Meg Heffron
Managing Director
Two proposals in the federal budget are unambiguously great news for older Australians looking to get more money into super. Both relate to extending the period of time for which particular opportunities are available.
The first was a proposal to bring the eligibility for “downsizer contributions” forward to 60 (from 65). These are the contributions people can make on selling their home as long as they meet a range of conditions (such as having owned it for more than 10 years). Importantly, anyone who meets the conditions can make these contributions no matter how much they already have in super.
The second proposal of interest is extending bring-forward opportunities from 65 to 74. A “bring forward” is the name given to the opportunity certain people have to make up to three years’ worth of contributions at a time.
These rules only apply to non-concessional contributions (personal or after-tax contributions for which no tax deduction is claimed) and are limited for those with a lot of money in super already. For example, someone with $1.7 million or more in super at June 30, 2021 won’t be able to use these rules at all in 2021-22.
What is particularly interesting is that historically the two kinds of contributions have been mostly mutually exclusive and now they won’t be. Under current law, for example, bring-forward contributions can only be initiated up until the year in which the individual turns 65 and downsizer contributions are only possible after 65. In the future they may well happen at the same time and the order could be important.
For example, let’s imagine the new rules are in place as planned for 2022-23. At June 30, 2022, Trish is 61 and has $1.4 million in super. There have been no changes to any caps or thresholds for being allowed to use the bring-forward rules since July 1, 2021. That means anyone wishing to use the bring-forward rules to contribute three years’ worth of non-concessional contributions at once must have had less than $1.48 million in super at the previous June 30. It looks like Trish meets this requirement.
Trish intends to sell her house and would also like to transfer some shares she owns personally into the fund as an in specie contribution using the bring-forward rules.
In Trish’s mind, the two events are not connected but in fact timing is everything.
If Trish sells her house and makes a $300,000 downsizer contribution in 2022-23, she may find that her total super balance rules her out of making large non-concessional contributions the following year (2023-24).
By contrast, if she makes both contributions in 2022-23 she’ll be fine (her June 30, 2022 balance will be low enough to allow the normal three-year bring-forward allowance).
Equally, she could use the bring forward rules in 2022-23 and even sell the house in 2023-24 (making a downsizer contribution that year) because – fortunately – the size of her June 30, 2023 balance doesn’t matter when it comes to making a downsizer contribution.
Remember that Trish won’t have a lot of choice when it comes to the year in which her downsizer contribution is made – the contribution must be made within 90 days of settlement. So she may be locked into a particular financial year based on when she sells the house. But what if the house settles in May 2023? Then she has choices – and they may really matter, depending on her contribution plans for 2023-24.
Another crucial area in which the new rules would collide with existing ones in a different way is preservation (this is the rule that keeps super locked up until retirement).
Traditionally, preservation has not been an issue for downsizer contributions. They weren’t available until age 65 and at that point super is entirely unpreserved in any case. But what happens now if a downsizer contribution is made at 60? Unless there is an explicit change to the preservation rules to prevent this, the downsizer contribution will be preserved like any other superannuation contribution.
Like any other contribution, it could still be used to provide a pension but unless the member has retired (or met another condition that frees up super) the pension will be a slightly more restrictive one known as a “transition to retirement” pension.
This is nothing new or unique to downsizer contributions. What is unique is that the changing of the age at which they become available will mean downsizer contributions bump into other superannuation rules in ways that may be unexpected.
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