Advisers cautioned on top 5 ‘downsizer risks’ for younger clients

Last week, the bill to reduce the eligibility age for downsizer contributions from 60 to 55 was passed through Parliament.

RSM Financial Services Australia director Grace Bacon said while the recent change in eligibility age may have created opportunities for more Australians to contribute to super when they may have otherwise not had the capital to do so, there are five risks that must first be considered.

One and done

Ms Bacon said it is important that clients are aware that the downsizer contributions can only be used once in their lifetime.

“This means that the concession cannot be used again from the sale of a second home if they decide to downsize again when they’re older,” explained Ms Bacon.

Locked away

Given that superannuation is locked away and in most cases can only be accessed between ages 60 and 65, where a condition of release is met, or automatically at age 65, advisers also need to give consideration to their clients’ liquidity requirements, she said.

“Utilising the downsizer contribution at age 55 is locking away your savings for five to 10 years, depending on when you meet the conditions to access your super,” she cautioned.

Failing to maximise your super benefit

Ms Bacon said while some clients may view adding $300,000 in a single contribution as a great way to maximise their superannuation, it may affect their ability to access other contribution strategies.

“[For example] strategies such as tax-deductible carry forward contributions and non-concessional contributions,” she explained.

She also noted that downsizer contributions can be made into super at any age, even if a member’s total super balance is greater than $1.7 million.

“However, once your balance is above $1.48 million, it does limit your ability to make non-concessional contributions to super,” she said.

She gave an example of a member with a current total super balance of $1.4 million that grows to $1.8 million by the time they retire.

“Provided that the current rules and caps still apply, they will be able to contribute up to $300,000 for singles or $600,000 for couples into super as downsizer contributions,” she stated.

However, if the same client were to use the downsizer concession now, she said, this would prohibit them from using it in the future.

“Also, [they] will not be able to make non-concessional contributions into super as [their] total super balance will be more than the $1.7 million limit,” she explained.

Pension impact

If the client qualifies for the Age Pension, it is also important that advisers consider what ramifications the downsizer contribution might have on their Age Pension if they sell their home.

She gave the example of Bob and Jenny, who sold their principal place of residence (purchased 15 years ago for $2 million) and have settled on a new home for $1.4 million.

“Bob is retired and receives a part age pension and Jenny works part-time. They can each put $300,000 into super as downsizer contributions. They are asset tested for Centrelink purposes and have total assessable assets of $730,000,” she explained.

“If they do nothing with the surplus sale proceeds, their Centrelink assessable assets will increase to $1,330,000. This means Bob will no longer be eligible for a part age pension as their combined assessable assets exceed the asset cut-off point of $935,000.

“If they each contribute $300,000 into super as downsizer contributions, this will increase their assessable assets to $1,030,000 for Centrelink purposes and would result in Bob no longer qualifying for a part age pension. This is because Jenny’s superannuation is not assessed as an asset as she is not of age pension age and Bob’s additional $300,000 in super will be an assessable asset.”

Ms Bacon said it is important to note that regardless of where the remaining $300,000 is held, either in super or in their personal names, it will still be an assessed asset for Centrelink purposes.

Carry forward implications

Downsizer contributions can also impact a member’s ability to use carry forward contributions if their total super balance is below $500,000.

She gave the example of Mario, who is age 60 and still employed, earning $60,000 a year and having a total super balance of less than $500,000 on 30 June 2022.

“He has not been making additional before-tax contributions beyond his employer’s contributions and has not been maximising his concessional contributions each year,” she said.

“He downsizes his home, has met all the eligibility requirements for the downsizer contribution and places the $300,000 into super in December 2022. In August 2023, Mario sells his share portfolio and has a realised capital gain of $200,000 in the 2023–2024 financial year.

“Because of the downsizer contribution in December, which resulted in increasing his total super balance to more than $500,000, Mario will not be able to utilise the carry forward concessional contribution to offset some of the capital gains tax from selling his share portfolio.”

Carry forward concessional contributions can be used to offset some capital gains or reduce taxable income in general, she noted.

“This strategy revolves around the ability to use any unused concessional contribution from prior years from 18–19 financial year for up to five years if you have a total super balance of less than $500,000 at the end of 30 June of the previous financial year,” she explained.