June 11, 2019
Legislative changes of recent years have made it difficult for people to make sizeable superannuation contributions too close to their retirement. It is because there are now legislative limits (called ‘caps’) on how much each of us can contribute to super per year. The annual cap on pre-tax contributions is $25,000, and it includes the amount contributed by your employer. However, individuals with a total superannuation balance of less than $500,000 just before the start of a financial year, can increase their concessional contributions cap in the year by applying unused concessional contributions caps amounts from one or more of the previous five financial years. ¹ The post-tax contribution limit is generally capped at $100,000, but it is possible for some to contribute as much as $300,000 in a single year. ² Unfortunately, those who are not working and are over the age of 65 may not be able to contribute to super at all. ³
For many, it is advantageous to transfer their assets from their own name to superannuation, as superannuation has a number of advantages, including:
- 0% tax on earning on superannuation investments held in pension phase.
- Pension payments and lump sum withdrawals form super are tax free for people aged 60 years and over.
- Possibility to pay the entire death benefit, including capital growth, tax free to certain beneficiaries. ⁴
- Ability to bypass the Estate and pay superannuation benefit on death directly to your intended beneficiaries.
Those who have missed out on transferring their wealth in the concessionally taxed superannuation environment may have another chance to contribute to super if they were to sell their main residence.
If you sell your home, you may be eligible to make a ‘downsizer superannuation contribution’. Downsizer contributions allow individuals aged 65 and over to make super contributions of up to $300,000 per person from selling their main residence. This means a couple may potentially invest up to $600,000 of sale proceeds in super between them. For a contribution to qualify as a downsizer contribution:
- The person contributing to super must be aged 65 or over at the time of the contribution, but no other age or work tests apply.
- The contribution must be sourced from the proceeds of the sale of one qualifying main residence that is eligible for at least a partial CGT main residence exemption. Proceeds from the sale of an investment property that is not eligible for any main residence CGT exemptions are not eligible.
- Either the person making the contribution or his/her spouse or former spouse had an ownership interest in the main residence for at least 10 years immediately prior to the sale. It is sufficient that one spouse held the ownership interest, as long as the other spouse meets all other eligibility requirements.
- The contribution must be made within 90 days of the change of ownership of the main residence (or a longer time allowed by the Commissioner).
- The person contributing must notify the super fund trustee in the approved form of the choice to treat the contribution as a downsizer contribution at the time the contribution is made.
- A person cannot make a downsizer contribution if he/she has made a downsizer contribution in relation to the sale of a different main residence in the past.
It is important to note that even though the contributions are called ‘downsizer contributions’, there is no legislative requirement to purchase a home of a lesser value or indeed to purchase a new home at all. As long as the home that was sold meets the eligibility criteria, the person is eligible to contribute an amount up to the value of the sale proceeds or $300,000 (whichever is lesser) as a downsizer contribution.
We note that you will not be able to claim a tax deduction on your downsizer contribution. Once the downsizer contribution has been made, this may impact your ability to make future non-concessional contributions, as this contribution increases your total superannuation balance. When downsizing your home, you need to consider the impacts on your social security entitlements and possible future aged care fees, as the released funds will be assessed as financial investments.
¹Using the ‘catch-up concessional superannuation contributions’ provision
²Using the ‘bring forward’ provision
³If aged 65+ at time of contribution – must have worked at least 40 hours over a consecutive 30-day period in financial year of contribution
⁴Must be a ‘tax dependant’