Michelle Bromley CFP®, Director – Strategy & Advice

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In recent years, many Australians have been considering downsizing their family homes as a strategic financial move, particularly as they approach retirement. Like a real-life Darryl Kerrigan deciding to sell The Castle for a permanent move to Bonnie Doon, it’s all about “the vibe” of enjoying the serenity while boosting your superannuation. Thanks to the Australian Government’s downsizer contribution provision, individuals aged 55 and over can now turbocharge their retirement funds with the proceeds from selling their homes. This article will delve into the benefits, eligibility, and process of using this provision to ensure your retirement is more serene than stressful.

Understanding the Downsizer Contribution Provision

Introduced on 1 July 2018, the downsizer contribution provision is designed to help older Australians enhance their retirement savings. It allows eligible individuals to contribute up to $300,000 per person (or $600,000 per couple) from the sale of their home into their superannuation, without it counting towards the concessional or non-concessional contribution caps. This special-purpose contribution provision is part of the government’s broader strategy to encourage self-sufficiency in retirement and reduce reliance on the age pension.

Eligibility Criteria

To take advantage of the downsizer contribution, certain conditions must be met:

1. Age Requirement: The individual must be 55 years or older at the time of making the contribution. There is no upper age limit, making Downsizer Contributions a valuable option for individuals aged over 75 who otherwise are ineligible to contribute to super.
2. Sale Date: The contract of sale must be signed on or after 1 July 2018.
3. Contribution Amount: This cannot be greater than the sale proceeds received from the disposal of a qualifying main residence, capped at $300,000 per person. For example, if a couple sells their main residence for $500,000 only one person can contribute the full $300,000 and the other is limited to contributing $200,000.
4. Qualifying Main Residence: The property sold must have been a principal place of residence for the individual, their spouse or former spouse for at least part of the ownership period. The property must have been owned for at least 10 years prior to the settlement date.
5. Contribution Timeframe: The downsizer contribution must be made to a complying superannuation fund within 90 days of the change of ownership, usually from the date of settlement. Individuals can apply to the ATO for a reasonable extension to this timeframe.
6. Downsizer Contribution Form: The individual must provide the super fund with a Downsizer Contribution into Superannuation Form either before or at the time of making the contribution. If multiple downsizer contributions are made, a form must be provided for each contribution amount.
7. A Once-Only Measure: The individual must not have previously made a downsizer contribution to superannuation from the sale of another home, even if the previous contribution was less than $300,000.

There is no obligation to subsequently purchase a new residence or a residence of lower value. Downsizer Contributions can be made as an in-specie contribution of other assets such as shares or managed funds, subject to the maximum amount being the lesser of sale proceeds or the individual cap of $300,000 per person.

That’s a real win!

The real wins with Downsizing and making a Downsizer Contribution centre around accessing your home equity to boost your cash flow to provide your desired retirement lifestyle.

Superannuation continues to be the most tax-effective investment environment, with concessional tax rates applying to investment earnings – 15% for investments held in the accumulation phase and 0% for pension phase investments. This compares favourably with the marginal tax rates applying to individuals from 1 July 2024, with an effective tax-free threshold including the Low Income Tax Offset of $22,575 and the top marginal rate of 45% for taxable income above $190,000.

Downsizing often means moving to a smaller, more manageable property, which can reduce maintenance costs and effort, freeing up time and resources for other activities, like getting into the great outdoors to enjoy that serenity.

The most significant advantage is the potential to significantly boost your superannuation balance to create or extend the longevity of a retirement income stream, setting yourself up for a retirement that’s comfy and secure.

The Cherry on Top

Picture this – you’re standing at the crossroads of retirement, staring down the path of downsizing like Darryl Kerrigan gazing at his beloved pool room. It’s a moment of contemplation – it's not just a house, it’s a home… how do you reimagine yourself, Darl, and the greyhounds in a more compact and carefree setting? Here are some key considerations before making the big move:

1. Cost of Living: Evaluate the general cost of living, including groceries, utilities, transportation, and healthcare services.
2. Housing Prices: Compare the housing market in potential new locations to ensure affordability. Investigate council rates and other ownership fees, such as strata management or deferred management fees if moving into a complex or retirement village.
3. Healthcare Facilities: Access to quality healthcare is crucial for retirees. Ensure that the new location has adequate medical facilities, including hospitals, clinics, and specialist services. Longer-term considerations centre around the availability of services such as home care, nursing homes, and assisted living facilities.
4. Climate: Up to a quarter of Downsizers move location, often to a warmer climate that better suits personal preferences and health needs.
5. Community and Lifestyle: Moving to a new location can mean leaving behind friends and family. Evaluate the opportunities for socialising and making new friends, such as community centres, clubs, and local events. Look for locations that offer recreational activities and amenities that align with your interests, such as golf courses, walking trails, cultural institutions, and dining options.
6. Accessibility and Transportation: Consider how walkable the area is, particularly in terms of accessing essential services like grocery stores, pharmacies, and recreational facilities. Check the availability and reliability of public transportation, especially if you plan to reduce or eliminate the use of a personal vehicle.
7. Proximity to Family and Friends: Assess how far the new location is from close family and friends, and the ease of travel between these places. Consider the importance of being near loved ones who can provide support and companionship, particularly as health and mobility needs change over time.

By carefully evaluating these factors, retirees can make more informed decisions about downsizing and relocating, ensuring that the move enhances their quality of life and supports their long-term retirement goals.

What’s the Snag?

Downsizing isn’t all beer and skittles. Before you get too excited and start singing “We’re going to Boonnnieee-Dooooon!” a-la Darryl Kerrigan, there are a few twists and turns on the road to retirement nirvana.

• Start by assessing your current home’s value and the potential benefits of downsizing. Consider the emotional and practical implications of moving to a smaller home or a new location.
• If you are thinking about a tree or sea change, give your new location a trial run – renting for 12 months before selling your home allows you to really see whether it’s the right move for you.
• Downsizer contributions will be added to your super and become assessable under the Centrelink means tests, whereas an individual's main residence is exempt from means testing. This may result in a reduction in benefits. At the time of writing, the Centrelink assets-test-free area for homeowners is $301,750 for singles and $451,500 for couples; for homeowners, Age Pension entitlement ceases beyond assets of $674,000 for singles and $1,012,500 for couples.
• A transfer balance cap limits the amount of superannuation you can move into the tax-exempt retirement income stream phase. If you have reached your personal transfer balance cap, any amount of downsizer contribution in excess of the cap must remain in the accumulation phase and be subject to a 15% tax on any earnings. If you don’t have taxable income in your personal name, you may be better off investing outside of superannuation to take advantage of your tax-free threshold.
• The amount contributed will add to your total super balance, and if you have total super savings of $1.9million or more you will not be eligible to make further non-concessional contributions.

Consult with a financial advisor to understand the tax implications and how the proceeds can be best utilised within your superannuation strategy. Ensure you understand how downsizing will impact your overall financial plan, including any changes to your Age Pension eligibility.

Conclusion

The downsizer contribution is a real chance for older Aussies to turn their retirement dreams into reality. With careful planning and a good dose of understanding, you can make choices that set you up for a ripper retirement – one filled with serenity, backyard cricket, and family barbies. Downsizing your family home isn't just about simplifying things – it's about supercharging your superannuation and giving yourself peace of mind for the golden years ahead. So, grab your deck chair, kick back, and breathe in that country air – because your retirement castle is waiting!

Contact one of our Wealth Advisers at clientservices@primefinancial.com.au for tailored financial solutions, utilising our strategic knowledge and investment acumen to help you and your family with long-term financial aspirations.

_{The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.}

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