Why downsizer contributions aren’t always the right move for retirees

Prue Cheeseman-Goodes, wealth management director at HLB Mann Judd, said while there are many positives to a downsizer contribution, and it is a great opportunity for some individuals to boost their superannuation, it might not always be the best path to take.

“The main reason someone would want to put an extra $300,000 into super is because super is the most tax-effective structure for your retirement savings,” she said.

“You can have a superannuation balance of up to $2 million, to be used to start a tax-free pension, which means there is no tax on earnings or on pension payments.”

Cheeseman-Goodes said unlike other contributions, it doesn’t matter if the member is retired or their super balance is above $2 million to be able to make downsizer contributions, adding it may be the last large contribution they can make to boost their balance for retirement.

“Downsizer contributions can be made even if your property was used partly for rental, was not your main residence for the entire period you owned it, or is on land greater than two hectares,” she said.

“There is no need to apportion the proceeds of sale from the property based on which part of the property was eligible for the main residence CGT exemption.”

Furthermore, she said downsizer contributions can be made using assets the member already owns.

“This can be particularly useful if you need the cash proceeds to fund a new home purchase and you have an SMSF,” she said.

“As long as the market value of the asset is equal to the contribution amount, it can be used to fund the contribution.”

She continued that one of the other advantages to a making a downsizer contribution is they are made “after-tax” and boost the tax-free balance, meaning they also come out tax-free and are not subject to 15 per cent tax upon death if passing to a non-dependent beneficiary, such as the member’s children.

“If there is a death of a spouse or a relationship breakdown, there is also the 10-year ownership period that allows for changes in ownership,” she said.

“The 10-year period also applies if a dwelling is demolished and rebuilt. It also applies if you build on previously purchased vacant land but you or your spouse must hold the interest directly – not via a trust or company.”

For individuals who own part of a dwelling as a joint tenant or tenant in common, they can sell their share to be eligible for a downsizer contribution, regardless of what other owners do.

However, there are some negative aspects to the downsizer contribution that also need to be considered, Cheeseman-Goodes said.

“Individuals should consider whether they have a high personal taxable income,” she said.

“Downsizer contributions cannot be used as a personal tax deduction so if you have higher income you may wish to allocate some of the amount to claim a tax deduction instead. You may be able to utilise carry forward concessional contributions to claim up to $162,000 in FY25.”

She continued that downsizer contributions can only be used once, so depending on the situation, it may be best to consider strategically utilising a non-concessional cap first.

“This is because once your super balance is over $2 million, you can no longer make further non-concessional contributions,” she said.

To use a downsizer contribution, it is also necessary to meet a condition of release to access super, so for an individual under 65 years and still working, they need to consider if they will need accessibility to this money for something like buying a new home.

“If that is the case, locking a downsizer contribution away in super might not be the best place for it,” she said.

“Additionally, if you are receiving or expecting to receive Centrelink benefits, including the age pension or Commonwealth seniors health card, selling your home and contributing proceeds to super can affect your eligibility.

“This is because while the home is exempt from the assets test for Centrelink purposes, superannuation that has not been grandfathered is subject to a deemed rate of income as part of the income test.”