Downsizer Contributions: What You Need to Know Before Putting Sale Proceeds Into Super

Selling a home later in life can be about much more than moving to a smaller property. You may be relocating closer to family, moving into a retirement village, entering aged care, renting for a while or simply choosing a home that better suits the next stage of life.

The sale may also create an opportunity to contribute more money to super through the downsizer contribution rules. An eligible person aged 55 or over may be able to contribute up to $300,000, while an eligible couple may be able to contribute up to $600,000 between them, subject to the available sale proceeds and each person meeting the rules.

Importantly, the contribution does not count towards the usual non-concessional contribution cap and can generally be made regardless of your total super balance. However, the name “downsizer contribution” can be misleading. You do not actually have to move into a smaller home, and you do not have to buy another property at all.

You do not actually have to downsize

Despite the name, the rules do not require you to trade a four-bedroom home for a two-bedroom unit and give away half the furniture. You could move into a larger property, buy something of similar value, rent, move in with family, enter a retirement community or decide not to purchase another home.

What matters is the property being sold and whether you satisfy the contribution rules. The property must generally be a residential dwelling in Australia, such as a house, unit or apartment. Houseboats, caravans and mobile homes do not qualify.

You, your spouse or former spouse must also have owned the property, or the land on which it stands, for at least 10 years before the sale. In addition, the property must qualify for at least a partial capital gains tax main residence exemption. It does not need to have been your main residence for the entire ownership period, and you do not need to be living in it when it is sold. This means a former home that was later rented out may still qualify, while a property used only as an investment throughout the ownership period generally will not.

Couples should not assume that both people automatically qualify. Eligibility is assessed individually, particularly where only one spouse owned or lived in the property.

The exact contribution money does not have to come from settlement

A common misunderstanding is that the money contributed to super must be the exact cash received from the property settlement. In practice, the rules focus on whether you have received eligible sale proceeds, the amount contributed and whether you meet the required timeframe.

This means you may be able to make the contribution using existing cash while using the settlement proceeds for another purpose, such as buying a new home, repaying a mortgage or keeping funds available for living expenses.

Timing and paperwork are just as important as eligibility

A downsizer contribution generally needs to be received by your super fund within 90 days of receiving the property sale proceeds, usually from the settlement date. You must also provide the fund with the approved Downsizer contribution into super form before, or at the time, the contribution is made.

The Australian Taxation Office may grant an extension where circumstances outside your control prevent you from meeting the deadline, such as serious illness or a death in the family. However, an extension is not normally available simply because you are waiting to reach the minimum age.

You should also check that your super fund accepts downsizer contributions. Funds are not required to accept them, and self-managed super funds may need to review their trust deeds before proceeding.

Getting the process wrong can create unwanted consequences. If the contribution does not satisfy the downsizer rules, the fund may need to treat it as an ordinary non-concessional contribution. This could use up part of your contribution cap, trigger the bring-forward rules or result in an excess contribution. In some cases, the money may need to be refunded.

Where the 90-day period crosses 30 June, there may also be an opportunity to delay the contribution until the new financial year. This may help preserve access to other contribution strategies by keeping your previous 30 June total super balance lower.

Consider access, Centrelink and estate planning before contributing

A downsizer contribution can increase retirement savings, but putting money into super may also reduce your access to cash. If you are under 65, the contribution may remain preserved until you satisfy a condition of release. This matters if you expect to use the money soon to buy another home, complete renovations, support family or cover living costs.

The Centrelink consequences can also be significant. Your principal home is generally exempt from the assets test. Once it is sold, money placed into super may become assessable, depending on your age and circumstances. For someone who has reached Age Pension age, the contribution may be counted as a financial asset and may also be subject to deeming. This could reduce an Age Pension entitlement or cause it to cease altogether. Clients entering aged care may also face changes to their aged-care fees.

Estate planning should be reviewed at the same time. Moving wealth from property into super changes how that money may pass after death. Your will does not necessarily control your super, so beneficiary nominations and the fund’s rules should be checked. This is particularly important for blended families and couples with children from previous relationships.

A downsizer contribution may be valuable, but it is not automatically the best option. Tax, social security, cash flow, future contribution opportunities and estate planning should all be considered together.

The information provided in this article is general in nature and has been prepared without considering your personal objectives, financial situation, or needs. It does not constitute financial advice. Before making any decisions, you should assess its appropriateness and seek professional financial advice tailored to your circumstances. Additionally, ensure you review the relevant Product Disclosure Statement (PDS) before deciding on any financial product.