Superannuation Downsizer Contribution

Written on the 23 February 2024 by Dean McKinnon

If you are nearing retirement, and your Financial Pan requires a maximum contribution to superannuation, you may be able to take advantage of the recent changes to the superannuation "Downsizer Contribution" rules.

Superannuation contributions have limits that cannot be exceeded without incurring penalties and therefore if you are trying to maximise contributions to your super before retiring, taking advantage of special rules allowing additional contributions would be a distinct advantage.

For this current 2024 Financial Year concessional contributions are limited to $27,500. Concessional contributions, for which a tax deduction is claimed, include employer contributions, payment of Life and TPD insurance premiums for policies that are owned by a superannuation trustee, and personal contributions made by you.  Concessional Contributions are usually taxed at 15% but may be higher, depending on your income in the Financial Year at the time of contribution.

Non-concessional contributions are limited to $110,000 for this 2024 Financial Year. Non-concessional contributions are basically any contributions made to your super for which no tax deduction is being claimed.  However, non-concessional contributions have a 'Bring Forward' rule that allows an additional two years' contribution.  Essentially this equates to an individual being able to make a non-concessional of up to $330,000 in one year, providing no further non-concessional contributions are made for the following two Financial Years.  This means a couple potentially has the ability to contribute $660,000 in one year, and this strategy is used a lot when developing a Financial Plan for retirement.

Now for the exciting part (exciting, if you're a Financial Planner!): In addition to the above-mentioned contribution limits, if you had decided to 'downsize' your family home as part of your retirement plans, you may be able to contribute more money into your super.

Quite often as you near retirement you may decide the family home is too big and requires way too much time and effort to maintain, and so you decide to sell it and buy a smaller home that will be more suitable to your retirement lifestyle.  A smaller home is likely to be easier to maintain and have lower purchase and ongoing costs compared to your family home.  This is where the Downsizer Contribution may be the perfect tax-effective strategy for your retirement income needs.

Let's say your family home is worth $1.5m and your new retirement home will cost you $1.2m.  The extra $300,000 you have can be contributed to your super without exceeding your non-concessional or concessional contribution limits.

The main advantage to using super to fund your retirement income needs is the lower rate of tax on earnings.  And, if you use your super to purchase an Allocated Pension, and then use the Pension investments to pay yourself an income, then there is likely no tax payable on the investment earnings or the payments to you (although the Federal Government is now trying to introduce a tax on your Pension fund, depending on the value of the fund, but that's another story and it hasn't been decided yet, so let's not get too bogged down on what might happen!).

The Downsizer Contribution allows you to contribute up to $300,000 to your super investment, but of course there are a few hurdles to overcome (you didn't think the government was going to make it easy for you, did you?).

The ATO has a comprehensive explanation of the ins-and-out and the can-dos-and-cants (probably not a word, but we'll run with it), but following are the main points you need to be aware of before you jump in to selling the family home and spend the kids inheritance :))   :-

1. Your family home must 'qualify' as a 'dwelling' (no caravans, houseboats or mobile homes unfortunately)
2. The money you use to make the contribution was from the sale of your home
3. You must be aged between 55 and 65 at the time the contribution is made (they changed the rules on age eligibility, so you'll to check on this one)
4. The contribution must not exceed $300,000 in total (it's not $300,000 for each if you are a couple)
5. You must have owned the home for 10 years prior to sale

Of course there is always fine print, so it is strongly recommended you seek professional advice before even considering if the Downsizer Contribution is the right strategy for you.  If you would like a free appointment with no obligations to discuss your Financial needs then don't hesitate to contact us.