From 1 July 2018, a new opportunity has been available to let you contribute more to your super.
Commonly referred to as the “downsizer strategy”, a range of measures in the 2017-18 Budget announced by the Government to help people purchase property encouraged those aged 65 and above to consider downsizing their homes.
More importantly though, the downsizer strategy is opening up opportunities for people to top up (or in some cases even commence) their super, and has fast gained traction as one of the most exciting strategies available. A recent release from the Australian Taxation Office1 has confirmed that over 5,000 individuals have used this strategy since its commencement, with 55% of those being females.2
With average superannuation balances at the ages of 60-64 ($270,710 for men and $157,050 for women) still below ASFA’s $640,000 projection for a comfortable retirement for a couple, an opportunity to top up your super is an important consideration, particularly as you near or enter retirement.
In order to utilise the downsizer strategy to make contributions to super, you need to be at least 65 years of age.
Despite existing opportunities for super top ups between ages 65 and 74 (provided you meet the work test or work test exemption), this doesn’t suit everyone. It also doesn’t consider the challenges involved in finding a suitable role from the age of 65 if you aren’t currently working, so it’s important to keep that in mind.
The benefit of the downsizer contributions strategy is that there is no requirement to meet a work test for this contribution, which makes it ideal for those aged between 65 and 74. It is even more appealing if you are aged at least 75, as generally outside of a downsizer contribution, you are otherwise no longer able to make voluntary contributions.
The total superannuation balance threshold of $1.6 million that would normally prevent an individual making further non-concessional contributions to super doesn’t apply for downsizer contributions.
In addition to the current age 65 threshold, there are a number of other important criteria to be met.
First, you must sell a property that is located in Australia, and you must have owned the property for at least 10 years.
Next, when you sell that property, you need to be eligible for at least a partial exemption from capital gains tax (CGT) on the sale of the property under the “main residence” provision. Basically, this means the property needed to be your principal place of residence for some time during its ownership. If you purchased the property before 20 September 1985 (pre-capital gains tax), you still need it to have been your principal place of residence at some stage during ownership. Keep in mind, it also doesn’t matter if the exemption from CGT is a full or partial exemption, which means the property could have been an investment at some stage during your ownership.
If you qualify as a “downsizer”, you may be eligible to make an additional contribution of up to $300,000 into super. It’s an after tax contribution so no tax is paid on the way in, and because you are over 65, it is returned tax free when you seek to withdraw these funds in the future. Note, that if you are eligible to make other contributions to super, you can still do this.
The opportunity for couples is even greater.
If your spouse qualifies, then they can also contribute $300,000 (which equates to $600,000 in total), even if only one member of the couple has owned the property.
To do this, however, the sale price is key, as your couple contributions cannot be more than the total sale price of the property.
If you are hoping to qualify for the Age Pension, the impact of selling an asset needs to be considered. The value of your main residence is excluded from the assets test, however if it is sold, and some of the proceeds added to your super, that value will then be assessed and may reduce your age pension benefits.
Perhaps the most important issue to be aware of is the timing of the contribution to super under the downsizer contributions strategy. There is a time limit of 90 days from receiving the sale proceeds to putting money into super.
Because of this, you need to notify the superannuation fund at the time of the contribution (or earlier) that the contribution is a downsizer contribution. If you forget to notify the fund in advance, then you could be deemed to have made contributions in excess of what is permitted, which could result in the amount being returned to you, or, penalties applying.
For many, the attachment to their principal residence is an important factor which means the downsizer contribution is not an option, even if you qualify in all other respects.
Given many Australians have their savings invested in their home, this opportunity to contribute more to super may offer a welcome relief. Like all things with super and finance in general, getting it right is important and you should seek professional guidance when considering what to do next.
EMFS was formed in 2001 originally to service the financial planning needs of the clients of Nexia Edwards Marshall, Chartered Accountants. In addition, we now service clients referred by other accounting firms, lawyers and clients who are not serviced by Nexia Edwards Marshall. We manage funds totalling about $250m on behalf of clients.
2 - https://www.ato.gov.au/Tax-professionals/Newsroom/Superannuation/Super-Downsizer-Measure---eligibility,-take-up-and-common-errors/
Liability limited by a scheme approved under Professional Standards Legislation. Contents of this publication are general of nature and are not intended to be used for decision making purposes. Edwards Marshall Financial Solutions Pty Ltd ABN 45 096 434 842 is an Authorised Representative of Edwards Marshall Advisory Pty Ltd ABN 18 600 878 555. AFS Licence No. 479 792.