Updated: Jun 13
Downsizing is about planning your lifestyle for the next couple of decades and how your home can support that.
Preparation is key to downsizing and like the poet John Milton said "Luck is the residue of design." Design takes preparation and planning. It takes skills and knowledge. Good design doesn't just happen and carefully designing your downsize could provide you some 'luck'. Just like using a designer for building a home, using professionals with your downsize can allow you to leverage their knowledge and network to improve your design. Should you design a downsize which results in excess capital, understanding the superannuation downsizer contribution rules could contribute to your 'luck'.
A Downsizer Contribution is a contribution of up to $300,000 per person using funds from the sale of a property you or your partner have owned for 10 years or more.
In combination with non-concessional contributions, it may be possible for a couple to contribute from home sale proceeds up to $1,260,000 into the tax effective environment of superannuation .
In summary, the 5 main Downsizer Contribution rules are:
The home is a qualifying dwelling such as a home, unit or apartment. It must meet the CGT main residence exemption.
You are aged 55 or over from 1 Jan 2023
The home was owned by you or your spouse for at least 10 years prior to sale
The downsizer contribution is made within 90 days of change of ownership.
The contribution is made using the required ATO form.
Other than the rules outlined above, there are a few things to be aware of:
Once only opportunity: You can only use the downsizer contribution once off for one downsize event. The ATO has one of the conditions of a downsizer as "You have not previously made a downsizer contribution to your super from the sale of another or from the part sale of your home." So if you don't use up all of the Downsizer Contribution limit, then it expires. Under the current rules, you can not use the balance in a later property sale.
Time is ticking: Once you settle your home sale, you only have 90 days to make the downsizer contribution. Fail to meet those dates and penalties could apply if you have also maxed out your non-concessional contributions. It is important to understand the relevant dates and to comply with them.
Timing of contributions: If you are close to the Total Super Balance cap of $1.7m each then timing your contributions is important. The Total Super Balance cap is calculated at the end of the financial year for the next year so contributing before 1 July could restrict your ability to contribute using non-concessional contributions the following year. Looking at your whole picture is important and could provide significant benefits.
Turning 75? You may be over 75 years old and make a downsizer contribution. This is not the case with the non-concessional contributions. So if you are approaching your 75th birthday, combining non-concessional and downsizer contributions could be an effective strategy to maximise your super balance.
55 but not retired? If you are 55 years old but not yet retired, you will be subject to the preservation rules and will have limited access to the funds you contribute until you retire.
Invest in what? Once the excess from downsizing your home is inside superannuation, what do you invest those funds in? Should it be income focused or growth focused? The answers to this will depend on the stage of life that you are at and your risk tolerance. With the rising interest rates, property may be facing some headwinds but bonds are experiencing tail winds. Recently we invested in an investment grade bond earning 15% per annum. Having expert knowledge to design your investment strategy can save many hours of work and give access to opportunities not generally available to the wider market, such as these bonds. If you would like to know more about our investments including bonds, sign up below for our newsletter.
The right fit for the next stage of your life doesn't just happen, just like luck, it is the residue of good design.
If you would like to learn more about how we can help you design the next stage of your life, get in contact with us or sign up for our newsletter below.