Many downsizers find they have capital left over after the move. They may decide to help the kids out with some and invest the rest. A tax effective strategy can be to contribute to superannuation via a Downsizer Contribution.
A Downsizer Contribution is a contribution using funds from the sale of a property you have owned for 10 years or more.
In combination with non-concessional contributions, it may be possible for a couple to contribute 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 money is inside superannuation, what do you invest it in? Should it be income focused or growth? 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 lean on 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 bond investments, sign up below for our newsletter.
Superannuation can provide a very tax effective environment to grow your wealth and to fund your retirement however tripping on the rules can be costly. If you would like to learn more about strategies to maximise your superannuation get in contact with us.
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