Downsizer Contributions to Superannuation
As at 1 July 2018, legislative changes for those over 65 and selling property have resulted in unique investment and estate planning strategies. Known as the “downsizer benefit”, this new and useful strategy benefits those looking to contribute excess sale proceeds to superannuation. Additionally, it may also prove to be beneficial for those without excess funds but who are concerned regarding tax to their Estate.
Sounds simple? Sell your home, move into a cheaper one and contribute the difference to retirement savings? As with all these schemes, the devil’s in the detail, so it’s important to understand the complexities here.
You don’t need to buy a smaller home
Firstly, the concept of being a “downsizer” strategy is a furphy. You are able to purchase a smaller, larger, cheaper or more expensive home. In fact, there is no impetus to buy another home at all (important for those entering aged care). As long as the proceeds from the sale are used to make the contribution (and not other funds), then the contribution stands.
Additionally, there is no need for the home to be a current main residence. As a result, this may be an appropriate strategy for investment properties which were formerly used as main residences.
The limits are:
- The property must be able to satisfy in whole or part the Capital Gains Tax exemption for main residences. There is no requirement that the property be considered your main residence at the time of disposal
- Contributions must be made within 90 days of the change of ownership
- You or your spouse must own the asset (not companies, trusts etc)
- You must be over 65
- The property must be held for at least 10 years
- Contributions are limited at $300,000 each, or the proceeds of sale, whichever is less
- The home must be in Australia and affixed to land (no caravans etc)
- Max and Martha are in their 70’s and want to downsize from their large home to an apartment. They sell the home for $3m and buy a $2m apartment. With the remaining monies, Max and Martha both contribute $300,000 to superannuation.
- Bruce and Betty (both 67) sell their $800,000 home and buy a new $1.7 million home, using cash funds they have available. They can each contribute $300,000 to superannuation.
- Norah is 88 and wants to move to a retirement home so she sells her $3.5m property. Norah is able to contribute $300,000 to superannuation.
Boost your super balance
Unlike other contributions, the downsizer funds are not subject to the $1.6m contributions cap and hence, for superannuants, this could be a way of “extending” the amount retirees hold in the superannuation environment. Similarly, for those who are moving from their main residence to another property of the same value, there could also be significant estate planning benefits in cashing out and recontributing funds from superannuation (speak to your adviser).
Whilst there are many pluses to this strategy, there are also the downsides. Primarily, the main downside is the impact on the income and asset tests for those receiving Centrelink benefits. Those in receipt of Centrelink should consult with a financial planner to understand the reduction in pension they may receive as the downsizer benefit is not exempt for Centrelink purposes (unlike the home).
Speak to a professional if you are interested in the downsizer strategy
Clearly, the best result for individuals is to consult a professional who understands the legislation prior to the sale date, so the appropriate strategies can be considered, modelled and the impacts understood by the property seller.
If you would like to discuss this further, please don’t hesitate to contact me or any of the team at Cashel House.
Gareth de Maid
Relationship Manager – Financial Strategy Specialist
Phone 03 9209 9000