Whether it’s a financial or lifestyle decision, downsizing your home once the kids have flown the nest is a common occurrence for many Australians. Selling the family home is a great way to unlock equity and help fund the next phase of your life. However, completing the sale and purchasing a new property is only one part of the problem. The next step can be just as tricky, as you need to identify the best way to get any excess cash generating a return into your superannuation.
Making voluntary contributions
For people aged under 67, the easiest way to contribute to super is by using the member contributions cap. Each year you are eligible to contribute $27,500 of pre-tax money (concessional contribution) and a further $110,000 of post-tax non-concessional contributions. If you are wanting to make concessional contributions, it is important to claim these on your tax return as an income tax deduction.
For people aged between 67 and 74, they will need to satisfy the work test before being able to make voluntary super contributions. What is the work test and how can we ensure it is met? For the work test to be met you must be gainfully employed for at least 40 hours during a consecutive 30 day period in the financial year in which the contributions are made. If you are currently employed while you are looking to downsize, then meeting the work test is not a task that you will need to complete and you will have the ability to contribute to your super.
For those aged 67 and older, the downsizer contribution scheme could be the best way to funnel the released equity from downsizing the family home into the superannuation environment. The downsizer contribution allows individuals to contribute the direct proceeds of downsizing into superannuation of up to $300,000 and $600,000 for couples. This contribution is treated as a post-tax non-concessional contribution and will not affect your contribution caps. To be eligible to make a downsizer contribution, the following criteria must be met;
- The individual is aged 65 or older.
- The property was owned for at least 10 years and must have qualified as your primary residence at some point during that period (making it wholly or partially CGT exempt).
- The contribution is made to the superfund within 90 days of receiving the proceeds of the sale (This is usually the settlement date).
- You provide the superfund administrator with the required NAT75073 form before or at the same time as making the contribution.
- You have not previously made a downsizer contribution (This is a once in a lifetime opportunity and cannot be repeated).
- The property being sold is in Australia and is not a caravan, houseboat or other mobile home.
Using this once in a lifetime downsizer contribution gives retirees the ability to contribute one last time into Super which holds significant advantages over investing the funds outside super or holding the equity in cash.
- Income is taxed concessionally at 15% within the superannuation environment.
- Upon meeting retirement conditions, the entire balance of your super may be tax-free in terms of both income and ongoing drawdowns.
- Upon meeting retirement conditions, unrealised capital gains could be waived.
- It does not affect your contribution caps/limits.
- Once invested, the funds will generally produce a higher return than holding cash.
If you wish to seek advice around downsizing options, please reach out to one of our Financial Advisers.
Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.