Downsizing is a major financial and lifestyle decision, offering the chance to free up home equity and boost your super balance in retirement. We regularly explore it because of the unique retirement planning opportunities it presents.
At its core, downsizing means selling your current home and purchasing a smaller, more affordable property. But it can also mean moving to a rental or a different living arrangement that better suits your needs in retirement.
Downsizer contribution rules allow eligible retirees to contribute up to $300,000 from the sale of their home into super, without impacting their usual contribution caps. This can help boost retirement savings in a tax-effective way, even for those who may not otherwise be able to contribute to super.
We know that downsizing isn’t for everyone. In some areas, selling and buying a smaller home leaves little financial gain, and moving costs add up. Research from the Australian Housing and Urban Research Institute (AHURI) shows that fewer than 20% of older homeowners who sell and buy another property actually reduce their housing equity.
That said, at Retirement Essentials, we’re often asked about the rules and eligibility for downsizing contributions to super.
Retirees want to understand how it works, what limits apply, and what impact it could have on their Age Pension Entitlements. So, if downsizing is on your radar, here’s what you need to know about making a super contribution from the proceeds.
Eligibility requirements
To qualify for a downsizer contribution, you must meet these criteria:
- Age: You must be 55 or older at the time of making the contribution. As of 1 January 2023, the minimum age requirement is 55, down from 60 or 65 in previous years.
- Ownership: The property must have been owned by you, or your spouse (or former spouse) for at least 10 years. This is calculated from the settlement date of purchase to the settlement date of the sale.
- Location: The home must be in Australia. Mobile homes (e.g., caravans or houseboats) do not qualify.
- Capital Gains Tax (CGT): To qualify for a downsizer contribution, your home must be fully or partially exempt from CGT. Alternatively, properties acquired before 20 September 1985 may be exempt.
- Contribution timing: Your contribution must be made within 90 days of receiving the proceeds from the sale (typically the settlement date).
- Previous contributions: You must not have made a downsizer contribution from the sale of another property.
- Downsizer contribution form: To make a valid contribution, you are required to submit the downsizer contribution into Super Form (NAT 75073) to your super fund before or at the time of making your contribution.
Note: If only one spouse owns the home, the non-owner spouse can still make a downsizer contribution as long as the other conditions are met.
How much can you contribute?
Maximum contribution
The maximum amount you can contribute is $300,000 per individual, or $600,000 for a couple, provided both meet the eligibility requirements.
How does this work in practice?
Maximum contribution
Raj and Priya sell their home for $800,000. Each can contribute up to $300,000, so together they can contribute $600,000.
Sale price limitation
Nikos and Eleni sell their home for $400,000. They can contribute up to the sale price, either splitting it equally or in another combination that doesn’t exceed $400,000.
Single owner situation
John and Fatima sell their home for $600,000, but only John is listed as the owner. Since they are married, both are still eligible to contribute $300,000 each.
Common traps and mistakes to avoid
Here are a few common mistakes to watch out for if you are making a downsizer contribution:
- Missed deadlines: Missing the 90-day deadline is a common pitfall. If you miss it, you won’t be able to make the downsizer contribution and may need to consider other options (e.g., non-concessional contributions).
In some cases, such as illness or delays in settlement, you can request an extension to the 90-day deadline. However, the extension will not apply if the delay is within your control (e.g., waiting to meet the age requirement).
- Incorrect documentation: Failure to submit the downsizer contribution form properly could result in the super fund not accepting the contribution. It’s best to check in advance with your super fund to learn their requirements.
- Contribution limits: The contribution cannot exceed the $300,000 cap per individual or the sale proceeds.
If contributing to multiple funds, ensure each fund receives the form. The total contributions across all funds cannot exceed $300,000 per individual.
- Eligibility confusion: A downsizer contribution can only be made from the sale of one home. If you sell part of your home’s equity, it’s treated as a single disposal, so you can’t make another downsizer contribution if you sell the remaining equity later.
What happens if you make an invalid contribution?
If your contribution doesn’t meet the eligibility criteria, your super fund may have to assess whether it can be treated as a personal contribution. If the contribution is invalid, it will be returned to you. Additionally, penalties may apply if you’ve made a false or misleading statement about your eligibility.
Considering Age Pension entitlement
Understanding how downsizer contributions interact with superannuation, the Age Pension and other entitlements can help you make an informed choice.
While adding to your super can strengthen your retirement savings, it’s important to consider how it might affect your Age Pension.
Once in super, downsizer contributions become financial assets assessed under Centrelink’s asset test for those over 67, and they also generate deemed income under the income test. Understanding these impacts can help you plan effectively.
Want to explore your options?
Retirement Essentials supports you in exploring alternative retirement strategies:
Retirement Forecasting (Compare the impact of downsizing vs. other strategies on your financial future).
Understanding Super (Maximise the benefits of your superannuation, especially if you’re considering a property sale).
Maximising Your Entitlements (Ensure you’re receiving all the benefits you’re entitled to, including Age Pension and Centrelink).
Exploring Home Equity Options in a Strategy Consultation (Learn about alternatives like the Home Equity Access Scheme or reverse mortgages for accessing your home’s value without downsizing).
What about you?
What do you think are the biggest factors to consider before deciding whether to downsize in retirement?
Have you or someone you know experienced any unexpected challenges with downsizing? How did you navigate them? Share your thoughts or questions below!
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.
