The downsizing superannuation measure is a powerful tool for freeing up equity in your home and growing your retirement savings.
Like all such schemes, it’s important to know the ins and outs before signing up.
To help you get informed and feeling confident in understanding how the scheme might work for you, we’ve answered your top questions.
Why did the government introduce the scheme?
The idea of people contributing the proceeds from a downsizing move into their superannuation was made available by the Australian Government from 1 July 2018.
The measure was introduced as part of a package aiming to reduce pressure on housing affordability in Australia.
The scheme is designed to be a win-win-win. You can get all the benefits that downsizing can bring at the same time as increasing your super pot. Younger families have increased options of larger established homes coming onto the property market.
And, on a societal level, more Australians can leverage their home ownership which is usually their largest form of voluntary savings.
Since the scheme was introduced in 2018, the financial benefits of home ownership in retirement is better understood but is still not fully utilised. The downsizing contribution scheme joins reverse mortgages, equity release schemes and home equity loans as possible measures for retirees to consider.
What’s the top level version of how it works?
In essence, this scheme is for older Australians who want to both downsize their living arrangements to simplify their lives and responsibilities and free up some of the valuable equity they’ve built up in their homes.
Like all schemes, there are subtleties and nuances so don’t assume you’re not eligible or that the scheme is not right for you before you’ve read on.
Are there age limits?
You need to be 65 years or older to make a downsizer contribution, although from 1 July 2022 the eligibility age will fall to 60.
There is no upper age limit to the scheme, fitting with the fact that it is never too late to enjoy the many benefits of downsizing.
Is there a time limit for using the measure after selling your home?
You must make your downsizer contribution within 90 days of receiving the proceeds of the sale of your home. This is almost always the settlement date rather than the sale or auction date.
If you are not quite 65, remember the length of a settlement is something you are able to negotiate with the party who buy your property.
This means that you could sell your home when you are 64 years old, as long as the settlement takes place less than 90 days before you turn 65 (and make the contribution immediately).
If you are unable to make your contribution within 90 days because of circumstances outside your control, you can apply for a time extension. These circumstances include ill health, a death in the family or – somewhat ironically, moving house. Be warned; don’t rely on being granted an exemption and apply as early as you can.
Let’s talk money. What is the maximum amount I can contribute?
The maximum contribution that one person can make is $300,000.
If you sell your home for less than $300,000 (rare in these days of high property prices), you can only contribute up to the total proceeds from the sale.
If you are part of a couple, read on to the next question.
Can couples use the scheme?
Yes, couples can both benefit from the downsizer measure. Each of you can contribute up to $300,000, meaning that, as a couple, you can contribute up to a total of $600,000.
This applies even if the house was only in one of your names.
If the amount you have available to contribute is less than $600,000, you can choose to divide the contribution 50:50 or unequally.
Though the downsizing measure is relatively straightforward, there are circumstances - including recent separation or the death of a spouse or other co-owner of the home - where expert advice is recommended to help navigate the application and process.
How long do I need to have owned my home before I can access the scheme?
As mentioned above, it is possible to plan ahead to use the scheme when you turn 65.
You can do this by ensuring you have owned the home for at least 10 years, and the home is exempt from capital gains tax by virtue of being the family home.
If your dates are looking line-ball, be aware that it is generally calculated from the settlement date rather than the sale or auction date.
So, if you bought your house at auction on 28 February 2011 but didn’t settle until 30 April 2011, you were eligible for the downsizer measure from 30 April 2021.
It’s worth noting that you can only use the downsizer measure once in your life, even if you sell your downsized home later.
Do I still need to be working to use the scheme?
No, you don’t need to be still working and you do not need to meet any work test.
The downsizing superannuation scheme is open to anyone from age 65 – 105 regardless of whether you spend your days working, gardening, golfing, grandparenting, giving back, or any combination of the above.
The scheme is open to anyone aged 65 or over, regardless of whether you spend your days working, gardening, golfing, grandparenting or giving back.
Do I need to downsize to a smaller home?
Sure, this measure is called ‘downsizer’, but there’s not actually any requirement that you buy a smaller home (in size or value) to benefit from the scheme.
In fact, you might be astonished to discover that you don’t need to buy another home at all!
This scheme is open to those who are moving into another property they already own, moving into a retirement village, or planning to move in with family.
Are any property types excluded?
You’ll see in the answer above that there are no rules about where you move to after selling your home.
There are, however, some restrictions about the types of homes you can sell in order to be eligible for the scheme.
In not great news for those who sold their family home in order to buy a mobile home before they turned 65, creative living places such as caravans, houseboats or other mobile homes are excluded from the asset that is being sold.
I don’t want to sell my home. Can I still use the scheme?
Until recently, the answer would have been no. Prior to August 2020, it was usually considered that you needed to sell your home completely in order to be eligible.
However, new advice from the Australian Tax Office indicates that there are options for more flexibility. The rules have expanded to include the sale of a partial interest in a home, potentially allowing you to remain living there while realising some of the asset such as through a home equity release scheme.
However, as mentioned above, you can only use this scheme once.
This means that while you can release equity from your home, stay in the home and make a downsizer superannuation contribution; you can't make a second contribution in the event you sell the home at a later date.
Are superannuation contribution caps affected by the money saved?
The ATO website states that the downsizer contribution is not a non-concessional contribution.
If that double negative sentence makes your head spin, you’re not alone!
What it means means is that your downsizer superannuation contribution will not count towards your usual annual caps on contributions to your super fund.
Your contribution will, however, count towards your transfer balance cap.
As of 1 July 2021, this cap was set at $1.7 million and represents the amount from which you can draw tax-free income when you transfer your savings from your accumulation super fund to your retirement or pension phase fund, or as a lump sum.
If time is of the essence for you, note that downsizer amounts won’t be counted in your superannuation balance until the end of that financial year.
I’m curious. How many Australians have used the scheme?
From 1 July 2018 to the end of January 2022, 36,800 individuals have contributed $8.9 billion to their superannuation using this measure.
This means homeowners who used the scheme were able to boost their super by an average of $241,000.
How might using the scheme impact my pension?
Any contribution you make using the downsizer measure will be counted when determining your eligibility for the age pension. This is because the contribution, and the interest you earn from the contribution, counts towards the asset and income limits which govern whether you can continue to claim the pension (or part-pension).
This means that the scheme won’t be right for some, but this shouldn't stop you from enjoying the overall financial and lifestyle benefits of downsizing. Or from accessing this scheme, remembering that you can select an amount less than $300,000 to contribute.
I’m keen! How do I get started?
Fantastic! We’re glad these answers have helped.
Firstly, a couple of double checks:
- Run through the basic eligibility requirements here: www.ato.gov.au/Individuals/Super/Growing-your-super/Adding-to-your-super/Downsizing-contributions-into-superannuation
- You may want to seek independent financial and legal advice
- Ring the ATO on 13 10 20, including if you think you might need an exemption from the 90-day time limit
- Contact your superannuation fund (or funds if you have more than one) to check that they accept downsizer contributions. If you are one of the few Australians who do not have a super fund, you’ll need to open an account before you make your downsizer contribution.
If all your ducks are looking nicely lined up, you’re ready to fill in the form.
Please also note that the above advice is general in nature only and should not substitute you making your own enquiries to ensure the scheme suits your needs.
The ATO version of the form is here and you may find that your super fund has a version of this form on their website too.
If you are a couple and both plan to make a contribution, or if you want to split your contribution between different super funds, you’ll need to complete one form for each contribution.
And, remember that, at any time, if your situation is unusual or complex, you can seek advice from your accountant or the ATO, including the free and 28-day turn around option of requesting a private ruling.
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