The 2021 federal budget included a number of interesting measures relating to superannuation contributions. Two of these relate to extending the period of time particular opportunities are available – bringing forward the eligibility for downsizer contributions to age 60 (from age 65) and extending bring-forward opportunities from age 65 to age 74.
Both are unambiguously great news for older Australians looking to get more money into super.
But what’s particularly interesting is that historically the two have been mostly mutually exclusive and now they won’t be. Under current law, for example, bring-forward non-concessional contributions can only be initiated up until the year in which the individual turns 65 and downsizer contributions are only possible after age 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 30 June 2022, Trish is 61 and has $1.4 million in super. There have been no changes to the general transfer balance cap or the concessional contribution cap since 1 July 2021. 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 her mind the two events are unconnected, but in fact timing is everything. If she sells her house and makes a $300,000 downsizer contribution in 2022/23, she may find her total super balance rules her out of making large non-concessional contributions in 2023/24.
In contrast, if she makes both contributions in 2022/23, she’ll be fine as her 30 June 2022 balance will be low enough to facilitate 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 30 June 2023 balance doesn’t matter when it comes to making a downsizer contribution.
Remember, she 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. Hence, 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.
Traditionally preservation has simply 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 be used to provide a transition-to-retirement income stream as the member will obviously have reached their preservation age.
It could even be applied to provide a retirement-phase pension, but only if the member has met a relevant condition of release. For example, they could be permanently retired, meaning they’ve had a paid job at some point in the past, it’s ended and they don’t ever intend to work 10 or more hours a week in the future. Alternatively, they could meet the ‘cessation of employment after age 60’ definition of retirement. But crucially, this would need to occur after the contribution is made. If the downsizer contribution is made later, giving up the job won’t help make the contribution accessible. It’s even possible, if another condition of release can’t be met, that the downsizer contribution could be preserved until the member reaches age 65.
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.
Meg Heffron is managing director of Heffron.
