Downsizer contributions allow people aged 65 and over to make super contributions of up to $300,000 per person from the proceeds of selling their main residence. The rules for making downsizer contributions are not particularly onerous and the contributor does not have to meet the work test, there is no maximum age and the usual concessional and non-concessional contribution caps don’t apply.
The idea behind the legislation is to encourage retirees to move out of large houses and free up housing stock although moving to a physically smaller dwelling is not a legal requirement.
To qualify as a downsizer contribution:
- The contract of sale must take place after 1 July 2018.
- The person making the contribution must be aged 65 or over at the time of the contribution.
- The contribution must be sourced from the sale proceeds of their main residence.
- Either the person, their spouse or their former spouse (or a combination) must have had an ownership interest in the main residence for at least ten years immediately prior to the sale of the property.
- The contribution must be made within 90 days of settlement date.
- The person must notify the super fund trustee that the contribution is a downsizer contribution when it is made.
- The person cannot make a downsizer contribution if they have already made a downsizer contribution in relation to a different main residence in the past.
However there are some important restrictions and downsizer contributions are limited to the lesser of:
- $300,000 per person (i.e. $600,000 for a couple), or
- the capital proceeds received by the contributor (and their spouse, if relevant) from the sale of a main residence.
The main risk of making a downsizer contribution is that the contributor could potentially jeopardise their eligibility for social security benefits or face increased aged care costs.
For Centrelink purposes, the principal residence is an exempt asset regardless of its value. If a person aged 65 or over uses some of the proceeds from the sale of their main residence to make a downsizer contribution, that amount is effectively converted from being asset test exempt to being asset tested.
Likewise, if the downsizer contribution is subsequently invested in an account-based income stream, that retirement income could be subject to deeming for the income test.
So from a social security perspective, it might be more advantageous to keep a main residence than to add more money to super. It’s also important to consider the impact that a downsizer contribution could have on the cost of aged care.
Selling a former home and using the proceeds to make a downsizer contribution will effectively convert a substantially asset test exempt asset for aged care purposes into one that is included in the person’s means tested amount. It will also be subject to deeming.
When someone enters aged care, the former home is exempt from the social security asset test for two years from the date of entry. By selling their former home and contributing the proceeds to super, the person seeking aged care will be assessed as a non-homeowner and the amount in superannuation will be assessed as a financial investment.
Having more money in super rather than a main residence might therefore increase their ongoing cost of aged care and potentially reduce their social security entitlements.