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Downsizer Contributions to super
– Who can benefit

Downsizer Contributions to super
– Who can benefit

Part 1 - Rules

Last week we were discussing the Downsizer Contribution, what type of contribution that is, how it works and what are the rules that you have to meet to be eligible to make this type of contribution. If you missed that article, read it here:
Downsizer Contribution to super – Part 1.

And now I will explain:

  • who will benefit from this strategy,
  • essential factors that you need to be aware of and
  • I will give you some solid examples of how it works in real-life situations.

The author of “The Little Prince” – this was one of my favourite books from my childhood. He said: “A goal without a plan is just a wish”. If you want to have safe, secure but also enjoyable and financially successful retirement, you need to do some solid planning and not just wishful thinking.

So let’s discuss this beneficial type of superannuation strategy.

Who can benefit from Downsizers Contributions:

1. This strategy can be very beneficial if you are between the ages of 65 and 74 as you are not required to meet any work test in order to contribute.

2. It can be particularly appealing if you are over the age of 74, as this is just about the only way how you can add to your super fund.

3. If you are a self-funded retiree who would like to put more money to super to improve your income level, especially if you know that you are not going to be eligible for Age Pension or any other government benefit.

4. Your super is already over $1.7mil in value and you want to take advantage of a lower superannuation tax rate of 15%, rather than paying tax outside of super, but you should also understand the transfer balance cap rules, that will still apply, regardless of the value of your superannuation. My recommendation is to get good retirement advice how to deal with those types of problems.

Other important issues you need to remember or consider:

1. The Downsizer Contribution can affect your Age Pension entitlement – when money is part of the value of your home, it is exempt from Income and Assets Test. However now, that you’ve decided to extract funds from your home equity, the added contribution will impact the level of Age Pension you might be eligible for or you might lose that benefit altogether which will impact your overall financial situation.

So please contact me to find out what strategies to use, to have both, income from your super and some Age Pension as well.

2. Please also be aware that the increased super balance will impact your eligibility for residential Aged Care as well as Home Care Services. If this is you or maybe this is the case of your parents, please contact me for a personal advice.

3. As mentioned before, you are required to make the downsizer contribution within 90 days of receiving the proceeds, which is usually your settlement date, however if due to factors outside of your control there is a delay in receiving funds, you can apply to the ATO for an extension of the contribution period.

4. The downsizer contribution doesn’t have to be paid in one lot, as a matter of fact, you can do multiple contributions, as long as the total does not exceed the allowable limit of $300,000 per eligible person and all contributions are completed within the prescribed 90 day period.

5. If for some reason ATO decides that you have not met all the rules of the downsizer contribution, your super fund will assess if they can keep funds under the regular non-concessional contributions. If not, the balance will be refunded back to you.

6. There is no requirement for you to purchase a new home. Sometimes it might be beneficial due to many reasons not to buy a new family home.

It could be a lifestyle choice, you might be advised that becoming a non-homeowner is a better financial and income decision, especially for Age Pension payments. Or maybe your retirement plan is to live overseas after selling family home in Australia and after applying for Age Pension (timing here is crucial).

Let’s check some examples:

Steve is 76 and Margaret 72 are married and decided to sell their family home of 25 years for $900,000. Each partner can contribute up to $300,000 to their respective super funds.

Tom 67 and Ella 64 also married sold their home for $850,000. Tom can contribute to super up to $300,000, but Ella is not eligible for downsizer contribution being below the age of 65.

Martin 71 and Cate 70 have sold their home for $450,000. As the total sale price is $450,000 and the total contribution cannot exceed the sale proceeds, therefore they can only contribute up to $450,000 and split the contribution in any way they wish up to $300,000 per person.

Therefore, they can contribute $200,000 for one partner and $250,00 for the other, or $300,000 for one and $150,000 for the other. It is a good idea to make a good plan how to split those funds for the best income planning for the rest of your retirement.

Bob 68 and Paula 67 sold their home for $600,000, but only Bob was on the title. So what is going to happen in this situation? Is Paula eligible, since legally she is not the owner of family home. Actually, they both are still eligible to contribute $300,000 each to their respective super funds.

Mary is 69, her husband Ryan died a year ago. He was the original owner of the house for over 20 years, but they were only married for 5 last years of Ryan’s life.

Mary wants to move on with her life and sold the house for $640,000. She lived in the house for 5 years while Ryan was alive and 1 year after his death. So altogether she lived in that house only for 6 years, not the 10 year period required.

Would she be eligible to contribute to super? What do you think? Well…..yes she is eligible as her life partner lived in the house for 10 years, this is sufficient evidence for ATO to accept Mary’s Downsizer contribution eligibility.

As you can see, each situation might be different, and each requires its own specific planning.

Not only it is sometimes not easy to figure out if you are eligible for the Downsizer contribution or any superannuation contribution for that matter. But what is even more important, you should know precisely the outcome, long before you start selling your home. Otherwise, you might have a nasty surprise like losing your Age Pension entitlement when you are completely unprepared for it.

One good news that I want to mention here is that in the 2021-22 Federal Budget the government is proposing to reduce the age of eligibility for a downsizer contribution from 65 to 60, but it still needs to pass as legislation. The plan is to commence the change from 1st July 2022.

For more information read the article: Federal Budget 2021 – 22 for Pre and Post Retirement”

Before you make your decision if the Downsizer Contribution is for you, check this with an experienced Retirement Planner, so you can implement the most beneficial strategies for your future retirement.

There are so many things that require your attention and your consideration, that this professional advice can actually go a very long way for you.

Retirement is a Journey NOT a Destination, so please be well prepared for the ride. 

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement
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