Margaret’s decision
At 62, Margaret stood in her four-bedroom family home in the northern suburbs, surrounded by decades of memories. With her children settled elsewhere and retirement approaching, the house felt too large. When her financial adviser mentioned the downsizer contribution scheme, Margaret discovered an opportunity to transform her property into a tax-efficient retirement strategy.
The opportunity
Australians aged 55 and over can contribute up to $300,000 per person from the proceeds of a home sale into superannuation, creating a powerful wealth transfer opportunity. For couples, this represents a potential $600,000 boost to retirement savings.
Three key benefits
- Tax advantages: Downsizer contributions are tax-free and don’t count towards annual contribution caps. When you move super into the retirement pension phase, the transfer balance cap applies (currently capped at $2 million), giving you greater capacity to convert accumulated super, including downsizer contributions, into tax-free pension income.
- No age ceiling: Downsizer contributions provide a rare opportunity to top up retirement savings regardless of your work status or existing super balance. You need to be aged 55 and above at the time of making the contribution, but there is no upper age limit unlike personal contributions.
- Eligibility requirements: The property must have been owned by you or your spouse for at least 10 years and qualify for a full or partial capital gains tax exemption under the main residence rules. Contributions must be made within 90 days of settlement, requiring careful planning and coordination with your super fund. An ATO election form must be completed to ensure the contribution is being reported as a Downsizer contribution.
Four potential downsides
- Transfer Balance Cap and Age Pension Impact: Downsizer contributions count towards your transfer balance cap if you decide to commence an income stream. These contributions are also assessed under Centrelink’s assets and income tests, potentially reducing Age Pension eligibility. An exemption may be applied if you are under age 67 at the time, and receiving other payments or benefits, and the contribution is being retained in the accumulation phase of super account.
- Hidden Costs: Sales commissions, legal fees, moving expenses, and stamp duty on new properties can substantially reduce the amount available to contribute. In capital cities particularly, downsizing to a smaller property may not release significant equity.
- One-time only: You can only make a downsizer contribution once in your lifetime, making timing crucial.
- No tax deduction: Unlike concessional contributions, you cannot claim a tax deduction for downsizer contributions.
Margaret’s outcome
Margaret sold her home for $950,000 and purchased a two-bedroom apartment for $580,000. After costs, she contributed $300,000 to her super, where her money would grow tax-efficiently. While her future Age Pension entitlement decreased slightly, the long-term benefits, including tax-free investment earnings, made the strategy worthwhile for her circumstances.
The bottom line: The downsizer contribution offers significant opportunities, but requires careful consideration of your personal circumstances, Age Pension eligibility, and long-term financial goals.
Professional financial advice is essential before proceeding.
The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.