The ‘Claytons’ superannuation contribution – the downsizer contribution you make when you’re not downsizing!
26 April 2018
By Colin Lewis,
Head of Technical Services,
Fitzpatricks Private Wealth
From 1 July this year if you sell your home and are aged 65 or more then you may be able to contribute some or all the sale proceeds into superannuation. These contributions, known as ‘downsizer contributions’, allow you to boost your super savings even if you’re otherwise ineligible to contribute under superannuation law due to your age, work status or the amount you’ve got in super.
But don’t let the name fool you!
Whilst these are called ‘downsizer contributions’, you do not have to downsize your home to qualify – you could be selling your home to buy a bigger one, if in fact you buy another place at all – you could be moving into your investment property, or holiday home, or even into aged care. You don’t even have to sell the place you’re living in – you could be selling another property that was once the family home.
There’s a lot to consider before jumping in. First, you need to be eligible to make a downsizer contribution and you need to consider a number of factors before doing it.
Contract of sale must be from 1 July 2018
The contract of sale must be entered into on or after 1 July 2018. So, if you’re thinking of selling now, it may be worth delaying it!
Am I eligible?
To be eligible to make a downsizer contribution you must be aged 65 or more at the time of the contribution, which arises from the disposal of a property in Australia that qualified for the capital gains tax (CGT) main residence exemption – in part or full – and was owned by you or your spouse for a continuous period of at least 10 years.
The property doesn’t have to be your main residence at the date of disposal. If you have more than one property that qualifies, you can choose which one to sell but, in this situation, be mindful of any potential CGT.
It doesn’t apply to the disposal of houseboats, caravans or other mobile homes.
The amount of the contribution will be the lesser of the sale proceeds or $300,000 per individual and it must be made within 90 days of change of legal ownership. Both you and your spouse may be eligible to a make downsizer contribution even though only one of you is on the title and it’s an individual cap, so a couple may be eligible to contribute up to $600,000.
The beauty of making a downsizer contribution is that you do not have to satisfy the age criteria or work test – it can be made by anyone aged 65 or more! Thus, it’s critical that you notify the super fund Trustee that it’s a ‘downsizer contribution’ before or at the time of the contribution. Another important reason for notifying the Trustee is to ensure that it’s not treated as a normal after-tax, non-concessional contribution (NCC), but you still cannot claim a personal tax deduction for it.
Not being treated as a NCC means that it does not count towards the NCCs cap and is not subject to the $1.6 million total super balance (TSB) test, i.e. the threshold test that usually determines your ability to make a NCC. Thus, a downsizer contribution can be made even if your TSB is $1.6 million or more. However, the contribution will be included in your TSB which may impact your ability to make future NCCs.
So, if you intend making a NCC in addition to a downsizer contribution, timing the contributions may be critical. Generally, the NCC should be made first because if the downsizer contribution is made first and it pushes your TSB above $1.6 million, you may be prevented from making the NCC. Whereas if you make a NCC first and it pushes your TSB above $1.6 million, you can still make a downsizer contribution.
What do I need to consider?
Whilst the downsizer contribution has broad application, people likely to benefit most will be self-funded retirees who have a level of income and assets that precludes them receiving any means-tested social security/Department of Veterans’ Affairs (DVA) benefits and are planning to sell their home and wishing to maximise their super.
The home is an exempt asset when it comes to the Age Pension. However, amounts in super are ‘deemed’ under the income test and counted under the asset test. Thus, a downsizer contribution could reduce, even eliminate, any means-tested social security/DVA income support payments.
Even self-funded retirees who risk losing their Commonwealth Seniors Health Card may steer clear of this strategy. Commencing an account-based pension from a downsizer contribution will result in loss of the card where deemed income from that pension pushes you over the income threshold – currently $53,799 for singles and $86,076 for couples, combined. However, if the contribution is retained in the taxable accumulation phase, there will be no impact on this card.
Nobody likes losing government benefits!
The value of making a downsizer contribution after selling the home to move into aged care will depend on a number of factors – including social security/DVA entitlements, life expectancy, how the accommodation payment is structured and the impact on the ongoing means-tested care fee.
If you’re selling the house and end up with a surplus to invest then by all means super may be the way to go! But make sure the tax paid, if any, on earnings from investments held in super is going to be less than what you’ll pay if those investments are held in your personal name.
So, if you’re considering selling the home then it may be worthwhile putting it off until after 30 June. Of course, if you get an offer to good to refuse between now and then, are you going to let missing the opportunity to contribute the proceeds into super get in the way?