This article is originally published on SMSF magazine

Downsizer contributions can be used strategically to generate favourable SMSF outcomes distinct from the ability to allocate more money into the superannuation fund, a retirement savings specialist has said.

According to Tax and Super head of superannuation Natasha Panagis, the strategic opportunities come from the governing rules stipulating downsizer contributions do not have to be made directly from the proceeds of selling a principal place of residence.

“The sale proceeds are just important to determine the maximum amount that can be made into super,” Panagis told delegates at the Self-managed Independent Superannuation Fund Association 2022 SMSF Forum held in Melbourne last week.

She pointed out this means the rules open up the ability for trustees to achieve strategic outcomes such as reducing tax liabilities that may apply to the recipients of superannuation death benefits.

“Using the downsizer contributions strategy in line with a recontribution strategy can really provide some good death benefit tax planning for particular clients,” she added, noting specifically this would apply to members with a significant balance in the accumulation account of the SMSF.

“What you would tell the client to do is withdraw $300,000 from their accumulation account [assuming the sale proceeds of the relevant property exceeded this sum of money], which is all taxable, and put that money back into super as a downsizer contribution,” Panagis said.

If the client in question had $1 million in their accumulation account, this course of action would reduce the taxable component of their superannuation balance from 100 per cent to 70 per cent, she said.

The strategy will in turn result in a significant tax saving if the member’s accumulation balance eventually becomes a death benefit to be paid out to adult children, she noted.

“With a recontribution strategy, for every $100,000 of taxable component that you withdraw and put back into super, you’re potentially saving up to $17,000 worth of death benefits tax for adult beneficiaries,” she said.

She suggested the strategy would be applicable for SMSF trustees who may have used the sale proceeds of a residential property for other purposes, such as the purchase of another property, leaving them without the required cash to make a downsizer contribution, or individuals who did not necessarily want to put any additional money into their super fund.