In Australia, we’re fortunate to have a superannuation scheme that makes for a more affordable and comfortable retirement; however, it does come with a few pitfalls.
When building your superannuation fund, the last thing you want to have to do is pay tax on any additional contributions you decide to make. But what if there was a way to make a significant payment to your super without having to pay tax?
One of the most frustrating things with super is the Contributions Cap, but there are ways to navigate around it. One of which is through Downsizer Contributions. If you want to understand the benefits of utilising Downsizer Contributions, read on.
What is a Downsizer Contribution?
As we get older, many of us no longer need a large home and decide to move somewhere that requires less maintenance. This decision can be beneficial for many reasons, one of them being increasing your super.
Downsizer Contributions are a payment that eligible older Australians can make to their superannuation fund when they decide to sell their home or an investment property and opt for a lower maintenance or smaller property to live in, hence the idea of ‘downsizing.’
Essentially, a Downsizer Contribution is the ability for older Australians to deposit another $300K per person ($600K for a couple) into their superannuation after the sale of their property.
The Downsizer Contribution was introduced in the 2017-18 federal Budget as part of the government’s package of reforms to reduce pressure on housing affordability in Australia and to assist older Australians in building their retirement funds.
Why are Downsizer Contributions so great?
Downsizer Contributions are a great way to improve your retirement. This is because:
- It doesn’t count toward your Contributions Caps as it is not considered a concessional or non-concessional contribution.
- You won’t pay tax on your Downsizer Contribution
- No work test or age limits apply to Downsizer Contributions
- You aren’t required to buy a new home after selling your old one
- It can be made even if your Total Super Balance is more than $1.6M, unlike non-concessional contributions.
- You can have more in super and the tax-effective environment it provides.
- Both members of a couple can take advantage
- Having more money in superannuation can also give you more flexibility for your Estate Planning
How do I know if I’m eligible?
Downsizer Contributions have some specific eligibility criteria.
Firstly, it is only available to those over the age of 65, but will be reduced to the age of 60 as of July 1st 2022. Other criteria include:
- Ensuring you are only using the proceeds from your selling your home.
- You or your spouse have owned the home for ten years or more.
- You make the contribution within 90 days of receiving the proceeds from the sale.
- Your home is exempt from Capital Gains Tax under the main residence exemption.
- You provide the fund with the Downsizer Contribution into super form before or at the time of the contribution.
- You have not previously made a Downsizer Contribution.
Is there anything I should be aware of?
While the Downsizer Contribution is an excellent option for those seeking to downsize their living and build up their super, there are some things you should be aware of before making a Downsizer Contribution.
It is important to understand that:
- The Downsizer Contribution will count towards your Transfer Balance Cap. This cap applies when you move your super savings into the retirement phase.
- You can only access the Downsizer scheme once. This means you can only make Downsizing Contributions for the sale or disposal of ONE home, including the sale of a part interest in a home. You can’t access the Downsizer scheme again where there is a subsequent sale or disposal.
- Downsizer Contributions are not tax-deductible and will be considered for determining eligibility for the age pension.
- If your Downsizer Contribution puts your total super balance over your personal Transfer Balance Cap (between $1.6 million and $1.7 million), you generally won’t be able to make non-concessional contributions in future financial years.
- It will count towards your Personal Transfer Balance Cap if you use your super to open a pension account.
If you’d like assistance with making a Downsizer Contribution or would like to see if you’re eligible, contact the experts at PCR Accounting & Advisory today on 03 9847 7516.
Owner of PCR Accounting & Advisory, Peter Marmara-Stewart is a top-tier accountant and financial advisor dedicated to helping clients reach their business goals and achieve financial freedom. Peter is highly regarded for his client-focused approach and entrepreneurial spirit, catering to a diverse range of professionals across a wide scope of industries all across the country. Peter’s expertise can help you plan effectively, set goals, maximise profits and protect your assets. Get in touch today on (03) 9847 7516.