Downsizing – making tax free contributions to superannuation

In November 2017, the Government passed legislation that would allow certain individuals who sell their main residence to contribute up to $300,000 of the sale proceeds to superannuation, without being constrained by the usual restrictions that otherwise apply to contributions, including contribution caps.

This strategy is available from July 1, 2018.

Contributions made to super under this arrangement are referred to as ‘downsizer contributions’ and are subject to specific rules. The legislation is designed to reduce the pressure on housing affordability and to facilitate downsizing.

How it works

To be eligible to make downsizer contributions, several conditions need to be met, including:

1. Contributions may only be made by an individual aged 65 or over;
2. The contributions arise from the sale of a residence that has, at some or all of the time of its ownership, qualified as the individual’s main residence for Capital Gains Tax purposes;
3. The residence has been owned by the individual and/or their spouse for at least ten years;
4. The contribution of up to $300,000 is made from the sale proceeds of the residence within 90 days of change of ownership (settlement);
5. The contract for sale of the property was entered into on or after 1 July 2018;
6. An election to make a downsizer contribution is made in the approved form; and
7. The individual has not previously made a downsizer contribution.  

Qualifying residence

To qualify as a downsizer contribution, the sale proceeds from which the contribution is to be made must be in respect of the sale of a property that has, at some time during its ownership, qualified for a Capital Gains Tax exemption as the individual’s, or their spouse’s main residence.

Therefore, the sale proceeds from the sale of a commercial property, or an investment property that has never qualified for the main residence Capital Gains Tax exemption, do not qualify as a downsizer contribution.

Furthermore, a qualifying residence does not include a houseboat, caravan or mobile home.

Making a downsizer contribution is contingent upon selling a qualifying residence. However, there is no requirement that a replacement residence must be purchased. For example, a person selling their home and planning to rent a property, relocate to a retirement village or residential aged care facility, or move in with family, may still make a downsizer contribution.  

Conclusion

Making a downsizer contribution to super as a result of these changes will be a viable strategy for some, and perhaps not so viable for others.

Find out more in part two, where we demystify downsizer contributions further. Remember superannuation can be extremely complex. Therefore, we always advise people seek qualified advice from a licensed financial planner.