Downsizer Contribution: What You Need to Know

What is a Downsizer Contribution?

If you're 55 or older and meet certain requirements, you can make a Downsizer Contribution to your super of up to $300,000 ($600,000 for couples) from the sale of your home. This is a great opportunity to grow your retirement savings and boost your super balance.

Why is the Downsizer Contribution Beneficial?

While you don't get the same tax deductions as concessional contributions, the Downsizer Contribution is a powerful tool for moving a significant amount of money into a low- or even zero-tax environment. Once you meet the conditions for releasing your super, you can transfer the money into an account-based pension, which offers major advantages:

-          Zero tax on investment earnings (including income and capital gains)

-          Zero tax on your income (if you’re over 60)

-          Zero tax on lump-sum withdrawals

By contributing more to your super, you're growing your retirement savings in a tax-efficient way.

How Much Can You Contribute?

You can contribute up to $300,000 (per person) or the sale proceeds, whichever is less. So if your home sells for less than expected, your contribution limit will be lower. Even if you gift your property (say, to a family member), the contribution will be limited to the sale proceeds. Debt on the property won’t impact the amount you can contribute.

How Does the Downsizer Contribution Impact Your Contribution Caps?

The Downsizer Contribution doesn’t count as either a concessional or non-concessional contribution, so it doesn’t affect your contribution caps. This means you can still use the bring-forward and carry-forward rules, provided you meet all the eligibility criteria for each.

Your Downsizer Contribution won’t impact your total superannuation balance (TSB) until the end of the financial year when it’s recalculated to include all contributions.

However, the Downsizer Contribution will count toward your Transfer Balance Cap (TBC), which is the limit on how much you can transfer from your super accumulation account into a tax-free pension account.

Downsizer Contribution and Other Strategies

If you're also eligible for the bring-forward rule, you can potentially contribute $300,000 through the Downsizer Contribution and up to $360,000 through the bring-forward rule, which could total $660,000 each or $1.32 million combined in a single year. If you have additional funds, you could contribute even more, taking advantage of other contribution options.

Timing Your Contribution

While the Downsizer Contribution doesn’t affect your contribution caps, you need to consider the timing. Once the financial year ends, your TSB will include your Downsizer Contribution, which could affect your future contribution options, like catch-up contributions. It’s important to factor this into your planning.

Do You Need to Notify Anyone?

Yes, you must notify your super fund that the deposit is a Downsizer Contribution by submitting the ‘Downsizer Contribution into Super’ form either before or at the time of making the contribution. You must do this within 90 days of receiving the sale proceeds, or it may be mistakenly counted as a non-concessional contribution, affecting your caps.

Do You Need to Buy Another Property?

No, there’s no requirement to buy another property to make a Downsizer Contribution. You can sell your home, downsize to a smaller property, or even buy a more expensive property. The key requirement is that the contribution comes from the sale of your primary residence.

Who is Eligible?

To make a Downsizer Contribution, you must meet these criteria:

-          Be at least 55 years old (there’s no maximum age limit, unlike other voluntary contributions)

-          The contribution comes from the proceeds of selling your home

-          The property was owned by you or your spouse for at least 10 years

-          It was your primary residence (you don’t have to have lived there the whole time)

-          The property is in Australia (not a caravan or houseboat)

-          You’ve submitted the Downsizer Contribution form to your super fund within 90 days of receiving the sale proceeds

-          You haven't previously made a Downsizer Contribution from selling another home

The Potential Downsides of Downsizing

While the Downsizer Contribution offers benefits, there are some costs to consider:

Irrecoverable Costs:

Selling costs: About 2.2% of the sale price for the agent’s fee (e.g., $26,400 for a $1.2 million home)

Preparation costs: 1-2% to make the home presentable for sale (e.g., $12,000-$24,000 for a $1.2 million home)

Stamp duty: Up to 5% on the new home purchase (e.g., $40,000 for an $800,000 property)

Additionally, you'll be forfeiting the growth of the asset, which would otherwise be capital gains tax-free as your primary residence.

Loss of Age Pension Entitlements: 

Downsizing can affect your Age Pension eligibility, as super is considered in the assets and income test, unlike your primary residence. If you downsize and invest the proceeds in super, you may lose part or all of your Age Pension entitlements.