Superannuation rules used to maximum advantage

As we noted last week, it’s easy to get basic super rules wrong. It doesn’t matter much if this is in a quiz. But if you make a mistake with your own money, that can be painful. There are two different contribution rules which can be used to significantly boost your super and subsequent retirement income. These are Downsizer contributions and the Bring Forward rules.

But they are frequently confused with each other and often difficult to understand.

Today we share a short explanation of each of these rules and how they may benefit your retirement income management.

What are Downsizer contributions?

A Downsizer contribution allows you to make a one-off superannuation contribution post-tax, up to $300,000 per individual. 

Downsizer contributions were created in part to encourage retirees to free up larger homes for younger families as well as help retirees boost their super. The legislation was introduced in 2018 and allowed those aged 65 or over to sell a home and use part or all of the proceeds to top up their super. The theory was that larger homes would then become more available for younger families while older Australians would ‘downsize’ to smaller residences. The incentive lay in the ability for the older vendors to contribute large amounts to their super. If they were drawing down a retirement income stream no tax would be paid on this money. Since the legislation was introduced, the age of eligibility has been lowered to 60 (1 July 2021) and it’s now 55 (since 1 January 2023). 

Does this apply to any all properties?

This contribution can only be used for proceeds from the sale of your principal residence

Who can use the Downsizer contribution?

There are restrictions on those who can use the downsizer contribution. You must be aged 55 or older, a resident of Australia and have owned your home for 10 years or more. There may also be CGT requirements that must be met.

Do you need to move to a smaller home?

Whilst the assumption was that this legislation would be used by older Australians to sell ‘family’ size homes and then move to smaller, more manageable dwellings, there is no requirement to purchase a smaller property. You can upsize, downsize or rightsize as you see fit. The legislation is not prescriptive about your next property.

How does this work for couples?

The legislation allows for a contribution of $300,000 per individual, so this means couples can contribute up to $600,000 combined. This could of course impact Age Pension eligibility If however there is a younger partner below Age Pension age then there could be the opportunity to enhance Age Pension eligibility for an older partner, using the specific Younger Partner rules

Are there time or upper age limits?

You must make your Downsizer contribution within 90 days of receiving the proceeds of sale, which is usually at the date of settlement. (You must also use a downsizer contribution form).

Whilst there are no upper age limits, it’s worth remembering that you can only use this type of contribution once.

What are Bring Forward Rules?

Bring Forward rules are not linked to the sale of a property. Whilst these rules are different from Downsizer contributions, they can, in some cases, be used in combination to contribute large sums to your super. 

The Australian Taxation Office (ATO) refers to these rules as the ‘Bring-forward arrangement’ which applies to the non-concessional contributions cap, or the maximum amount of after-tax contributions you can contribute to your super each year without contributions being subject to extra tax. From 1 July 2021, the non-concessional contributions cap is $110,000.

Those who wish to make contributions above the annual non-concessional contributions cap can use the Bring Forward arrangement to gain access to future year caps. Using the Bring Forward legislation allows you to make non-concessional contributions of up to three times the annual non-concessional cap in that financial year, $110,000 by three times, totalling $330,000.

Who is eligible?

Eligibility for the Bring Forward arrangement is determined by

  • your age
  • your total super balance on 30 June of the previous financial year.  You can’t take advantage of this if your super balance exceeds the transfer balance cap – currently $1.9m for the 2023/24 financial year. 

Here is a link to further terms and conditions, including what happens if you are over 75.

How do these two rules work together?

Bring Forward arrangements can also be used after the sale of the family home. They can be combined with Downsizer contributions which allow you to make a one-off superannuation contribution post-tax, up to $300,000 per individual. Combining Bring Forward and Downsizer allowances means an individual may be able to contribute up to $630,000 in any one year. But it is important to check all possible implications, including taxation. Additionally, the use of either or both these rules may lead to Centrelink means test ramifications if you receive or hope to receive an Age Pension.  Our Understanding more about Super consultations can help with this.  

Are there any downsides?

Yes, these rules will allow for larger than usual superannuation contributions. But they can only be used in certain circumstances and have specific terms and conditions attached. It’s therefore important that any use of these rules aligns with your long term income goals. In particular, if you are part of a couple, it may be that your age and Age Pension status will play a role in determining the efficacy of using either the Downsizing contribution or the Bring Forward arrangement, or both. 

Both these allowances could help you fund a much more comfortable retirement lifestyle. But the rules can be confusing, so if you are thinking about using either or both of these options, you may wish to discuss your plans in a consultation with one of our experienced advisors. Many Retirement Essentials members report a great sense of relief when they have worked through the rules with our team and can then move forward, confident in their own decision-making.  

Other pros and cons of downsizing

Have you considered using either the Downsizer contribution or the Bring Forward rules? 

On the face of it, they both allow for major contributions towards your retirement income. 

Would either work for you?

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.