The downsizer contribution is a measure under Australian superannuation law that allows eligible individuals to contribute proceeds from the sale of their home into their superannuation fund. This contribution is not counted toward the usual non-concessional contribution cap, making it an attractive option for boosting retirement savings.
Financial Snapshot
Joe (68) and Mary (65) are both recently retired and are wishing to move from Sydney’s North Shore to a new property on the NSW South Coast. Their income needs are between the two of them $80,000. They have maximized all of their carry-forward and non-concessional contribution caps as throughout their lifetime they never paid much attention to their superannuation accounts.
| Assets | Expenses |
| Primary Residence: $1,200,000 | New Home: $600,000 |
| Super Account (Joe): $600,000 (100% Taxable Component) | Living Expenses per annum: $52,000 |
| Super Account (Mary): $500,000 (100% Taxable Component) |
Understanding Mary’s Financial Needs
Joe and Mary wanted primarily wanted to know whether they had sufficient income to fund her retirement and whether her assets will ‘go the distance’. Given that they were also in the process of relocating they also wanted to understand how to maximize their contributions to their super and fund their retirement expenses. Understanding Mary’s Financial Needs
Financial Objectives
- To fund retirement 66 on an income of $52,000 per annum until their respective life expectancies + 5 years
- To purchase a new home in Kiama for $600,000
Strategy Consideration – The Downsizer Contribution
- You must be 55 years or older at the time of making the contribution
- The home must have been owned by you (or your spouse) for at least 10 years prior to the sale
- The home must qualify (in whole or in part) for the main residence capital gains tax (CGT) exemption
- The property must be located in Australia, and it must not be a caravan, houseboat, or mobile home
- The downsizer contribution must come from the proceeds of selling the home
- The contribution must be made to your superannuation fund within 90 days of receiving the sale proceeds (usually the settlement date)
- You must provide your super fund with the appropriate ATO downsizer contribution form before or at the time of making the contribution
NB: The downsizer contribution itself is not capped by your total super balance
Quarantining The Contributions and Strategy Outcomes
There are several factors to consider with such a strategy, including:
- The Downsizer contribution does not count towards your non-concessional contribution cap, however, it does form a part of the tax-free component of the superannuation fund
- In doing so, Joe and Mary decided to make the downsizer contributions to a separate superannuation account to quarantine the taxable and tax-free component.
| Joe | Pension Account A | Minimum Withdrawal | Pension Account B | Minimum Withdrawal |
| 68 | $600,000 | $30,000 | $300,000 | $15,000 |
| Mary | Pension Account A | Minimum Withdrawal | Pension Account B | Minimum Withdrawal |
| 65 | $500,000 | $25,000 | $300,000 | $15,000 |
The primary consideration was that for estate planning purposes they nominated one another as reversionary beneficiaries once an account-based pension was established. By quarantining the funds it provided the ability to make commutations to the superannuation account with the highest taxable component and then re-contribute it as a non-concessional contribution to the other, which resulted in an increase of the tax-free component.
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Further Considerations
As part of the advice provide to Mary he also considered the other areas of financial advice which were: Carry Forward Contributions Quarantining Concessional and Non-Concessional Contributions Re-contribution strategy Transfer Balance Cap and Total Super Balance
