Every few months someone at a barbecue tells us they’re “doing the downsizer thing” with their super, usually in the same tone people use for a tax dodge they read about online. The downsizer contribution is neither a dodge nor a secret. It’s a simple rule that lets older Australians move money from the family home into super. For some people it’s one of the best moves available. For others it quietly costs them pension money they didn’t need to lose.
Here’s how it works, and how to tell which group you’re in.
What the downsizer contribution actually is
If you’re 55 or older and you sell a home you’ve owned for at least 10 years, you can put up to $300,000 of the sale proceeds into super as a downsizer contribution. If you’re part of a couple, you can each contribute up to $300,000, so up to $600,000 between you, even if only one of you was on the title.
The main conditions, according to the Australian Taxation Office, are:
- You’re 55 or older when you make the contribution. There is no upper age limit and no work test.
- The home is in Australia and you (or your spouse) owned it for 10 years or more before the sale.
- The sale qualifies, at least partly, for the main residence capital gains tax exemption. In plain English, it was your home at some point, not just an investment property.
- You make the contribution within 90 days of receiving the sale proceeds, which usually means settlement day.
- You give your super fund the ATO’s downsizer contribution form before or at the same time as the money arrives.
- You haven’t made a downsizer contribution from the sale of another home before. It’s a once-in-a-lifetime option.
You don’t have to buy a smaller place, or buy anything at all. The name is a bit misleading. You can sell and rent, sell and move in with family, or sell and buy something more expensive in a different suburb, and still use it.
Why people like it
The appeal comes down to the caps. Normally the amount you can put into super each year is limited, and once your total super balance passes a certain level you can’t make after-tax contributions at all. Downsizer contributions sit outside those limits. That’s what makes them useful for people who have most of their wealth tied up in the house and not much in super, which describes a lot of Australians who bought decades ago.
Once the money is in super and moved into a retirement income account, earnings are generally tax-free. Leaving the same money in a bank account or shares in your own name means paying tax on the interest or dividends at your marginal rate. For someone with a decent private income, that difference adds up.
The catch most people miss: the Age Pension
This is where the barbecue version of the story usually falls apart.
Your home is exempt from the Age Pension assets test. It doesn’t matter if it’s worth $600,000 or $6 million. Super is different. Once you reach Age Pension age (currently 67), your super balance counts as an asset, and it’s deemed to earn income under the income test.
So when you sell the family home and move $300,000 or $600,000 into super, you’re turning an asset Centrelink ignores into one it counts. If you’re receiving a part pension, or expect to, that can reduce your fortnightly payment, or end it altogether.
As a rough guide, the assets test reduces the pension by $3 a fortnight for every $1,000 of assessable assets above the threshold. That’s $78 a year for every $1,000. Put $300,000 into super above the threshold and you could be looking at a pension cut of around $23,000 a year. Very few investments reliably earn that.
We’ve written a separate piece on how the family home changes the Age Pension assets test, because it surprises a lot of people.
Keep in mind the money doesn’t escape the assets test just because it stays in the bank instead of super. Sale proceeds are counted wherever they sit. There is a temporary exemption for proceeds you intend to use to buy your next home, for up to 24 months, but that’s about buying another home, not about super.
Who it suits
The downsizer contribution tends to work best for:
- People who won’t get the Age Pension anyway. If your other assets or income already put you over the cut-off, Centrelink isn’t a factor and the tax benefits of super are pure upside.
- People under Age Pension age. If you’re 58 and won’t touch the pension for years, super isn’t counted until you reach pension age. It might still affect you later, but there’s time to plan.
- People with a large super balance who can’t otherwise contribute. Because downsizer contributions aren’t limited by the usual balance tests, they’re one of the few ways left to add more.
- Couples where one partner has much less super. Each partner can contribute up to $300,000, which is a straightforward way to even things up.
Who should think twice
- Part pensioners close to the thresholds. Moving money from the home into any assessable asset, super included, could cost more in lost pension than you’d gain in tax savings.
- People who will need the money soon. If you’re planning to buy another home, help the kids with a deposit, or fund aged care in the next year or two, putting the money in super and pulling it straight out again is mostly paperwork.
- Anyone who’d miss the 90-day window. Settlement day starts the clock. If you’re not organised, you can lose the option. The ATO can grant extensions, but only in limited circumstances.
Questions worth asking before you sell
- Will I receive any Age Pension now or in the next few years, and how close am I to the thresholds?
- What will I do with the sale proceeds: buy, rent, gift, invest or spend?
- Does my partner have room in their super that would make more sense to use?
- How will the sale and contribution interact with any aged care costs down the track?
Services Australia’s free Financial Information Service can talk you through how a home sale would affect your pension, and it won’t try to sell you anything. For the super side, a licensed financial adviser is worth the fee when this much money is involved.
FAQ
Can I make a downsizer contribution if I’m still working?
Yes. There’s no work test and no requirement to be retired. You just need to be 55 or older and meet the home and timing conditions.
Does the downsizer contribution count towards my contribution caps?
No. It sits outside the concessional and non-concessional caps. It does count towards your total super balance, and towards your transfer balance cap if you later move it into a retirement income account.
Can I contribute if my partner owned the home and I didn’t?
Yes. A spouse who wasn’t on the title can still make their own downsizer contribution from the sale, provided the other conditions are met.
Will a downsizer contribution reduce my Age Pension?
It can. Once you’re over Age Pension age, super is counted in both the assets and income tests, while your home is not. Check your situation with Services Australia before you contribute.
This article is general information only and isn’t financial advice. Rules and thresholds change, so check the current details with the ATO and Services Australia before acting.
