New rulings for self-managed super funds (SMSF) might hold the key to help fund retirement. Those of us aged over 65 can now put up to $300,000 tax free into their super using money from the sale of their main residence and not incur fees or penalties under the new downsizer ruling provided certain criteria are met, effectively boosting retirement savings.
Downsizer contributions allow Australians a way to top up their super balance and could be the perfect answer for those who haven’t had the chance to save for retirement or top up the amount they have saved.
Under the The Treasury Laws Amendment (Reducing Pressure On Housing Affordability Measures No. 1) Act 2017 (Cth), downsizer contributions came into effect on 1 July 2018, however there are four broad steps that need to be approved for an SMSF member to make downsizer contributions.
Usually people aged between 67 to 74 need to satisfy a work test, where 40 hours of work over a period of no more than 30 consecutive days is required to make super contributions, while people over 75 and over generally are ineligible to make voluntary contributions to their super. Under the downsizer ruling, those aged 65 or over can make this tax-free contribution without satisfying a work test.
The main residence must be held by the member, the member’s spouse, the member’s former spouse or a trustee of the estate of the member’s deceased spouse during ten years prior to sale. If a main residence is sold, a member is not required to purchase a new home with the money you might have made on the sale. You need to have owned the home for at least 10 years. Caravans, mobile homes and houseboats are excluded.
Pro Tax Tip: This is a once only contribution. Members of SMSF’s are only able to take advantage of this contribution if they have not previously made downsizer contributions to an earlier sale of a main residence.
The superannuation cap of $1.6 million ($1.7 million from 1 July 2021) also does not apply to this type of contribution. Non-concessional contributions are capped when a super balance is $1.6 million or above as of 30 June of the previous year, the downsizer contribution is not restricted.
Upon the sale of a main residence, a maximum of $300,000 can be made as contributions into a super fund. Concessional and non-concessional caps of $25,000 and $100,000 annually respectively do not apply to downsizer contributions. The amount contributed must be from the capital proceeds received from the sale of a residence in Australia that is owned by the contributor. The member or spouse can have an interest in the residence before disposal and is also able to make a downsizer contribution.
Pro Tax Tip: Contributions are limited to $300,000 per member however could potentially allow for additional contributions of $600,000 for a couple (2 x $300,000)
Contributions must be made into the super account within a 90 day timeframe. If settlement goes beyond 90 days, an extension will need to be granted from the Australian Taxation Office (ATO).
The ATO must be informed of this contribution during the super fund’s annual reporting by submitting a downsizer contribution form, who will then run verification checks on the amount. Once verification has taken place and criteria approved, no further action will need to take place.
The ATO will contact the superannuation provider and tax applied if the amount is classified as a non-concessional contribution, which may exceed the current caps.
Pro Tax Tip: The downsizer contribution may affect the Age Pension eligibility as there are no special Centrelink means test exemption for making downsizer contributions. The contribution may be either subject to not receiving the aged pension or receive a reduced aged pension.
It’s important to note that the costs for selling or buying a property need to be taken into account when selling your home. Downsizer contributions are not tax deductible. Other government entitlements may also be affected because of the greater level of superannuation assets.
If you answer yes to the following criteria, you may be eligible to make a downsizer contribution:
Yes – You are 65 years or over
Yes – Your contribution amount is directly from the sale of your main residence on or after 1 July 2018
Yes – You and/or your spouse owned your home for 10 years prior to sale
Yes – Your home is not a caravan, houseboat or other mobile home
Yes – The capital gain or loss from the sale of your home is exempt or partially exempt from capital gains tax (CGT)
Yes – You have provided your super fund with you declaration made via the Downsizer Contribution in Super form
Yes – You have made your contribution within 90 days of receiving the proceeds of the sale (usually the date of settlement)
Yes – This is the first and only time you are contributed using the downsizer contribution into your super fund
The Next Step
Is this for you? Nobody’s circumstances are the same. It’s always best to speak to a professional before making any important financial decisions, including the sale of your main residence. Do your research and chat with an advisor. If you would like some tax advice, an ITP Accounting Professional can help. Phone 1800 367 487 today.