- 01No need to downsize; sale home 10+ yrs with CGT relief.
- 02Age cap removed; usable from 55+.
- 03No $2.1m cap; balance not disqualifying.
- 04Submit the ATO form before contributing.
One of the downsides of Australia’s superannuation system is that it is quite complicated.
This results in plenty of myths being spread.
Three very common ones I often hear refer to the issue of the downsizer contribution—arguably one of the most attractive ways to significantly boost super accounts before and even well after retirement.
Some people categorically state that you must move to a smaller home to qualify, that you must be aged 65 or older to take advantage of a downsizer contribution, or that such contributions cannot be made if you already have more than $2.1 million in your superannuation account.
All three of these statements are in fact incorrect; although a couple of them no longer apply because the rules have been changed.
Rules Have Changed
Starting with the “downsizing” myth – a very understandable one given the name of this contribution – moving to a smaller place to live is actually not required at all.
Indeed, you can move to a larger house and still qualify for the contribution, or you can even move to a more expensive house and still use the downsizer contribution.
Indeed, more money can even be added from other sources if required rather than just the property sale.
The most important thing to watch here is that the house being sold must have been owned for ten years or more and be subject to at least a partial capital gains tax exemption.
In other words, it needs to have been the principal place of residence for most if not all of those ten years.
No Need to Wait Until 65
As for the need to be aged 65 or more to use the downsizer contribution, this became a myth when the rules were changed.
Initially when the downsizer contribution was introduced in 2018, you did need to be 65 or older to use it.
That minimum age was changed down to 60 and then later down to 55 way back in the 2022-23 financial year.
That really opens up the field to include a really wide range of people.
The real added kicker of an advantage for using the downsizer contribution is that while most other forms of superannuation contribution disappear once you hit the age of 75, this one doesn’t—making it an almost unique way to boost super balances until well into the retirement years.
That flexibility even extends to being able to split the contributions between two spouses, which allows each to make a $300,000 contribution from the sale of a house, even if they need to add money in from another source to make up the total.
Be Careful with the Paperwork
While many of the rules around the downsizer contribution make it a highly attractive way to pump up a super account, there are lots of technicalities in claiming this deduction to be mindful of to avoid a mistake.
One of the main ones is getting the paperwork right.
It is absolutely essential that you get the particular Tax Office form to your superannuation fund before you make the contribution.
If the contribution arrives before the paperwork, then there are a number of ramifications which can be particularly awkward.
Without the form the super fund is likely to treat the contribution as a non-concessional contribution.
That is bad enough, but if the person is aged over 75, the contribution might be rejected.
Worse still, the contribution might be accepted but later treated as an “excessive” contribution with negative tax consequences.
This can happen for those who already have too much in super to make any more non-concessional contributions.
Contributions Are Capped
Another thing to remember is downsizer contributions are capped at $300,000 per person, with a couple able to contribute $300,000 each.
It is also important to note that the downsizer contributions claimed for a particular home sale can’t add up to more than the proceeds from the sale.
The final bit of paperwork that needs to be made correctly is that downsizer contributions must be made within 90 days of the property sale settlement, with your age test applying at the time the contribution is made.
Hopefully awareness of the potential usefulness of the downsizer contribution will spread over time but at the moment it is something of a niche strategy with ATO figures showing an average of around 16,000 people have been using the strategy each year.
Given the aging of the population and the high levels of property ownership among those retiring, it would not be a surprise if the number of people using the strategy doesn’t rise substantially over time.
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The ASX small-cap stories that matter, filed before 9am AEST. Curated by the Small Caps desk.