Utilising the downsizer contribution to build super balance

The downsizer contribution is available to individuals who are at least 65 years old and who have just sold their home. The proceeds from the sale may be used as a downsizer super contribution. This type of contribution may come in handy for individuals who are unable to make super contributions because of their age, have not meet the work test, or due to having a super balance of more than $1.6 million. So how does it work?

Qualifying requirements

To qualify for the downsizer contribution, there are some rules to follow:

• A person must have entered into a contract to sell the home on or after 1 July 2018. If the contract was entered into before that time, the person will not be eligible, even where the settlement has occurred after 1 July 2018;
• Individuals making a downsizer contribution must be at least 65 years of age at the time the contribution is made. The person’s age at the contract date or date of settlement is not relevant. For example, it allows a person to sign a contract when they are 64 years old and make the contribution when they turn 65 years old. However, time limits do apply to be eligible to make the downsizer contribution.
• A time limit of 90 days applies after the time ownership of the property changes to make the downsizer contribution. This is usually the settlement date of the sale. However, the ATO may allow an extension of time for an individual to make the contribution;
• A limit applies to the amount of the downsizer contribution, which is the lesser of:
  • The amount of the sale; and
  • $300,000 per person.
• Here are a couple of examples:
  • Hansel and Gretel sell their family home for $1.4 million and they are eligible to make a downsizer contribution. They can contribute a maximum of $300,000 each.
  • Trent and Madeline sell their family home for $500,000 and they are eligible to make a downsizer contribution. They can contribute a maximum combined amount of $500,000, with no more than $300,000 contribution to be made by either one of them.
• The home, and the land it is built on must be in Australia and cannot be a caravan, houseboat or other mobile home;
• The downsizer contribution can only be made on a once only basis and can be only be claimed on one main residence; 
• The person, their spouse or former spouse, must have owned the home for at least 10 years prior to sale. This allows some flexibility for the home to be held either solely, jointly, or as tenants in common, and also allows for the death of a spouse during the 10-year test period. Also, it is possible for an individual to own a home for the required 10-year period and they may have a spouse for less than the 10-year period. For example, a spouse, of only 12 months, will be eligible for a downsizer contribution, if their partner owned the home for at least 10 years. The 10-year period can apply to a block of land which has been held from the time a person, or their spouse, legally acquired the land, which is the settlement date.
• To qualify for the downsizer the person’s home must be exempt, or would have been exempt or partially exempt, from CGT under the main residence exemption. As an example, a property that was a person’s main residence could have been rented out, or part of the property was partially used to conduct a business.

How is the downsizer contribution treated in the super fund?

The downsizer amount is not subject to the contribution caps which means:

• There is no total super balance test for downsizer contributions – for those who are at least 65 years old with a total super balance of more than $1.6 million, they are eligible to make a downsizer contribution;
• There is no requirement to satisfy a ‘work test’ if the person is at least 67 years old when the downsizer contribution is made;
• There is no maximum age limit for individuals to make a downsizer contribution – though other personal super contributions cannot be made for anyone older than 75 years of age.
  

How the total super balance applies

The total super balance test does not apply when an individual makes a downsizer contribution. However, once the contribution has been made to the fund, the downsizer contribution will add to the person’s total super balance, which is relevant for individuals over the age of 65 intending to make non-concessional contributions. From a strategy point of view, the timing of a downsizer contribution and personal non-concessional contributions can be an important consideration. If the downsizer contribution results in an individual exceeding the $1.6 million total super balance cap, they may not be able to make additional non-concessional contributions. To avoid this situation, it may be better for an individual to make the non-concessional contribution first, and then the downsizer contribution afterwards.

One-off application

The downsizer contribution can only be accessed once, that is, for the sale of one qualifying home. Even if all of the $300,000 downsizer cap has not been used, it’s not possible to make further downsizer contributions if a person sells another qualifying home. Whilst there is no requirement to make the downsizer contribution in one amount, individuals can make many contributions within 90 days after the property has been settled, providing the $300,000 downsizer cap has not been exceeded.

Included in tax-free portion

For tax purposes, a downsizer contribution is included in the tax-free component of any benefit payment and can’t be claimed as a tax deduction. It is not counted as a non-concessional contribution nor is it counted against anyone’s non-concessional contributions cap, which is an advantage for most individuals.

Don’t forget the election form

Individuals who make a claim for the downsizer contribution for the amount contributed to their fund must make their intention clear by completing an election form, which is available from the ATO website. For those who do not make the election, the contribution amount could be rejected or assessed as a non-concessional contribution. This could result in the ATO issuing an excess non-concessional contribution determination. So, providing the right information to the fund is imperative.

What are the Centrelink ramifications?

A key factor to take into account is that Centrelink’s asset test excludes an individual’s main residence as it is considered to be an exempt asset. However, selling the home and making a downsizer contribution is included in the assets test and may reduce the age pension they receive. That is, any proceeds from the sale of the family home that is contributed to super as a downsizer contribution, will effectively be a transfer from an asset test exempt asset (the family home) to an asset tested asset (superannuation). For anyone receiving the age pension, this may act as a disincentive to access the downsizer contribution rule for Centrelink purposes.

It’s all about tax

Making a downsizer contribution from the sale of your family home, without having to meet the ‘work test’ or being subject to the non-concessional contribution cap rules, could be considered a bonus. It transfers some, or all, of the capital from the sale to a tax advantaged structure, where any income on investments is taxed at a maximum rate of 15% or as little as 0% if it is supporting a pension. However, on the other hand if a person invested the same amount in an individual’s own name, they should consider the maximum tax rate that may be applied for that investment.

No need to move to a smaller home

While ‘downsizer’ seems to suggest that you need to move into a smaller residence after the sale of the family home, there is no such requirement. In fact, you don’t need to purchase another home. It is possible for an individual to sell their family home, contribute a downsizer amount to their super, and then simply travel around Australia without buying another home, move into rental accommodation, or assisted living accommodation.