Legislation to make superannuation downsizer contributions has now passed enabling individuals who are 65 or over to contribute proceeds from the sale of one eligible property to superannuation without needing to satisfy the work test.
The new rules provide more flexibility for retirees to fund their retirement using capital released from their homes. From July 1, 2018, retirees can make downsizer contributions and use the contributions to access superannuation retirement income products (subject to their transfer balance caps).
Downsizer contributions are also exempt from the concessional and non-concessional contribution rules and provide scope for retirees in different situations to enhance their retirement outcomes.
This article will examine the rules around making downsizer contributions and discuss some of the planning considerations that can help enhance outcomes for those utilising the new rules.
For a contribution to be a downsizer contribution, the following conditions will need to be met:
- At the time of the contribution, the individual is 65 or over (there is no upper age limit)
- The contribution is in relation to the sale of an eligible property (see below) that the individual or their spouse owned just prior to the sale, and where the contract of sale was entered into on or after July 1, 2018 (there is no requirement to purchase another property)
- The total amount of downsizer contributions in respect of an eligible property does not exceed the capital proceeds, or $300,000 per individual
- The contribution is made within 90 days after the change in ownership of the property (usually the settlement date) unless the Commissioner has allowed a longer period; and
- The contribution is made using the approved form.
Cap on the amount of downsizer contributions
The amount of downsizer contributions is not governed by an individual’s concessional or non-concessional caps (or their total super balance) and can be made in addition to these contributions. However, the amount that can be contributed is capped at the lesser of:
- $300,000 for each individual; and
- The capital proceeds received (before any mortgage repayments).
For example, if a couple received $600,000 from the sale of an eligible property, they can each contribute up to $300,000 as a downsizer contribution. If their property was sold for $500,000 instead, the most they could contribute is $500,000 between them up to $300,000 for each person (the combination does not matter) ie. each could contribute $250,000 or have one person contribute $300,000 and the other $200,000.
Importantly, downsizer contributions are not deductible and cannot be made in respect of a second property regardless of how much was contributed for the first.
Although contributions can only be made in respect of one eligible property, multiple contributions can be made for that property (to different superannuation funds for example) if it is made within the above cap and timeframe (90 days).
For the property to be an eligible property, it must be located in Australia and cannot be a caravan, houseboat or mobile home. In addition:
The property must have been owned by the individual, their spouse or their former spouse for 10 continuous years just before the sale of the property. This means the 10-year period is still met where ownership changes between spouses (e.g. relationship breakdown or death of a spouse) during the period. The 10-year period is calculated from the day the ownership commenced to the day it ceased (usually the settlement dates). There are certain events that do not ‘break’ the continuous 10-year period including where:
– a property was vacant because it was destroyed or knocked down and a new home built; or
– a substitute property was purchased and owned for less than 10 years because the former property was compulsorily acquired. However, the former property had to have been initially acquired at least 10 years prior to the sale of the substitute property.
Note: All conditions of section 118-47(1) of the Income Tax Assessment Act 1997 (ITAA97) need to be met in relation to the purchase of the substitute property, including the requirement that the substitute property was purchased within a year after the end of the financial year that the former property was compulsorily acquired.
The individual must satisfy all requirements (apart from the fact that their spouse owned the property) to qualify for a full or a part main residence capital gains tax (CGT) exemption for that property. The property does not need to be the individual’s main residence for the entire 10-year period or at the time of sale. It also does not need to be owned by both members of a couple for each of them to make downsizer contributions.
For properties acquired before September 20, 1985 (pre-CGT asset), this requirement is still met if the individual would have qualified for a full or part main residence CGT exemption had the property been a CGT asset (it was not an investment property for the entire time it was owned).
There are a number of planning considerations that can help enhance outcomes for clients looking to make downsizer contributions. These include:
- Downsizer contributions will form part of the superannuation benefit’s tax-free component. To maximise the effectiveness of re-contribution strategies, downsizer
- contributions should be made after the re-contribution strategy has been implemented.
- In cases where a person is unable to meet the work test or may not have released additional capital when downsizing, the downsizer contribution rules create a new opportunity to implement a re-contribution strategy. For example, individuals who do not release capital from downsizing their home (for example, they may have moved to a smaller home in a better location) can make a lump sum withdrawal from their super benefits and use those proceeds to re-contribute as a downsizer contribution (without the need to meet the work test or other contribution rules).
- Although downsizer contributions do not count towards an individual’s concessional or non-concessional contribution caps, they do contribute to their overall total super balance. This can impact their ability to make future non-concessional contributions or catch-up concessional contributions.
- The downsizer contributions are not treated differently for Centrelink purposes and
- are assessable under the pension income and assets tests. This can impact Age Pension entitlements where capital is accessed from an individual’s exempt principal home.
- Downsizer contributions must relate to a sale of a property which qualifies for a full or partial main residence CGT exemption. This means an investment property that was a former main residence can be an eligible property.
- Where a downsizer contribution does not meet the eligibility requirements (including exceeding the allowable amount), the individual’s super fund will be notified. The fund may assess whether the contribution could have been accepted under personal contribution rules or decide to return the contribution.