This measure broadly allows people aged 65 and over, who have sold their principal/main residence, to contribute all/part of the resulting sale proceeds to super, irrespective of their age-based eligibility and other restrictions that might otherwise prevent such a contribution.
This article outlines the eligibility for, and operation of, this new measure based on the legislation and accompanying explanatory memorandum. It is expected that further practical insights will emerge when enabling regulations and contribution election forms become available.
The key features and eligibility criteria are broadly as follows:
A contract to sell a property is entered into on or after 1 July 2018.
The property being sold is the person’s main residence, or is eligible for at least a part main residence capital gains tax (CGT) exemption, including a residence purchased pre September 1985 (i.e. pre-CGT).
The contribution is made within 90 days of receiving the sale proceeds and on or after the day the person reaches age 65 (no upper age limit applies).
Eligible contributors can contribute up to $300,000 each of the sale proceeds of the property.
An election form must accompany the contribution(s).
No tax deduction is available for the downsizing contribution.
Downsizing super contributions will form part of the tax-free component of the contributor(s) superannuation interest(s) and is non-assessable non-exempt (NANE) income, regardless of the form in which it is subsequently withdrawn from the fund (i.e. pension or lump sum).
No special Centrelink or Department of Veterans’ Affairs (DVA) means test exemptions or concessions apply to the downsizing contribution.
The Transfer Balance Cap of $1.6 million (indexed) continues to apply. This may limit, or effectively prevent, the transfer of the downsizing contribution from super accumulation phase to a tax-exempt retirement phase pension.
Essentially, the benefit of these ‘downsizing’ contributions is that they can be made regardless of contribution caps and restrictions that otherwise apply when making super contributions, i.e. due to age and total super balance.
1. Selling a property
It is important to emphasise upfront that only sale contracts entered into (exchanged) from 1 July 2018 will be eligible.
The property that is being sold must be in Australia and not be a caravan, mobile home or houseboat. Further, it must have been owned by the person, and/or their spouse, for at least 10 years prior to disposal.
This 10 year ‘ownership’ period can include:
period(s) when only one member of the couple owned the property, for example, when a property was inherited from a deceased spouse who was the prior sole owner;
a period when the property was held by the trustee of the deceased estate of the owner; and
a period when the residence was acquired by a sole owner who is now a member of a new couple as a result of a property settlement following a relationship breakdown (i.e. includes ownership period prior to the relationship breakdown, even if the property had only been owned by the former spouse).
In addition to this, for the property to be an eligible main residence, it must be eligible for at least a partial main residence CGT exemption.
As such, this may include a property that may currently be an investment property but was previously the main residence of a member of the couple, i.e. was previously eligible for the main residence CGT exemption. It could also include a property that is currently a main residence for CGT purposes but was previously an investment property.
A downsizing contribution can also be made from the sale of a dwelling that is not a CGT asset because it was acquired prior to 20 September 1985. For a sale of a pre-CGT asset, the person can only have a downsizing contribution if they would have been entitled to a whole or partial main residence exemption if the dwelling had been a CGT asset.
On the other hand, in some situations, a property (or part) can lose its main residence CGT exemption. This includes situations, for example, where part of a property is sub-divided and sold separately from the land, which includes the actual main residence. Where this occurs, it appears that eligibility to make a downsizing contribution from the sale of the sub-divided land (i.e. which does not include the residence) may not be available.
While it is expected that in the vast majority of cases it will be obvious that the property being sold will be an eligible residence, allowing the seller(s) to make the downsizing contribution, there may be situations where the property’s eligibility for the main residence CGT exemption is unclear. In these cases, it is suggested that clients obtain specific advice from their tax adviser and/or a private ruling from the Australian Taxation Office (ATO).
Importantly, there is no requirement that the person who has sold an eligible property actually ‘downsizes’. That is, there is no obligation to purchase another residence. So, for example, a downsizing contribution could be made by someone going into aged care, a granny flat, retirement village, a rental arrangement or moving into another property that they (or a partner) already own.
2. Determining sale proceeds
In simple terms, ‘sale proceeds’ is basically the arm’s length sale price of the eligible residence. So, amounts deducted for agent’s fees, secured or other loan repayments and other expenses, can be disregarded when assessing the amount of ‘sale proceeds’.
The term ‘proceeds’ or ‘capital proceeds’, is extensively defined in the Income Tax Assessment Act 1997 (ITAA 1997). In the majority of cases, where an ‘arm’s length’ sale between unrelated parties occurs, ‘capital proceeds’ will basically be the gross sale price, i.e. the amount of money you have received or are entitled to receive plus the market value of any other property you received or are entitled to receive in respect of the disposal of the asset.
However, the downsizing legislation specifically refers to ‘capital proceeds received from the disposal…’ as being eligible for the purposes of making a downsizing contribution. At the time of writing, it is doubtful whether a downsizing contribution can be made when no ‘proceeds’ have actually been received, for example, when disposing of a residence to a spouse or other related entity for no consideration (and assuming that the disposer has other funds available to make the contribution).
The actual amount of ‘proceeds’ received may further limit the amount that can be contributed using the downsizing contributions strategy.
Rob and Sue (both age 65+) sell their eligible country residence for $400,000. They also have $200,000 in the bank. Rob and Sue are limited to contributing a combined total of $400,000 (not exceeding $300,000) for either of them as downsizing contributions. For example, Sue could contribute $300,000 and Rob could contribute $100,000.
John and Betty (both age 65+) sell their eligible residence for $700,000. Both John and Betty could contribute up to $300,000 each as downsizing contributions.
They could potentially also contribute the remaining $100,000 as a Non Concessional Contribution (NCC) subject to meeting the over 65 work test, their previous 30 June Total Superannuation Balance (TSB), and their remaining NCC cap limit.
3. Making a contribution
Super funds will be allowed to accept ‘downsizing’ contributions from those age 65 or over (regardless of whether the person meets the work test) where a prescribed election form is provided before or with the contribution.
As noted earlier, a downsizing contribution can be made regardless of the individual’s 30 June TSB and will not be included in any contribution cap of the individual. However, once a downsizing contribution is made, it will increase the person’s TSB for the future application of that test.
A maximum contribution of $300,000 per person is permitted. However, this is also potentially limited by the actual sale proceeds received (see examples above).
It’s worth noting that, even if only one member of a couple was the property owner, both will be eligible to contribute up to $300,000 each (limited by the actual sale proceeds).
Eligible individuals are limited to making downsizing contributions from only one property in their lifetime.
However, an individual may make more than one downsizing contribution from the proceeds of sale of a single eligible property – as long as the individual’s total downsizing contributions do not exceed $300,000. In such cases, each contribution must be covered by the prescribed election form. For example, downsizing contributions from the proceeds of sale of one property could be contributed to more than one super fund. The downsizing election form will be required for each downsizing contribution.
The downsizing contribution must be made within 90 days of settlement (unless allowed a longer period by the ATO).
As noted above, a notice must be provided prior to or with the contribution, notifying the super fund that the contribution is from the proceeds of eligible downsizing. At the time of writing, the prescribed notice was not yet available.
This is similar to the notice requirements for those making contributions under the small business CGT concessions and those contributing amounts of personal injury compensation/structured settlement claims.
4. Centrelink issues
A person’s principal home is exempt from the Centrelink asset and income tests.
On the other hand, superannuation assets held by those who have already reached their Age Pension age, are broadly assessed under the Centrelink asset and income tests.
Unfortunately, there are no special Centrelink means test exemptions applicable to amounts contributed to super under this ‘downsizing’ measure.
As such, individuals who sell their home (i.e. a non-assessable asset) and use some/all of the proceeds to make a superannuation contribution, may see a reduction in their social security benefits due to all or part of the asset becoming assessable.
Having said that, the proceeds freed-up as a result of a genuine downsizing have broadly similar Centrelink income and assets test implications, whether contributed to super using the downsizing measure or instead, invested in the individual’s own name.
When a Centrelink recipient sells their residence, the sale proceeds can typically be exempted from the assets test for up to 12 months, to the extent that the sale proceeds will be used to purchase another residence. However, deeming rules will usually apply to the sale proceeds under the income test, depending on how the proceeds are spent/invested.
This asset test exemption can also apply when proceeds are contributed to super, as long as the client’s intention is to use the proceeds to purchase another residence. This could be useful as, for someone aged 65 (or over) who makes a downsizing contribution, there is no impediment to subsequently withdrawing the contribution.
With the Age Pension qualifying age progressively increasing to age 67, there may be additional scope for those below their Age Pension qualifying age to use the ‘sheltering strategy’. Under this strategy, assets are contributed to the superannuation fund of someone below their Age Pension age where superannuation is exempt from Centrelink means testing.
This strategy will become more practical as the Age Pension qualifying age progressively increases to the currently legislated age 67. For example, consider the sheltering benefits of downsizing contributions made by someone aged 65, but less than their Age Pension qualifying age of say, 67.
Observation: An impediment to some clients taking up the downsizing opportunity may be the unfavourable assets and income test outcomes. Some clients may maximise Age Pension/income support by remaining in the assets test exempt main residence, rather than by creating additional assessable assets by its sale.
5. Interaction with the Transfer Balance Cap
The ‘downsizing’ contribution measure will allow eligible persons to contribute sale proceeds up to $300,000 to superannuation where they may not otherwise be eligible to do so. However, this measure does not necessarily allow this contribution to be moved to the tax-exempt retirement pension phase.
That is, from 1 July 2017, the amount that can be moved to a tax-exempt retirement phase pension is limited by the $1.6 million pension transfer balance cap. The downsizing contribution legislation does not provide any extension or exemption from the pension transfer balance cap for these contributions.
Perhaps the ideal target market for the downsizing contributions strategy will be those who do not qualify for any income support and who are paying marginal rate tax on their retirement income – e.g. those in receipt of taxable defined benefit pensions, or other investment or employment income.
The downsizing contribution may give such clients the opportunity to contribute up to $300,000 each into a tax-exempt retirement phase pension (subject to the pension transfer balance cap), subsequently providing tax-free income payments from the pension.
1. Amongst other eligibility criteria, downsizing contributions can be made by those who:
a. Are age 65 or more at the time the contribution is made.
b. Have sold their main residence, regardless of age.
c. Have reached their preservation age or more when the contribution is made.
d. Only those who are the registered owner(s) of the residence which has been sold.
2. Sale proceeds of a residence will be available to be a downsizing contribution when:
a. The settlement occurs before 1 July 2018.
b. The sale contract is exchanged on 1 July 2018 or later.
c. The sale contract is exchanged on 1 July 2017 or later.
d. The sale contract is exchanged on 1 January 2018 or later.
3. Eligible downsizers, Linda and Peter, sell their residence for $500,000. What is the maximum downsizing contribution Peter can make?
4. An election form in approved format must accompany each eligible downsizing contribution and be given to the super fund before or at the time the contribution is made.
5. Features of a downsizing contribution include:
a. The dwelling sold must be eligible for at least a partial main residence CGT exemption.
b. The contribution must be made within 90 days of the settlement.
c. Age-based and other contribution limitations do not apply to the downsizing contribution.
d. All of the above.
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