The ‘downsizer contribution’ is a relatively new type of contribution that can be made into superannuation funds. This new contribution type was first announced by the Government in the May 2017 budget, and came into effect on 1 July 2018.

The new measure is designed to reduce pressure on housing affordability by reducing a barrier for older people to move from homes that no longer meet their needs. These homes can potentially become available to younger families, and in return, assist older people to build up their retirement income.

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 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.

Although individuals can make a downsizer contribution regardless of their total superannuation balance, the contribution is counted towards an individual’s total superannuation balance at the end of the financial year that the downsizer contribution is made and is also counted towards the individual’s transfer balance cap. Therefore, downsizer contributions cannot be used to get additional money into an individual’s pension phase, or to claim a tax deduction.

A downsizer contribution is neither a concessional contribution nor a non-concessional contribution, and is not included in the assessable income of a superannuation fund. The contribution forms part of the individual’s tax-free component held in the fund.

Listed below are all the conditions that must be satisfied in order for an individual to be eligible to make a downsizer contribution:

1. An individual must be at least 65 years old at the time of making the contribution.

An individual must be at least aged 65 at the time of making the downsizer contribution. This means, if an individual sells their home when they are under 65, but within 90 days of selling their home they turn 65, then they can make a downsizer contribution.

2. The home was owned by the individual or their spouse for at least 10 years prior to the sale.

The individual and/or their spouse/former spouse, must have held an ownership interest in the home, or an ownership interest in the land on which the home is situated, at all times during the 10 years prior to the disposal. The ownership period is calculated from the date of settlement of the purchase to the date of settlement of the sale. The home must be located in Australia and cannot be a caravan, houseboat or other type of mobile home.

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

In addition, if the individual’s name is not on the title, but their spouse’s name is, then the property also qualifies for the downsizer contribution. If there was a divorce or separation in the last 10 years, the individual will still be able to sell the home previously registered in their former spouse’s name and make downsizer contributions. If the individual’s spouse dies, they can count the deceased spouse’s previous period of ownership, including the period the dwelling was held by the trustee of the deceased estate, towards the 10-year period.

If the original home was destroyed and the individual acquired a substitute home, then as long as the individual owned one or the other across the entire 10-year period, it qualifies.

3. The proceeds from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT rather than a pre-CGT (acquired before 20 September 1985) asset.

The home must have been the individual’s or their spouse’s main residence at some point during the period of ownership. The individual does not have to have lived in the home for all 10 years, but it must meet the test for a ‘main residence’ exemption under CGT rules. This means, if the individual was renting out the property that originally was their main place of residence, then the property qualifies, as long as when they sell the property it would be entitled to either a full or partial CGT exemption.

Also, if the property was acquired prior to 20 September 1985, the individual is able to make a downsizer contribution only if they would have been able to claim the main residence exemption had the dwelling been acquired after this date.

The main residence requirement test applies to the individual for whom the contribution is made, or would otherwise apply if the old interest was held by them, and not their spouse, prior to the disposal. The property does not need to be treated as the individual’s main residence at the time of the disposal, as long as a partial main residence exemption under the main residence provisions applies, or would have applied if the interest was held by them and not their spouse.

There is currently a proposed change to the law Treasury Laws Amendment (Measures for a Later Sitting) Bill 2019 to clarify the way the CGT rules interact with the downsizer provisions. If the change occurs, an individual will be eligible to contribute the sale proceeds from a property that was held by their spouse, purchased prior to the introduction of CGT in September 1985 and was the spouse’s main residence. The current law only covers a pre CGT main residence that is owned by the individual but not by their spouse.

Also the home cannot be held through an entity, such as a trust or a company. This is because if an interest in a dwelling is held in a trust or company structure, the capital gain made by the trustee or company resulting from the disposal will not qualify for a main residence exemption.

For the purposes of making a downsizer contribution, it is not relevant how the main residence exemption is calculated or apportioned. The downsizer contribution amount available relates to the proceeds from the disposal of the interest in a dwelling and does not depend on the extent to which the amount is exempt as a main residence for CGT.

4. The amount contributed must be from the proceeds of selling their home where the contract of sale exchanged was on or after 1 July 2018.

A contribution can only be a downsizer contribution where the contract for the disposal of the home is entered into on or after 1 July 2018.

Downsizer contributions are limited to the lesser of $300,000 or the total capital proceeds received from the sale of a 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 a home, do not reduce the maximum available to contribute.

The maximum contribution is $300,000 per person. However, couples can take advantage of this measure, meaning up to $600,000 of contributions can be made by a couple from the proceeds of selling their home.

If a couple sell their home under a single contract and are both eligible to make a downsizer contribution, they can choose how to apportion the total capital proceeds between them, as long as neither make a contribution of more than $300,000. Also, if only one individual of a couple is eligible, they can use the total capital proceeds from the sale up to $300,000.

An individual can make multiple downsizer contributions from the proceeds of a single sale of a home. However, they can only make downsizing contributions for the sale of one home, and the scheme cannot be accessed again for the sale of a second home. Therefore, an individual may have one residence from which their downsizer contributions are sourced and their spouse may make their downsizer contributions from another property. This is acceptable, as long as all downsizer contributions for one person is made from the same home. Any unused portion of the downsizer contribution cap cannot be transferred to their partner.

Downsizer contributions can be made as an in-specie contribution. Where the sale proceeds have been used to purchase an asset, the asset can be contributed as a downsizer contribution. As the asset will be transferred to the fund from a related party, it can only be listed securities and business real property (as allowed under section 66 of the Superannuation Industry Supervision Act 1993).

There is no requirement for the individual to purchase another home. There is, however, a requirement that the capital proceeds are received. This means, where a disposal for no consideration occurs and accordingly does not involve any capital proceeds being received, no downsizer contributions can be made.

The intention of the downsizer policy is that an individual sources their downsizer contribution from the total proceeds received from the disposal of the ownership interest in the dwelling. It is not intended that an individual be eligible to make a downsizer contribution by entering into a non-arm’s length arrangement, to dispose of their ownership interest for less than market value and applying the CGT market value substitution rules; so as to be taken to have received the market value of the ownership interest.

5. The contribution is made within 90 days of disposing of the home or such longer time as allowed by the Australian Taxation Office (ATO).

More than one downsizer contribution may be made to one or more superannuation funds from the sale of one home. However, all contributions must be made within 90 days of receiving the proceeds of the sale.

If due to circumstances outside the individual’s control, they require a longer time period, they can apply for an extension of time to the ATO. However, an extension of time will not be granted if it is to allow the individual to meet the age requirement. To apply for an extension of time, the request must be received before the 90-day period has expired.

6. The individual makes a choice to treat the contribution as a downsizer contribution, and notifies their superannuation fund in the approved form, at or before the time they make the contribution.

The individual must make a choice to treat a contribution as a downsizer contribution using the ATO’s form ‘NAT 75073’. The form must be submitted before, or at the time, the contribution is made. The individual’s superannuation fund must inform the ATO of the downsizer contribution received in its annual tax return at Section F Label H & H1.  The ATO will then run verification checks on the amount and may contact the individual for further information. If the contribution does not qualify as a downsizer contribution, the ATO will notify the individual’s superannuation fund. The fund can then re-categorise the contribution as an individual’s non-concessional contribution or assess whether the contribution is to be refunded to the individual.

For example, if the individual is over 65 and meets the part-time work test, then their contribution can remain in their superannuation fund as non-concessional contributions and count towards the non-concessional contributions cap. Excess contributions will be treated in the usual way. If, however, the individual is not eligible to make contributions to the fund, then the downsizer contributions must be returned to them.

Caution: Age Pension eligibility

The downsizer contribution will be taken into account for determining 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.

The asset test thresholds for the Centrelink Age Pension from 1 July 2019 are detailed in Table 1.

Table 1: Asset test thresholds for the Age Pension

Monica Rule is the founder of Monica Rule – Your Self Managed Super Expert. 

***

QUESTIONS

To answer the following questions, go to the Learn tab at moneyandlife.com.au/professionals

1. To be eligible to make a downsizer contribution, an individual must be:

1. Under age 65 at the time of selling their home.
2. Over age 65 at the time of selling their home.
3. Under age 65 at the time of making the contribution.
4. At least age 65 at the time of making the contribution.

2. An individual can make a downsizer contribution:

1. Regardless of what their total superannuation balance is.
2. Only if their total superannuation balance is less than $500,000.
3. If their total superannuation balance is less than $1.6 million.
4. If their total superannuation balance is more than $1.6 million.

3. Michelle and Tony are both aged 65. They want to retiree and decide to sell their investment property that they have owned for 15 years and make a downsizer contribution to their superannuation. How much of the downsizer contribution can they make to their superannuation account?

1. $600,000 as a combined contribution.
2. $300,000 as a combined contribution.
3. $150,000 as a combined contribution.
4. $0 as the property is not their main residence.

4. A couple sell their home worth $600,000 and contribute the total sale proceeds to their superannuation fund as downsizer contributions (i.e. $300,000 each). They decide to rent for a period of time. They have assets worth $500,000 outside of superannuation. How much Age Pension would they receive?

1. The couple would be denied an Age Pension as their assessable assets would exceed the maximum $1,074,000 threshold.
2. The couple would receive a part Age Pension as their downsizer contribution is below the assets test threshold.
3. The couple would receive the full Age Pension, as they are no longer living in a home owned by them.
4. None of the above.

5. To qualify, the downsizer contribution must be:

1. Made within 30 days of receiving the proceeds of sale.
2. Made within 60 days of receiving the proceeds of sale.
3. Made within 90 days of receiving the proceeds of sale.
4. Made within 30 days of accepting the purchase contract.