Have you ever heard about the downsizer superannuation contributions and wondered what it means? How might it affect you? Or if you are eligible?
This article will look at the nuts and bolts of the downsizer contributions and recent legislative changes that may affect you.
What are downsizer superannuation contributions
From the sale of your home, you may be able to make a contribution of up to $300,000 into your chosen superannuation fund once you have reached the eligible age.
General criteria for eligibility relating to the home include:
- The home must be in Australia.
- The home must be owned by yourself or your spouse for at least 10 years.
- The disposal of the home must be exempt or partially exempt from Capital Gains Tax (CGT).
Another key consideration to note is that you cannot have made a previous downsizer contribution to your super from the sale of another home or a partial sale of your current home.
On a positive note, the downsizer super contribution can be made by an individual and their spouse respectively into their superannuation following the sale of their home. For example, lets assume that person 1 and person 2 are married and have decided to sell their joint home for $3 million. Both person 1 and person 2 can make a contribution of $300,000 each into their respective superfunds if all other criteria is met.
Recent legislation has passed the parliament, that will amend and introduce new measures that may benefit you when looking to downsize contributions into superannuation. These include an age reduction to the Downsizer eligibility and an extension for the social security home proceeds exemption.
Reduction of Downsizer eligibility age from 60 to 55
Legislation has recently passed reducing the eligibility to make a downsizer superannuation contribution from 60 to 55. However, the change still awaits Royal Assent, hence the commencement date whilst being forecasted to begin from 1 January 2023, could potentially be extended until 1 April 2023.
Following the reduction of the eligibility age, more people will have the option to make super contributions from the sale of their home. Contributions must be made within 90 days after the settlement has occurred. Which means that if the age requirements are met any time in the 90-day period, then the person has the opportunity to make a contribution given all other criteria is met.
Let’s take the example where the following assumptions are held,
- the commencement date of the new eligible age is 1 January 2023,
- the individual sold their home on 10 October 2022,
- the settlement occurred on 25 November 2022,
- the individual is 57 years old,
- and all other criteria has been met.
In this scenario, the contribution must be made before 23 February 2023, but after 1 January. This is because they only meet the new eligibility age following the change on 1 January and have 90 days post settlement to make the contribution.
Extension for the social security home proceeds exemption
Legislation outlining an extension for the existing assets test exemption has passed and is currently waiting the Royal Assent. It relates to the earnings from the sale of the principal home and has changed from 12 months to 24 months. Additionally, there has been an amendment to the deeming rate which is applied to the exempt earnings.
The commencement date is set for 1 January 2023, however, is possible to be delayed if the Royal Assent has not been received prior to this date.
Currently an assets test exemption applies to profits that have the intended use for purchasing, building, rebuilding, repairing, or renovating a new home. This period is currently 12 months and following the legislation change will be extended to 24 months.
A key point to note is that the exemption is only applicable to the amount that relates to the mentioned purposes. For example, if an individual has decided to downsize and following the sale of their home, they only require 60% of their proceeds for purchasing a new home, the assets test exemption is only applicable to the 60%.
Under the discretion of Centrelink and after meeting certain criteria, it is possible to have the assets test exemption period extended for an additional 12 months. Following the changes, this means that individuals can have an extended period of up to 36 months in total. The criteria that the extension is granted upon, is as follows,
- any delays that are faced are beyond their control
- reasonable attempts have been made to purchase, build, rebuild, repair, or renovate their new home
- attempts have been made after selling the principal home over a reasonable period
Additionally, deeming rates on exempt proceeds have been changed so that all exempt proceeds are now subject to the lower deeming rate, which is currently at 0.25%. Previously, exempt proceeds that were held in a financial investment were subject to an income test. People had to pay a higher deeming rate of 2.25 percent, when passing the threshold for singles with total investment assets over $53,600 and couples with assets over $89,000.
If you would like to improve your current investment strategies or are looking to start your investment journey, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.
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