Downsizer Tips and Traps: What You Need to Know
Downsizer contributions are an attractive way to bolster superannuation savings, but they come with key considerations and potential pitfalls. This guide provides a comprehensive overview of tips and traps to help you navigate downsizer contributions effectively.
Key Benefits of Downsizer Contributions
Boost Super Savings:
Contribute up to $300,000 per individual ($600,000 for couples) into superannuation without impacting concessional or non-concessional caps.
Flexibility:
Contributions can be made regardless of Total Super Balance (TSB).
No upper age limit applies.
Social Security Considerations:
Contributions retained in accumulation phase may be exempt from Age Pension means testing.
Estate Planning Benefits:
Allows for tax-effective wealth transfer to beneficiaries.
Important Considerations
Preservation of Super:
If downsizer contributions are made at an earlier age, funds will remain preserved until a condition of release is met. Ensure this aligns with your financial objectives.
Eligibility for Investment Properties:
Properties don’t need to be a primary residence for the entire ownership period. Partial Capital Gains Tax (CGT) exemptions may still qualify the property for downsizer contributions.
Maximizing Social Security Entitlements:
Consider contributing to the super fund of a younger spouse who is below Age Pension age to reduce assessable assets.
Plan contributions to align with broader financial and family goals, particularly for blended families or couples with significant age gaps.
Timing of Contributions:
Contributions must be made within 90 days of settlement. Strategic timing can optimize TSB for future contribution eligibility.
Common Traps to Avoid
Impact on Future Contributions:
Large contributions can push your TSB above thresholds that affect eligibility for catch-up concessional contributions or non-concessional contributions in future years.
CGT Liabilities:
Selling a property with CGT liabilities may require a personal deductible contribution strategy instead of a downsizer contribution to offset tax payable.
Exceeding NCC Caps:
An invalid downsizer contribution can lead to non-concessional contributions being treated as excess, resulting in penalties.
Multiple Properties:
A downsizer contribution can only be made once, even if you own multiple qualifying properties. Choose the property wisely.
Estate Planning Conflicts:
Large contributions to super can complicate estate planning, especially if beneficiary nominations or wills are not updated.
Strategic Tips
Plan Around Financial Years:
Delaying a contribution to the next financial year can preserve eligibility for other types of contributions.
Combine Contribution Strategies:
Use the downsizer contribution in conjunction with the bring-forward rule for non-concessional contributions to maximize super savings.
Utilize Lower Deeming Rates:
Sale proceeds intended for a new home may be exempt from asset tests for up to two years while benefiting from lower deeming rates.
Engage Legal Advice:
Ensure estate planning arrangements align with your new super contributions, especially if there are blended family dynamics or complex wills.
Case Study: Downsizing with Social Security in Mind
Scenario:
Jack (66) and Jill (58) sold their home for $1 million. Jack is six months away from Age Pension eligibility.
Strategy:
Jill contributes $300,000 as a downsizer contribution and maximizes her NCC cap with $330,000, reducing assessable assets.
Outcome:
Jack qualifies for the full Age Pension while preserving their long-term financial security and estate planning goals.
