Did you know that if you sell your home you may be able to make an extra contribution to your superannuation of up to $300,000 each?
There are a just a few rules though …
From 1 July 2022, you may be eligible if you are over age 60 and make a contribution within 90 days of settlement of a sale (or part sale). To qualify, you and/ or your spouse have owned it for at least 10 years and lived in it as your main residence at some point. The property cannot be a caravan, houseboat or other mobile home.
Whether or not you buy a new home, the maximum contribution is $300,000 for each spouse (unless total proceeds were less than that), and you cannot claim a tax deduction for the amount or have previously made any downsizer contributions. You must provide your super fund with the ATO Downsizer contribution into super form. Invalid downsizer contributions will be treated as personal contributions or rejected for individuals over age 75.
… Phew! So now that you know you can make a downsizer contribution, the question becomes whether you should.
- The main reason you would want to put an extra $300,000 each into super is because super is the most tax effective structure for your retirement savings. You can have a superannuation balance of up to $1.7 million, to be used to start a tax-free pension, i.e. no tax on earnings or on pension payments.
- Is your super balance over $1.7 million or are you retired? Unlike other contributions, it doesn’t matter if you are retired or if your super balance is over $1.7 million, to be able to make downsizer contributions. This may be the last large contribution you can make to boost your balance for retirement.
- Downsizer contributions can be made even if your property was used partly for rental. The amount of the proceeds that you can contribute is the portion that is applied for the main residence exemption. When the property is more than 2 hectares this can get complicated, and you will likely need to seek advice from a tax specialist.
- You are able to make downsizer contributions using assets you already own. This can be particularly useful if you need the cash proceeds to fund a new home purchase and you have a Self-Managed Superannuation Fund. As long as the market value of the asset is equal to the disposal proceeds, it can used to fund the contribution.
- Do you have a high taxable component in super at the moment? Downsizer contributions are made ‘after-tax’ and boost your tax-free balance. This means they also come out tax-free and are not subject to 15% tax upon death if passing to a nondependent beneficiary (e.g. your children).
- Do you have high personal taxable income? Downsizer contributions cannot be used as a personal tax deduction so if you have higher income you may wish to allocate some of the amount to claim a tax deduction instead.
- You can only use this opportunity once, so depending on your situation, you may consider strategically utilising your non-concessional cap first. This is because once your super balance is over $1.7 million, you can no longer make further nonconcessional contributions.
- You need to meet a condition of release to access your super. So if you are under age 65 and still working, you need to consider if you will need accessibility to this money e.g. to buy a new home. If so, locking it away in super might not be the best place for it.
- Are you receiving, or expecting to receive Centrelink benefits, including the Age Pension or Commonwealth Seniors Health Card? Selling your home and contributing proceeds to super can affect your eligibility. This is because while the home is exempt from the assets test for Centrelink purposes, superannuation that has not been grandfathered is subject to a deemed rate of income as part of the income test.
- Of course, another aspect to consider is that if you sell your home, what will you purchase to replace it, and will you have any spare funds left over to fund the strategy?
As you can see there is a lot to think about when considering if you should make a downsizer contribution and whilst it is a great opportunity for some individuals to boost their superannuation, it might not always be the best path to take.
Superannuation contribution rules are complex. It is a good idea to seek advice. If you are interested in learning more about the types of contributions you can make, please contact us.
This article was first published in Personal Wealth Adviser – Issue 4.