Downsizer Contributions for Returning Expats
A Boost for Your Superannuation
Superannuation is the preferred retirement vehicle for most Australians. This is mainly because of its ability to grow wealth in a tax-favoured environment, diverse investment strategies, and the possibility of tax-free income drawdowns in retirement. However, many Australian expats return home to find that their superannuation accounts are underfunded. This can happen due to factors such as inactivity, a “set-and-forget” mentality, or the decision to invest in foreign pension schemes instead. For expats, downsizer contributions for expats offer a valuable opportunity to boost super balances and are often overlooked.
When expats decide to return to Australia, they often look for ways to boost their superannuation balance. Though contribution caps can limit their ability to transfer accumulated wealth from overseas into their super accounts. After exhausting traditional super contributions like salary sacrifice and non-concessional contributions, many expats find themselves waiting years before they can contribute again.
What is a Downsizer Contribution?
A downsizer contribution allows eligible individuals to contribute up to $300,000 ($600,000 per couple) from the proceeds of selling their main residence into their superannuation account. The beauty of this strategy is that the downsizer contribution does not count toward the normal contribution caps. That is, it is not subject to the standard super contribution rules, such as super balance limits. This presents a great opportunity for returning expats to significantly boost their super balance.
Eligibility for Downsizer Contributions
To use the downsizer contribution strategy, you must meet the following criteria:
- Qualifying Dwelling: The property must be your main residence (not a caravan, houseboat, or mobile home).
- Age Requirement: You must be at least 55 years old at the time of making the contribution.
- Location of Property: The property must be located in Australia.
- Capital Proceeds: The contribution must be based on the actual capital proceeds (not deemed proceeds) from the sale of the property, up to a maximum of $300,000 per individual. The property should have been owned by you or your spouse for at least 10 years before being sold.
- Capital Gains Tax Exemption: The sale must be exempt or partially exempt from capital gains tax under the main residence exemption.
- Timely Contribution: The downsizer contribution must be made within 90 days of the change of ownership.
- No Previous Downsizer Contribution: You must not have made a downsizer contribution for a previous sale of another main residence.
How Downsizer Contributions for Expats Work: A Case Study
Let’s take a look at how the downsizer contribution strategy can work in practice.
Ashley (60) and Isaac (62) purchased their Australian home in 2001. In 2018, they moved to the US for work, and they decided to rent out the Australian property while living abroad. During their time overseas, they paused super contributions and invested in their 401(k) retirement plan.
Upon their return to Australia in 2022, Ashley and Isaac decided to sell their home and downsize to a smaller apartment with less maintenance. They were concerned about the balances of their super accounts and wanted to maximize their superannuation contributions over the next few years.
Ashley and Isaac’s Financial Strategy:
Their financial planner recommended the following approach:
- $330,000 non-concessional contribution (triggering the bring-forward rule).
- $300,000 downsizer contribution each.
By utilizing the bring-forward rule, Ashley and Isaac were able to contribute $330,000 each into their super accounts. They also qualified for the downsizer contribution and made an additional $300,000 contribution each within 90 days of selling their property.
As a result, they were able to contribute $630,000 each into their super accounts, totaling $1.26 million between them. This strategy allowed them to significantly boost their super balances as they transitioned back to life in Australia.
Is the Downsizer Contribution Strategy Right for You?
The downsizer contribution is a powerful tool to grow your super balance, especially for returning expats who may have underfunded superannuation accounts. However, as with any financial strategy, it’s essential to consider your personal circumstances, eligibility, total super balance, and the timing of your contributions.
If you’re a returning expat looking to maximize your superannuation, the downsizer contribution may be an excellent option. To determine if this strategy suits your situation, contact one of our experienced financial planners at Atlas Wealth for personalised advice and guidance.
To learn more, check out Atlas Wealth Groups’ podcast: Expat Chat