Picture this – you’ve lived in your family home raising your kids and getting them through school.
It had all the room you needed for your family and suited the lifestyle.
You’re now older, the kids have moved out and the space that once suited your lifestyle may have become a burden to maintain.
So, you make the decision to sell up and move into a smaller house valued considerably less than your prior home. The question then on your mind… what do I do with the money?
One option that you might consider is to make a ‘downsizer contribution’ to your SMSF.
What is a ‘Downsizer Contribution’?
From 1 July 2018, the ATO Introduced the ability for people aged 65 and older to make a tax-free contribution (exclusive from the annual non-concessional contribution cap limit) from the proceeds of selling their family home.
Age-related contribution restriction rules are excluded from downsizer contributions, making it useful for older Australians who are no longer able to make personal contributions due to age or employment status. For example, a retired member aged 70 (with over $1.7 million in their SMSF) who due to their age cannot make a personal contribution could utilise the downsizer contribution cap.
To be eligible to make the contribution, a member must meet the following requirements:
Between 1 July 2018 and 30 June 2022, the member must be 65 or over to be eligible
From 1 July 2022, the new eligibility criteria is 60 years or older
The downsizer contribution for a member must not exceed $300,000
You or your spouse must have held the dwelling for at least 10 years. Whilst you do not have to have lived in the house for the entirety of the 10 years, it must meet the CGT’ Main Residence’ exemption rules set out by the ATO
The dwelling is located in Australia and MUST NOT be a caravan, houseboat, or mobile home
You make the contribution within 90 days of receiving the proceeds of the sale of your home
You have not previously made a downsizer contribution from selling another home
Even if the 300k cap hasn’t been exceeded, only one downsizer contribution can be made in a lifetime per member
For example, if a member previously sold their home in the past and made a $200k downsizer contribution, that same member could NOT make a $100k downsizer contribution in the future.
There is no downsizer contribution cap to be utilised over time. It is a one-time contribution that can be used with a maximum of $300k that can be contributed.
A downsizer contribution into superannuation form must be provided to the SMSF trustees prior to (or at the same time) as making the contribution
The value of the contribution cannot exceed the sale price of the home
Note, where the member and their spouse both make a downsizer contribution, the total amount cannot exceed the value of the sale price of their home
A handy benefit of a downsizer contribution is that both you and your spouse can make this type of contribution, even if you or your spouse did not have an ownership interest registered on the title of the house.
You are both able to contribute (provided the spouse without the ownership interest meets all the relevant criteria above).
The lifetime cap per member for a downsizer contribution is currently $300,000, meaning up to $600,000 can be contributed into your SMSF – a substantial amount into the concessional friendly environment of SMSF’s given the current restrictive climate.
Note, under s.10 of the SIS Act, a spouse is defined as:
Another person (whether of the same sex or a different sex) with whom the person is in a relationship that is registered under a law of a State or Territory; or
Another person who, although not legally married to the person, lives with the person on a genuine domestic basis in a relationship as a couple.
Other benefits include:
No requirement to purchase a new home immediately after the sale of your previous home.
You are free to move into whatever housing situation is most suitable for your needs
The downsizer contribution is not subject to the $1.7 million total superannuation balance (TSB) non-concessional contribution (NCC) restriction.
Even if your TSB exceeds this amount, you can still contribute up to the downsizer contribution cap amount
Example – a member (aged 72) has $1.5 million in their SMSF and make a $300k downsizer contribution. Although the contribution will have the member exceed the $1.7 million TSB-NCC restriction, the member is eligible to make the contribution as a downsizer contribution is not assessed against this cap
No work test required to be met, regardless of your age