability to make non-concessional contributions to super.
If your current total super balance is $1.4M and by the time you retire and want to downsize your home, your total super balance has grown to $1.8M. Provided the current rules and caps still apply, you will still be able to contribute up to $300,000 for singles or $600,000 for couples into super as downsizer contributions.
On the other hand, if you downsize now and put the funds into super as downsizer contributions. 10 years later, you downsize your home again and have surplus funds from the sale of your home into super. You will not be eligible to make a downsizer contribution as you’ve already utilised the concession.
You will also not be able to make non-concessional contribution into super as your total super balance is more than the $1.7M limit.
If you qualify for the Age Pension, it is important to consider the impact it might have on your Age Pension if you are thinking about selling your home.
Bob (67) and Jenny (60) are married. Bob is retired and is in receipt of a part age pension. They sell their Principal Residence that they purchased 15 years ago for $2M, they also settled on a new home purchase for $1.4M. They can each contribute $300K into super as downsizer contributions. Jenny is working part-time, and Bob has retired and receives a part Age Pension.
They are asset tested for Centrelink purposes, and have total assessable assets of $730,000. If they do nothing with the surplus sale proceeds, their Centrelink assessable assets will increase to $1,330,000. Which means Bob will no longer be eligible for a part Age Pension as their combined assessable assets exceeds the asset cut-off point of $935,000.
If they each contribute $300,000 into super as downsizer contributions, this will increase their assessable assets to $1,030,000 for Centrelink purposes, and would result in Bob no longer qualifying for a part Age Pension. This is because Jenny’s Superannuation is not assessed as an asset as she is not of Age Pension age and Bob’s additional $300,000 into super will an assessable asset. It is also important to note regardless of where the remaining $300,000 is held, either in super or in their personal names, it will still an assessed asset for Centrelink purposes.
The ability to use the carry forward contribution, if your total super balance is less than $500,000.
John is 60 years of age, still working, earning $60,000 p.a. and his total super balance is less than $500,000 on 30 June 2022. He has not been making additional before tax contributions other than his employer contributions and has not been maximising his concessional contributions each year. He downsizes his home, has met all the eligibility requirements for the downsizer contribution, and makes a downsizer contribution of $300,000 into super in December. In August 2023, he sells his share portfolio and have realised capital gain of $200,000 in the 2023/2024 financial year.
One of the tax effective ways of reducing one’s taxable income is by making salary sacrifice or deductible tax contributions into super and often the carry forward concessional contribution (the ability to use any unused concessional contribution from prior years from 18/19 financial year for up to 5 years, if you have total super balance of less than $500,000 at the end of 30 June of the previous financial year) strategy is utilised to assist in offsetting some capital gains or reducing taxable income in general.
Because of the downsizer contribution in December, which resulted in increasing his total super balance to more than $500,000. He will not be able to utilise the carry forward concessional contribution to offset some of the capital gains tax from selling his share portfolio.
*This budget announcement will take effect from the first quarter the bill receives Royal Assent. This may be subject to change until the legislation is updated.