Wait! Don’t sell your home to downsize yet.

You could enhance your retirement outcome by using downsizer contributions.

Legislation has passed enabling individuals to contribute the proceeds from the sale of one eligible property into Superannuation, without needing to satisfy the work test and bypassing other contribution rules.

From 1 July 2018, if you are 65 or older (at time of contribution) and you meet the eligibility requirements (shown below), you could choose to make a downsizer contribution into your superannuation of up to $300,000 from the proceeds of selling your home. That means up to $600,000 for a couple.

Note: If you sign a contract before 1 July 2018, you will not be eligible.

If you sell your home and choose to make a downsizer contribution, there is no requirement for you to purchase another home.

ELIGIBILITY

So, what is the criteria to be eligible for the Downsizer measure?

You will be eligible to make a Downsizer contribution to super if you can answer yes to all of the following:

  • you are 65 years old or older at the time you make a downsizer contribution (you could be 64 at time of signing the contract, but you need to be 65 when you make the contribution – there is no maximum age limit)
  • the amount you are contributing is from the proceeds of selling your home where the contract of sale was exchanged on or after 1 July 2018
  • you make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually the date of settlement
  • your home was owned by you or your spouse for 10 years or more prior to the sale – the ownership period is generally calculated from the date of settlement of purchase to the date of settlement of sale
  • your home is in Australia and is not a caravan, houseboat or other mobile home
  • the proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT rather than a pre-CGT (acquired before 20 September 1985) asset
  • you have provided your super fund with the downsizer contribution form either before or at the time of making your downsizer contribution
  • you have not previously made a downsizer contribution to your super from the sale of another home.

There are additional points to note:

  • You can only make downsizing contributions for the sale of one home. You can’t access it again for the sale of a second home;
  • You can make multiple contributions within the maximum limit, but they must be made within the 90day time period and a new contribution form must be done for each contribution;
  • Downsizer contributions are not tax deductible;
  • Downsizer contributions are exempt from the concessional and non-concessional contribution rules;
  • The ATO has discretion to grant an extension of time for you to make your downsizing contributions where your circumstances warrant it;
  • Contributions will be taken into account for determining eligibility for the age pension.

Maximum downsizer contribution amounts

If eligible, you can make a downsizer contribution up to a maximum of $300,000. This means for a couple that they can contribute a total of up to $600,000 into their Superannuation.

The contribution amount can’t be greater than the total proceeds of the sale of your home.

Some examples to help you

  • Example – contributing $600,000 into Superannuation

Bill and Doreen are both 80 and sell their home that they owned for 50 years for $975,000. Each spouse can make a contribution of up to $300,000, hence a total of $600,000.

Even though they rented it out for 15 years while they did the “grey nomad” caravan adventure around Australia, they still meet the eligibility criteria.

  • Example – limit is less than maximum

Don and Thelma sell their home they owned for 20 years for $400,000. The maximum contribution both can make cannot exceed $400,000 in total. This means they can choose to contribute half ($200,000) each, or split it – for example, $300,000 for one and $100,000 for the other.

The ownership of the home was in Thelma’s name only, however Don is still entitled to make a downsizer contribution as he is a spouse.

  • Example – not 65 at time of sale

Bob is 67 and Doris is 64 and they sign a contract on 1 July 2018 (1) to sell their home and decided on a 60day settlement period (2).

Doris has her 65th birthday on 14 November 2018 (3).

She is now entitled to make a downsizer contribution as she is within the permitted timeframe of 90days (4) from receiving the proceeds of the sale (usually the settlement date).

Hence, as Doris has now turned 65, she may make a downsizer contribution from 14 November 2018 to 28 November 2018.

Example Timeline

(1)________________(2)__________________________(3)_________(4)

1 July                          30 August                              14 November            28 November

  • Example – Upsizing

Fred and Wilma are both 71 and they both retired at 65. They don’t qualify for the pension as their existing cash and investments are $250,000 above the upper limit to receive a pension and they haven’t been able to make further contributions to Super since their retirement. They have been thinking of a sea-change. They decide to upsize (in price, not a bigger house). They sign a contract on 1 July 2018 to sell their home they have lived in for 25 years for $700,000 and they want to buy a unit at the Sunshine Coast for $950,000.

They are eligible to contribute up to $300,000 each into Superannuation, hence up to a total of $600,000 from the proceeds of the sale. This potentially moves money from a taxable environment to a tax-free environment if they commence an income stream with the Superannuation money.

They can then use their existing cash holdings to supplement the purchase of the new unit. As they have used some of their surplus cash and this is their new home, it will be exempt from the Assets and Income tests and hence they may now be eligible for a small pension.

  • Example – extension granted (details from ATO website)

Ben is 77 and decides to sell his family home of 15 years. Settlement occurs on 1 August 2018. He purchases a new home in a retirement village which is due to settle on 1 October 2018.

The retirement village has only just been built and Ben’s settlement is delayed until 1 December 2018 while final council approvals are obtained.

Ben does not want to contribute funds from the sale to his super until after the settlement of his new property to ensure he has enough money to purchase and move into the property.

Upon his request, the ATO will give Ben an extension of time to contribute until 1 February 2019. This extension allows Ben enough time to settle on the new property and make a contribution of the remaining money from his sale.

Ben can afford to contribute $200,000 to his super fund after the sale and makes this on 25 January 2019.

CAUTION – EXTRA AWARENESS NEEDED

As with all shiny new things or “opportunities”, you need to look beyond the initial hype to determine whether this new measure is appropriate for you.

  • Major opportunity:

Ability to get money into Super and potentially a more tax effective area;

  • Possible disadvantage:

Your main residence is exempt from the Assets and Income tests for receiving the Age Pension, hence if you downsize, the surplus cash (whether used as a downsizer contribution, used for other investments or left as cash in the bank) is now assessable.

What to do?

If you are nearing or have reached 65 and you are considering downsizing, relocating or even upsizing, we recommend you discuss your circumstances with us before embarking on any grand plans.

For qualified, professional advice, talk with Ian today on 3822 7201 and find out how the new Downsizer rules may benefit you or your family members.

 


 

Ian Chester-Master is a Certified Financial Planner with over 20 years’ experience and a Director of Your Financial Design P/L.

Your Financial Design Pty Ltd is a Corporate Authorised Representative (1233744) of Madison Financial Group Pty Ltd | AFSL No. 246679 | ABN 36 002 459 001.

General Advice Warning

Before acting on any information in this article, we recommend that you consider whether it is appropriate for your circumstances.  You should not act on any advice until we have fully considered your personal circumstances and provided you with a Financial Services Guide, Statement of Advice and Product Disclosure Statement/s.