How do downsizer contributions work with my SMSF?
For many years, housing affordability has been an issue in Australia. As a solution, the government introduced a measure in the 2017 Budget allowing older Australians to utilize the proceeds of the sale of their family home into their superannuation without it counting towards any contribution caps. The goal is to encourage the elderly to downsize from larger homes, which are no longer suitable for their needs, to free up housing for younger and growing families while boosting retirement assets.
Like with most things there are a few considerations you need to make before deciding to make a downsizer contribution.
How it works
If you are 60 years old or above from 1 July 2022, you are eligible to contribute to your super fund up to $300,000 from the proceeds of selling your home. This means an eligible couple can contribute up to $600,000 (i.e. $300,000 each) into their Self Managed Superannuation Fund from the sale of the family home. The contribution will not be counted towards either your concessional or non-concessional contribution caps.
There is an added advantage as well – with the downsizer contribution option, more members can contribute to their SMSF as the following restrictions do not apply:
- No contributions are allowed for individuals over 75 years old;
- Non-concessional contributions are not permitted for funds with a total balance exceeding $1.7 million.
This means that if you are over 75, and/or have a total superannuation balance above $1.7 million you are still able to utilize the downsizer contribution.
Am I eligible for a downsizer contribution?
Before making the contribution you need to ensure you meet all of the following conditions;
- You have reached the eligible age (60 or older) on the date you make the downsizer contribution. Note: The eligible age prior to 1 July 2022 was 65 years old before it was changed to 60 years old.
- You, or your spouse, must have owned the home for at least 10 years before the sale.
- The home must be in Australia and is not a caravan, houseboat or any other type of mobile home.
- The home was classed as your main residence and therefore exempt from Capital Gains Tax (CGT).
- Before making your downsizer contribution, you will need to have completed and signed a Downsizer Contribution Form. We can assist you in completing this form as part of our service.
- You make the deposit to your SMSF within 90 days of receiving the proceeds of the sale (usually at the date of settlement).
- You have not previously made a downsizer contribution to your super from the sale of another home or part sale of your home (such as a subdivision).
What happens if the property is only in the name of one person? Can a couple still make a contribution together?
If the property is only in your name or just in your spouse’s name, both can still make the downsizer contribution of up to $600,000 ($300,000 each) provided all the other eligibility conditions are met.
What if a contribution was already made, but it was determined that the eligibility requirements were not met?
If you made a downsizer contribution on the assumption that it was acceptable but later discovered that you were ineligible, the SMSF will then see if the contribution can be accepted as a personal contribution under the standard contribution rules (age, total super balance, and contribution cap limits).
If so, the SMSF will then it will count towards the contribution to your relevant contribution cap. This may mean you will also be liable or excess contributions if the amount exceeds your available cap.
On the other hand, if the SMSF cannot accept the contribution, it should be returned to you within 30 days from the original deposit date.
What are the steps to making a downsizer contribution to an SMSF?
Step 1: Check that you meet all the eligibility requirements.
Step 2: If you are receiving the age pension, or intending to apply, consider how the sale of your home and downsizer contribution can affect your entitlement. Depending on your circumstances, your benefit may be reduced.
Step 3: Contact us! We can confirm your eligibility and assist in completing the Downsizer Contribution Form required to make the deposit to your SMSF. We recommend doing this once you have accepted a contract for the sale of your home.
Step 4: Deposit the contribution to the SMSF within 90 days from the settlement of the sale.
Downsizer Contributions: Important Things to Remember
Some reminders and considerations to think about when you’re planning to make downsizer contributions:
- The downsizer contribution amount has a limit of $300,000 per individual and cannot exceed the actual sale proceeds of the home. For example if you sell for $700,000 you are still limited to a maximum of $300,000 or $600,000 per couple.
- The downsizer contribution does not count towards the contribution caps, however will forms part of your tax-free component of your member balance which is beneficial for estate planning purposes.
- The contribution is still allowed even if a member has a total superannuation balance of over $1.7 million.
- However, the contribution will increase the member total super balance the following year as this amount is recalculated each financial year.
- If you commence a pension from the contribution the amount will be counted towards the Transfer Balance Cap.
- You can only use the Downsizer Contributions from selling one home and can’t be used again for selling a second home. You can however make multiple deposits provided the proceeds are all from the same sale.
- You don’t need to purchase a new home after selling the family home and making the contribution.
- Downsizer contributions will be taken into account to determine the eligibility for the age of pension (proceeds in an SMSF count towards the asset and income test).
Please don’t hesitate to reach out to our team at SMSF Australia and we’ll be more than happy to address your queries.