The new downsizer rules provide an important opportunity for clients to contribute sale proceeds from their main residence to superannuation later in life.
The rules have also generated a large number of adviser queries. In this article, we detail frequently asked questions regarding downsizer contributions.
MY CLIENT HAS AN INVESTMENT PROPERTY THAT THEY WISH TO SELL AND CONTRIBUTE THE PROCEEDS UNDER THE DOWNSIZER CONTRIBUTION RULES. AS THE PROPERTY IS NOT CURRENTLY THEIR MAIN RESIDENCE, ARE THEY ABLE TO MAKE A DOWNSIZER CONTRIBUTION?
The qualification criteria to make a downsizer contribution requires the property being disposed of to qualify for a full or partial CGT main residence exemption.
To qualify for the CGT main residence exemption, the property must be considered the client’s main residence for all or part of the ownership period. There is no requirement for the property to be considered the client’s main residence at the time of disposal.
Whether a dwelling qualifies as a main residence depends on the facts and circumstances of each case. The ATO will generally take the following factors into consideration:
- The length of time they have lived there (note, there is no minimum time a person has to live in a home before it is considered to be their main residence);
- Whether their family lives there;
- Whether their personal belongings are situated there;
- Where their mail is being delivered;
- Their address on the electoral roll;
- The connection of services (eg phone, gas or electricity) to the dwelling;
- Their intention to occupy the dwelling.
Therefore, if the investment property was the clients’ main residence at some point during the ownership period and qualifies for at least a partial CGT main residence exemption, it meets the downsizer contribution qualification criteria.
MY CLIENTS ARE A MARRIED COUPLE: MARGARET, AGE 67 AND BOB, AGE 63. THEIR MAIN RESIDENCE IS IN BOB’S NAME ONLY. IF THEY SELL THEIR HOME, CAN MARGARET MAKE A DOWNSIZER CONTRIBUTION EVEN THOUGH THE HOME IS NOT IN HER NAME?
Yes. Downsizer contributions can be made in respect of an individual if they or their spouse held an ownership interest in the dwelling, whether that ownership interest was held solely, as joint tenants or as tenants in common.
As Margaret is over age 65, she can make a downsizer contribution as her spouse owned the dwelling, assuming all other criteria are met.
MY CLIENT HAS A TOTAL SUPERANNUATION BALANCE AT 30 JUNE 2018 EXCEEDING $1.6 MILLION. ARE THEY ABLE TO MAKE A DOWNSIZER CONTRIBUTION?
Downsizer contributions are not impacted by the client’s total superannuation balance as they are not classified as non-concessional contributions. Therefore, clients with a total superannuation balance exceeding $1.6 million are able to make downsizer contributions.
However, once the downsizer contribution has been made, it may impact the client’s ability to make future non-concessional contributions as it increases the client’s future total superannuation balance.
In addition, the amount of the downsizer contribution that can be used to purchase a retirement phase income stream is limited by the client’s transfer balance cap.
WHEN DOES THE DOWNSIZER CONTRIBUTION HAVE TO BE MADE? IS IT WITHIN 90 DAYS OF THE EXCHANGE OF CONTRACT OR SETTLEMENT?
A contribution must be made within 90 days of the change in ownership, which is usually the settlement date.
Clients can request an extension of time in certain circumstances.
The explanatory memorandum contains an example where the client sold their home with the intention of purchasing a retirement village unit. The settlement date for the purchase of the retirement village was delayed, and the client did not want to make a downsizer contribution until the purchase was completed to ensure they had enough money. In this circumstance the ATO provided an extension of time.
ARE CLIENTS ABLE TO MAKE A DOWNSIZER CONTRIBUTION WITH THE PROCEEDS FROM THE SALE OF A FARMING PROPERTY THAT INCLUDES THEIR MAIN RESIDENCE?
For a property to qualify under the downsizer contribution rules, the dwelling that’s being disposed of needs to qualify either partially or wholly for the main residence exemption in the CGT provisions of the Tax Act.
If someone lives on a farm, the residential dwelling that they live in, as well as up to a maximum area of 2 hectares of adjacent land to the dwelling, can qualify for the CGT main residence exemption. In this situation, the sale proceeds could be contributed as a downsizer contribution assuming all other qualification criteria are met.
There is no need to apportion the sale price of the property based on which part of the property was eligible for the main residence exemption and which part was not for the purposes of working out the maximum amount that can be contributed.
IF A HOUSE IS OWNED BY A COMPANY OR TRUST BUT HAS BEEN USED AS A MAIN RESIDENCE, WOULD THE CLIENT STILL BE ABLE TO MAKE A DOWNSIZER CONTRIBUTION WITH THE SALE PROCEEDS?
No. The legislation specifically stipulates that to qualify as a downsizer contribution “you or your spouse held the old interest just before the disposal”.
Therefore if the dwelling is not owned by the individual or their spouse it will not qualify. In addition, a dwelling owned by a company or trust cannot qualify for the main residence CGT exemption. The only exception to this rule is if the ownership interest was held at a particular time by the trustee of the deceased estate of the spouse of the individual.
MY CLIENT WANTS TO SELL THEIR HOME AND PURCHASE A NEW HOME FOR A SIMILAR VALUE. ARE THEY ABLE TO MAKE A DOWNSIZER CONTRIBUTION?
Yes. There is no legislative requirement to purchase a home of a lesser value or indeed to purchase a new home at all. As long as the home they dispose of meets the eligibility criteria (e.g. eligible for at least a partial CGT main residence exemption and held for at least 10 years), the client is eligible to contribute an amount up to the value of the sale proceeds or $300,000 (whichever is lesser) as a downsizer contribution.
In the case where the client is purchasing a new residence of similar value, the client could use other funds to make a downsizer contribution. For example, they could withdraw funds from superannuation and recontribute those funds as a downsizer contribution (assuming all other eligibility criteria are met). This strategy is similar to a re-contribution strategy and may have estate planning benefits due to the reduction in the taxable component.
IS MY CLIENT ABLE TO CLAIM A TAX DEDUCTION FOR A PORTION OF THE DOWNSIZER CONTRIBUTION?
No. The legislation specifically states tax deductions are unable to be claimed for downsizer contributions.
However, if the client meets the qualification criteria to make a personal deductible contribution (i.e. under age 75 and meets the work test) they could contribute part of the sale proceeds as a personal deductible contribution and the remainder as a downsizer contribution.
MY CLIENT IS AGE 90 AND ENTERING RESIDENTIAL AGED CARE. IF THEY SELL THEIR HOME TO FUND THEIR ACCOMMODATION PAYMENT, CAN THE REMAINING PROCEEDS BE CONTRIBUTED AS A DOWNSIZER CONTRIBUTION?
Yes. There is no upper age limit when making a downsizer contribution and there is no requirement to purchase a new principal residence.
As long as the client meets the other eligibility criteria, (i.e. the home qualifies for at least a partial CGT main residence exemption and has been held for at least 10 years) they are eligible to make a downsizer contribution.
However, the impact on the clients’ social security entitlements and aged care fees needs to be considered. Funds contributed to superannuation as a downsizer contribution will be assessable assets and deemed for both social security and aged care fee purposes.
Kim Guest is senior technical manager at Colonial First State.