Understanding the new ATO downsizing contribution entitlements

Many older Australians are planning on downsizing their family home as part of achieving their financial and retirement goals. However, there are also new and improved ways to benefit from the sale of your property from the Australian government, such as investing the proceeds into their super.

From January 2023, if you’re 55 years old or older, you can now make a $300,000 contribution into you super fund from the sale of your primary residence under the Australian Government's downsizer contribution allowance. Great news for those just turning 55, as prior to January 2023, the age limit for making a downsizer contribution was 60 years. Win!

Provided that your spouse is also 55 years old or older, then they can also make a separate $300,000 contribution from the sale of your property, allowing a maximum of $600,000 into a suitable superannuation fund.*

There are a number of additional benefits to the ATO downsizer contribution.

• There could be tax efficiencies for you.

The ATO downsizer contribution is after-tax, so no tax is payable when the contribution is made and because you are over 60, the contribution is returned tax free when you withdraw the funds in the future as a part of your retirement. Bonus.

• Your new home doesn’t have to be a new one, freeing you up to purchase a home that suits you!

The proceeds from the sale of your existing home doesn’t have to then be used to purchase a brand-new home, and there is technically no need to move to something smaller or cheaper contrary to the name of the contribution.  

• Contribution caps aren’t considered

There is no consideration for your super balance at the point at which your downsizer contribution is made. You could have $1000 or $1,000,000 in your superannuation, it doesn’t matter. However, it is important that your downsizer contribution form is received by your super fund either before or at the time your downsizer contribution is made for it to be an eligible downsizer contribution and avoid any issues into the future with the ATO.

*Source: Australian Government Taxation Services Australia, as of 26 March 2024.

So, who is eligible for the ATO Downsizer Contribution?

From 1 January 2023, in addition to the reduced 55 years of age threshold, there are a number of other important boxes you have to tick.

• The property you are selling to fund the downsizer contribution has to located in Australia, and you must have owned your property for 10 years or more.
• When you sell your existing home, you need to be sure that you are eligible for some form of exemption from capital gains tax (CGT) on the sale of the property under the “main residence” provision from the ATO. In essence it means the home that you are selling has to be your principal place of residence for at least some time during the time that you have owned it. This can be a tricky one if you are using a former holiday house or similar to fund this contribution so make sure you check with your accountant before you do anything
• Your downsizing super contribution has to be made within 90 days of receiving the proceeds of sale.  
• You have not made a previous downsizer contribution to your super from the sale of another home or from the partial sale of a home.
• If you purchased the home that you’re selling before the 20 of September, 1985 (CGT didn’t apply prior to this date), the home you’re selling still needs to have been your principal place of residence at some stage.*

*Source: Australian Government Taxation Services Australia, as of 26 March 2024.

Does the Downsizer Contribution impact the pension?

If you currently qualify or are hoping to qualify for the Age Pension once you stop working, selling any asset of significant value needs to be always considered (and you should always seek advice from your accountant). Whilst the value of your primary residence is currently excluded from the Aged Pension asset limit, when it is sold, and some of the proceeds added to your superannuation fund, that value is going be assessed and depending on the balance, may reduce your pension entitlements.

If in doubt, contact your accountant or the ATO directly for the best financial advice for your circumstances.