Selling the family home and moving somewhere smaller can free up a lot of money. It can also be a great opportunity to give your super a boost. But the rules around downsizing and super are strict, and a timing mistake can be costly and hard to undo.
Is the Sale of Your Home Taxed?
For most people selling their main residence, the news is good. The home is usually exempt from capital gains tax (CGT) under the main residence exemption. If you’ve lived in it the whole time you’ve owned it and haven’t used it to produce income, you generally won’t pay CGT on the sale.
It gets more complicated if the home was ever rented out, used for business, or sits on a large block of land. If any of that applies to you, get advice before you sign a contract.
What Is a Downsizer Contribution?
If you’re 55 or older, you may be able to put some of the sale proceeds into super as a downsizer contribution. The key points:
- ·Up to $300,000 per person, so up to $600,000 for a couple
- ·You must have owned the home for 10 years or more
- ·The home must be eligible for at least a partial main residence CGT exemption
- ·There is no work test and no upper age limit
- ·It doesn’t count towards your non-concessional contribution cap, but it does count towards your total super balance and your transfer balance cap once you move into retirement phase
- ·It isn’t tax-deductible
Each person can only make downsizer contributions from the sale of one home in their lifetime.
The Timing Trap
This is where people get caught out.
- 1.The contribution must be made within 90 days of settlement (the change of ownership).
- 2.The downsizer contribution form must be given to your super fund before or at the time the contribution is made. The ATO’s current guidance is clear that a fund can’t accept a downsizer notice after the contribution has already been made.
- 3.The form goes to your super fund, not the ATO. The fund reports the contribution to the ATO.
If the form arrives late, the fund may not be able to treat the money as a downsizer contribution at all. If it can be accepted as an ordinary personal contribution instead, it may count towards your non-concessional cap, which could lead to excess contributions and tax consequences you weren’t planning for.
For self-managed super funds (SMSFs), this matters even more. At audit, the SMSF auditor needs evidence that the member signed and dated the form, and that the fund received it at or before the time the contribution was made.
Watch the $300,000 Limit
The $300,000 limit applies to each person individually. Contributing more than $300,000 for one person means the excess isn’t a downsizer contribution. It may be treated as a non-concessional contribution, and depending on your balance and cap position, that can mean additional tax. How the amount is split between you and your partner should be planned before settlement, not after.
Other Things to Think About Before You Downsize
- ·Age Pension: Super and sale proceeds are treated differently under the assets test. Moving money into super may help or hurt, depending on your situation.
- ·Transfer balance cap: Large contributions can affect how much you can move into a tax-free retirement pension account.
- ·Estate planning: Your new circumstances may mean your will, binding nominations and powers of attorney need updating.
- ·Access to your money: Super generally can’t be accessed until you meet a condition of release, so make sure you’re comfortable with how much you’re locking away.
The Best Time to Talk to Us Is Before You Sell
The best time to talk to us is when you first start thinking about selling, not after settlement. If you let us know early and keep us updated as the sale progresses, we can make sure:
- ·the right form is signed and with your fund on time
- ·the contribution amounts are split correctly between you and your partner
- ·your SMSF paperwork is audit-ready
If you’re an SMSF client, or you’re considering a downsizer contribution, please tell us your plans and expected settlement date as early as you can.
Talk to the Team at Cashflow Financial
Whether you’re thinking of selling next year or you’ve just signed a contract, we’re here to help you make the most of the move. Talk to one of our expert accountants in Sutherland or Wollongong. Contact our team today to book a time to chat.