What are the Downsizer Contribution rules?

There are many detailed rules to understand when it comes to making contributions to your super. And then there are a whole lot more when it comes to accessing it! But the relatively recently expanded downsizer contribution rules are well worth exploring for two reasons.

Firstly because they allow you to put significant sums of money into your super in one hit. And, secondly, because the downsizer contribution is available to those aged 55 and over. This means that people who may be a long way off retirement have the opportunity to significantly increase their super savings many years before retirement age.

Here’s what you need to know when deciding whether this type of contribution might help fund your retirement.

Introduced in July 2018, the Federal Government’s downsizer contribution allows older Australians to top up their super with some of the proceeds of selling their family home. The theory was that many ‘empty nesters’ living in three or four bedroom homes might want a smaller, more easily maintained property. And that encouraging older Australians to buy smaller homes or apartments would free up housing stock for younger families.

If you are aged 55 years upward, you can contribute up to $300,000 (for singles) or $600,000 (for couples, as long as you’re both eligible) of the sale proceeds, regardless of caps and restrictions that otherwise apply to concessional contributions.

This is an important distinction as no work test or upper age limits apply to downsizer contributions; usually, if you’re aged 67 to 74 you need to satisfy a work test to make voluntary super contributions. People aged 75 and over are generally ineligible to make any voluntary contributions to their super, with the exception of employer contributions.

Downsizer contributions are one-offs, so it is important to be sure it’s a sound strategy before you decide to proceed. These contributions are subject to the same tax rules which are applied for your super. They will also count toward your Transfer Balance Cap (TBC) which refers to the amount you can move from accumulation to income stream phase. The Transfer Balance Cap was increased to 1.9 million as of 1 July 2023.

The Australian Tax Office has seven downsizer contribution eligibility requirements, all of which you need to meet in order to make the contribution and top up your super:

1. You have reached the eligible age (and there is no maximum age limit) at the time you make a downsizer contribution. Here are the downsizer contribution age limits:
   – from 1 January 2023, 55 years or older
   – from 1 July 2022, 60 years or older
   – from 1 July 2018, 65 years or older.
2. You have provided your super fund with the ‘downsizer contribution into super’ form either before or at the time of making this contribution.
3. Your home was owned by you or your spouse for 10 years or more prior to the sale.
4. Your home is in Australia and is not a caravan, houseboat or other mobile home.
5. The proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption or would be entitled to such an exemption if the home was a CGT rather than a pre-CGT (acquired before 20 September 1985) asset.
6. You make the downsizer contribution within 90 days of receiving the proceeds of sale (unless you apply for and receive a special exemption).
7. You have not previously made a downsizer contribution to your super from the sale of another home or from the part sale of your home.

Contribution limits apply to individuals, so both members of a couple can contribute a maximum amount, but only once. Singles may contribute $300,000 and couples can contribute $300,000 each, or $600,000 jointly. Such large contributions can clearly assist with funding a comfortable retirement.

Despite the name, there is no requirement to do ‘down’ in property size. This is why this process is often called ‘rightsizing’ and some retirees will even ‘upsize’. Clearly they can’t contribute profit from property sale unless the new property is less expensive than the former home. Generally speaking, those who downsize tend to choose properties which are more suitable to their retirement lifestyle, sometimes in retirement communities, and properties which are less expensive and easier to maintain.

Is downsizing the right choice for you?Before making your final decision, it’s helpful to fully consider the following pros and cons of downsizing in retirement:

Benefits of downsizer contributions

• You can make a downsizer contribution to add to your super balance
• It frees up money to improve your retirement lifestyle
• A smaller home may have a more suitable layout, be more accessible or easier to maintain
• Your new home could be closer to family and services
• Newer, smaller homes can be more environmentally friendly

Negatives of downsizer contributions

• There are many costs associated with moving, from stamp duty to sale fees and more
• You may need to move further than desired, depending on availability
• A new neighbourhood may see you further removed from family, friends and community
• You may need to let go of possessions with emotional value
• You may have less space for family and guests

Topping up your super using the downsizer contribution may have an impact on your Age Pension entitlements. This is because your home is typically exempt from Centrelink assessment. But if you decide to sell it and use the proceeds to top up your super, that amount of money will then be ‘deemed’ to earn income by Centrelink. This may mean that you no longer pass the income test.

As always, it’s advisable to seek financial advice and speak to Centrelink to discuss your individual circumstances before you commit.

There are always costs associated with selling and buying homes. It’s useful to do the sums first so any anticipated surplus from your property sale won’t be swallowed up by costs of the sale and moving.

If you need more money to fund your retirement, another important part of your research will include the other alternatives to downsizing. There are many financial options open to retirees to fund their ongoing retirement in addition to moving out of a family home. If you genuinely love living where you do, then you may wish to read about other ways of supplementing your current retirement income, without being forced to sell and move.