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Understanding super & money
By William Truong, Technical Services Manager
Individuals disposing of an interest in their home may be eligible to make a downsizer contribution to super of up to $300,000. To be eligible to make a downsizer super contribution several conditions must be satisfied, a key condition being that your client needs to be age 65 or over at the time of making the contribution.
The Government have introduced a Bill, the Treasury Laws Amendment (Enhancing Superannuation for Australians and Helping Australian Businesses Invest) Bill 2021, which seeks to lower the downsizer age from 65 to age 60 from 1 July 2022.
Among other things the Bill also seeks to extend the age at which you can trigger the bring-forward non-concessional contribution rule to client’s age 74 or younger at the start of the financial year. Once your client attains age 75 or over, they cannot make a non-concessional contribution to super. Note this includes up to the 28th day of the month following your client’s 75th birthday. The Bill also alludes to the anticipated removal of the ‘work test’.
If these proposals become law there may be more opportunities to use downsizer contributions to increase retirement savings.
Let us pretend it is now 1 July 2022 and the proposals have become law. A couple with nothing in super and between the ages of 60 and 74 sell their home for $2 million. The couple may be able to get up to $1,260,000 into super (combined) by taking advantage of the relaxation of the contribution rules.
Each member of a couple can make a downsizer contribution of up to $300,000 each (total combined $600,000). Then they may each take advantage of the bring forward rule and contribute up to $330,000 into super ($660,000 combined), which is a combined amount of $1,260,000.
ASFA estimates a couple need $640,000 for a comfortable retirement so this couple are now well-placed for their retirement.
Downsizer contributions are not impacted by the client’s total super balance. However, downsizer contributions will increase your client’s total super balance meaning they can limit your client’s ability to make NCC contributions in subsequent financial years.
The following case study of Amy illustrates this point.
Case study - Amy
As at 30 June 2022, Amy is 60* and has a superannuation balance of $1.2 million.
Let’s assume there have been no changes to the general transfer balance cap of $1.7 million or the concessional contributions cap since 1 July 2021.
Amy intends to sell her home of $1.5 million and would like to maximise the amount of the proceeds she can contribute to super to plan for her retirement. She may also have other assets which she can sell and contribute to super in the future.
Amy is not aware of the bring forward non-concessional contributions rule (of up to $330,000). She is also not aware that the downsizer and concessional contribution opportunities are connected, and in fact, timing is crucial to maximise her contributions to super.
If Amy sells her home and makes a $300,000 downsizer contribution in financial year 2022/23, she may find that her total super balance stops her from making large non-concessional contributions in financial year 2023/24 or later.
In contrast, if she makes both a bring forward non-concessional contributions of $330,000 and a $300,000 downsizer contribution in 2022/23, she’ll be fine as her 30 June 2022 total super balance will be low enough to allow her to also make a bring forward contribution.
Another option for Amy is to make the bring forward contribution of $330,000 in 2022/23 and even sell her home in 2023/24 (making a downsizer contribution that year) or a later year because, fortunately, the size of her total super balance is irrelevant when it comes to making a downsizer contribution.
Again, this case study assumes the proposal becomes law as intended, effective from 1 July 2022.
You should not forget to remind your clients that making a downsizer contribution can be impacted if they are under 65 and have not yet retired from the workforce (or don’t meet another condition of release). In this case, your client’s money will be preserved, which means they can’t access their super, including their downsizer contribution, until they are retired or meet another condition of release.
The proposed reduction in the downsizer age to 60 may, give couple’s an opportunity to shelter money in super without being assessed by Centrelink. Superannuation (accumulation) is not asset or income tested under Centrelink for clients for those below age pension age (increasing to age 67). This means where one member of a couple is age pension age and the other is below age pension age there may be an incentive to make a downsizer contribution for the younger spouse to increase age pension entitlements for the older spouse.
However, keep in mind that if clients have reached pension age and your family home is currently exempt from the Centrelink assets and income test, if they sell it and contribute the proceeds into super, age pension entitlements can be reduced.
If the Government’s proposal to reduce the downsizer age to 60 years old becomes law, there may be more opportunities to use downsizer contributions to increase retirement savings.
For more information on eligibility for downsizer please see our TechConnect Strategy Guide on Downsizer contributions.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.