The downsizer contribution allows individuals, who may be prevented from making superannuation contributions due to their age, work status, contributions caps or their total superannuation balance, the ability to make superannuation contributions using some of the proceeds from the sale of their home. The new measure allows individuals aged 65 or over, to sell their home in Australia that they have owned for at least 10 years and make a contribution into their superannuation fund of up to $300,000 from the proceeds.

Since the new measure took effect, data from the Government shows that in just one year, 4246 individuals had used the new measure, with 55% of the contributions being made by women and 45% by men. One billion dollars has been contributed to superannuation.

Listed below are all the do’s and don’ts that must be considered in order for an individual to be eligible to make a downsizer contribution:

Do’s

No work test requirements

SIS Regulation 7.04 has been amended recently to allow members aged 65 and over (including members aged 75 and over) to make downsizer contributions without having to satisfy the work test.  In addition to this, there is no maximum age limit to make a downsizer contribution.

Not affected by the total superannuation balance

Members with a total superannuation balance (TSB) of $1.6m or more at 30 June of the previous financial year are able to make a downsizer contribution in the current financial year.  The contribution, however, is counted towards a member’s TSB at the end of the financial year that the downsizer contribution is made.

Not affected by the contributions caps

A downsizer contribution is neither a concessional nor a non-concessional contribution, and therefore is not counted towards the concessional or non-concessional contributions caps.  The downsizer contribution is not included in the assessable income of a fund and forms part of the member’s tax-free component in the fund.

Member’s name need not be on the title of the property

The member’s name does not need to be on the ownership title as long as their spouse or former spouse’s name is on the title.

Joint tenant or tenants in common

The property can be owned by the member alone, or owned by the member with other people as a joint tenant or as tenants in common.

Not affected by borrowings

The maximum contribution is $300,000 per person.  This means, a couple can make a contribution of up to $600,000 from the proceeds of their home.   It is the gross capital proceeds, which means any debt outstanding on a mortgage that is discharged or costs incurred from the sale of home, do not reduce the maximum available to make a contribution.

Partial CGT main residence exemption

There is no requirement for the dwelling to be used as a member’s main residence just before the disposal or even throughout the entire 10-year ownership period, as long as the dwelling meets the test for a “main residence” exemption under CGT rules.

This means, a dwelling that was used as the member’s main residence and also for business purposes qualifies for downsizer contributions. In these circumstances, even though the sale proceeds of an eligible dwelling also relates to the sale of business premises, there is no need to apportion the sale proceeds to work out the maximum amount of the downsizer contribution. The downsizer contribution can still be made up to the lesser of $300,000 or the total actual capital proceeds received from the sale.

Ownership period where there was no dwelling on the land

The 10-year ownership period is not broken where an existing dwelling was destroyed/demolished and a substitute/new dwelling is built; or where there was no dwelling on the land when the property was first acquired and a new dwelling is built after its acquisition.

For example, where land was purchased in January 2005 and a dwelling built on the land in September 2008.  The 10-year period will be calculated from January 2005 for the purpose of measuring the eligibility of the downsizer contribution.

Contribution made within 90 days

More than one downsizer contribution may be made to one or more superannuation fund from the sale of one home.  However, all contributions must be made within 90 days of receiving the proceeds of sale.  An extension of time can be applied to the ATO, if made, within the 90-day period.

The member must inform their superannuation fund of electing to treat the contribution as a downsizer contribution by using the ATO’s form NAT 75073. The fund must inform the ATO that it received the contributions in its annual tax return at Section F Label H & H1.

Don’ts

Under 65 years of age

A member must be aged 65 or older at the time the downsizer contribution is made.

Transfer balance cap

A downsizer contribution is counted towards a member’s transfer balance cap (TBC) if the contribution is used to commence a retirement pension.  Excess transfer balance tax may apply if the member exceeds their TBC.

Ownership period of less than 10 years

The home must be owned by the member and/or their spouse/former spouse for 10 years or more prior to the sale. The ownership period is calculated from the date of settlement of the purchase to the date of settlement of the sale. A member cannot make a downsizer contribution where the contract for the disposal of the home is entered into prior to or on 1 July 2018.

Overseas homes and investment properties

The home must be located in Australia and cannot be a caravan, houseboat, or other types of mobile home.  Also, it cannot be a home entirely used as an investment property that does not qualify for a partial main residence CGT exemption.

Multiple homes

Downsizer contributions can only be made from the sale of one home.  The scheme cannot be accessed again from the sale of a second home. However, a member may use one residence from which their downsizer contributions are sourced and their spouse may make their downsizer contributions from another property. All downsizer contributions for one person must be made from the same home.

In-specie transfer between spouses

A downsizer contribution can be made where a member transfers their ownership interest in an eligible dwelling to their spouse when all the requirements of the law are satisfied, which includes when the capital proceeds are received from the sale. However, no downsizer contribution can be made if the transfer between spouses is for no consideration.

Vacant land

A downsizer contribution cannot be made from the sale proceeds of a vacant block of land.

Aged pension entitlements

The downsizer contribution will be taken into account for determining a person’s eligibility for the age pension.  The age pension, administered by Centrelink, is assessed against an asset test.  An individual’s family home is generally not included in the assets test; however, superannuation savings are included once an individual reaches pension age.  This means, if an individual disposed of their main residence and makes a downsizer contribution, they may either be subject to reduced age pension payments or no longer be eligible to receive any age pension payments at all.

References

  • Section 292-102 of the Income Tax Assessment Act 1997
  • Sub-regulation 7.04(1) of the Superannuation Industry Supervision Regulation 1994
  • Law Companion Ruling 2018/9
  • Guidance Note 2018/2

IN THE NEWS

Our Managing Director, Naz Randeria, was in the news last month when she was invited to speak as a guest entrepreneur at CERI – Centre for Entrepreneurial Research and Innovation.

CERI is a social enterprise focused on early stage innovation attracting, supporting and inspiring talent while creating the mindset and providing the knowledge needed to successfully commercialise those ideas. Outside of work hours, Naz contributes her time to develop the entrepreneurial mindset and culture for the next generation entrepreneurs.

Watch the full interview on https://www.youtube.com/watch?v=wrZgEjxDOFs


RELIANCE AUDITING SERVICES

Reliance Auditing Services is a specialist independent auditing services firm providing quality audits to SMSFs, companies, not-for-profits and AFS licensees all over Australia. Reliance Auditing places a huge emphasis on educating our clients to ensure they fulfil their reporting obligations. We believe that self-funding retirement is the pathway to making the economy self-sustainable.

Call: 1300 291 060 or email info@relianceauditing.com.au.

DISCLAIMER: This information is an interpretation of rules, regulations and standards. It should not be considered as general or specific advice and neither purports, nor is intended to be advice on any particular matter. No responsibility can be accepted for those who act on the contents of this publication without first obtaining specific advice. Liability limited by a scheme approved under Professional Standards Legislation.