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Should you downsize to boost your super? Pros, cons, and tax implications

The idea of downsizing can be very appealing to empty-nesters. There will be less cleaning, gardening and maintenance, more time for hobbies and travel, and the icing on the cake comes if you can use the cash surplus you created to give your super a significant tax-effective boost.

But is the picture totally rosy, or are there some drawbacks to downsizing?

Advantages of putting downsizer contributions into super

 1.      Boost your super. Since January 2023 it’s been possible for both members of a downsizing couple to contribute, from the proceeds of the sale of their home, up to $300,000 each into their superannuation accounts, and therefore $600,000 for a couple. But there are some eligibility requirements:

  • You must be aged 55 or older.

  • You (or your spouse) must have owned the home for 10 years or more.

  • The sale must be wholly or partially exempt from Capital Gains Tax. (Generally speaking, this means you must have lived in it as your main residence and not used it to earn income for some of those 10 years.)

  • You must make the contribution within 90 days of the sale, unless you’ve been granted an extension.

  • You cannot have previously made any downsizer contributions.

  • You must provide a Downsizer contribution into superannuation form to your super fund.

 2.      Contributions cap not affected. Downsizer contributions don’t count towards your concessional or non-concessional super contribution caps. You can make a downsizer contribution regardless of your total super balance.

 3.      Age limit does not apply. Ordinarily, you cannot make voluntary super contributions after you turn 75, but downsizer contributions are exempt from this rule.

 4.    Tax advantage. You may choose to put your downsizer funds into super, rather than in a savings account or share investment portfolio, because superannuation is the most tax-effective place for your retirement savings. In the accumulation phase (pre-retirement and pre-pension) a super fund’s earnings are taxed at only 15%, and both the fund’s earnings and your withdrawals are likely to be tax-free once you retire and start taking a pension.

Disadvantages of putting downsizer contributions into super

1.     Impact on Age Pension. Once you reach retirement age, Centrelink will assess your income and assets in order to determine whether you qualify for a full or part Age Pension. Your family home is exempt from the Centrelink assets test, but once you sell it and put all or part of the proceeds into super, the proceeds will count towards both the assets and income test. You may receive a lower Age Pension as a result.

2.     You may have to wait a while. In order to access your super you must reach preservation age and retire, or turn 65. So, if you’re under preservation age, or under 65 and not retired, your downsizer funds may be locked away for a few years.

3.     Investment risk. Superannuation funds typically invest in the share market and are subject to market volatility. If you’re totally risk averse, and are prepared to miss out on the tax advantages, you may prefer to put your downsizer funds into a high interest savings account.

4.     Cost to your estate. Your beneficiaries can usually inherit your home tax-free after your death, but tax is payable on superannuation death benefits, at a rate of up to 17% (including Medicare levy) on the taxed element of your super, and up to 32% on any untaxed element.

Weigh the pros and cons and get professional advice

Downsizing won’t automatically generate a cash bonanza, since you may decide to move to an area where the real estate is more expensive, or choose a more upmarket property. A smaller residence may mean less work, but it’s also possible that your family will not be able to visit you comfortably, and you may lose access to a garden or your former community.

When it comes to the question of superannuation contributions and taxation, downsizing has many benefits, but also complexities which have only been discussed in a general way in this article. Before you act, seeking financial advice applicable to your particular circumstances is highly recommended.

Warm regards,

___
Ben Wieland | EGU Wealth Management
Partner and Senior Wealth Manager

1300 102 542 | 0423 710 820
ben@egu.au | www.egu.au
GPO Box 1598 Brisbane QLD 4001

This information is general in nature and does not take into account your personal objectives, financial situation, or needs. Before acting on this advice, you should consider whether it is appropriate for your individual circumstances. If the advice involves acquiring a specific financial product, you should read and consider the relevant Product Disclosure Statement (PDS) before making any decision.

Sources:

Ben Wieland