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Four checks for super downsizer contributions

The downsizer contributions legislation will allow an individual aged 65 years or over to use the proceeds of the sale of one main residence to make contributions of up to $300,000 to superannuation for themselves and/or their spouse. The legislation became law in December 2017 and is designed to reduce pressure on housing affordability. However, downsizer contributions can only be made if the contract for sale of the home is exchanged on or after 1 July 2018.

In this article, we outline the eligibility criteria and requirements that relate to:

  1. the contributor
  2. the downsizer contribution cap
  3. the home
  4. contributing to super

1. The contributor

The person making the contribution must be age 65 or over. There is no maximum age, no work test requirement, and no requirement for the contributor to be permanently retired.

2. Downsizer contribution cap

The downsizer contribution cap is the maximum amount that can be contributed to super. The cap is calculated as the lesser of:

  • the proceeds of the sale
  • $300,000 per person

If a couple sell their home for $1 million, they can contribute $300,000 each. If a couple sell their home for $400,000, the contribution made between the two of them may not exceed $400,000. They could contribute $200,000 each or some other combination totalling up to $400,000 with no more than $300,000 for one person.

3. The home

The sale contract for the home must be exchanged on or after 1 July 2018. The settlement date is not relevant. The home must be located in Australia and must be affixed to land. Caravans, houseboats, or other mobile homes are not eligible.

The home must have been owned for 10 years or more by the contributor, their spouse, or former spouse. Ownership can be held solely, jointly, or as tenants in common.

There is no need for the spouses to have been in a relationship for 10 years or more. For example, if a person has owned a home in their sole name for more than 10 years, their current spouse of only two years is still eligible to receive a downsizer contribution if the home is sold.

The home must qualify for the main residence capital gains tax (CGT) concession or would have qualified if it is a pre-CGT asset, acquired before 20 September 1985.

A home will be eligible if the main residence CGT concession applies in part or in full. This means that the property does not need to be a current home. It could be a former home that is now an investment property.

This is also relevant for the sale of a farm or business where only a partial main residence CGT exemption applies because the property is also used for income producing purposes.

Case studies

Sidney and Isabel are both in their 70s and are looking to retire from the farm. They have lived in the homestead on the farm for 45 years and they sell the farm in 2019 for $3 million.

As they qualify for a partial main residence exemption they can each contribute $300,000 to super. There is no need to apportion the proceeds from the sale between the part of the farm used as the main residence and the income-producing part of the farm.

Although the contributions are named downsizing contributions, there is no need to sell the home to buy a smaller home. In fact, there is no need to buy another home at all.

In addition, if a person was to ‘upsize’ their home and buy a more expensive one, they could still make a downsizer contribution (up to the sale proceeds of the home) if they have other cash that they can use to contribute to super.

Kim and Kanye sell their $1 million home and buy a $1.5 million home, using some of the $2 million they have available in cash. As the sale proceeds are $1 million, they can each contribute $300,000 to super.

4. Contributing to super

A downsizer contribution does not count towards the non-concessional contributions cap and a person’s total super balance is not relevant. Normally, non-concessional contributions cannot be made if a person has a total super balance of $1.6 million or more at the previous 30 June. However, downsizer contributions can still be made even if a person has $3 million in super.

The balance at 30 June after the contribution is, however, relevant if making other non-concessional contributions. There is no exemption from the total super balance for downsizer contributions.

The ability to make a downsizer contribution is a once-in–a-lifetime event: only one home sale ever is eligible for downsizer contributions. For example, if a person sells their only home and contributes $100,000 to super and buys a new home, when they subsequently sell their new home, they are not able to ‘top-up’ their downsizer contributions.

Downsizer contributions cannot be used to claim a tax deduction or to receive a Government co-contribution.

The proceeds from the sale of the home must be paid to super within 90 days of receipt. Multiple contributions may be made from the sale of a single home, however, they must all be made within 90 days of receipt.

Further, individuals must elect to treat the contribution as a downsizer contribution by completing the ATO downsizer contribution form. The form must be received by the super fund at or before the time the contribution is made.

Whilst the downsizer contribution may increase a person’s super retirement income, it may reduce any Centrelink age pension. Unlike the family home, there is no Centrelink means test exemption for the downsizer contributions. Any downsizer contribution to super for members over their qualifying age pension age counts towards the age pension assets test and is deemed under the income test.

Conclusion

The downsizer contribution could assist older Australians who would otherwise be precluded from contributing to super to upsize their super balances. However, people in receipt of Centrelink benefits should seek professional financial advice before making downsizer contributions to understand any reduction in age pension that may result.

 

Julie Steed is Senior Technical Services Manager at Australian Executor Trustees. This article is in the nature of general information and does not consider the circumstances of any individual.

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