What are the pros and cons of downsizer contributions?

Downsizing is part of the retirement plan for many Australians.

Selling the family home not only means less work and maintenance, it can also free up the equity you have built to boost your retirement income.

Australians aged 55 or older can now contribute part or all of the proceeds of the sale of a home to their superannuation.

But some conditions and limits apply, so it’s worth weighing up the pros and cons to determine if a downsizer contribution is the right move for you.

What are downsizer contributions?

From January 1, 2023, people aged 55 or older can make a downsizer contribution to their superannuation of up to $300,000 ($600,000 per couple) from the proceeds of selling their home.

It is a tax-free contribution that can be made in addition to any concessional and non-concessional contributions.

If you gift your home to a family member, you cannot use that gift (considered $0 in sale proceeds) to make a downsizer contribution.

Who is eligible to make downsizer contributions?

You are able to make a downsizer contribution if you meet all of the following requirements:

• You are at least 55 years old on the date you make the downsizer contribution (for downsizer contributions made between July 1 and December 31, 2022, you must be 60 years old).
• The house was sold on or after January 1, 2023.
• You or your spouse owned the home for more than 10 years prior to the sale.
• The house was your main residence and is exempt or partially exempt from capital gains tax (CGT).
• You have not made a downsizer contribution before from the sale of another home.
• The downsizer contribution cannot be greater than the sale proceeds of your home.
• The downsizer contribution is made within 90 days of receiving the sale proceeds. However, an extension may be allowed by the Australian Taxation Office (ATO).
• You complete the required ATO form and provide this to your super fund before or when the downsizer contribution is made.

What are the pros of downsizer contributions?

Superannuation is one of the most tax-effective ways to invest your retirement savings, considering you can use your super balance – up to $1.7 million – to start a tax-free pension.

Downsizer contributions are also an opportunity to top up your super between the ages of 55 and 75, when superannuation rules stop you from making voluntary contributions.

The sale of a property that was partly used as a rental can also be eligible for downsizer contributions.

The downsizer contribution is a particularly attractive incentive for sea and tree changers, who see significant financial gain when they sell their home and move to a more affordable, regional area.

What are the cons of downsizer contributions?

If you have a higher income, it’s important to note you can’t use your downsizer contribution as a personal tax deduction.

Downsizer contributions count towards your transfer balance cap, which limits the amount you can move into the tax-free retirement phase to start a super income stream or pension.

If a downsizer contribution pushes your super balance over $1.7 million, that will prevent you from making further non-concessional contributions.

Your downsizer contribution is also considered when assessing your eligibility for Centrelink benefits including the Age Pension and Commonwealth Seniors Health Card.

Speak to the superannuation experts

Are you looking to downsize but unsure if the downsizer contribution is the best investment option for you?

Contact LDB Group for superannuation guidance by calling (03) 9875 2900 or filling out the form below.