Downsizer Contributions – What You Need to Know
As we round the home stretch towards retirement, our thoughts generally turn to two main issues, finances and living arrangements. The two being inextricably linked and if you own a property, you may want to look into how downsizer contributions could provide a tax-efficient approach to building your superannuation balance as part of your pre-retirement strategy.
It’s a time when many people, with suddenly empty nests, start to think about downsizing. The benefits are clear. A smaller house means smaller utility bills, less cleaning, less maintenance.
Another benefit of downsizing is the new government Downsizer Contribution Concession for superannuation. Let’s take a look at what it is, who can take advantage of it and how it can impact both your financial and lifestyle plans.
What Is The Downsizer Contribution Concession?
Simply put, this is a sum of money you can contribute towards your superannuation, over and above any other concessional contributions you might have made, from the proceeds of the sale of your primary place of residence.
Who Can Benefit?
Anyone over the age of 55 who is downsizing can take advantage of the Downsizer Contribution Concession. However, there are a couple of conditions:
- You need to have owned the home for a minimum of 10 years
- You must make the contribution within 90 days of receiving the funds[i]
- The proceeds of the sale must be at least partially CGT exempt
- The home must be a permanent dwelling, not a caravan, motorhome or boat
How Much Can I Contribute?
The maximum you can contribute through this concession is $300,000 per person, and it does not impact your concessional cap amounts. So, you can still take advantage of any other concessions you qualify for.
The caveat is that your contribution cannot exceed the sale price of the home. In other words, if you are a couple, and sell your home for $500,000, you can divide the contribution up however you choose, providing neither person invests more than $300,000 in their superannuation via the Downsizer Contribution Concession. However, you cannot invest more than a total of $500,000.
One Time Offer
The Downsizer Contribution Concession is only available once. If you’re thinking of making an ‘interim’ move to downsize while you’re still working, but planning on a more substantial one on retirement, it’s important to do the sums. You can’t make a $100,000 contribution now, and another $200,000 down the track. You only get one bite of the cherry. Of course, that could change, but it’s not good planning to gamble on a change that may never happen.
So, think carefully. Will you have sufficient funds available after an interim move to make a $300,000 contribution? Or is it more likely you will have that level of surplus in your next downsize?
Talking your options through with an experienced financial advisor can help you make this decision. If now is not the time to take advantage of the Downsizer Contribution, there are other options for investing that surplus.
What If I Have More than $300,000?
If you are in a position where you have greater than $300,000 per person surplus after selling your home and making new living arrangements, you will need to make a decision on how to disburse the balance of those funds.
It may be that you can take advantage of the other concessional contribution schemes available, or you may wish to invest in property, shares, or managed funds. It’s important to get the right professional advice around this disbursement in order to minimise your tax exposure, and maximise any government benefits you may be eligible for.
What If I Want To Keep The Cash?
If you would like to keep some, or all, of the proceeds of the sale in cash so you can access it for things like renovating your new home, buying a new car, or taking a well-earned holiday, you do have an option.
You can make an ‘in specie’ Downsizer Concession Contribution. ‘In specie’ means using an asset, such as shares or a managed fund, in its current form, to make an equivalent contribution rather than using the cash proceeds from the sale of your home.
Usually, this is done through a SMSF.
The only requirement is that the asset used is equal to part or all of the total contribution you are eligible to make, under the Downsizer Concession Contribution.
…And When I Retire?
You should be aware that whatever money you put into your superannuation, or any other asset for that matter, will be taken into consideration as part of your asset assessment for the Aged Pension. At present, the only asset not assessed is your primary place of residence.
As at January 2024 the maximum value of assets you can hold and still qualify for any amount of Aged Pension is $667,500 for a single person and $1,003,000 for a couple.[ii]
Making The Decision
As we mentioned up front, downsizing is not just a financial decision. It’s a lifestyle decision too, so you need to factor that into your planning. Take a look at our article Downsizing Before Retirement for a few tips on things to consider when making what is a big decision.
The Right Advice
Everyone’s circumstances are different, and it’s important to get the right advice for your own personal situation. Making the wrong move now can negatively impact your eligibility for government benefits or tax concessions when you are moving into retirement, a time when your ability to recoup losses and generate income is likely to be reduced.
A qualified financial advisor with experience in downsizing and retirement planning is not just a good idea, but an essential investment in your future financial health.
If you are thinking about downsizing and wondering what the best use of any surplus funds might be, Manly Financial Services have the expertise to give you the right advice. Give us a call on (02) 9976 3388 to a chat about your personal circumstances or contact us via the below link.