Sizing Up the Downsizer

Access to a new type of personal super contribution is available from 1 July 2018 – the ‘Downsizer’ contribution. It gives older Australians the opportunity to transfer money into super after reaching 65 without overly complex rules applying. Whilst the name ’downsizer’ implies a smaller family home, maybe a four-bedroom home to a 2-bedroom apartment, there’s actually no requirement for it to be smaller than the original. In fact, there’s no requirement to even replace the home that has been sold.

Qualifying requirements

Here are the requirements to qualify for this new type of personal contribution:

• The contract to sell the home must be entered into on or after 1 July 2018 – but, be careful if contemplating selling the family home now. Proceeds from the sale of a contract signed before 1 July 2018 will not be eligible for the downsizer, even where settlement occurs on or after 1 July 2018;
• At the time of the contribution, the contributor must be at least age 65 – note, it’s the age when the contribution is made and not the age at contract or settlement date that matters;
• The downsizer must be no more than the maximum allowed – the downsizer contribution cap is the lesser of:
  • The proceeds of the sale; and
  • $300,000 per person

Examples of maximum contributions for eligible contributors:

• • Homer and Marge sell their family home for $1.4m.They can contribute a maximum of $300,000 each.
  • Ned and Maude sell their family home for $500,000. They can make a maximum combined contribution of $500,000, with no more than $300,000 or anyone one of them. 
• Any downsizer contribution must be made within 90 days after the change of ownership (the prescribed period in which to make the downsizer contribution). Change of ownership usually occurs at settlement date. The Commissioner can allow a longer period, if necessary;
• The home sold (including the land it is built upon) must be located within Australia and is not a caravan, houseboat or other mobile homes;
• The home must have been owned for at least 10 years by the contributor, their spouse, or former spouse. This allows the home to be held either solely, jointly, or as tenants in common. It also allows for the death of one spouse during the 10-year ownership period. 

For example:

One person can own the home for the required 10-year period and their spouse may have owned it for a short period, say, the last 12 months. The spouse, of only 12 months, will be eligible for a downsizer contribution, as their spousal partner has owned the home for at least 10 years.

• To qualify for the downsizer, the home must qualify under the CGT main residence exemption or would have qualified, if it is a pre-CGT asset. The home will also qualify where the CGT main residence exemption only partially applies. For example, a property that was the main residence, but is now being rented out. 

The downsizer – what super rules don’t apply?

Some super rules don’t apply to downsizer contributions. The downsizer is not a non-concessional contribution which means:

• there is no total super balance test – a person who has at least $1.6m in total super at 30 June prior, has a non-concessional cap amount of zero. However, for a downsizer contribution, this test is disregarded;
• the “work test” does not have to be met. Anyone at least age 65 when the downsizer contribution is made does not need to satisfy the 40 hours of ‘gainful employment’ in 30 consecutive days test;
• There is no upper age limit for making downsizer contributions, so it can be made even if the contributor is 75 or over.

Application of total super balance

We have mentioned previously that the total super balance test does not apply when making the downsizer contribution. However, once it’s been accepted by the fund it’s included in the calculation of the total super balance, which is relevant to non-concessional contributions.

One-off application

A downsizer contribution is a once-off opportunity, that is, it applies to the sale of one qualifying home only. Even if a person only uses part of the $300,000 cap, from the sale of one qualifying home, a further downsizer contribution is not available when they sell another qualifying home.

"A downsizer contribution is a once off opportunity"

Included in tax-free portion 

Whilst a downsizer contribution is not a non-concessional contribution by someone 65 or over, it is included in the tax-free component of any benefit payment, which can be important for estate planning purposes. Further, the downsizer cannot be claimed as a personal income tax deduction. 

Don’t forget the form!  

There’s paperwork to be completed for a downsizer contribution. An eligible contributor must make the choice that the contribution is a downsizer contribution and complete the approved form (a form to be issued by the ATO). Further, and importantly, the form must be given to the superannuation fund before or at the time the downsizer contribution is made 

Are there Centrelink ramifications?

A good reason to keep the family home is that it is as an exempt asset for the Centrelink Asset Test purposes. This helps to maximize a person’s entitlement to the age pension. While the downsizer contribution rule allows older Australians to contribute to super any proceeds from the sale of their home, once in super it will not be exempt from the Centrelink Asset test.

What’s the real benefit of the downsizer contribution?

In the end, making a downsizer contribution from the sale of the family home is about being able to transfer capital to a tax structure, superannuation. In that structure, tax on investment earnings is limited to a maximum of 15%. With the $1.6m transfer balance cap in place, there is a need to take a holistic view of your tax affairs. It’s no longer as simple as getting it all into super, starting a pension on everything and having a zero-tax rate for the fund, as well as for the individual.

Mark Ellem, Executive Manager, SMSF Technical Service, Super Concepts