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Downsizer Contributions For Individuals In Australia

As per the Australian tax laws, downsizer contributions don’t count towards any of the contribution caps. They are also not applicable to affect your total superannuation balance unless it is recalculated at the end of the financial year.

If you are planning to generate favourable SMSF outcomes, downsizer contributions can be used strategically. They differ in the ability to allocate more money into the superannuation fund.

Natasha Panagis, the Tax and Super Head of Superannuation in Australia, said the strategic opportunities from the governing rules that specify the downsizer contribution for individuals and pensioners do not have to be made directly from the proceeds of selling a principal place of residence.

In other words, the sale proceeds for the downsizer contribution is considered important to determine the maximum amount that can be made into the Super, as announced by Natasha Panagis at the Self-managed Independent Superannuation Fund Association 2022 SMSF Forum.

The newly formulated Super rules open up the ability for trustees to achieve strategic outcomes such as reducing tax liabilities for the recipients of superannuation death benefits.

An individual can also achieve some death benefit tax planning by using the downsizer contributions strategy in line with a re-contribution strategy. The rules will specifically apply to the Super members with a significant balance in the SMSF accumulation account.

For instance, a client can withdraw an amount of $300,000 from their accumulation account and put that withdrawn money back into the super as a downsizer contribution. This, in turn, would reduce the taxable component of the superannuation balance from 100% to 70%.

If a member’s accumulation balance becomes a death benefit, this re-contribution can result in significant tax savings to be paid out to the children. For every $100,000 of the taxable amount you withdraw and put back into super, you can end up saving up to $17,000 of death benefits tax. This saving strategy will be applicable to SMSF trustees who may have used the sale proceeds of a residential property for other purposes.

For more information about downsizer contributions and SMSF trusts, feel free to contact our tax accountants at KPG Taxation.