Starting on July 1, 2018, new legislation will come into effect in Australia that has the potential to prompt some massive changes to your retirement plan.
The downsizer contributions rule allows over-65s to make a sizeable addition to their super fund when selling their home. This change opens up a whole new stream of super contributions, meaning those nearing retirement should review the opportunity to reshape their retirement plans now.
Under the new legislation, Australians aged 65 or older will be allowed to contribute up to $300,000 worth of the proceeds of selling their home to their super fund, provided certain conditions are met. These include:
It’s important to note that you do not have to buy a new home for the sale to be considered downsizing – so moving in with loved ones, to a retirement village or into an investment property are all viable options.
These contributions are made post-tax and are not tax-deductible, however, they do not count towards your concessional or non-concessional contributions limit. They will also impact your total super balance – particularly for the purposes of the $1.6 million transfer balance cap and determine eligibility for the age pension.
— ato.gov.au (@ato_gov_au) February 27, 2018
The new legislation is intended to benefit Australians in two ways.
The ability to invest downsizing proceeds can help Australians support their own retirement – with $300,000 constituting a large portion of ASFA’s retirement standard. This helps to ease pressure on the public pension fund and means more Australians can live out their golden years in style.
Currently, many larger homes are occupied by older people and are surplus to their needs. However, being unable to invest the proceeds into their retirement fund presents a barrier to many soon-to-be retirees. With more older people encouraged to downsize, the 2017-18 Budget states that this should free up housing stock for younger, growing families.
Ahead of July 1, those nearing or enjoying retirement should take the opportunity to reconsider their strategies. Your downsizer contribution can make a massive change to your total balance and doesn’t impact your non-concessional contributions cap. If you’re over 65 and still working, it pays to know that you can still utilise your non-concessional limit to contribute more than the $300,000 downsizer limit.
Your contribution allowance will be determined by your total super balance, which is not calculated until June 30 each financial year. This means that your eligibility for various schemes such as spouse contributions and concessional carry-forward will only change at the end of the financial year. So if your downsizer contribution drives your total super balance above the general transfer balance cap of $1.6 million, you’ll have the remaining time in that financial year to maximise your super.
A downsizer contribution can make a huge difference to you and your spouse’s super balances.
For example, Jessica and Steve are both over 65 and are working part-time. Should they sell their family home after July 1, 2018, both will be eligible to contribute up to $300,000 to their personal super accounts. Steve already has a total super balance of $1.4 million, so this contribution will put him above the general transfer balance cap. This would make him ineligible to make non-concessional contributions in the next financial year. Until then, Steve is able to put in up to a total of $100,000 more as non-concessional contributions because he meets the work requirements for over-65s.
Jessica, however, already acquired a total super balance of $1.6 million before the end of the last financial year. Therefore, even though she’s working, she is only eligible to make the downsizer contribution and also cannot receive spouse contributions from Steve.
Regardless, a downsizer contribution will make a huge difference to both Jessica’s and Steve’s super balances and see them enjoying an especially comfortable retirement.